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28th August 2012: “Convertibility” – The September Buzz-word

The new Buzz-Word for September will likely be “Convertibility”…
For simplicity, in a perfect world with perfect assumptions:
  • >> Portuguese $ denominated debt of T years may be priced at 6%, German $ denominated debt of years may be priced at 1%.
  • >> There is a 5% differential due to creditworthiness disparity.
  • >> But Portuguese EURO denominated debt of T years may be priced at 7%, German EURO debt of T years may be priced at 0.75%.
  • >> There is now a 6.25% differential… WHY?
  • >> Because of the issue of convertibility … investors are putting a premium on the break up of the Euro… they don’t want Euro-denominated Portuguese debt for fear that upon break up of Euro (or splintering/temporary exit of Portugal) they may end up with debt denominated in Portuguese Escudos … or some native equivalent.
So when Draghi talks about protecting the Euro at all costs, capping peripheral debt and/or vents at people “betting against the break up of the Euro”…you know what he’s talking about… and when the media keeps using the “convertibility” word… you know what they are saying…
I recommend you read these two articles (especially the second one from my favourite Euro-skeptic Meagan Greene):
 
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Posted by on August 28, 2012 in Bond Markets, Central Banks, ECB, Euro, Europe, Mario Draghi

 

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1st July 2012: Referenda On The Agenda – A Democratic Revolution In Europe?

… are the Germans getting used to defeat in Europe?

Quote of the Day:

What is needed is a tenable, medium-term solution to the euro-area crisis, which is affecting financial markets and real economic output beyond its borders.

Paton Odom, Dallas Fed report global economic growth, June 27th 2012.

Macro Overview

Europe Is Everybody’s Problem

  • Great little program by The BBC’s Newsnight – worth a watch for everyone whether European, Asian, American… and it sets the tone for today’s comment. I’d watch it as soon as you can as, no doubt, it’ll soon get pulled from YouTube.
  • Europe is everybody’s problem. For those who think that Europe is a place too far away to affect them, I highlight a couple of excerpts today from the Dallas Fed report on growth momentum in the World economy:

Global gross domestic product (GDP) growth forecasts have moderated in the second quarter, with industrial production and purchasing manager indexes reflecting restrained activity in advanced and emerging economies. Uncertainty regarding near-term stability of the euro area, which appears to be in recession, remains the most important determinant of expansion. While large emerging economies such as Brazil, Russia, India and China have led growth following the global financial crisis, their expansion has cooled to reflect slowing trade activity with advanced-economy partners as well as internal adjustments. Inflationary pressures and commodity prices have moderated.

Reflecting On Merkel’s “Defeat”

  • That said, with Merkel’s current line going down exceptionally well with the German electorate, I’m skeptical as to how this U-turn can be engineered without:

a)      incurring more dept on sovereign balance sheets with highly stringent conditions to the effective creditors (i.e.Germany) causing wider political and social split within the Eurozone

b)      significantly subordinating existing debt holders in Europe–causing wider financial and economic split in the market place. It would be a dangerous game to turn the entire European bond market into a retrospective CDO market. The ECB tried it in Greece, remember – the bond market got very squeamish.

  • Then, suddenly, out of the blue come Europe’s “begging men” (Monti, Hollande and Rajoy) announcing that they have indeed found a perfect “solution” which involves directly bailing out the Spanish banks without the Spanish government incurring more debt while simultaneously protecting the seniority of existing investors in the Eurozone bond markets! I could go into detail here but there is little point, that was essentially the crux of it – or at least the most important part. For those of us following Euro-politics closely, it was indeed a WOW moment…
  • It appeared Merkel had buckled under the pressure from her Southern Counterparts and was seen as the big loser in the Eurozone showdown. Global indices were off to the races on Friday. A rapid transformation for The Iron Lady of Europe, who had been dubbed as “Frau Nein” in the Eurozone media, was now suddenly crowned “Countess Capitulate” (by me)!!
  • This is politics in Europe at its most exciting (believe it or not). But there were mutterings that Merkel, like her national soccer team, had been simply blindsided, or blackmailed (“erpressen” as popular German Magazine, Der Spiegel, put it – Google, rather more kindly translates the verb erpressen as “to extort”) by the shrewd and powerful men from Southern Europe. It almost seems that Monti and Rajoy simultaneously threw their teddies out of the pram in a kind of pre-empted, orchestrated tantrum. They threatened to simply “block everything” if she persisted on her political tact. Merkel had to yield; no German leader wants the dubious honor as the protagonist of a political and diplomatic collapse in the Eurozone – that’s a burden the German public understand all too well. I remember Michael Lewis’ great article, It’s The Economy Dummkopt, (another MUST read) where he says:

The streets of Berlin can feel like an elaborate shrine to German guilt. It’s as if the Germans have been required to accept that they will always play the villain. Hardly anyone still alive is responsible for what happened: now everyone is. But when everyone is guilty, no one is.

Reactions back home were devastating, and there were even calls for pushing back key parliamentary votes on the permanent euro bail-out fund, known as the European Stability Mechanism (ESM), as well as Merkel’s fiscal pact scheduled for Friday evening. In fact, the vehemence of the attacks seems to have taken even Merkel’s advisers by surprise.

  • Ultimately, Merkel is merely a foil for German public opinion. So what happened? Did she truly get blindsided/blackmailed/out-maneuvered, was she astutely calculative of Germany’s inherent guilt over past failures in Europe and its desire to cement harmony with its neighbours… or is something else in play?

Potential Political Revolution in Europe

  • I have my doubts that Merkel has simply crumbled without a plan, for one, she has a pretty good record at reading the political landscape and at horse-trading and bartering for political power amid the chaos in Europe. With back-door meetings between the begging-men of Europe, she must have anticipated this kind of mutiny. So let’s examine exactly what may be happening in Euroland politics here.
  • Firstly, let’s be clear, the Eurozone crisis has not been “solved”, what has happened is that there is potentially a solution for the Spanish banking problem (and a bit of concurrent relief for Ireland too). Let’s also be clear that nothing is set in stone … yet. So far though it looks as though the European politicians have indeed bought more time. This does not surprise me in the least, remember in only my last comment, Eurocidal Tendencies, I wrote:
  • I predict that the politicians will do just enough to prevent an all-out collapse on Monday morning, perhaps even a little bounce, but not enough to reassure investors over the medium term. Then we’ll look forward to the next “summit to save the World”. With all this can-kicking I’m surprised the European politicians do not have sore feet?!
  • So buying more time is all that has happened… or is it? I have to admit, this is a breakthrough in terms of a change of tactic and change of direction and a change of attitude among all Europeans of all political persuasion towards the European experiment. This is squeaky bum-time at its squeakiest. There has been a distinct change of mood here in Europe over the last week.
  • I feel a bit of a political and even cultural revolution taking place on this, most diverse, most intriguing, most complicated continent of ours. For the first time ever, I feel Europeans all over are simultaneously beginning to objectively consider the true nature of their ambitions and desires towards a European political union. Do we really want to be The United States of Europe, as Axel Merk brands it, and (more importantly) are we willing to make the sacrifices required to achieve that objective?
  • The answer to this question is not necessarily: “no”.
  • Here in Britain, only this week, the most pro-Euro politicians were pointing to the inevitability of a Euro-referendum (something that would have been unheard of a year ago). Incidentally, good to see Britain has learnt its lesson in Europe and has opted not to run headlong into the Euro-debate guns blazing and, rather, wait and see how the political crisis inEurope resolves itself first.
  • Now, even in Germany, the prospects of a Euro referendum are clearly being openly debated after German Finance Minister, Wolfgang Schauble kicked the proverbial hornets nest on the matter, last week. Zerohedge even speculate that the Merkel “defeat” was merely part of a strategic maneuver towards a German referendum.
  • It’s tempting to be a little anxious about all this unrest, all this upheaval and political revolution. But, for once, it seems the politicians are having to turn to the people and resort to (heaven forbid) a democratic process to base their Euro-policies. Ultimately, even in bureaucratic Brussels, the people do seem to have the power – which would mean that, no matter what the results of the process are, it will likely have more credibility and therefore more stability both politically, economically and within the financial markets.
  • Despite my skepticism about the actual substance of the latest “can-kick” by the European elite, I too am changing my attitude towards the specter of Europe and therefore my approach to the political challenge and… in this respect, for some unknown reason, I feel a twinge of optimism this rainy Sunday afternoon… not a big one… but a twinge never-the-less…
 

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12th June 2012: The Mantra Of Astro-Economics: Do Not Listen To Economists – The Drugs Don’t Work

Quote of the Day:


The drugs don’t work…, they just make you worse…

The Verve

Macro Overview

Recap

  • 2 days ago I said we were all cyclical beings born into a cyclical world. Our very behaviour is not only responsive to cyclicality, billions of years of evolution have actually made us, indeed all life-forms, dependent on cyclicality.
  • 1 day ago I said that both economists and quantum physicists are ignorant. The only difference is that a quantum physicist recognizes the limitation of his knowledge – an economist does not.
  • Hey, by the way, if you want to think about the limitations of quantum physics watch this clip, WARNING: this made me feel very small.
  • I digress… and perhaps that was a little harsh on our esteemed academic class – I do know some very humble economists… but not many. However, the thought I wish to convey is that even the smartest of our academic gurus can only work within the constraints of the human mind and its ability to interpret. There are many things we can “understand”, but what does it mean to understand? We have many answers … but there are many, many more questions to which there are no answers. It’s the same in economics and finance – sometimes we should be humble enough to say: we do not know and therefore we do not have a solution to this problem.

Don’t Listen To The Smart Guys

  • But moving on. For all these economic wizards advising our political elite, they did not stop the Japanese from stagnating for a generation, they have not managed to halt the train-wreck in Europe and they’re failing to de-odorize the stench of a stagnant workforce, gangrene growth and a rotting housing market in the US. They all have many complicated theories, most of which I’m too stupid to understand. So I revert to what all ignorant people revert to: common sense.
  • Both expansionary/Keynesian and austere/Austrian policies have not worked thus far and there are many instances in which they have not worked in the past. Do the proponents of each doctrine humbly admit they’re wrong? No… of course they don’t. I don’t think they ever will. Instead, they all stare blankly for a moment and then stamp their feet and, red-faced, hiss the same response: “No! NO! It didn’t work because you did not do ENOUGH of it!!” Austerity in Spain/Britain did not work because we did not do enough of it. Stimulus in Japan/US did not work because we did not do enough of it!
  • Right. That’s because your education is based on theories which are largely empirical – economics is, I’m afraid, largely an observational science, not a pioneering one. The ideas of policy makers and their so-called Nobel Prize winning wiz kids are not based on hard fool-proof theory nor are they pragmatic within the political and historical context.
  • If someone tells me they can design a solar powered helicopter which works in the dark and it turns out they cannot, then their concept is flawed because their theories did not take into account all the practical considerations and the context of the experiment (because, that was what it was, let’s face it). “But, but, wait…. in theory there’s enough moonlight, I just didn’t think of the weight of the…”  aaah… forget it mate… just admit you were wrong… and I was a fool for believing you.
  • If someone tells me they can revive the economy by either spending more or with more austerity and it turns out they cannot, then I’m a fool for believing them and their concept is flawed because their theories did not take into account all the practical considerations and the context of the experiment (because that was what it was, let’s face it). “But, but, wait…. in theory we can revive the economy, Congress is in gridlock! Young Greeks are on the streets! The banks won’t lend!” …  aaah… forget it mate… just admit you were wrong and I was a fool for believing you.

The Drugs Don’t Work

  • So here’s an experiment I have tried many times and come to only one conclusion. If you drink many pints of Belgian beer… you’re gonna have a hangover. There ain’t much you can do about it… yeah I’ve tried all the techniques. Like drinking a pint of water before you go to bed only to see it re-emerge with startling ferocity. Eating a kebab at 3 in the morning on your way home… … … only to see it re-emerge with startling ferocity. I’ve tried the old alka-seltzer too… same result – fizzy and ferocious. The drugs don’t work… they just make you worse. How about hair-of-the-dog? Yeah right – its barf will be louder than its bite. So look, if you’ve done such a monumental job of screwing your guts up by downing copious amounts of booze in a single night, there ain’t much you can do about it the morning after the night before … you just have to get through it… somehow.
  • Here’s a novel thought. Policy makers of a by-gone era prostituted economic HIV and now economically, we’re at a place for which there is no practical cure. There is no magic remedy for the disease we have spent the last 20 years getting ourselves into. As ZeroHedge put it today: By Incentivizing Debt, We’ve Guaranteed Debt Serfdom and Stagnation. We just have to deal with it – austerity won’t work it just makes it worse. Stimulus won’t work – it just makes it worse. We were all present at the orgy and had our noses in the punch-bowl, scoffing like swine at a trough for so long we didn’t realize how much we were screwing up our intestinal organs… now we have a hangover, a big hangover… and we just have to get through it.
  • We’ve strayed beyond the limitations of our theoretical responses from our limited theoreticians. The drugs don’t work, they just make you worse.
 

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11th June 2012: Deeper Forays Into “Astro-Economics”

Quote of the Day:

Each thing is of like form from everlasting and comes round again in its cycle.

Marcus Aurelius – 161 to 180 AD

 

Macro Overview

The Inevitability Of Cyclicality

  • So, as I commented yesterday, last weekend my herb garden was the source of my ponderings. We are cyclical animals, born into a cyclical world. The circular movements of the planets create cycles which we see so often that we are not even aware that we move effortlessly in synchrony with them. What is interesting is that most of these movements which define our very lives, our existence, our entire experience of this thing we call “life” is this… they are all circular in nature. The Earth itself is a 3 dimensional circle – a sphere. It “spins” on an axis, so every one of us is experiencing a circular spin towards and away from the sun (the sun rising and setting). In turn, the Moon circles the Earth and the Earth circles the sun. We call this observation of a circular motion from a singularity a cycle.
  • Here is an interesting thought, life has existed on Earth for about 4 billion years – give or take a hundred million or so years. So think about it, every aspect of every living thing that has ever existed on Earth has had to adapt to these cycles (in fact, everything that has ever lived in this universe, actually). The day and night, the rotation to the sun and sidereal days, the axial tilt and seasonal cycles, the moon and tides and its lunar cycles.
  • As a consequence we have adopted our own cycles:  emotional cycles, energy cycles, menstrual cycles, economic cycles and perhaps the biggest cycle of all – the cycle of life. For, just like parsley seeds I planted today, life is born into a cyclical world and before it perishes it reproduces offspring and another life enters the clock we live on… it is the cycle of life and we, like every other form of life on this planet are by definition cyclical organisms. It is part of our blood, our DNA, through billions of years it has been etched into our skin, hard-coded into our brain, it’s in the substance of our bones and the very existence of our soul. Not only do we depend on cyclicality, we embrace it… for it is life, we love the pattern of cyclicality, we embrace the concept of consistent and repetitive change (which is all that a cycle is). We are cyclical beings, born into a cyclical world – not only do we expect cyclicality. We live for it, we thrive on it… it is the very substance of what makes us living beings.

 

Economists And Other Ignorant Academics

  • Greenspan-worshippers praise “the Maestro” for trying to suppress the cyclicality of the economy, for trying to iron out the volatility in the markets. I say he’s a fool for doing so, not only is this (as we have seen) impossible, it is actually counter productive in the long run. And THAT ladies and gentlemen, is how planting marjoram in my herb garden, is related to capital markets and monetary economics – through the medium of astro-economics!
  • Greenspan was the original sinner, let’s not forget what damage his monetary ambivalence has done. This is not an argument about Keynesianism and Austrian Economics, it is about common sense. If indebtedness is allowed to propagate through an economic system unchecked it does not dispel the rules of cyclicality. The “economic energy” in the system remains the same, it merely alters the frequency and the magnitude of the cycle – both on the upside AND the downside.
  • It’s been a long enough reading session. But next time let’s talk about how ignorant we all are – especially the smart people like quantum physicists (no that’s not oxymoronic) and especially the so-called smart economists. I’m not clever, but I admit it. The best quantum physicists are, by their own admission, ignorant – indeed the only difference between an economist and a quantum physicist is that the economist is generally less humble – economists think they have the answers to everything, at least physicists accept that they don’t.
 

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10th June 2012: My Herb Garden, The Cyclicality Of A Celestial Clock And Other Conundrums In “Astro-Economics”

Cogs In The Clock We Live On


Quote of the Day:

It is change, continuing change, inevitable change, that is the dominant factor in society today. No sensible decision can be made any longer without taking into account not only the world as it is, but the world as it will be.

Isaac Asimov

Humanity has the stars in its future, and that future is too important to be lost under the burden of juvenile folly and ignorant superstition.

Isaac Asimov

Macro Overview

A Word For Asimov

  • Let’s not talk about Spain and Italy– I know that’s what I should be doing but I’m not going to. The only referral I feel like making in this direction is to the Euro 2012 Soccer Championships – intriguing match between Europe’s “help-they’re-too-big-to-bail” nations, by the way. But that’s it as far as Europe goes… this weekend I preferred to think about my garden.
  • I have a herb garden. I’m very proud of it. But I’m worried. You see, it is at the side of the house, the Western side. Which means that it only gets 50% of the direct sunlight. Still, it’s lovely – I have mint, rosemary, sage and now (after today’s little session in the garden) I have basil, marjoram, parsley and coriander. I really hope they flourish, but I’m worried about the light. According to my gardening app on my ipak, coriander and parsley are tough enough, but basil and marjoram need a lot of light as well as water – the only way to see if they can hack the shadow is just to plant them and see what happens. Fingers crossed.
  • But it got me thinking about an Isaac Asmiov book I read when I was about 14 years old. It was called: The Clock We Live On. This is what I love about Asimov, and probably what makes him my favourite overall author. It is his ability to hold the fascination of the reader when writing both, seemingly mundane, facts and as well as fiction – he transforms the obvious into the sublimely imaginative.

My Herb Garden – And Other Conundrums In Astro-Physics

  • So, there I was this afternoon, 37 years old, on my hands and knees in the garden, thinking about a book I had read over 20 years ago. I felt I knew enough about the clock we live on to justify the anxiety over my marjoram. Like most people, I knew that, living in the Northern Hemisphere of the planet meant that the Sun hangs perpetually to the South in the sky – at its zenith, it points due South. So the South sides of the property get the most sunlight. This is a well-known fact to every green-fingered gardener and real estate agent. But almost everyone knows this, or at least is aware of it  – I can’t help feeling that this is because most of the arable land on the planet is in the Northern Hemisphere, indeed most of the land is in the Northern Hemisphere and, in fact, 90% of the population resides in the Northern section of the clock we live on. So why does the Sun “point South” for us Northerners?
  • Well, it isn’t really pointing South is it? Asimov told me that it only appears to point South because the Earth doesn’t spin straight – it spins on a slight tilt. That is, Earth does not spin in exactly the same 2-dimensional plane as its orbit around the sun – it’s slightly out of kilter, if you like. We call this leaning effect the axial tilt. This anomaly makes our lives ever more beautiful, indeed, it is for this reason we have seasons. I cannot plant basil in November because of the axial tilt the Earth has. Because of this leaning factor, there are times when the Northern hemisphere is generally leaning away from the sun, as a consequence the Northern Hemisphere gets less energy from the sun: there is less heat and less light during this period. We call these periods of changing energy exposure to the sun: seasons. As we, the Northern Hemisphere, lean away from the sun, we call this darker, colder season winter.
  • 6 months later, at the other end of Earth’s orbit around the sun, we lean into the sun and soak up more energy from our local star – and I’m planting herbs… because it’s summer.  The Equator is the waistline of the planet, it runs exactly around the middle of the planet, like the outer rim of a spinning top. It is constantly hotter than the poles, of course, because the way the Earth spins means that it is always closer to the sun, whereas the pole are always further away. Interestingly, as us Northerners lean towards the sun, because of the axial tilt, the equator is no longer the closest point to the sun. During our longest day the sun is closest to another scorching line, parallel to the equator – we call it the Tropic of Cancer. There is another one South of the equator which we call the Tropic of Capricorn – this is the closest line to the sun during our (Northerners’) winter.

Calibrating The Clock

  • I probably would have known this if I hadn’t read Asimov’s The Clock We Live On (and I apologize for insulting your intelligence dear reader) but I doubt I would have known things like what a “sidereal day” is. A sidereal day is the time it takes for the planet earth to rotate 360 degrees. But it is NOT equal to a day, it is actually 23.93447 hours. Seems alarming at first doesn’t it – someone’s stealing my time!?
  • But it’s obvious really. Imagine a point on the Earth – let’s call it my house in West England. As the earth spins away from the sun my house is in the shadow of the entire planet – it’s dark, we call it night time. So it must spin another 180 degrees to that it can face the sun again at the same time of day we began observing. Or is it really exactly 180 degrees? Because, remember, not only is the Earth spinning on its axis – it is also slowly moving around (orbiting) the sun. So, in the period of that one day, it has nudged a teeny weeny bit 1/365th, approximately, of its way around its orbit of the sun. In slowly nudging around the orbit, the Earth must spin just that teeny weeny bit further than 360 degrees in order for my house in sunnyWest England to fully face the sun again. The time it takes for a single point to directly face the sun and then directly face it again is 24 hours, the time it takes for the Earth to spin 360 degrees is slightly less, 23.93447 hours. It’s obvious, when you think about it.
  • But what about sidereal years, did you know that the Earth’s orbit around the sun is not exactly the same as a full year as we understand it by seasons? In fact, the time it takes for the Earth to orbit the sun is 365.256363 days (approximately) as it relates to other fixed objects around us (i.e. using other stars to coordinate our position). In reality the year as observed from the Earth (tropical year) is 365.2422… etc etc.
  • This is, of course, why a year is 365 days long. But it’s not exactly 365 days long – it’s more like 365 and-a-quarter days long. Very irritating that the time for orbit around the sun doesn’t round off exactly into whole spins of the planet (days), but this rounding error is why we have leap years. We need them to correct our seasons so our calendar years are kept in line with the sidereal year – otherwise our seasons would be shifting “out of season” by approximately one day every four years… but actually, it’s not exactly 365 and one quarter is it? Its 365.2422…etc etc, so we’re still shifting out ever-so-slightly aren’t we? Which is why we do not just recalibrate our little seasonal clock every four years in a leap year – it’s a little more complicated than that.
  • The proper leap year rule is that, a leap year exists when:
  1. The year is divisible by 4
  2. If the year can be evenly divisible by 100 it is NOT a leap year… UNLESS…
  3. The year is also evenly divisible by 400… then it IS a leap year.
  • So in the Year 2000 unbeknown to most, all 3 rules were in effect: we could have had a “null leap year” because it was a year divisible by 4 which was ALSO divisible by 100 (rule 2)… however it was a year divisible by 4 and divisible by 100 which was ALSO divisible by 400 (rule 3)… so 2000 WAS a leap year – seamlessly, just like the one 4 years prior to it and the one 4 years after it. Everybody just keep calm.
  • It’s all very mechanical isn’t it? Where am I going with this? Well, if you would be so kind, please stay with me until the next comment I write. You see, nothing happens randomly in this respect. Pieces in the universe moving in effortless harmony may seem far away but they affect our very soul every “day” (non-sidereal axial spin) and in every way – it’s quite beautiful. Asimov was right… we do live on a clock. I was right too… planting marjoram in my herb-garden is, in fact, a conundrum set in astrophysics.
 
1 Comment

Posted by on June 10, 2012 in Economics, Volatility (of asset prices)

 

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20th May 2012: Death By A Million Debts

Quote of the Day:

What begins as a temporary program of providing liquidity becomes a permanent program of printing money needed in order for the system to merely function.

Chris Martenson

 

Macro Overview

The First Thing I Noticed When I Got Back  

  • Apologies to readers for the “radio silence”, I’ve been away for 3 weeks inHong Kong. As usual, there are, of course, a few things to report from my observations in the East. Some of them may surprise you, but let’s leave that for another day.
  • The thing I noticed as soon as I logged in to check my blog statistics was that the articles I had written a long time ago on Greece (in an attempt to simplify the explanation of how Greeks had gotten themselves into a debt trap) had generated a lot of renewed attention. It’s surprising because I wrote these two articles a year ago and yet readers clearly think it has relevance today… the sad truth is that it does. Here we are 3 years into Greece’s woes and the same old problem persists with the Eurozone now bracing itself for “GREXIT” – the exit of one of its members, Greece, from the Monetary Union.
  • I turns out the word “solidarity” may have a different meaning when it’s vented from a European politicians mouth. If the Greeks exit they take not just themselves but also the credibility of all Eurozone politicians. Who’s gonna believe Van Rompuy or Merkel or Rajoy when they say that “Portugual/Ireland/Spain [insert your favorite peripheral nation here] will definitely not exit the Eurozone”?
  • For those of you that care, here are the two articles, apologies for the gross simplifications, the articles are intended to be soft humor, not condescending in any way.
  1. The Greek Sovereign Debt Crisis, Part 1 – Thomas The Tank Engine Economies
  2. The Greek Sovereign Debt Crisis, Part 2 – The Greek Tragedy
  • In the first article I quoted Chris Martenson’s piece Death by Debt. This is a great article, I suggest you read it – it too was written a year ago but still has relevance today.

 

Death By A Million Debts

  • You see, I have old fashioned principles. I believe that if one is in debt to someone else, one only has two options: repayment or default. It’s really that simple.
  • There are those who believe that government debts (in particular Treasuries) do not need to be repaid, the laws of logic are corrupted, bent and therefore rendered mute, in these special cases. They believe that debts can be magically printed out of existence. If this is the case then, by definition, they are not debts, they are something else … and the market will eventually treat them accordingly; assigning the relevant risk premium to both the debt instruments and/or the paper currency in which they are denominated.
  • For now, though, let us go along with the charade and simply understand the risks the Feds around the globe are undertaking on our behalf… the markets are down, even inflation is a little softer, even oil has come off the highs… so what are the headlines du jour? More QE of course! QE in the UKQE in the USQE in EuropeQE in Japan… QE forever! If we all print those suckers fast enough nobody will owe anybody anything and everything will be better…
  • But look around you; everything is not better is it? Although suffering may be drawn out over a longer time to reduce the visible impact, the tragic reality is that everything will not be better, most of us will suffer terribly under this monetary overkill. A small proportion of the victims will suffer and understand the root of this suffering … and a smaller proportion still will know root causes and have the fortitude to do something about it.
  • I leave you once again with Chris Martenson’s quote:

What begins as a temporary program of providing liquidity becomes a permanent program of printing money needed in order for the system to merely function.

 

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29th April 2012: US-China – Strategic Games In The Pacific

Quote of the Day:

We recognize that China has 2,300 operational combat aircraft, while our democratic partner Taiwan has only 490.

Rob Nabors – White House Director of Legislative Affairs

 

Macro Overview

Focus On China

  • I’m going to Asia for about 2 and a half weeks so you’ll have to bear with me there may not be much commentary from me during this period. I’ll be sure to report back on my own layman’s view of the how I feel the economic sentiment is shifting there.
  • In the mean time, let’s take a little look at China and, in particular America’s relationship with the World’s largest contributor to economic growth.
  • This week Stephen Roach, now of YaleUniversity, once again wrote an article about America’s Renminbi Fixation. Again, Roachie highlights many points about America’s unhealthy political fixation with China’s currency “manipulation”, but I have written tons about this – click here, for example. Firstly, that Bernanke himself supports currency “manipulation” as a form of monetary management. Any person who thinks that our own Federal Reserve does not manipulate the value of the USD cannot deny that they manipulate the largest securities market in the World.
  • But also about how utterly useless it would be in US job creation if Chinawere indeed to de-peg the Renminbi. As Roachie says, the US has a multilateral trade imbalance, not a bilateral imbalance. Something tells me The West is not about to build an economy on the ability to manufacture sneakers to sell to Indonesians or back to the Chinese themselves or whoever, for that matter.
  • Protectionism of all sorts is a blunt and dirty tool the effects can be resounding and persistent. If The Western political movement “succeeds” in crippling Chinese imports, we’ll soon the consequences, as Western business loses its fastest growing export market on Chinese protectionist retaliation… and to add insult to injury, the manufacturing that was in China will not come back to The West – it’ll simply accelerate the migration of assembly (that is already occurring) to Indonesia, Malaysia, Vietnam, Philippines etc…
  • Here is an excerpt from Roachie’s article:

 

Finally,Chinahas evolved from the world’s factory to its assembly line. Research shows that no more than 20 percent to 30 percent of Chinese exports to the US reflect value added inside China. Roughly 60 percent of Chinese exports represent shipments of “foreign invested enterprises” –- in effect, Chinese subsidiaries of global multinationals. Think Apple. Globalized production platforms distort bilateral trade data between the US and China, and have little to do with the exchange rate.

Rather than vilifying China as the principal economic threat toAmerica, the relationship should be recast as an opportunity. The largest component of US aggregate demand –- the consumer – is on ice. With households focused on repairing severely damaged balance sheets, inflation-adjusted private consumption has expanded at an anemic 0.5 percent average annual rate over the past four years. Consumer deleveraging is likely to persist for years to come, leaving the US increasingly desperate for new sources of growth.

Exports top the list of possibilities.Chinais now America’s third largest and most rapidly growing export market. There can be no mistaking its potential to fill some of the void left by US consumers.

Strategic Games: The Key To The Pacific May Lie In The Indian Ocean

  • Just to add a little nugget I thought I’d send this article: China – USA: Struggle for Control of the Pacific. An interesting read.
  • And also this one at Stratfor: The India-China Rivalry.
  • What I find interesting is how both articles mention Myanmar’s strategic position; a country undergoing massive political reform, nestled snugly between China and India with a huge coastline perfect for shipping ports… both industrially strategic and militarily strategic. Just some food for thought, dear reader.

Chinese Equities - a 5yr Chart of Shanghai Composite (Source: Bloomberg)

 

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