Archive - Nov 24, 2012

Jerry O'Neil, six-term GOP state representative in Montana, has asked to receive his salary (which at $10.33 per hour is around $1800 per month) in gold or silver. The long-standing legislator was driven to this decision by his constituents' concerns about the nation's massive debt-load and fears of our country's collapse as "only so many dollars can be printed before they have no value." The long-time Ron Paul supporter, according to Time, cited Article 1, Section 10 of the US Constitution, which says, in part, that "No State shall... make any Thing but gold and silver Coin a Tender in Payment of Debts." State administrators have denied his request and added that "a bill could be introduced to accomplish this result." O'Neil, like many other, believes "The Keynesian era of financing government with debt appears to be close to its demise."

Following this week's 'failed' Eurogroup meeting, leaked details suggest a debt-buyback is becoming the corner-piece of the 'new' Troika deal with Greece. The leaking of details (and anticipation by the market) has driven GGB prices up and reduced much of the benefit of the buyback 'boondoggle' but as Barclays notes, "even if the debt buyback enables the IMF and EU leaders to come to an agreement, leading to a Greek resolution in the near term, in the medium-to-long-term Greek debt is not sustainable on realistic macroeconomic assumptions without notable outright haircuts on official EU loans to Greece. Therefore, a successful debt buyback might resolve the Greek debt sustainability issue on paper in the troika report but it will most likely not resolve it in investors’ minds." While there are 'optical' advantages to the buyback, the four main disadvantages outlined below should be irksome to the Greeks (e.g. creditor benfitting over growth-empowering) - which is critical since, as ekathermini notes, a senior finance minister commented "God forbid we should not be close to an agreement on Monday."

While the general consensus from the media, and the majority of analysts, is that the U.S. economy will avoid a recession - there have been numerous indicators that have continued to point to deterioration in the economic fabric.  Most recently industrial production in the U.S. dropped sharply, along with capacity utilization rates, due to the growing recession in Europe, and slowdown in China, which has impacted exports from domestic manufacturers. While it is not popular within the media, or blogosphere, to point out economic concerns but rather why markets are going to engage in a continued bull market - the simple reality is that by the time the NBER announces an official recession it will be far to late for investors to minimize the damage.  The leading-to-lagging ratio continues to point to an economy that has very little, if any, actual momentum which leaves it very susceptible to exogenous shocks.

Back in March, we first presented a rather stunning finding: by 2020 75% of Americans will be obese or overweight. This was promptly followed up with a post showing just how it is transpired that America became the fattest nation in the world in less than 20 years. What however may not be known, is that America's fatness epidemic is not localized to the country that gave the world the McDonalds burger (and the McMansion): it really is a fat, fat world, after all.

Ireland is continually held up as the poster-child for austerity-driven 'aid' and how the European Union can successfully manage an economy through a depression with no real pain for bankers. Unfortunately, as we have pointed out previously, judging a nation's progress on the back of its bond yields (when liquidity is negligible and the mighty hand of ECB-collateral-reacharound is upon us) should become anathema from any serious analysis. The sad truth, specific to Ireland in this case, is the relative size and importance of EU subsidies (and the EU budgetary allocation) mean that assumptions of current account surplus going forward (the much-needed elixir to sustain the gross debt load the nation's taxpayers now are buried under thanks to banker-transfers) leave Ireland's debt sustainability greatly in question.

Old Drag Down the Young ... and The Economy

For the entire 8 day duration of Operation Pillar of Defense, there was one major geopolitical player who had been largely quiet and certainly absent from the scene: the same player whose unflinching position over the Syria conflict has so far prevented any intervention in the civil war torn country: Russia. The same Russia which has a military base in the Syrian port city of Tarsus, and thus in its own eyes, a very substantial "national interest" role to play in the middle east, one that is certainly opposing that of the US and the pro-NATO forces, a tension that will surely boil to the surface now that war between Iran and Israel is always at most "hours away" depending on who is asked, and which one day will be more than just a war of words. Today, Russia decided that it had kept quiet for too long over the Gaza conflict, with Voice of Russia reporting, courtesy of Al Arabiya, that Russian warships anchored off the eastern coast of the Mediterranean Sea will be put on military alertness should the conflict in Gaza escalate and brought in proximity, according Russian Navy Command source on Friday.

When it comes to firmly established, currency-for-commodity, self reinforcing systems in the past century of human history, nothing comes close to the petrodollar: it is safe to say that few things have shaped the face of the modern world and defined the reserve currency as much as the $2.3 trillion/year energy exports denominated exclusively in US dollars (although recent confirmations of previously inconceivable exclusions such as Turkey's oil-for-gold trade with Iran are increasingly putting the petrodollar status quo under the microscope). But that is the past, and with rapid changes in modern technology and extraction efficiency, leading to such offshoots are renewable and shale, the days of the petrodollar "as defined" may be over. So what new trade regime may be the dominant one for the next several decades? According to some, for now mostly overheard whispering in the hallways, the primary commodity imbalance that will shape the face of global trade in the coming years is not that of energy, but that of food, driven by constantly rising food prices due to a fragmented supply-side unable to catch up with increasing demand, one in which China will play a dominant role but not due to its commodity extraction and/or processing supremacy, but the contrary: due to its soaring deficit for agricultural products, and in which such legacy trade deficit culprits as the US will suddenly enjoy a huge advantage in both trade and geopolitical terms. Coming soon: the agri-dollar.