Archive - Feb 24, 2013

Back in December 2011, a US RQ-170 Sentinel drone was either brought down or crash landed smack in the middle of Iran, allowing the local military and scientists to reverse engineer it furthering their own understanding of possible countermeasures, as well as selling the underlying technology to China and other countries eager to peek inside America's remote-controlled "oppression liberators." All this happened because someone during the drone design phase forgot to add a self-destruct option. Now, over a year later, we will see if someone finally thought of adding this simple feature following news that Iran has just brought down another (just modestly antagonizing) foreign spy drone over its territory.

In the last few days we have seen reports suggesting Brazilian household debt and service payments are weighing on growth, that Southeast Asia’s commercial credit is approaching its pre-1997 financial crisis peak of 75% GDP, and that South Korea’s household debt has reached 164% of disposable income compared with 138% in the US at the start of the housing crisis. Chinese debt rose 15% in excess of GDP last year from 191% to 206%. Its corporate cash flow is around 50% of profitability whilst loan growth is way in excess of the banks’ return on equity meaning the growth is dependent on a continual supply of new capital to the banks. Over the last few years whilst the developed economies have struggled to reduce their debt relative to GDP – (the most successful of the major economies has probably been the US which has taken non-financial sector debt down from a high of 253.15% GDP to 248.18% GDP) – the developing economies have taken advantage of cheap funding to inflate their debt levels dramatically, leaving the global debt position worse than in 2007.. Some of the emerging market debt is relatively small and the necessary rebalancing of the economy should be relatively easy to achieve, but even if it is only a cyclical limit as oppose to the structural limits of the developed economies, it is coinciding at the same time and will add to the global problem. As data on world GDP growth would suggest, it is not just Brazil where the numbers show “the exhaustion of a growth model based on consumption”.

Equities have rallied to all-time highs, sovereign debt is still just off their all-time lows and risk assets have compressed to their benchmarks in ways not dreamed about five years ago. The absence of hyper-inflation, once thought to be the consequence of this type of behavior, is nowhere to be seen and this has befuddled many economist and money manager alike.  In other words, what most people thought would happen has not happened and there is a lesson here which rests upon all of the Central Banks acting in concert.  Money is always put to use, it is never idle because it then earns nothing, but since it cannot be invested off-world it must go into the spaces that are provided and so it has. One can honestly say that the game has been rigged and this is an accurate statement but it makes no difference; this is the game that we have been given to play. Investors get to make all kinds of choices but we do not make the rules and arguing with reality may be an interesting academic exercise but it changes nothing in the end.

For those who want to get a sense of who the leading candidate in Italy is, at least based on concurrent mentions on Twitter, here is an application that tracks candidate references in real-time. Needless to say, Grillo and Berlusconi are head and shoulders above the rest.

The 2011 failure of the Super Committee produced a sequester that reduces budget authority in FY2013 by $85bn; resulting in estimated actual spending cuts of $42bn. What is less commonly known is that in FY2013 there is also a second sequester. The math behind the second sequester is even messier than the Super Committee sequester, but the bottom line is that it adds to the fiscal pain and highlights the complexity of the budgetary process.

Some interesting numbers from the Spooks.

Looking for a rebound?

Silver closed Friday`s trading session at $28.46 an ounce, capping off what has been an auspicious start to 2013.