Archive - Oct 2012 - Story

This past Wednesday, nobody reported that a squadron of 8 Israeli F-15 jets dropped 4 two-ton bombs on the giant Yarmouk missile factory on the outskirts of Sudan's capital Khartoum. Which is just as Israel wanted it. Because what otherwise would be a provocative incursion tantamount to war (if only Sudan wasn't a complete basket case of a country), was really nothing short of a dry-run for an Israeli attack on Iran. At least according to the Sunday Times. "A long-range Israeli bombing raid last week that was seen as a dry run for a forthcoming attack on Iran’s nuclear facilities has destroyed an Iranian-run plant making rockets and ballistic missiles in Sudan.... The raid, in which two people died, triggered panic across the city. Witnesses said they heard a series of loud blasts followed by the sound of ammunition exploding. “It was a double impact — the explosion at the factory and then the ammunition flying into the neighbourhood,” said Abd-al Ghadir Mohammed, 31, a resident. "The ground shook. Some homes were badly damaged." And... nobody cares. Here we leave it up to readers to imagine the epic horror, deep revulsion that would greet news that Iran had conducted a pre-emptive strike against Israel by blowing up a missile factory in Turkey, killing two innocent people, just to make sure it can.

For two decades the rate of growth of world trade volumes considerably outstripped that of industrial production as credit-fueled globalization created huge imbalances in the world. As Diapason Commodities' Sean Corrigan indicates in these three simple charts, all that vendor-financed circular exuberance has come to an end. The bottom-line is that forced deleveraging (not least of which in Europe) is crushing the credit-fueled (and unsustainable) dream of endless growth as debt saturation has been reached (on private and now public balance sheets). To wit: Global Trade Volume growth is deep in the danger zone and about to turn negative; as the hopes of so many Sinomaniacs and Pollyannas is slowly peeled back to a righteous recognition of reality.

The NYSE has just released a statement clarifying its hours tomorrow - due to the storm:

*NYSE TRADING FLOOR TO CLOSE TOMORROW; ALL TRADING TO BE ON ARCA

So, hold tight as all those low-lying humans will have left the building in the calm thoughtful hands of Johnny-5 and his friends.

It seems like it was just yesterday that we were posting pictures of empty shelves at New York supermarkets ahead of the epic dud that was Hurricane Irene. It is now one year later, and it is time for the obligatory snapshots of empty shelves, such as this one showing the bread isle at the Food Emporium on 68th and Broadway. Many more coming as all local New York food stores and pharmacies finally sell out their expired and extended inventory.

Yesterday we posted the official statement of Bundesbank executive board member Carl-Ludwig Thiele, which in turn was a response to a recent surge in concerns about the safety and sanctity of German sovereign gold, held mostly abroad (if a major part of it held in London had been secretly repatriated), and demands by the general public - i.e., those who actually own the gold - for either an audit, or full repatriation, or both. There are, however, some problems with the official Bundesbank statement: the statistics cited in it, as well as the various explanations, are wrong, incorrect or misleading. Below we present some of the "facts" stated by Herr Thiele, and what the truth is.

First it was governor Cuomo, now it is Mike Bloomberg holding a press conference discussing advance preparations for Sandy, and just like last year, the first thing to be done, is the order of a mandatory evacuation of all low-lying areas, where some 375,000 New Yorkers live, contained in Zone A - those who don't voluntarily evacuate will not be arrested, but are being "selfish" according to Mayor Mike (it is unclear what happens if the non-evacuatees are also found to be in possession of a highly illegal 32 Oz coke container... that may be a felony offense). Depending on the storm surge, if any, it is likely that Zones B and C will also be evacuated. To find if you live in a zone to be evacuated, go to this website, alternatively the full hurricane evacuation preparedness map is presented below. And remember: if packing a go bag: no sugar... anything but sugar, or else Nurse Sam will be very angry.

What this data does not show are the reverse transfers via interest payments. There is no data (that I can find) on treasury interest payments received by income quintile, but assuming that the top quintile dominates income from interest (as they dominate ownership of financial assets, owning over 95% of all financial assets) this leaves the lower income quintiles benefiting from transfer payments, the top quintile benefiting from interest (as well as policies like bank bailouts, corporate subsidies, and quantitative easing, whose benefits overwhelmingly benefit the top quintile), and squeezing the taxpaying middle quintiles who receive neither the benefits of interest payments, nor significant welfare transfers. To misquote George Orwell, when it comes to the national debt and who takes its burden, some pigs are definitely more equal than others.

Looking back, it seems like only yesterday that the world's realized, "out of the blue" that Europe was, gasp, insovlent. Alas, as the following terrific "walk through memory lane" interactive infographic from the Guardian reveals, it has now been well over three years and counting, with everything starting with this October 2009 article in the FT, "Greece vows action to cut budget deficit" in which then-PM G-Pap revealed a massive hole in the Greek official economic data and that its budget deficit would be double what was previously forecast. The rest is history, and now Greece is a shell, with unemployment off the charts, its finances and economy in shambles, and the whole country serving as a passthru funding vehicle for Europe to keep its own banks, and the ECB, solvent.

It seems like it was only yesterday that the panic ahead of Hurricane Irene, which was a light breeze by the time it hit NYC, was being spread by various government agencies and every possible media. It is deja vu time, and moments ago, in order to be "fully prepared" ahead of Frankenstorm Sandy, NY governor Cuomo just announced that at 7:00 pm tonight, the New York Metropolitan Transit Authority, i..e., subways, buses and trains, is suspending all service at 7:00 pm (and 1,100 national guards are being activated) and will be halted until Wednesday at the earliest. This also means that tomorrow Wall Street will be a complete ghost town as everyone takes two days off, and the algos will be the only ones in charge (more or less as usual).

The 2008 elections were contested on the basis of rescuing the banks and financial markets while claiming that this was ESSENTIAL to save the economy. Four years later, the 2012 elections are being contested on the basis that the economy HAS been saved, but more needs to be done to ensure that it  STAYS saved. Wall Street, as one of the first recipients of the new “money” cascading from both the Fed and the Treasury, has been happy to buy this. Main Street does NOT buy it. The result is an election campaign in the context of a comparative calm on financial markets and a seething discontent in the electorate.

This is no longer your "father's economy." The importance of this shift in the U.S. from away from being the epicenter of global production and manufacturing to a service and finance based economy should not be overlooked.  This transition is responsible for the issues that are impeding economic growth in the U.S. today from structural unemployment, declining wage growth and lower economic prosperity. What does this have to do with GDP and exports?  Well, just about everything. With exports declining which is impacting corporate profit margins, employment conditions deteriorating, and business spending contracting - these are all the necessary ingredients to spin out a negative economic growth rate at some point in the not so distant future.

Since the 2008 financial crisis the foundations of the global economy have been in repair, translating into a prolonged period of economic frailty. Against this backdrop, social and political tensions have increased between citizens and government, international institutions and governments, and individual nation states. The European debt crisis remains the largest challenge facing the global economy. A negative resolution emanating from the world’s largest economic bloc would cause harmful ripple effects worldwide in global trade flows. More importantly, it could also mark a paradigm shift in international relations, dealing a critical blow to what has been a relentless trend towards liberalism since the end of World War II, while providing fecund ground for a resurgence in realist ideology. Interestingly though, constructivism may be at the forefront in explaining the current dilemma between the European core and its periphery. It would also be wise to ponder the idea of whether a supranational government could exist. Proceeding down a path with a likely dead end would consume precious resources and lead to widespread suffering among every day citizens.

Two of the saving features that allowed Japan to internalize 30-some years of failed fiscal and monetary policy (and yes, not one, not two, but now 8 failed iterations of quantitative easing) and to offset one relentless deflationary vortex was i) its demographics coupled with an investing culture that favors deposits and bonds over equities, which incentivized its aging population to invest its savings into government bonds, and ii) its trade surplus which led to foreign capital flows to enter the country. Well, as far as i) is concerned, Japan may have reached its demographic limit, since as reported several months ago, Japan's pension funds are now not only selling JGBs to meet redemption and cash needs, but forced to do truly stupid things like investing in the riskiest of assets to generate a return at any cost. In other words, demographics will no longer be a natural source of demand for deficit funds. As for ii), well... here is what has happened with Japan's trade surplus status in recent weeks following the collapse in the country's foreign relationship with China.

"We do not have the slightest doubt that our holdings in New York and Paris are also made up of the purest fine gold. We have at our disposal fully documented lists of the bars, and our partner central banks send us every year confirmation not only of the bars’ existence but also of their quality.... We had nothing but the best of experiences with our partners in New York, London and Paris. There was never any doubt about the security of Germany’s gold. In future, we wish to continue to keep gold at international gold trading centres so that, when push comes to shove, we can have it available as a reserve asset as soon as possible. Gold stored in your home safe is not immediately available as collateral in case you need foreign currency....for years, our gold has been stored by the highly esteemed central banks of the United States, Great Britain and France without provoking any complaints whatsoever – not by just any fly-by-night operators. Part of the debate in Germany has veered somewhat towards the absurd."

First, it was Greece who failed to stick with the "do not rock the boat until the US election" script so meticulously crafted by Tim Geithner, and now it is Italy's turn as Europe threatens to come unhinged precisely in the week when complete peace and quiet is needed to avoid deflecting attention from the peak season of the US presidential theater. As Reuters reports, "Tens of thousands of people marched through Rome in a "No Monti Day" on Saturday, some throwing eggs and spraying graffiti to protest against austerity measures introduced by Prime Minister Mario Monti's government. Appointed in November when Italy risked being sucked into the euro zone debt crisis, Monti has pushed through painful austerity measures to cut the country's massive debt, including tax hikes, spending cuts and a pension overhaul. "We are here against Monti and his politics, the same politics as all over Europe, that brought Greece to its knees and that are destroying half of Europe, public schools, health care," said demonstrator Giorgio Cremaschi... In another demonstration in northern Italy, a small group of protesters scuffled with police near where Monti was addressing a rally on the theme of family values." So who gets to capitalize on the latest bout of surging discontent with the Goldman appointed technocrat? Why the same man who yesterday was sentenced to several years in jail (a sentence that will be never carried out of course), Silvio Berlusconi, and whom the ECB singlehandedly took down nearly a year ago, when it sent Italian bond yields to record highs: "The center-right bloc will decide "in the next few days" whether to withdraw confidence for Prime Minister Mario Monti in parliament or support him until elections in April, former Prime Minister Silvio Berlusconi said on Saturday. Monti's government of non-elected technocrats is backed by the center-left, the center and the center-right. It would have to resign if it lost the support of the entire center-right."