Saudi Arabia

Even if the US economy really takes off in 2013, don`t look for oil and gasoline demand to overtake supply in the equation.

A broken safety net is no safety net at all.  

My thoughts on what is headed our way

On this lackluster Boxing Day dominated by illiquid moves in every asset class, we thought a few succinct minutes spent comprehending the US and European government policies of social welfare and their outcomes was time well spent. Canadian MP Pierre Poilievre delivers a rather epic speech destroying the myths of US and European 'wealth' noting that "Once the US citizen is in debt, the US government encourages them to stay in debt," noting that "the US government encouraged millions of Americans to spend money they did not have on homes they could not afford using loans they could never repay and then gave them a tax incentive never to repay it." His message, delivered seamlessly, notes the inordinate rise in the cost of all this borrowing, adding that "through debt interest alone, soon the US taxpayer will be funding 100% of the Chinese Military complex." From Dependence to Debt to the Welfare State and back to Dependence, this presentation puts incredible context on the false hope so many believe in the US and Europe. Everyone takes, nobody makes, work doesn't pay, indulgence doesn't cost, money is free, and money is worthless. Must watch.

• Here come the low margin products: Apple Tests Designs for TV (WSJ)
• Obama and Republicans Trade Offers to Avert Fiscal Crisis (BBG)
• Carney broaches dumping inflation target (FT)
• Bernanke Critics Can’t Fight Bonds Showing No Inflation (BBG)
• Corporate Taxes on Table in Cliff Talks (WSJ)
• US business chiefs back tax rise (FT)
• Greece Confident Bond Buyback Needed for Aid Succeeded (BBG)
• New Faith in Europe's Banks (WSJ)
• European Bank Sees Little Room for Rate Cuts (WSJ)
• North Korea Claims Success in Rocket Launch (WSJ)

In a sharp turn around from the open, Italian and Spanish 10yr government bond yield spreads over German bunds trade approx. 10bps tighter on the day, this follows several market events this morning that have lifted sentiment. Firstly from a fixed income perspective, both Spain and Greece managed to sell more in their respective t-bill auctions than analysts were expecting and thus has eased concerns ahead of longer dated issuance from Spain this Thursday. In terms of other trigger points for today's risk on tone the December headline reading in the German ZEW survey was positive for the first time since May 2012 coming in at an impressive 6.9 M/M from previous -15.7 with the ZEW economists adding that Germany will not face a recession. Finally, reports overnight have suggested that Italian PM Monti could be wooed by Centrist groups which means that if he wanted too the technocrat PM could stand for elections next year albeit under a different ticket. As such yesterday's concerns over the Italian political scene have abated and the FTSE MIB and the IBEX 35 are out performing the core EU bourses. Looking ahead highlights from the US include trade balance, wholesale inventories and a USD 32bln 3yr note auction, however, volumes and price action may remain light ahead of the key FOMC decision on Wednesday.

Own Physical Gold Now - While You Still Can!

“Farther from care than danger…”

The title above is a quote from Sir Thomas More’s classic, Utopia, describing a people’s overconfidence in their capacity for navigation given the compass for the first time.

The Bank of Korea increased gold reserves 20% last month to diversify investments, boosting holdings for the fourth time since June 2011 and underscoring increased demand by central banks according to Bloomberg.  The bank added 14 metric tons in November, bringing the total to 84.4 tons, the bank said in a statement today. By value, holdings increased about $780 million to $3.76 billion, equivalent to 1.2% of total reserves, the bank said. “Gold is a physical, safe asset,” the Bank of Korea said in the statement. The precious metal “is a way of diversification, which helps reduce investment risk in terms of foreign-exchange reserves management,” it said. The Bank of Korea bought 16 tons in July, 15 tons in November 2011 a further 25 tons over a one-month period from June to July last year.

Yesterday we noted that India was preparing to send its Navy into the South China Sea - defending its mineral rights from China's increasingly vociferous presence. The Philippines also expressed concern. Today, it's Vietnam's turn as Reuters reports the nation is condemning China's "serious violation of sovereignty" as Chinese boats sabotaged Vietnamese State oil and gas company - PetroVietnam's operations (by severing a seismic cable). The actions stem from China's 'belief' that two Vietnamese-owned archipelagos (Spratly and Paracel Islands) are theirs. While China (who oppose unilateral oil and gas development in disputed waters) argued somewhat comically that "Chinese fishing boats were operating normally," the Vietnamese saw it as "blatant violation of Vietnamese waters," and are deploying marine police and a border force to stop foreign vessels. As one analyst noted, "It's going to lead to friction."

As if global geopolitics were not tempestuous enough, it seems China's increased military presence near Indian state-run explorer Oil and Natural Gas Corp's (ONGC) Nam Con Son basin operations near Vietnam are sparking India's navy into action. India's Navy Chief Joshi according to Reuters, said it was prepared to act, if necessary, to protect its maritime and economic interests in the region. He added that "When the requirement is there, for example, in situations where our country's interests are involved, for example ONGC... we will be required to go there and we are prepared for that." While the Straits of Hormuz seem to get most of the world's attention, the growing trouble in the South China Sea is troubling since it "is one of the most important international waterways and freedom of navigation there is an issue of utmost concern to India," because a large portion of India's trade is through the South China Sea. Noting that the modernization of China's Navy is "truly impressive", Joshi concluded:  "...are we preparing for it? Are we having exercises of that nature? The short answer is yes!" The Chinese are not making any friends as The Phillippines also condemned China's actions.

Doug Casey often gets letters from angry readers who accuse him of hating America, disloyalty, and perhaps even treason. The truth is that he loves the idea that was America. It's the United State it has become for which he has nothing but contempt. Where to begin? ...the US Constitution was essentially a coup; the delegates to what we now call the Constitutional Convention were not empowered to replace the existing government – only to improve upon the Articles of Confederation between the then-independent states. The framers of the Constitution drafted it with the notion of a national government already in place, but calmed fears of loss of state sovereignty by calling the new government the "United States of America" – a verbal sleight of hand that worked for over half a century. Then the southern states decided to exercise what these words imply, their right to leave the union... and as the government becomes more powerful, it's completely predictable that everything – including the justice system – will become ever more politicized... As great as a US citizen's risk is in the marketplace these days, the greatest single risk to their wealth and health is the government.

In mid-December, the U.S. military will have only one aircraft carrier positioned in the Persian Gulf region for the first time in two years. At the same time, the Iranian navy said it was kicking off a 10-day exercise in the region. Oil prices spiked when Iran early this year threatened to close oil-shipping lanes in the region. If talks scheduled for December between Tehran and the IAEA turn sour, there exists for Iran the potential to exploit the security vacuum in the region and use its defensive position for geopolitical gain.

• Rough start for fiscal cliff talks (Politico)
• Europe Fails to Seal Greek Debt-Cut Deal in IMF Clash (Bloomberg)
• Japan’s Exports Reach Three-Year Low as Recession Looms (BBG)
• Beggars can be angry: Greek leaders round on aid delay (FT)
• More financial blogs launching soon: Financial Times Deutschland closing (Spiegel)
• China's backroom powerbrokers block reform candidates (Reuters)
• BOE Voted 8-1 to Halt Bond Purchases as QE Impact Questioned (Bloomberg). In the US the vote is 1-11
• UK heads for EU budget showdown (FT)
• Eurodollars - another epic scam: How gaming Libor became business as usual (Reuters)
• Clinton Shuttles in Mideast in Bid for Gaza Cease-Fire (Bloomberg)
• Fed Still Trying to Push Down Rates (Hilsenrath)

In a prior post, we discussed the implications of the global shadow banking system having risen to the unprecedented level of roughly 100% of global GDP. By now it should be quite obvious to even the most jaded optimists, that the reason why traditional leverage conduits are no longer applicable (and the only real source of bank credit creation is the Fed via the hopeless blocked up excess reserve pathway), and why credit money (and hence in a Keynesian world "growth") has to come via deposit-free, unregulated "shadow" venues, is that there are no longer enough good money good assets for conventional secured credit creation, and viable levered projected cash flows for conventional unsecured credit creation. Yet not the entire world has gone all in on this gambit, which together with the Fed's money printing, is truly the last bastion of "money' creation. In fact, as the FRB demonstrated, there are three distinct paradigms when it comes to source of credit creation or as it puts it, "financial structure": the US "massive shadow banking system" way, the German "conventional bank deposits funds loan creation" way, and the Saudi Arabian, and soon everyone else, "central planning to the max" way. In a nutshell, these are the three credit system structure extremes, with everything else currently inbetween. These can be visualized as follows:

Earlier today, the Financial Stability Board (FSB), one of the few transnational financial "supervisors" which is about as relevant in the grand scheme of things as the BIS, whose Basel III capitalization requirements will never be adopted for the simple reason that banks can not afford, now or ever, to delever and dispose of assets to the degree required for them to regain "stability" (nearly $4 trillion in Europe alone as we explained months ago), issued a report on Shadow Banking. The report is about 3 years late (Zero Hedge has been following this topic since 2010), and is largely meaningless, coming to the same conclusion as all other historical regulatory observations into shadow banking have done in the recent past, namely that it is too big, too unwieldy, and too risky, but that little if anything can be done about it. Specifically, the FSB finds that the size of the US shadow banking system is estimated to amount to $23 trillion (higher than our internal estimate of about $15 trillion due to the inclusion of various equity-linked products such as ETFs, which hardly fit the narrow definition of a "bank" with its three compulsory transformation vectors), is the largest in the world, followed by the Euro area with a $22 trillion shadow bank system (or 111% of total Euro GDP in 2011, down from 128% at its peak in 2007), and the UK in third, with $9 trillion. Combined total shadow banking, not to be confused with derivatives, which at least from a theoretical level can be said to offset each other (good luck with that when there is even one counterparty failure), is now $67 trillion, $6 trillion higher than previously thought, and virtually the same as global GDP of $70 trillion at the end of 2011.