Global Economy

We have discussed the probability (around 50%) and possibility of a Greek exit from the Euro ad nauseum; how the post-election anti-austerity rage is bringing the world to a new realization that this is probable not possible and the widespread risk aversion of this event is much more of a global event than local - no matter how many times you are told how small Greece is. Critically, as BofAML notes, it is the systemic threat of an untamed banking and sovereign crisis in Europe which makes multiple-sigma events less 'tail' and more 'normal'. With money due to run out at the latest by July, new elections mid-June (that show massive support for the anti-bailout party), and the impacts on the real economy, exchange rate and inflation fears, and default and ECB balance sheet implications; it seems there are also strong incentives to keep Greece in. However, there is a political line of compromise and austerity that will be hard to cross for both parties which, if it failed - and it doesn't have much time - would mean a very fast 'ring-fencing' would need to occur for this not to thermonuclear with the three main channels of volatility transmission to the rest of the world being: banking and finance, trade, and confidence - all three of which are active already with Asian trade (and banking exposure) seemingly under-appreciated in our view with Singapore dramatically exposed with a stunning 60%-plus of GDP tied up in European bank claims.

All you need to read.

Germany's Bundesbank confirmed yesterday that the German gold reserves are held overseas by the Federal Reserve, the Bank of England and the Banque de France. The German parliament, the Bundestag, has been examining the accounting of German gold reserves at the Bundesbank. The parliament's Budget Committee, one of the most powerful committees in the German parliament, had requested a critical report by the Federal Audit Office. "The decision has been unanimous," the paper quoted the Christian Social Union budget expert Herbert Frankenhauser. The newspaper report alleged "account cheating" regarding the German gold reserves. According to a Bild report, the federal auditing office complained of "inadequate diligence of the accounting of the gold reserves, which are stored in some foreign countries. Repatriation of the gold reserves is encouraged.” The Bundesbank confirmed that it, like many central banks, keeps part of its reserves in vaults at foreign central banks and said some of its gold is held at the Federal Reserve Bank of New York, the Banque de France and the Bank of England. It declined to say how much gold in total is held overseas or how much gold is stored with the Federal Reserve, Bank of England and Banque de France. The Bundesbank statement said it had complete confidence in the integrity of the central banks where the gold is held. "From these central banks, the German Bundesbank annually gets confirmation of the gold holdings in troy ounces as a basis for its accounting," the Bundesbank’s statement said.

Explaining why and how the global monetary system is failing, why it is too late to stop, what will come next, and why the crisis is only financial – not commercial.

All you need to read and some more.

Unbelievable.

That is the only way to express this author’s utter bewilderment that former Federal Reserve chairman Alan Greenspan is still given an outlet to speak his mind.  Actually, I am surprised Mr. Greenspan has the audacity to show his face, let alone speak, in public after the economic destruction he is responsible for. It was because of Greenspan, of course, that the world economy is still muddling its way along with painfully high unemployment.  His decision to prop up the stock market with money printing under any and every threat of a downtick in growth, also known as the Greenspan Put, created an environment of easy credit, reckless spending, and along with the federal government’s initiatives to encourage home ownership, the foundation from which a housing bubble could emerge. It was moral hazard bolstering on a massive scale.  Wall Street quickly learned (and the lesson sadly continues today) that the Federal Reserve stands ready to inflate should the Dow begin to plummet by any significant amount.  Following his departure from the chairmanship and bursting of the housing bubble, Greenspan quickly took to the press and denied any responsibility for financial crisis which was a result in due part to the crash in home prices. 

Many, if not most, people would agree with the general use of subsidies in a vertical equity fashion, or the efficient redistribution of wealth for a common social purpose: social justice to provide shelter for those who need it. It is subsidies in housing designed to support a political and not a socioeconomic purpose that bother me. Subsidies as they continue to exist in the US in housing follow in this category – much in exclusivity these days to the subsidies in other developed nations the world over, at least in quantifiable terms.

Goldman maintains “constructive” 6-month forecast, says case for higher prices remains in place. Goldman stands by its forecast for a rally in gold this year, saying that the precious metal will advance to $1,840/oz over six months as the U.S. central bank embarks on a third round of stimulus in June. The precious metal remains the “currency of last resort,” according to analysts led by Jeffrey Currie in a report released yesterday. Goldman’s gold forecast implies a 15% return in 6 months. “In early 2009, we suggested that gold had become the currency of last resort, overtaking the U.S. dollar’s status due the rising risk of sovereign default and debasement concerns,” Currie wrote in the report. Even as the U.S. currency advanced and gold fell on the European crisis in recent months, “it is too early for the dollar to reclaim this status,” they wrote. “The case for higher gold prices remains in place,” the analysts wrote. “U.S. economic and employment data has now disappointed for several weeks, European election results point to further stress in the euro area, while anecdotal data suggests that physical gold demand remains resilient.”

The global economy is facing a structural surplus of labor and a scarcity of paid work. Here is the critical backdrop for the global recession that is unfolding and the stated desire of central banks and states everywhere for "economic growth": most of the so-called "growth" since the 2008 global financial meltdown was funded by sovereign debt and "free money" spun by central banks, not organic growth based on rising earned incomes. Take away the speculation dependent on "free money" and the global stimulus dependent on massive quantities of fresh debt, and how much "growth" would be left? The Internet has enabled enormous reductions of labor input. A mere 15 years ago when I first learned HTML (1997), you had to code your own site or learn some fairly sophisticated website creation/management software packages, and you needed to set up a server or pay a host. Now anyone can set up a Blogspot or equivalent blog for free in a few minutes with few (if any) technical skills, and the site is free. The other trend is the cost of labor in the developed West is rising as systemic friction adds cost without adding productivity. Workers in the U.S. only see their wages stagnate, but their employers see total labor costs rising as healthcare costs rise year after year. In effect, the U.S. pays an 8% VAT tax to support a bloated, paperwork-pushing, inefficient and fraud-laced healthcare system that costs twice as much as a percentage of GDP as other advanced democracies. No wonder many entrepreneurs are selling their high-overhead businesses and becoming flexible, low-cost one-person enterprises.

• Greek pro-bailout parties lack majority, final poll results (Reuters)
• Greek Election Gridlock Raises Risk for Bailout, Euro Future (Bloomberg)
• Socialist Hollande ousts Sarkozy as French leader (Reuters)
• Merkozy End Means Franco-German Gulf; Greek Voters Rebel (Bloomberg)
• Election swing leaves Greece teetering (Kathimerini)
• Merkel's Coalition Appears to Suffer Loss in German State (WSJ)
• The Only Solution to the Eurozone Crisis (FT)
• Cameron Faces Clamour From Party Right (FT)
• Falcone’s LightSquared Said to Get Week Credit Extension (Bloomberg)
• Hungary plans three-year, 15 billion euro IMF deal: state sec (Reuters)
• Putin pledges unity on return to Kremlin (Reuters)

If history has taught one certain lesson, it is that the less fettered an economy, the better humankind is able to do what it does best: run from trouble and run toward opportunity. In this way mistakes are quickly resolved and progress assured. Conversely, the deeper the muck of regulation, mandates, taxes, subsidies and other bureaucratic meddling, the slower we humans are in following our natural instincts until the point that progress is slowed or even stopped. It is said that history doesn't repeat itself, but it often rhymes. In the current circumstances, it appears that enough time has passed that current generations have completely forgotten the critical connection between the ability of humans to freely pursue their aspirations and economic progress. You can see this ignorance in the popular demand for even more, not less, meddling in the affairs of humankind. Should this trend continue – and for reasons I will touch on momentarily, I firmly believe it will – then the aspirations of the productive minority will soon be dampened by ever higher taxes and other attempts to "level the playing field" and the global economy, already in tatters, will fall off the edge. There is no more timely nor acute example of this growing trend than what is currently going on in France. I refer, of course, to the first round of the presidential election process, scheduled for this weekend.

One month later the purge is over: "Norway’s sovereign wealth fund sold all its Irish and Portuguese government bonds after rejecting the Greek debt swap and warned that Europe faces considerable challenges." Wait, what's that? The Eurozone's political strongarming (think Steve Rattner and GM) was unable to force the world's most powerful sovereign wealth fund into agreeing to what was essentially extortion when bank after bank noted how delighted they are to be bent over and take an 80% writedown on their Greek holdings. Stunning. But at least we now know who will be suing Greece shortly in an attempt to recoup par value of their strong law bonds: grab the popcorn - Norway vs Greece will be quite a spectacle. As for their dump of Irish and Portuguese bonds, no surprise there: fool me once (in perpetuity) shame on me, fool me twice, shame on Dan Loeb... who was buying everything Norway was selling. We wonder who ends up right.

All you need to read.

• Chinese dissident seeks exile, strains U.S.-China ties (Reuters)
• Sarkozy and Hollande lock horns on TV (FT)
• UK in furious rejection of EU bank plan (FT)
• EU Fails to Reach Deal on Capital (WSJ)
• China energy use may be capped for 2015 (China Daily)
• Buffett Trails S&P 500 for Third Straight Year (Bloomberg)
• King admits failing to ‘shout’ about risk (FT)
• Obama promises 110,000 new summer jobs for youth (Reuters)
• China sturdy enough for reforms: Geithner (Reuters)
• Geithner repeats call for stronger yuan (Reuters)

The phrase “New World Order” is so loaded with explosive assumptions and perceptions that its very usage has become a kind of journalistic landmine.  Many analysts (some in the mainstream) have attempted to write about and discuss this very real sociopolitical ideology in a plain and exploratory manner, using a fair hand and supporting data, only to be attacked, ridiculed, or completely ignored before they get a chance to put forward their work.  The reason is quite simple; much of the general public has been mentally inoculated against the very whisper of the terminology.  That is to say, they have been conditioned to exhibit a negative reaction to such discussion instinctively without even knowing why....  The Liberty Movement has always defined the NWO as a concerted effort by elitist organizations using political manipulation, economic subversion, and even war, to centralize global power into the hands of an unelected and unaccountable governing body.  The goal; to one day completely dismantle individual, state, and national sovereignty.  However, what I and many others hold as fact on the New World Order is not enough.  We must examine the original source and how we came to our mutual conclusions.