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Posts Tagged ‘european central bank’

Why We Expect To See $2,300 Gold Prices By January 2014 (GLD, IAU)

October 21st, 2012

Jeff Clark: While many of us at Casey Research don’t like making price predictions, and certainly ones accompanied by a specific date, it’s hard to ignore the correlation between Read more…

Commodities, ETF, Gold, Precious Metals

The Secret Panic Of European Banks

September 10th, 2012

Jeff Nielson: Regular readers know that going back more than a year now, I have been outlining two, potential (and nearly opposite) scenarios going forward. I indicated that either our economies would plummet into a high-inflation/hyperinflation price-spiral Read more…

Currency, Europe, Financials

Europe: Supra Mario, Bond Vigilante

September 9th, 2012

FOR the second time or more since May, today’s Handelsblatt newspaper in Germany carries a big picture of Edvard Munch’s The Scream. Read more…

Europe, Markets

European Central Bank Capping Rates on PIIGS? Wait Till Traders Call Its Bluff

August 20th, 2012

EconMatters: The big buzz about the debt-embattled Euro Zone on an otherwise quiet Sunday came from German news magazine Der Spiegel that ECB Read more…

Europe

CIA Now Thinks Greece Military Coup Possible

June 1st, 2011

Despite last year’s 110 billion euro Greece bailout — from the European Union, the International Monetary Fund, and the European Central Bank — there remains serious concern that the periphery EU nation will be unable to continue its debt repayments. Due to the increasing severity of the problem, and the ongoing resistance to additional support, the Central Intelligence Agency has now issued a report warning on how worsening Greek unrest could bring rise to even a military coup.

According to Turkey’s Daily News & Economic Review:

“According to he CIA report, ongoing street protests in crisis-hit Greece could turn into escalated violence and a rebellion and the Greek government could lose control, said Bild. The newspaper said the CIA report talks of a possible military coup if the situation becomes more serious and uncontrolled.

“Greece is under immense pressure owing to public debt that has swollen to 340 billion euros. The EU, IMF and European Central Bank are pressing Greece to step up a privatization program and get all political parties to approve more austerity and reform measures that have sparked violent protests, but emergency talks called by the president on Friday failed to make any headway, AFP reported.

“Opposition parties have mostly refused to support the government in its quest to cut spending by trimming an overblown civil service and the sweeping privatization drive announced this week has attracted even stronger protests.”

A number of European Union countries including Germany, Finland, and the Netherlands have lost already lost interest in and support for extending any further bailout funds to Greece as its austerity measures continue to flounder. You can read more details in the Daily News & Economic Review’s coverage of the recent CIA report on how a military coup is possible in Greece.

Best,

Rocky Vega,
The Daily Reckoning

CIA Now Thinks Greece Military Coup Possible originally appeared in the Daily Reckoning. The Daily Reckoning provides over half a million subscribers with literary economic perspective, global market analysis, and contrarian investment ideas.

Read more here:
CIA Now Thinks Greece Military Coup Possible




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Uncategorized

The Amphora Report’s 2010 Topics in Review (4 of 4)

January 3rd, 2011

[Introduction below, and then continuing from Part 3.]

In 14 editions of the Amphora Report this year we have covered nearly 30 topics, many of which overlap in some way. What binds them all into a coherent set is our view that the economic policies being implemented in nearly all major countries are not just unsustainable but in some cases outright reckless. These countries include the US, the issuer of the world’s reserve currency. By implication, the dollar is likely to lose its pre-eminent reserve currency status in the coming years. The result is bound to be a period of global economic and financial market turmoil and, for most if not all traditional financial assets, underperformance in real, purchasing-power adjusted terms. What follows below is a list of all topics, including both a brief summary and an update of our thinking for 2011.

THE FED’S TEENAGE TEMPER TANTRUM | VOL 1/11

When a young child is caught in a lie, they deny it. As they grow, they find ever more elaborate ways of deceiving their parents, only to be caught out time and again. Finally, as a teenager, they give up trying to deceive and begin simply to blame their parents for their transgressions, rather than take responsibility. Recent statements by Federal Reserve officials suggest that, following a long childhood, the Fed has now entered its teenage years.

It is highly unusual for the Fed to offer opinions about US government economic policy, much less criticize it, but Chairman Bernanke did just that earlier this year, when he said that the Congress should focus on getting the deficit under control and leave the economy to the Fed. Yet the Congress has now extended tax cuts and unemployment benefits, actions which will increase the deficit. The Fed may not be pleased with this development. It might result in a scaling back of planned Treasury bond purchases. But regardless, relations between the government and the Fed are more strained today than at any time since the early 1980s, when Paul Volcker came under fire for raising interest rates in the middle of a major recession. With Ron Paul, a noted Fed critic, assuming the Chairmanship of the House Monetary Affairs Subcommittee next year, the acrimony is all but certain to continue in 2011.

GUESS WHAT’S COMING TO DINNER: INFLATION! | VOL 1/12

The surge in global food prices will soon arrive on the dinner table. However, to focus on the direct inflationary impact of higher food prices alone is to miss the bigger, far more inflationary picture implied by rising wage demands in developing countries. Beginning next year, consumers in most developed economies will discover to their surprise that “food” price inflation is creeping into an astonishingly wide variety of consumer goods.

Food price inflation is a dangerous animal. As a product which must be purchased and consumed on a daily basis, consumers are acutely aware of it and, for those on low incomes, it can threaten their basic health and that of their family. This is why the recent surge in global food prices is so significant. And so far, food prices are holding these gains, with corn, wheat and soya bean prices all near recent highs. In 2011, as food price inflation feeds into wage pressures in emerging markets, it will gradually transform into a more general manufactured goods price inflation the world over.

FROM STAGNATION TO STAGFLATION | VOL 1/12

US CPI has been trending lower amidst a stagnating US economy. However, a look behind the headline economic data and across some financial market developments reveals a disturbing picture, that in fact the US economy may already have entered a “stagflationary” situation not unlike the late 1970s. This spells danger for financial asset prices.

Many economic commentators have speculated that the US might find itself in a stagflationary situation as a result of a weaker dollar, higher oil and import prices generally, yet with a weak jobs market and high unemployment. We argue that, if you look behind the headline economic data, we may already be there. While the Fed claims that inflation is undesirably low, they are referring to the current rate of core price inflation, which excludes food and energy. Also, the CPI calculation methodology has changed dramatically through the years. Indeed, if CPI is measured in the same way in which it was in the 1970s, for example, the last time the US economy was mired in stagflation, then you find that the current rate of overall CPI is over 8% y/y and rising, notwithstanding broad unemployment in the double-digits. As pipeline price inflation is still on the way, this situation is likely to worsen in 2011.

PLUS ÇA CHANGE (PLUS C’EST LA MÊME CHOSE) | VOL 1/13

This past week provided an excellent example of this old French saying, which translates somewhat inelegantly into English as: “The more things change, the more they stay the same”. The US mid-term elections may have resulted, as expected, in a large victory for the Republicans, who now control the House of Representatives. But notwithstanding some grand headlines in the press, this is highly unlikely to change current US or global economic and financial market trends.

Our assessment of the US political outlook following the recent mid-term elections was not entirely correct. We expected complete gridlock, yet there has already been agreement to extend both tax cuts and unemployment benefits. We doubt we are the only ones surprised by this. However, while these actions may not qualify as gridlock, they do nevertheless reinforce our ultimate conclusion in this topic, which is that the US government is not going to be able to address its deficit during the coming two years. Indeed, the deficit is now going to be commensurately larger in 2011 and 2012, and perhaps beyond.

THE TALE OF ANDRÉ PRENNER, A PARABLE FOR OUR TIMES | VOL 1/13

In this edition, we take a brief pause from our normal economic and financial market commentary with this tale of common sense economic calculation and action. And no, we do not believe that the world is any more complex than we present it here. If you want to understand economics, you need first understand two things: That the human condition of one of scarcity and uncertainty; and that absent rational economic calculation and a certain degree of passionate risk-taking, nothing good can ever come of it.

As this topic was a parable, rather than an economic or investment analysis, there is really nothing to update other than to say that we still don’t believe that the US is as attractive a place to do business as it used to be, with obvious consequences for future economic growth. We would like to draw readers’ attention to the protagonist’s name, however. Did anyone make the connection between his name and the themes in the story? Hint: Adopt a gentle French accent and speak the name softly as one long word.

A CENTURY OF MONEY MISCHIEF | VOL 1/14

The US Fed recently celebrated the centennial of its founding at a historic hotel on Jekyll Island, off the cost of Georgia, where a secret meeting took place to lay the political foundations for what would become the Federal Reserve System. But what, exactly, does the Fed have to celebrate, as it was created, ostensibly, to promote financial stability?

What can we say? More and more observers are coming to the inevitable conclusion that the Fed has not done a particularly good job at promoting financial stability, nor at protecting the purchasing power of the dollar through the years. But why? Is the Fed incompetent? Is it poorly designed? Does it have the wrong mandate? We are pleased to learn that Ron Paul will be Chairing the US House Monetary Affairs Subcommittee next year as he is likely to ask these questions. 2011 may be the year that we begin to get some answers.

THE RISING SEA OF DEBT | VOL 1/14

As yet another wave of crisis rolls across the global financial markets, it is instructive to step back and look at the entire sea of debt. As is postulated by global warming theory, rising temperatures result in rising sea levels. Well, as the global debt crisis heats up and the sea of debt rises, it eventually yet suddenly swamps those living close to the shore. Whether a home is lost to foreclosure, a factory to corporate bankruptcy, or both are lost to the sea, makes little difference to the holders of the debt that is defaulted on. From an investor’s point of view, there is simply too much credit risk in the sea and they want it reduced. At first, politicians presumed this could be summarily accomplished with sovereign bailouts. But now the sovereigns themselves, one by one like dominoes, are toppling over. The credit risk, sovereign and all, must be reduced. This can occur either through default or currency devaluation. With few exceptions, policymakers appear to prefer the latter.

We attempted to pull many previous threads into this topic, which looks at the debt crisis from the investor’s perspective. They want less credit risk and they are going to find a way to reduce it, one way or the other. 2011 will be yet another year in which policymakers struggle to prevent such an implied deleveraging. What forms of fiscal and monetary stimulus are we yet to see? How will investors react?  We don’t presume to know the specifics but what we do know is that increasingly arbitrary attempts to prevent financial markets doing what they know they must do are going to fail. That credit risk will be reduced in the end, through some combination of default and currency devaluation. The only question is how much additional economic damage will be unnecessarily caused along the way. Judging by the experience of 2008-10, there could be much additional damage indeed.

We wish all of our readers a pleasant and festive holiday season, free from the relentless doom and gloom of the Amphora Report. Best Wishes to all for a happy and prosperous 2011.

Regards,

John Butler,
for The Daily Reckoning

[Editor's Note: The above essay is excerpted from The Amphora Report, which is dedicated to providing the defensive investor with practical ideas for protecting wealth and maintaining liquidity in a world in which currencies are no longer reliable stores of value.]

The Amphora Report’s 2010 Topics in Review (4 of 4) originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
The Amphora Report’s 2010 Topics in Review (4 of 4)




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Uncategorized

The Amphora Report’s 2010 Topics in Review (2 of 4)

December 29th, 2010

[Continued from Part 1.]

In 14 editions of the Amphora Report this year we have covered nearly 30 topics, many of which overlap in some way. What binds them all into a coherent set is our view that the economic policies being implemented in nearly all major countries are not just unsustainable but in some cases outright reckless. These countries include the US, the issuer of the world’s reserve currency. By implication, the dollar is likely to lose its pre-eminent reserve currency status in the coming years. The result is bound to be a period of global economic and financial market turmoil and, for most if not all traditional financial assets, underperformance in real, purchasing-power adjusted terms. What follows below is a list of all topics, including both a brief summary and an update of our thinking for 2011.

HOW WOULD EINSTEIN VALUE FINANCIAL ASSETS? VOL 1/5

With this brief topic we presented the idea that assets can only be valued relative to other assets, rather than in absolute terms, as things only have an identifiable, quantifiable value if they are exchanged for something else. All other measures of value are ultimately subjective to the individual rather than objective in the marketplace. Einstein showed that the speed of light was the only constant against the universe against which all else could be measured. In financial markets, the only constant is the time value of money, as represented by the term structure of interest rates. If a central bank sets interest rates at an artificial level, asset prices will become distorted and resources misallocated, with potentially severe economic consequences.

While highly theoretical, this topic becomes more relevant as the US Fed becomes increasingly desperate in its desire to stimulate economic activity. Previously considered a fringe view, it is now widely believed that US financial asset prices are distorted in some way by Fed policy actions. Indeed, in a recent op-ed published in the Washington Post, Fed Chairman Bernanke made explicit that monetary stimulus was likely to support the stock market which, in turn, was likely to stimulate economic activity. But if asset prices are distorted, are resources being misallocated? We believe so. These misallocations will only increase in 2011 as more and more artificially stimulus is thrown at the economy.

THE ASSET-PRICING IMPLICATIONS OF THE GREAT BAILOUT | VOL 1/5

Moving from theory and into practice, we investigate in detail just how we believe asset prices are being distorted by various forms of economic stimulus. In general, we find that the assets for which values are most likely distorted to the upside are those with relatively uncertain and long-dated cash flows. Investors should therefore be underweight growth vs. value assets and underweight nominal vs. real assets. In this regard, investors should be particularly concerned about recent developments in euro-area and US state and municipal debt markets.

Since we wrote this edition, asset prices in general have risen in value, with the exception of the sovereign and US state and municipal debt markets, where prices are generally lower, in some cases dramatically so. Also, real assets such as commodities have outperformed nominal quite substantially in the second half of the year. As recent moves to add additional stimulus to the US economy are likely to reinforce existing distortions in asset prices, we expect these trends, in general, to continue in 2011, although probably at a more gradual rate following the rather dramatic developments in recent months.

IS THIS THE BEGINNING OF THE NEXT CRISIS? VOL 1/6

No. The great financial crisis of 2008 never ended. It merely changed form. When public authorities stepped in to prevent a further deleveraging of the financial system, they explicitly or implicitly assumed responsibility for much of the debt that was collapsing in value. In doing so, they issued more of their own and also raised expectations for future issuance. It is obvious that this is unsustainable. No realistic real growth assumption would allow this debt to be paid pack at its present value. These debts are going to be devalued either by inflation or some form of default.

Where others observe a series of separate crises, ranging from US subprime mortgage debt to euro-area sovereign debt, we see a continuum. The financial risk of bad lending decisions, once originated in the form of debt, has never left the system but rather has moved from place to place. Ireland is a clear example of this, as back when the banks were at risk of failure, the government stepped in and guaranteed not just deposits but the complete liabilities of its entire banking system. It may have taken a number of months but the financial markets finally figured out that the debt was still there, only in sovereign form. This sort of debt “shell game” is being played over much of the world and will not end until there is a proper deleveraging of the global financial system, through some combination of debt default and currency devaluation. We have a long way to go yet.

REAR-VIEW MIRROR MYOPIA | VOL 1/6

The dramatic rise in the price of gold in recent years finally began to receive attention in the mainstream financial press in 2010. But rather than analyze the fundamental reasons behind this trend, much commentary has suggested that gold may now be in a “bubble”. When looking at the past 20 years or so, gold does look expensive when compared to financial assets. But given that the risks of a general global sovereign debt and fiat currency crisis are without doubt the highest they have been for many decades, to focus only on the past 20 years is to demonstrate severe rear-view mirror myopia.

Gold continues to feature as a popular topic in the mainstream financial press, although it still receives far less attention than traditional financial assets. Certainly the rally in gold has gone a long way and a growing number of investors have no doubt acquired some position in the metal, either as physical bullion or via ETFs, futures, or other forms of “paper” gold. But let’s put this in perspective: According to the World Gold Council, the total value of investment gold is only some 2% of the total value of global financial assets, far below historical averages. Yet central banks continue to expand their balance sheets, aggressively in the case of the US Fed, and sovereign debt crises are spreading. The risks of devaluation and/or default continue to increase. In this context, we expect the gold price to continue to rise in 2011, not only in dollar terms but also in that of most global currencies.

IS GOLD ALL THAT GLITTERS? VOL 1/6

Notwithstanding the view above, that the gold price is likely to continue to rise in 2011, this does not imply that gold is going to outperform all other real assets. Indeed, in 2010, up about 30%, gold was far from the top performer. Silver rose by around twice as much, as did coffee. Cotton doubled in value.  Certain rare earth minerals multiplied their value several times over.

While we would not presume to debate anyone touting the wealth-preserving properties of gold through the ages, it stands to basic economic reason that diversification should always play a prominent role in any defensive investment strategy. 2010 provides ample evidence of this. At times gold was the outperformer amongst commodities, yet during the summer agricultural commodities were the top performers and, beginning in September, silver began to surge. There are no doubt those out there who think they are able to pick the best asset at any point in time but we are of the opinion that holding a broad, well-diversified portfolio of liquid commodities is a better answer to the dilemma posed by global debt default and devaluation risks. As we enter 2011, nothing has changed our thinking in this regard.

THE BENCHMARK IS IN THE EYE OF THE BEHOLDER |VOL 1/7

How do we measure wealth? In some unit of account. Money is meant to function, among other things, as a unit of account, the denominator for any given asset value. But if the purchasing power of a currency is unstable, either due to inflation or deflation, this distorts the way in which real wealth is measured. For example, if your benchmark unit of account is the Zimbabwe dollar, you have made outrageous profits during the past few years almost regardless of your choice of investment.

Investment idiots are made to look like geniuses if measured against a chronically devaluing benchmark. As such, it is important for serious investors to choose a benchmark which is not and cannot be deliberately devalued. Well, now that the Fed is purchasing Treasuries in an attempt to prop up assets and also to place downward pressure on the dollar, is the dollar a sensible benchmark? Should investors measure their wealth and performance in dollars or in some other unit of account? We believe that the answers to these questions have become increasingly obvious as this year has progressed. The dollar is no longer an appropriate benchmark. We expect others to come to a similar conclusion in 2011.

WHEN IS A RISING STOCK MARKET ACTUALLY FALLING? VOL 1/7

In domestic currency terms, the Zimbabwe stock market was a fantastic investment over the past decade. In some years it rose more than tenfold in value. In particularly good months it rose by several hundreds of percent. No major stock market performed in such spectacular fashion during this time. But this was not due to positive economic developments in Zimbabwe. On the contrary, it was reflective of the severe hyperinflation that was taking place.

This topic is really just a corollary to that above. Yes, most stock markets have risen this year in dollar terms. But if the dollar is no longer a sensible benchmark, what does this really tell us? Did stock markets perform well or not? Did they rise in terms of purchasing power? Stock markets do appear to have risen with respect to price inflation, which will give comfort to some. But then valuations don’t look as attractive as before. In any case, looking forward into 2011, we suggest that investors consider measuring their performance in ways that reference more stable benchmarks than the dollar.

THE REAL ECONOMIC HORROR SHOW | VOL 1/7

As it becomes increasingly evident that the US economic recovery is not self-sustaining, but rather is going to require additional stimulus at some point, we explore what this implies for the future. One key implication is that, as the public sector is growing rapidly relative to the private, that the tax base is shrinking even as the government debt burden increases. This implies a lower future potential growth rate and lower standard of living. Curiously, given its free market traditions, the US is bucking a global trend toward fiscal austerity, as demonstrated by recent policy actions elsewhere.

It had already become clear by mid-summer that various countries, notably the UK and Germany, were increasingly opposed to using fiscal expansion to fight the deleveraging in credit markets and associated economic weakness. In other countries, including Greece and Ireland, debt crises had already forced governments’ hands toward dramatic fiscal tightening. It is true that, around that time, the work of the bipartisan US “deficit panel” was well underway, with the understanding that President Obama would most probably consider implementing at least a few of the recommendations. Well, in the event, not a single one of the recommendations has received serious consideration in Washington. Instead, the US as chosen to implement even more aggressive fiscal stimulus by extending both tax cuts and unemployment benefits. As such, even though growth in 2011 may be artificially supported, this is merely going to draw growth away from the future, at increasing cost. Indeed, with Treasury yields having spiked a full percentage point in recent weeks, interest expense is already rising.

To be continued…

Regards,

John Butler,
for The Daily Reckoning

[Editor's Note: The above essay is excerpted from The Amphora Report, which is dedicated to providing the defensive investor with practical ideas for protecting wealth and maintaining liquidity in a world in which currencies are no longer reliable stores of value.]

The Amphora Report’s 2010 Topics in Review (2 of 4) originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
The Amphora Report’s 2010 Topics in Review (2 of 4)




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Commodities, ETF, Uncategorized

The Amphora Report’s 2010 Topics in Review (1 of 4)

December 28th, 2010

In 14 editions of the Amphora Report this year we have covered nearly 30 topics, many of which overlap in some way. What binds them all into a coherent set is our view that the economic policies being implemented in nearly all major countries are not just unsustainable but in some cases outright reckless. These countries include the US, the issuer of the world’s reserve currency. By implication, the dollar is likely to lose its pre-eminent reserve currency status in the coming years. The result is bound to be a period of global economic and financial market turmoil and, for most if not all traditional financial assets, underperformance in real, purchasing-power adjusted terms. What follows below is a list of all topics, including both a brief summary and an update of our thinking for 2011.

FROM “DARTH” TO “CZAR” VOLCKER? VOL 1/1

Imagine that, as in 1979, Paul Volcker is tasked with restoring global confidence in the US dollar and economy generally. We believe that, notwithstanding the best of intentions, it is unrealistic to expect that Mr Volcker, or anyone else for that matter, could possibly succeed at preventing a dramatic relative economic decline of the US in the coming years. To do so would require fundamental economic reform vast scope, far beyond what anyone in Washington, DC is willing to seriously consider or debate.

Our thinking on this topic has not changed one bit. If anything, our conclusions seem largely vindicated by recent developments in Washington, including the growing lack of fiscal discipline demonstrated by the extension of tax cuts and unemployment benefits. There is no serious talk of fundamental economic reform, even following the elections, in which deficit reduction was an important topic. Meanwhile, the Fed has embarked on an increasingly radical monetary course which does nothing to restore confidence in the dollar. The outperformance this year of emerging market economies, many of which are investing heavily in infrastructure and other capital stock, is a clear demonstration of relative US decline. We would expect this outperformance to continue in 2011 although it might well be less pronounced.

IS MONEY A STORE OF VALUE? VOL 1/2

We generally take it for granted that cash in a government-guaranteed bank deposit account is a risk-free store of value. But is it? The fact is that the dollar, and all fiat currencies for that matter, tend to lose purchasing power over time, occasionally abruptly in a sharp decline or, even worse, in a hyperinflation. Given current global economic conditions, we believe that investors should be particularly wary of currencies as stores of value and should seek ways to preserve wealth outside of cash.

It is not surprising that, as policymakers have resorted to ever more desperate means to get their economies going, currencies in general have declined in value relative to commodities this year, including the historical cash substitutes, the precious metals. We are confident that this trend of rising commodities prices, not just in dollars but in most currencies, is going to continue in 2011, although quite possibly at a slower pace than in recent months, in the event that the global economy slows somewhat, as we expect.

HOW MUCH FREE LUNCH WOULD YOU LIKE, SIR? VOL 1/2

As diversification is rightly considered to be the only “free-lunch” in economics, in this topic we explore how, in a world of both low interest rates and high uncertainty, investors should be inclined to seek rather more diversification than would ordinarily be the case. However, as financial assets are increasingly highly correlated with each other–a consequence of artificial monetary stimulus–diversification through financial assets alone is unusually limited. As such, investors should consider increasing their allocations to alternative investments, including liquid commodities.

Commodities have outperformed this year, most probably for a variety of reasons. There were some supply issues at times, in particular with grains and certain other agricultural commodities, but the strength was in fact quite broad-based and demonstrates both good demand from the more dynamic emerging markets but also, importantly, that global inflationary pressures are rising. While 2011 may not be as good a year for commodities as 2010–in part because there are signs that emerging market demand is now cooling–we nevertheless expect investors to continue to seek diversification in alternative assets.

THE REAL LESSON OF THE GREEK DEBT CRISIS | VOL 1/2

Greece now finds itself under attack from the financial markets and unable to refinance its debt. We believe that Germany and France will not come to Greece’s rescue absent a dramatic fiscal consolidation. While Greece is certainly trying to reduce its deficit, success is far from assured and some sort of debt restructuring is probably inevitable. In any case, the Greek crisis has kicked off a round of general euro-area fiscal consolidation. This demonstrates that the euro-area can respond positively to market pressures. In time, this could be supportive of the euro.

The sovereign debt crisis that began in Greece earlier this year has spread to Ireland, Portugal and Spain. In all four countries, governments are desperately trying to reduce deficits in return for financial assistance from France and Germany and also temporary funding support from the European Central Bank (ECB). Interestingly, however, notwithstanding the ongoing and widening crisis, the EUR/USD exchange rate, at 1.32 today, is essentially at the same level it was when the crisis broke in April this year. While we are not particularly optimistic for the economic future of the euro-area which, absent Germany and a few other pockets of regional strength, does not have a great deal going for it, we nevertheless think it is important to make a fair comparison between the euro-area and the US. This requires investors to look at the overall US fiscal situation, which continues to deteriorate amidst federal tax cut and unemployment benefit extensions. But don’t forget the brewing debt crisis in state and local governments either. California, New York and Illinois are all at risk and collectively are of comparable economic size to the entire euro-area periphery. Indeed, the US economy in aggregate, when evaluated according to the size of the public sector, the overall tax base and fiscal and current account balances, bears a far greater similarity to the euro-area periphery than to the core.

FINANCIAL CRISES AND NEWTON’S THIRD LAW | VOL 1/3

Policymakers tend to react to financial crises in ways that contribute to an even greater crisis down the road. Indeed, the reactions of policymakers and regulators are consistently disproportionate to the actions of financial markets. In sinister dialectical fashion, the powers assumed and mistakes made by policymakers tend to grow with each crisis, thereby ensuring that future crises become progressively more severe.

If you are stuck in a hole, so the old saw goes, you had better first stop digging. Well try telling that to the US government, which has just decided to accelerate the ongoing deterioration in its finances with a broad tax cut extension as well as extended unemployment benefits. Meanwhile, the Fed has embarked on another round of monetary expansion. This is yet another example of policymakers contributing to an even greater crisis down the road. Rather than get out of the way and let the economy restructure and rebuild in a natural, undistorted fashion by allowing asset prices to adjust lower to more sustainable levels and banks and corporations to be sensibly downsized and, where necessary, restructured, policymakers continue to dig an ever deeper hole, the legacy of multiple asset bubbles and busts.

WHY FINANCIAL GENIUS FAILS | VOL 1/3

Believe it or not, well prior to the great financial crisis of 2008, it was widely known among the educated financial elite that the standard risk management models and methods used by the major banks were woefully inadequate, with the consequence of systematically underestimating risk. But rather than take appropriate action to protect their firms with sensible risk management policies, senior executives chose instead to focus on short-term profitability: A healthy balance sheet became of secondary importance to a healthy income statement which, of course, justified healthy bonuses.

Much has been written this year about how the risk management culture on Wall Street was a key ingredient to the crisis of 2008. It is increasingly clear that most if not all financial executives were aware of the risks they were taking but were unwilling to confront the short-term, bonus-driven culture which had come to dominate a once conservative, partnership-based industry. Now that the industry has been bailed out and has returned to profitability–at least for a brief time–another important lesson has been learned: The more risks you take, the better, as policymakers will see to it that in the event of yet another crisis, the taxpayer comes to the rescue. Events this year have done nothing in our opinion to change this. Those firms already too big to fail in 2008 are now even bigger. The moral hazard of the system has grown. The seeds of the next crisis have been sown. Recent developments in Ireland should serve as an example of what happens to a country that underwrites the risks of its financial sector.

IS CHINA BEING TAKEN FOR A RIDE? VOL 1/4

Back in the spring we noticed that inflation rates were picking up just about everywhere, including in China. However, as China is a huge importer of raw materials, rising global commodities prices implied that Chinese inflation was likely to increase further. As much of China is still a subsistence economy, food price inflation would most likely turn into wage inflation, which in turn would push up prices for Chinese manufactured goods generally and possibly lead China to revalue its currency versus the dollar. Eventually, as the US imports a huge amount from China, this would also push up prices in the US.

Chinese inflation has continued to rise all year. The spike in food prices over the summer has played a part, to be sure, but the underlying pressures were already in place. Additional fiscal and monetary stimulus in the US is most probably going to contribute to still more inflationary pressure in China and other more dynamic economies around the world. Indeed, China is just one of many countries which is now taking action to cool growth and keep prices under control. China and India have both recently raised interest rates. Brazil and South Korea are taxing foreign capital flows. These trends are likely to continue in 2011 and will contribute to “stagflationary” conditions in the US.

To be continued…

Regards,

John Butler,
for The Daily Reckoning

[Editor's Note: The above essay is excerpted from The Amphora Report, which is dedicated to providing the defensive investor with practical ideas for protecting wealth and maintaining liquidity in a world in which currencies are no longer reliable stores of value.]

The Amphora Report’s 2010 Topics in Review (1 of 4) originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
The Amphora Report’s 2010 Topics in Review (1 of 4)




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Commodities, Uncategorized

Is The German Eagle a Grey Swan? (Part Two of Two)

September 15th, 2010

With the EMU history lesson behind us we are now brought up to date. Once again, notwithstanding the introduction of a single currency “straightjacket”, Germany has gained in competitiveness. A strong euro has not been an impediment to an impressive German export performance. Yet the European Central Bank and the EU, which helps itself annually to a substantial portion of German taxes, are throwing all manner of support and subsidies at those countries that have chronically underperformed the hard-working Germans and are unable, without assistance, to service their massive and growing debts.

Consider now how Germans feel about this. For decades they have provided vast subsidies and support to other European countries, both via the EU and bilaterally. They spent a huge amount of their savings to help rebuild East Germany following reunification. They thought they were doing Europe a great favour through their willingness to enter into EMU, thereby sharing the fruits of their successful hard-currency policy with their neighbours. Yet how have several of these neighbours returned the favour? By encouraging and subsidising real estate speculation; by standing by while public and private sector unions demanded ever higher wages, eroding competitiveness; by using accounting tricks to hide the true size of their public sector deficits; and then, when it all blew up in their faces, they had the audacity to BLAME THE GERMANS for being wary of more hazard and thus slow to acquiesce to ECB emergency lending facilities and a massive, open-ended EU bailout commitment.

Many Germans are, in a word, furious. However, what should be of greater concern to financial markets is that Germans are now openly debating, in academic and policy circles and well as in the press, just what is in Germany’s best interest. Few believe that the current bailout arrangements are. And in this debate there is little if any sympathy for the club of euro-area countries that have in their view betrayed German good-will and perhaps permanently compromised the hard-earned, hard-currency legacy of the Bundesbank.

Several prominent German economists are now openly advocating that Germany reconsider participation in EU-bailout arrangements which do not require a substantial debt restructuring. Perhaps the most outspoken of these is Dr Hans-Werner Sinn, President of the prominent IFO Institute and member of the German Council of Economic Advisers, colloquially known as the “Five Wise Men”. In a recent paper, Rescuing Europe, he argues that not only have various euro-area countries taken advantage of low borrowing costs to artificially amplify growth by failing to deliver meaningful cuts in fiscal spending; but also that the capital that flowed into housing and unsustainable government spending in the “windfall” economies was German capital that should in fact have stayed in Germany, where investments would have been less speculative and ultimately more sustainable. In other words, German capital has been misallocated and is now at risk of being outright squandered by German participation in ill-conceived bailouts which do nothing to remedy the underlying malaise of the bail-out recipients. Rather, such bailouts create a massive moral hazard problem which virtually ensures that German capital will continue to flow to inefficient, dysfunctional governments.

Needless to say, this paper has caused quite a stir in European financial and political circles.  Martin Wolf of the Financial Times, arguably the most influential European financial columnist, has proclaimed Mr Sinn’s views as being both dangerous and wrong, arguing that Germany is a huge beneficiary of EMU and of European integration in general. While Mr Wolf’s rhetoric is impressive, his economics are somewhat less so. Ultimately his argument can be reduced to circular logic: Germany’s neighbours, using German capital, buy German exports, thereby helping Germany. Everybody wins, right? Wrong. That capital has multiple potential uses. That portion that goes to wasteful, unsustainable government policies could, and should, be deployed elsewhere, such as in Germany itself.

We side with Dr Sinn on this one. There is no free lunch in economics. Capital that is misallocated is capital that is forever wasted, never to return. Germans–indeed, all Europeans–would have been better off if, following the start of EMU, capital had flowed to efficient firms, regardless of location, rather than to inefficient governments and property speculation. The former would have used such capital to invest, to innovate, to improve their competitiveness, rather than have used it to keep bloated, inefficient welfare programmes afloat while hiding their true cost behind a dazzling array of derivative transactions designed by the most sophisticated investment banks in the world. Money well spent, to be sure, from the perspective of those who earned enormous bonuses by structuring and executing such transactions. But from an economic point of view, such spending was capital flowing down the proverbial toilet.

As Dr Sinn raises his voice, Germans listen, and the political momentum to do something about the current, open-ended bailout arrangement, grows. A handful of current and former German politicians, including former SDP Bundestag member Prof Wilhelm Noelling, are now pressing the German Constitutional Court to rule one way or the other as to whether open-ended bailouts are permissible under the Maastricht Treaty. Of course they are not. The Court probably already knows this, hence they are reluctant to hear the case. But if the issue is not to be decided by the Court, it will be decided by politics.  Up to now, those in favour of the bailout have had the votes on their side. But not by a wide margin. A small shift of just a few votes would swing things the other way.

The German economy is now beginning to weaken. It is early days yet, but the signs are there. Exports are slowing as the global economy runs out of all the stimulus thrown at it in 2008 and 2009.  Extrapolate current trends out a year or so and what you have is a German economy that has slowed by enough to push up the unemployment rate slightly. Amidst a continuing debate as to whether Germans should be continuing to provide open-ended bailout funds to others, rising unemployment could well shift the political balance slightly. The risk of Germany reneging on current, tenuous, arguably unconstitutional (ie Treaty-violating) bailout arrangements is going to be higher a year from now that it is today.

Now, who wants to be holding that Greek debt, or shares of European banks exposed to Greece, if that shift occurs? That’s right. No one will touch it. It will be game over. The question then becomes, how large a haircut (loss of capital) will bondholders face in a restructuring? And how will this impact European bank balance sheets and earnings? Well, it won’t be pretty. Now repeat with Ireland. With Portugal. With Spain. With even Italy perhaps.

If Germany does choose to remove its support for open-ended bailouts in favour of qualified support for meaningful sovereign debt restructuring, it could set off another round of disorderly de-leveraging in a fragile global financial system which has not yet meaningfully restored capital lost in the 2008 crisis.

Regards,

John Butler,
for The Daily Reckoning

[Editor's Note: The above essay is excerpted from The Amphora Report, which is dedicated to providing the defensive investor with practical ideas for protecting wealth and maintaining liquidity in a world in which currencies are no longer reliable stores of value.]

Is The German Eagle a Grey Swan? (Part Two of Two) originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
Is The German Eagle a Grey Swan? (Part Two of Two)




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Real Estate, Uncategorized

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