Monthly Archives: September 2012

Flash Point: Trade Wars in Real Time

Knowing somewhat of Argentia’s past, we began a post: Placing Argentina on Deathwatch. Because news was slow we discontinued updating it. We still believe Argentina will default again. However, we are more interested in what is emerging as a trade war. Protectionist polices are being openly challenged, today by Mexico as Stratfor (Mexico Launches Dispute Before World Trade Organization) citing Reuters wrote:

Mexico launched a dispute before the World Trade Organization against Argentina, Reuters reported Aug. 27. The European Union, United States and Japan have made similar complaints against Argentina. Each complaint focuses on Argentina’s import licensing, which is said to be one of several protectionist policies that Argentine President Cristina Fernandez de Kirchner’s government has adopted.

On August 21, the US, Japan and the EU launnched a WTO action against Argentina as reported by Reuters: UPDATE 2-US, Japan follow EU, slam Argentine “protectionism” at WTO.  According to Reuters:

Notification of the two new complaints comes a day after Argentina hit the EU with a separate WTO complaint, alleging discriminatory treatment by Spain against Argentine shipments of biodiesel. These bring the number of trade disputes launched at the WTO so far this year to 18, already more than double the eight that were filed last year.

Argentina has 60 days to settle dispute or face adjudication at WTO.

This follows the May nationalization of the Spanish oil company Repsol subsidiary, YPF: Argentina nationalizes oil company YPF.

Related Posts

Flash Point: The Other Side of the Coin

So often in economic commentary, the pundit focuses on an aspect of an issue, apparently totally oblivious to the fact that he is looking at one side of a coin. As an example, many doomsayers like to propose the idea that the China can somehow sell its Treasuries and destroy the US. The fact is if they sell, someone else has to buy. The Treasuries are still owned by someone. Is the Treasury threatened? Probably not. Do they care who the owner is? Probably not.

Perhaps one of the most common economic coins is the bond. This coin is not misunderstood. Heads the yield goes up, tails the price goes down. But today we started entertaining another one. We hear constantly that money printing is inflationary and we agree with this idea. But the other side of the coin is that the value of the money deflates proportionately. Since almost all debt can be considered to be money with a non-zero maturity, the value of all debt deflates.

We suppose the issue is not so much that every action has an equal and opposite reaction – certainly a bilateral event – but that every action has that which is acted upon. All events are bilateral. When you argue a point, what is the bilateral consequent?

Remember: every coin has two sides.

Flash Point: Civil War Breaks Out in Europe!

Have we joined the yellow press to gain readership? No but maybe we got your attention. However, we do see the potential for civil war within the EU. Consider a few things.

Last November we posted an article: The Future of Europe. It was a commentary on the proposal of for the European Stability Mechanism (ESM) which as we noted was:

In short, an unelected and nonrepresentational body, which with its officials would be completely above any law, would have an unlimited claim on the finances of a member country.

We also captured a some remarks of Angel Merkel’s:

  1. Nobody should take for granted another 50 years of peace and prosperity in Europe … that’s why I say: If the euro fails, Europe fails.
  2. We have a historical obligation: To protect by all means Europe’s unification process begun by our forefathers after centuries of hatred and blood spill. None of us can foresee what the consequences would be if we were to fail.

At the time we wondered if this was a veiled threat to use force on member countries to keep them in the union and subjugated to the dictates of an increasingly powerful and comprehensive European Union. For recent coverage listen to the KWN interview of Sept. 25 with Nigel Farage.

There is increasingly a move towards centralized fiscal control of EU members by an entire process of undemocratic advances in EU power. The enslavement mechanism is to force EU members to require and request EU bailout support at the cost of national fiscal independence. The nature of the bailout process is that it does not remove the debt burden of countries but perpetuates it at the cost of national and democratic control.

Greece and Spain in particular are in such desperate economic straits that they may face internal revolution. That is the point that we expect to see a pan-European paramilitary force intervene. What happens if the military seizes control in Greece as they have an historical tendency to do? Will they be pro or anti-EU and if the latter, will war ensue?

We think there is the possibility as the centralized control of nations progresses that there will be popular revolts leading to civil war. Will we see A second Spanish Civil War? How will NATO and particularly the North American members respond? AS we said, a possibility

Signs of a Structural Change in the US Economy

We had the privilege, a few days ago, of speaking with Dr. Lacy Hunt of Hoisington Investment Management on the topic of structural change in the US economy. In his most recent Quarterly Review and Outlook, he argues for depressed GDP growth for twenty years or more due to the high levels of debt in the US (see our discussion of his letter in The Policy of Doom). This we suggest represents a structural change.

Motivated by Dr. Hunt’s writing, we analyzed Chairman Bernanke’s Jackson Hole speech in The Hole in Jackson Hole. We suggested that both employment (Figure 6) and GDP (Figure 4) have recovered to trend and have little room for improvement from this point on. Furthermore we argued that these trends represent a structural shift and not a cyclical correction. In our conversation, Lacy suggested that we were on “the right track”.

Apart from discussing what we had previously written, Dr. Hunt suggested a number of aspects of the US economy that point to a structural shift. These we review briefly below.

Flash Point: You’ve got to ask yourself one question: “Do I feel wealthy?” Well do ya, punk?

In a recent Zero Hedge clip, our attention was caught by this part of a recent Bernanke interview (The Punchline In His Own Words: Bernanke Advocates Blowing Asset Bubbles As The Antidote To Depression):

There are a number of different channels — mortgage rates, I mentioned other interest rates, corporate bond rates, but also the prices of various assets, like, for example, the prices of homes. To the extent that home prices begin to rise, consumers will feel wealthier, they’ll feel more — more disposed to spend. If house prices are rising, people may be more willing to buy homes because they think that they’ll, you know, make a better return on that purchase. So house prices is one vehicle.

 The part of this phrase we emphasized seems to be the basis for current Fed policy. It also contains a kernel of insight into why the Fed is so dangerous and why its policies no longer work.

Why do they want the consumer to spend? To stimulate the economy. The ‘economy’ is the great abstraction that the Fed thinks in terms of. But they have it all backwards! Their focus is on the ‘economy’ and what they can do to it to shape it into a form they want. The problem is that the economy is an emergent phenomenon, the result of the collective financial interactions of all the individuals, corporations and organizations that participate in it. And the Fed has little direct influence or control over these participants.

The great fear of central planners is that natural systems such as economies and markets, if left to themselves, will self-destruct or at least be subject to cyclical downturns that cause distress to some participants. A frequent argument for their interventions is the allegory of the “Tragedy of the Commons”. The fallacy in this thinking we discussed in Negative Feedback, the Tragedy of the Commons, and Complex Systems. Complex systems do not respond in the long run either well or predictably to centralized planning and control.

The Fed Is Wrong

If we were to use the analogy of the Tragedy of the Commons, the Fed would be the town council urging everyone to buy more cattle to pasture to raise the aggregate income of the community. The consumer would be the farmer who sees progressively less return for the cattle he is already grazing and tries to reduce his herd and his exposure to the debacle in progress.

Since the recession began, we have regularly heard authorities urging policies that would encourage consumer spending. We have concluded in Portrait of the American Consumer, that:

At a ratio of 120% debt/income, the consumer has little room and apparently little inclination to take on more debt. Moreover, with interest rates across the yield curve at historic lows and the fact that consumers are not taking advantage of this suggests that we are at a credit limit.

In Flash Point: How Is the American Consumer Doing?, we noted that:

total household credit market debt is decreasing but this as we see above is entirely due to the decline in mortgage debt. The upturn in non-mortgage debt is troubling. We do not see that the consumer will be in a position to raise GDP significantly any time soon.

We maintain the position that the consumer has reached his credit limit and knows it. This of course renders all Fed stimulus ineffective in the most important segment of the economy. The Fed’s last bullet, the psychological inducement to spend created by the “wealth effect” in the stock market, seems to be giving little traction to the economy at the cost of creating a stock market bubble that must end in at least a violent correction (crash). This is paper wealth and a serious attempt by market participants to crystallize the apparent wealth as real wealth will crash the market.

Addendum 20131024

A short history on Alan Greenspan and bubbles from Mike Shedlock: Clueless Magoo’s Crash Guarantee.

Flash Point: Neat or on the Rocks?

We’ve commented before on “coin” issues. By this we aren’t referring particularly to monetary issues but to issues that in some sense are binary – issues that have two sides. A simple example is the much discussed hypothetical sale of US Treasury debt by the Chinese. Selling is a binary event. As we have pointed out, if China sells someone else buys. The debt remains ‘owned’.

We have been aware of news that arctic sea ice is at the lowest ever recorded. Firstly we would point out that reliable data only extends back to 1979 and the beginning of satellite measurement. This is an infinitesimal span of time in climate terms. But secondly, sea ice appears to be somewhat binary as this article suggests: Antarctic Ice Area Sets Another [maximum] Record – NSIDC Is Silent. Sea ice is a complicated area of climate science that we do not wish to get into, but because reporting of climate issues is so politically motivated and one-sided, we present some evidence to keep the discussion two-sided.

Flash Point: How Is the American Consumer Doing?

We received a link to a special report at Comstock Partners: The Deleveraging of the Two Most Outrageous Financial Manias in History. This prompted us to take another look at consumer debt. In Figure 1, we plotted (blue line) total household credit market debt (CMDEBT) – total household mortgage debt (HHMSDODNS) as a percentage of disposable income (TDSP). This represents all non-mortgage debt including credit card debt, student loans and other personal and car loans. It has tripled since 1980. Over the same period, however, the debt servicing cost as a percentage of disposable income has remained roughly constant in the 11-14% range (red line). This is thanks to the fall in interest rates shown in this picture by the Effective Fed Funds Rate (EFFR green line) as a proxy.

Figure 1. Household non-mortgage credit market debt and debt service cost as a percent of disposable income shown with the EFFR. (Click on image to open in a new window)

We suggest that with interest rates near their lower bounds, the consumer cannot take on more debt and maintain a constant level of debt service payment, something that he seems predisposed to maintain at this level.

The figure in the Comstock report, Household Debt Percent Of GDP, shows that the total household credit market debt is decreasing but this as we see above is entirely due to the decline in mortgage debt. The upturn in non-mortgage debt is troubling. We do not see that the consumer will be in a position to raise GDP significantly any time soon.

Flash Point: Where’s the Thunder?

Anyone who has witnessed a thunderstorm knows that there is a delay between the lightning flash and the sound of the attendant thunder. As an aside, those who witnessed no delay cease to be witnesses (not a trivial point). As another aside, by counting one thousand and one, one thousand and two, … one can get a rough idea of the corresponding distance away the lightning was in miles, one or two miles …

Anyway, when the French satirical magazine Charlie Hebdo published cartoons of the Prophet Muhammad on Wednesday we started counting. Recall that in response to the avalanche of news items from our regular sources in response to the American video, we published Flash Point: What You Won’t Get from the MSM. Within a few hours, most of the Muslim world was on fire. Now we repeat the exercise tabulating the response to the french insult to the Prophet:

  • Iran: Protests Begin At French Embassy: Up to 100 people protested at the French Embassy in Tehran on Sept. 20 after a French magazine published cartoons of the Prophet Mohammed, AFP reported. Police around the embassy compound prevented the crowd from approaching.

So more than 24 hours later, that’s the response from the Muslim world. The West’s response, however, has been another matter with critical comments in most Western media such as this from Spiegel Online: France to Shut Embassies Over Muhammad Cartoons.

Admittedly the lightning strike might have been farther away than we thought with the thunder still on its way. Should the Hebdo event in the end turn out to be a flash in the pan instead of a lightning strike, we will have learned a very interesting and critical lesson. That the response to the video was not a response to the defamation of the Prophet but an expression of a strong, latent ant-Americanism. If that’s the case, Obama can shrug off responsibility for the video but he must come to the realization that he and his administration own the problem of anti-Americanism.

Flash Point: We’re Not the Only Ones Thinking This …

Back in August, in Midnight Musing: Can the US End Up Owning Itself?, we asked the question if the Fed could end up owning all US debt. Were sure many have pondered this but today we get a published perspective via Zero Hedge: What Mitt Romney Also Said: A Glimpse Of The Endgame? Quoting Romney:

We’re living in this borrowed fantasy world, where the government keeps on borrowing money. You know, we borrow this extra trillion a year, we wonder who’s loaning us the trillion? The Chinese aren’t loaning us anymore. The Russians aren’t loaning it to us anymore. So who’s giving us the trillion? And the answer is we’re just making it up. The Federal Reserve is just taking it and saying, “Here, we’re giving it.” It’s just made up money, and this does not augur well for our economic future. You know, some of these things are complex enough it’s not easy for people to understand, but your point of saying, bankruptcy usually concentrates the mind.

As Zero hedge notes: Under Twist the fed has monetized 91% of all LT gross issuance. The transformational effects on its balance sheet we captured in Flash Point: The Limits of QE3. The Fed is increasingly acquiring more of all new debt issued. It’s buying the US.

Flash Point: War in the Middle East?

We were alerted to an article in the Asia Times today: All-out Middle East war as good as it gets. The author quotes a report from the Georgetown University’s Center for Strategic and International Studies, that “A strike by Israel on Iran will give rise to regional instability and conflict as well as terrorism”. He presents this as somewhat of a consensus view but offers a contrarian opinion to the effect of the possibility that all-out regional war is the optimal outcome for American interests.

Apart from expanding on this idea, the article we found to be valuable because it presents a point-form list of the major issues the Muslim world and the Middle east pose for the US. It discusses current dynamics in the area and how things might evolve under the scenario proposed by the author. His comments on the projected decline of Muslim states are worth the read.

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