‘Back to life, Back to reality, Back to the here and now, I live on top of the block, No more room for trouble or fuss, Need a change, a positive change look, Look it’s me writing on the wall’ (Soul II Soul – 1989)
It’s been a long time since my last blog, much too long. But I am back, I am back to stay. I will however, change the format. I will blog bi-weekly and do day to day updates via twitter @toobigtoflail and facebook.
So what has happened in the world of finance and geo-politics since the last time I wrote this blog:
China has been dominating the market headlines as of late, lending a helping hand to Europe while tightening their monetary policies because of inflationary pressures. Rates in the United States have gone up even though the FED is monetizing all the debt that the Treasury department issues weekly, Republicans took over the House of Representatives and threatening to NOT raise the debt ceiling. And oh yes, a government in Tunisia has been toppled after social unrest broke out because of ever higher food prices. There is much to talk about, so let’s get started.
Inflation
Inflation in most of the developed world has been subdued. The latest CPI numbers in the U.S. put inflation (including Food & Energy) at a modest 1.5% (YoY) while the CPI in the Euro zone came in at a benign 2.0% (YoY). Nothing to worry about you would say, well in China the CPI came in at 4.5% (YoY) and in Tunisia food prices shot up so high there was a public uprising which eventually chased the President out of the country. Apparently the inflation numbers in the ‘modernized’ world always undershoot the real inflation as experienced by day-to-day purchases. I guess our bureaus of statistics are cleverer in manipulating the facts.
Let’s take a look at agricultural prices (S&P Agricultural Index):
As you can see from this graph, prices advanced by 36%, from Jan 1st 2010 to last Friday, with Wheat +38% YoY and Corn +44% YoY leading the way.
The same can be seen when we look at oil prices +17% YoY and Heating Oil + 20.5%
In countries where people don’t spend most of their disposable on luxury items as IPads, Ferraris or Apartments, but where they barely have enough money to put food on the table or heat their homes (if they are not re-possessed), the impact of skyrocketing food and energy prices are undeniable and cannot magically disappear by tweaking the basket of goods used to measure inflation. And those are the countries where the public uprising appears first, but let’s be clear about it, for a lot of people in the U.S. (and to a lesser degree in Europe) rising food and oil prices do matter, so I wouldn’t be surprised if it is just a matter of time until we see demonstrations in the Western World as well, no amount of statistical manipulation can prevent that.
As of October 2010 43.2 mln people in the US were using the Supplemental Nutrition Assistance Program, also known as Food Stamps. This is up from 37.6 mln a year earlier, an increase of almost 15% which is almost 11% of all Americans. I say that’s a fairly high percentage to say the least.
I can imagine the leadership in China is worried about the food and energy inflation. The social and economic inequality between is so huge between many of their regions (most of the wealth is concentrated in the South East) that even though their per capita income was up 13% in 2010 (2010 data from the IMF and 2009 data from the World Bank, so the 13% might not be completely true, but is probably a good guesstimate) something tells me most Chinese did not get a 13% rise in their paycheck but they were however exposed to sky rocketing food prices, making the economic inequality even bigger. After what happened in Tiananmen Square 21 years ago, I don’t think President Hu Jintao is particularly fond of a public uprising in the Chinese heartland, so he is doing whatever he can to stop the inflation from rising further which means slamming on the economic breaks. In the mean time the FED keeps flooding the world with cheap money to get the U.S. economy back on its feet (or at least stop it from sliding further), which of course works contrary to what the Chinese are trying to achieve.
And this is precisely why Geo-politics is so much fun.
Financial Markets
What do the various financial markets make of all this:
While the U.S. and European markets have been rising on an almost daily basis since the FED hinted at a new quantitative easing program, the Shanghai stock market has been falling ever since China started their monetary tightening campaign, trading down over 10% since the beginning of November.
Shanghai:
S&P:
DAX:
What is really interesting has been the fact that the equity markets kept being strong, while interest rates in the U.S. started to move up during the last month of 2010. Some of the move can be explained by the fear that the now Republican Congress voiced concerns over raising the debt ceiling. The treasury secretary, Mr. Timothy Geithner, had asked congress to vote yes to raising the debt ceiling, as this magical number of $ 14.3 trillion will most likely be reached by April 1st, maybe even sooner. If the ceiling is not raised, the U.S. can do nothing but start to default on its debt, thereby forcing credit agencies to cut their triple-A rating.
Also not helping was the sell-off in municipal bonds when it became clear President Obama would not extend the Build America Bonds program, which was part of the recovery act, in exchange for republican support of an extension of the ‘Bush tax cuts’. Meaning it will be harder for cities and states to raise much needed capital.
U.S. 10 Year Rate:
Europe
Europe is still having problems of its own. In December Ireland was ‘forced’ to accept financial support from the EFSF. My guess is they came begging for money, but to keep up appearances it was decided to have them accept the money reluctantly.
2 down, 4 to go.....
I say 4, since not only Portugal, Spain and Italy are slowly getting into more and more trouble, but Belgium was also suddenly thrown to the wolves. General elections were held more than 7 months ago in Belgium and they are still unable to form a new government. Not very surprisingly, since the party that won the elections is pro the segregation of Flanders from Wallonia (i.e. the Dutch speaking from the French speaking part). For now it proves that a government is not always necessary, since the country still exists, but bondholders are getting more and more restless.
Portugal and Spain were given a new lifeline as China vouched they would keep on buying their debt, as does the ECB on a daily basis. Even with the Chinese guarantee, both Portugal, Spain and the ECB thought it wise to introduce a new way to raise money, a private offering. It’s a simple way to keep alive the Ponzi scheme that is the Mediterranean part of Europe. How does it work?
Spain’s treasury needs 4 billion euro. What can they do? They can auction the debt in a public auction, but then the outside world knows the exact participation rate of direct and indirect bidders, i.e. how eagerly investors want Spanish debt. They can also issue the debt through a private auction, where they call up Santander, Banco Popular and Banco Bilbao Vizcaya, force them to take the entire 4 bln euro issue at a reasonable rate. Why would these banks do this? Because they can turn around, call Jean Claude Trichet, deposit those bonds as collateral and get more liquid instruments in return.
But wait, isn’t this exactly what the FED is doing every single day with their POMO’s? Well yes it is, but here in Europe we don’t call it printing money or monetizing, because our central bank is not allowed to do that.
Long story short, Portugal managed to raise about 2.5 billion euro in their last public offering (at least for the time being), Spain just around 4 billion euro and a sigh of relief was felt throughout Europe. I guess it wasn’t so much the relief that they raised the cash as much as it was the relief of nothing having to endure the global panic that would have ensued if they hadn’t been able to raise a measly 7 billion euro combined.
Well, I guess there is always next time.
That’s all for today, I will write the next blog Wednesday evening and will use twitter and facebook for updates during the week.
Happy Hunting & Let’s Be Careful out there!!!
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