The tragedy in the Gulf of Mexico is bad enough. The reaction, or OVER-reaction by the political community, is the real crime.
Let's take an objective look at the situation. The worst oil spill in history has been nothing short of an ecological disaster. First, was the death of the 11 platform workers when the well exploded. Then came the destruction of wildlife, whose cost is immeasurable. What should the Obama Adminstration do?
Punish British Petroleum (BP)? The marketplace has already taken care of it. Currently trading at $38 per share, BP has lost nearly $100 billion dollars in market capitalization since news broke of the spill in just a few weeks. The stock has lost more than 40% of its value. Could any penalties imposed by Washington do anything more than merely pandering to all the constituents calling for BP's death?
Add to that the tremendous public relations hit that BP is taking, and, for that matter, the entire oil industry. It's easy to hate oil companies. In the view of the public, oil companies make obscene profits, manipulate energy prices, block the creation of alternative fuels and enter into deals with governments that sponsor terrorism.
Oil companies are owned by shareholders like you and me. So, punishing them just places economic costs on a different set of constituents. Of course they are after profits. So, are the shareholders. So am I. So are you. They have never claimed to be altruistic any more than Big-Pharma, the auto companies or the financial sector.
The other response has been to call for severe restrictions on offshore drilling. What would that accomplish? Higher energy prices and higher profits for all the OTHER oil companies! Less supply for Americans. More dependence on the Middle East. Bad approach.
But, we have to do SOMETHING! Really? Why? Uncle Sam can't cap the well. Uncle Sam has been a miserable failure when it comes to interfering in the energy business. Remember the "Windfall Profits Tax"? That was an unmitigated policy disaster which only drove oil prices higher and led to the famous gasoline lines in the 1970's.
Politicians everywhere are using the public outcry to gain political footing by creating a policy issue where none exists. It's politically popular to wring your hands and claim that things should have been handled differently. How would you have prevented this, Mr. Senator? Mr. President? Mr. Candidate?
The liability for the damage, which will easily run into the tens of billions, clearly belongs primarily to BP and Transocean Ltd. (RIG). Since the explosion on Transocean's platform on April 20, the company has lost nearly HALF its value, or $15 billion.
Undoubtedly, each of these companies carries insurance which will be employed to cover some portion or the majority of the costs.
Regulate future oil drilling activity? Not necessary. The entire oil industry has taken a hit. Even stalwarts such as ExxonMobil (XOM) have suffered massive losses in value in anticipation of a much less friendly business environment. XOM's market value has dropped by 10% or about $30 billion. If one were to factor in the entire oil industry including drillers, the losses would certainly exceed an additional $100 billion.
Clearly, any company NOT involved is working overtime to make sure a similar disaster does not occur in one of their wells. The last thing any oil company wants right now is to be responsible for some other disaster while the world's microscope is analyzing every step they take.
There is no place for public policy here, despite the cry for penalties, regulations and restrictions. The marketplace has imposed HUGE penalties, as has the forum of public opinion. We can either choose, as a society, to encourage more oil supplies at the cost of an occasional disaster, or we can reduce the probability of this kind of problem by imposing massive costs on society. Oil is highly combustible, therefore, we can not possibly eliminate the risk in this industry any more than we can eliminate traffic deaths by imposing more penalties on the automobile manufacturers.
No solution to this situation exists. You want more nuclear? Prepare for the occasional reactor radiation leak. You want less production of oil here? Prepare to be more beholden to Saudi Arabia and other nations that sponsor terrorism.
What we have to understand is that life comes with trade-offs. These can't be legislated away despite the self-serving proclamations of our elected officials and those that seek to be elected. Cry about it, but don't make it worse by over-reacting. Let the market take care of it.
Marko's Take
Our 7-Step solution to fixing the ponzi scheme called Social Security is now available on You Tube. Entitled "Social In-Security: The Solution", the video can be accessed by clicking here http://www.youtube.com/markostaketv#p/u/0/7Rl6XtobFpE.
Thursday, June 3, 2010
Wednesday, June 2, 2010
Euro-Zone Defies Phillips Curve
Once upon a time, many economists ascribed to the notion that unemployment and inflation were trade-offs.
The notion of an inverse relationship between inflation and unemployment was first put forth by William Phillips, a New Zealand born economist, in a paper in 1958 entitled "The Relationship Between Unemployment and the Rate of Change of Money Wages in the United Kingdom 1861–1957". Phillips describes how he observed an inverse relationship between wage changes and unemployment in the British economy over the subject period.
In 1960, Paul Samuelson and Robert Solow took Phillips' work and made explicit the link between inflation and unemployment using some statistical analysis. When inflation was high, unemployment was low and vice-versa.
Milton Friedman concluded that there is a SHORT-term correlation between accelerating inflation and employment. He observed that when an inflationary surprise occurs, workers are fooled into accepting lower pay because they don't see the drop in real wages right away. Firms hire them because they see inflation as generating higher net income for a given level of wages. Eventually, as workers discover that real wages have fallen, they push for higher pay.
Further studies of the Phillips Curve have demonstrated that any relationship is short-term at best. In the long run, the relationship is likely direct rather than inverse. Once inflation takes hold, the economic distortions that result are more likely to contribute to economic weakness and add to, as opposed to subtract from, unemployment. History has shown that hyper-inflation can exist alongside high unemployment, so the theory's limitations have been accepted.
The situation today in the Euro-Zone demonstrates how fallacious this theory is. Unemployment is now at a 12-year high of 10.1%, while inflation appears to be moving upward. Even Germany, considered the strongest economy, has unemployment approaching 8% - a very high level in normal times.
Producer prices posted their sharpest gain for 21 months in April fueled by higher prices for energy and intermediate goods, data from the European Union's Eurostat statistics office showed this morning.
In March, factory level prices rose 0.6% on the month and 0.9% on the year. The data showed producer prices for energy jumping 1.9% in April, while prices for intermediate goods gained 1.3%, the strongest monthly rise since January 1995. On a year-to-year basis, intermediate goods prices gained 2.7% and energy prices jumped 7.7%, both the strongest annual increases since October 2008, Eurostat said.
Both unemployment and inflation are strongly influenced by the money supply. In general, spurts in growth of money are typically followed by an "output effect", in which economic growth accelerates. About a year later, the "price effect" takes over as upward pressure is put on inflation. Initially, unemployment and economic growth get a boost which is then followed by prices increasing. Thus, the appearance of an inverse relationship.
Of course, over time, price increases become worrisome. With a background of a strong economy, financial authorities will act to cool inflation. The result is the opposite. The "output effect" is felt immediately, the economy slows and perhaps goes into a recession. About a year later, price increases start to cool as people lose their jobs.
While the Phillips Curve itself is no longer advocated as a methodology for making economic adjustments, the Keynesian notion that government spending should be used as a policy tool remains in force. Most of the top economic and financial advisers in the Obama Administration ascribe to Keynesian thinking which is at the heart of the notion of the Phillips Curve.
While Keynes and Phillips had plenty of data to support their ideas, neither are appropriate as a basis for making policy decisions today. As long as these continue to get "air time", our economic and financial problems will remain most difficult to solve.
Marko's Take
Ready For a 7-step proposal to fix the FRAUD/Ponzi Scheme called Social Security? If so, our new video blog entitled "Social In-Security: The Solution" is now posted. It can be accessed by clicking here http://www.youtube.com/watch?v=7Rl6XtobFpE.
The notion of an inverse relationship between inflation and unemployment was first put forth by William Phillips, a New Zealand born economist, in a paper in 1958 entitled "The Relationship Between Unemployment and the Rate of Change of Money Wages in the United Kingdom 1861–1957". Phillips describes how he observed an inverse relationship between wage changes and unemployment in the British economy over the subject period.
In 1960, Paul Samuelson and Robert Solow took Phillips' work and made explicit the link between inflation and unemployment using some statistical analysis. When inflation was high, unemployment was low and vice-versa.
Milton Friedman concluded that there is a SHORT-term correlation between accelerating inflation and employment. He observed that when an inflationary surprise occurs, workers are fooled into accepting lower pay because they don't see the drop in real wages right away. Firms hire them because they see inflation as generating higher net income for a given level of wages. Eventually, as workers discover that real wages have fallen, they push for higher pay.
Further studies of the Phillips Curve have demonstrated that any relationship is short-term at best. In the long run, the relationship is likely direct rather than inverse. Once inflation takes hold, the economic distortions that result are more likely to contribute to economic weakness and add to, as opposed to subtract from, unemployment. History has shown that hyper-inflation can exist alongside high unemployment, so the theory's limitations have been accepted.
The situation today in the Euro-Zone demonstrates how fallacious this theory is. Unemployment is now at a 12-year high of 10.1%, while inflation appears to be moving upward. Even Germany, considered the strongest economy, has unemployment approaching 8% - a very high level in normal times.
Producer prices posted their sharpest gain for 21 months in April fueled by higher prices for energy and intermediate goods, data from the European Union's Eurostat statistics office showed this morning.
In March, factory level prices rose 0.6% on the month and 0.9% on the year. The data showed producer prices for energy jumping 1.9% in April, while prices for intermediate goods gained 1.3%, the strongest monthly rise since January 1995. On a year-to-year basis, intermediate goods prices gained 2.7% and energy prices jumped 7.7%, both the strongest annual increases since October 2008, Eurostat said.
Both unemployment and inflation are strongly influenced by the money supply. In general, spurts in growth of money are typically followed by an "output effect", in which economic growth accelerates. About a year later, the "price effect" takes over as upward pressure is put on inflation. Initially, unemployment and economic growth get a boost which is then followed by prices increasing. Thus, the appearance of an inverse relationship.
Of course, over time, price increases become worrisome. With a background of a strong economy, financial authorities will act to cool inflation. The result is the opposite. The "output effect" is felt immediately, the economy slows and perhaps goes into a recession. About a year later, price increases start to cool as people lose their jobs.
While the Phillips Curve itself is no longer advocated as a methodology for making economic adjustments, the Keynesian notion that government spending should be used as a policy tool remains in force. Most of the top economic and financial advisers in the Obama Administration ascribe to Keynesian thinking which is at the heart of the notion of the Phillips Curve.
While Keynes and Phillips had plenty of data to support their ideas, neither are appropriate as a basis for making policy decisions today. As long as these continue to get "air time", our economic and financial problems will remain most difficult to solve.
Marko's Take
Ready For a 7-step proposal to fix the FRAUD/Ponzi Scheme called Social Security? If so, our new video blog entitled "Social In-Security: The Solution" is now posted. It can be accessed by clicking here http://www.youtube.com/watch?v=7Rl6XtobFpE.
Tuesday, June 1, 2010
China's Problems Intensify
The great economic miracle called China is slowly coming unwound. Beset by a host of converging economic and financial problems, Beijing is about to face the ultimate test.
Front and center is the housing bubble and an economy that is rapidly overheating.
The problems in China’s housing market are thought to be more severe than those in the U.S. before the financial crisis. They combine the potential housing bubble with the risk of social discontent, according to an adviser to the Chinese central bank. In the last 12 months, property prices have appreciated by 11.7%.
China initiated limitations on property speculation recently as economic growth accelerated to 11.9% in the first quarter from the same period last year. The State Council said anyone buying a second home would be required to put up a 50% deposit, up from 40%, while the mortgage rate for second homes was also raised. The downpayment for first homes bigger than 90 square meters was increased to a minimum of 30%.
The economy expanded at its fastest rate in nearly 3 years and more quickly than economists had expected, putting new pressure on the financial authorities to consider tougher tightening measures, including an appreciation of the exchange rate and interest rates.
Despite rising fears of overheating, consumer price's dipped to an annualized 2.4% in April from 2.7% in February, according to recently published data. Inflation at the factory level continued to accelerate, increasing half a percentage point to 5.9%.
Asia’s soaring factory output appeared to have slowed this morning as production data from China, Taiwan, South Korea and Australia showed a decrease in the pace of growth in output in May.
The official Purchasing Managers’ Index (PMI), compiled by the China Federation of Logistics and Purchasing, fell to 53.9 in May from 55.7 in April. Concurrently, the unofficial but closely watched HSBC China Manufacturing PMI fell to 52.7 from 55.2. An index reading above 50 indicates an increase in output.
Beijing has been the main driver of commodity prices in the past year, but the markets have been hit in recent weeks by concerns that measures to cool growth will temper the country’s appetite for raw materials. As a result, oil prices have stalled.
Add to that China's exposure to the dismantling of the Euro-Zone and belligerent neighbor North Korea to the south and the ingredients are in place for an early termination of the China miracle. As a result, investors need to be careful about taking on too much exposure to Chinese interests.
Marko's Take
Interested in learning more about that ponzi scheme/FRAUD known as Social Security? Our new video blog series addresses not only the problems but will present a market-based solution to fixing this mess.
To access "Social In-Security: The Problem", click here http://www.youtube.com/markostaketv#p/u/0/twFn9XyP2rI.
Front and center is the housing bubble and an economy that is rapidly overheating.
The problems in China’s housing market are thought to be more severe than those in the U.S. before the financial crisis. They combine the potential housing bubble with the risk of social discontent, according to an adviser to the Chinese central bank. In the last 12 months, property prices have appreciated by 11.7%.
China initiated limitations on property speculation recently as economic growth accelerated to 11.9% in the first quarter from the same period last year. The State Council said anyone buying a second home would be required to put up a 50% deposit, up from 40%, while the mortgage rate for second homes was also raised. The downpayment for first homes bigger than 90 square meters was increased to a minimum of 30%.
The economy expanded at its fastest rate in nearly 3 years and more quickly than economists had expected, putting new pressure on the financial authorities to consider tougher tightening measures, including an appreciation of the exchange rate and interest rates.
Despite rising fears of overheating, consumer price's dipped to an annualized 2.4% in April from 2.7% in February, according to recently published data. Inflation at the factory level continued to accelerate, increasing half a percentage point to 5.9%.
Asia’s soaring factory output appeared to have slowed this morning as production data from China, Taiwan, South Korea and Australia showed a decrease in the pace of growth in output in May.
The official Purchasing Managers’ Index (PMI), compiled by the China Federation of Logistics and Purchasing, fell to 53.9 in May from 55.7 in April. Concurrently, the unofficial but closely watched HSBC China Manufacturing PMI fell to 52.7 from 55.2. An index reading above 50 indicates an increase in output.
Beijing has been the main driver of commodity prices in the past year, but the markets have been hit in recent weeks by concerns that measures to cool growth will temper the country’s appetite for raw materials. As a result, oil prices have stalled.
Add to that China's exposure to the dismantling of the Euro-Zone and belligerent neighbor North Korea to the south and the ingredients are in place for an early termination of the China miracle. As a result, investors need to be careful about taking on too much exposure to Chinese interests.
Marko's Take
Interested in learning more about that ponzi scheme/FRAUD known as Social Security? Our new video blog series addresses not only the problems but will present a market-based solution to fixing this mess.
To access "Social In-Security: The Problem", click here http://www.youtube.com/markostaketv#p/u/0/twFn9XyP2rI.
Monday, May 31, 2010
Bond Rating Agencies Yield Junky Results
Think a certain credit rating means something? Think again!
Amid the financial crisis which enveloped the global financial system in 2008-2009, Standard & Poors (S & P) and Moody's played a central role. So much paper with sub-prime mortgages defaulted that were originally given Triple A ratings, that any scintilla of crediblity these agencies had has vanished.
The meaning of an AAA rating is that the likelihood of default is virtually nil. Yet, in the 2008-2009 period, thousands of Collateralized Debt Obligations (CDOs) not only defaulted, but suffered principal losses of up to 90% of face.
The problem with the entire business of rating credit has been that issuers "pay" to have their bonds rated to make them marketable to institutional investors, who often base their asset allocations on how highly rated an issuer is. Since S & P and Moody's are paid by the issuers, they're beholden to their customers and not the investors that will ultimately rely on the ratings themselves.
Another side-effect is that the rating agencies are incredibly slow to issue downgrades. A recent example is Spain, which was just downgraded by Fitch to AA+ from AAA. Spain's bonds already trade at levels more akin to comparable issuers rated either A or BBB with yield spreads in excess of 150 basis points. When issuers ARE about to be downgraded, they often fight the downgrade, delaying it further.
Credit ratings have ZERO informational content. Studies performed by my own firm, Helix Investment Partners, indicated that the yield spreads needed to compensate investors for the probability of default were highly correlated with 3 market driven variables: a company's market capitalization (share prices times shares outstanding), its market-adjusted DEBT/EQUITY ratio (debt divided by market capitalization) and the volatility of the issuer's common stock.
Once these variables were considered appropriately, a company's credit rating was absolutely meaningless statistically, In all likelihood, the 3 aforementioned variable captured imputed information much more accurately since money is on the line. A credit rating imperfectly captures these market indicators and is, therefore, nothing but a poor cousin.
Last week, in a Senate hearing, former Moody’s and S&P employees admitted that the agencies tried to please investment banks that were paying big fees to get high ratings. The three largest ratings companies, Moody's, S&P and Fitch (a unit of France's Fimalac SA), generated combined revenues of $3.6 billion on bond ratings last year.
Nowhere has the failure of the rating agencies been more prounced than in the mortgage securities market. Of all the issues assigned Triple A ratings in both 2006 and 2007, a full 90% have been downgraded to junk or defaulted!
On the corporate side, there are now only 4 issuers carrying Triple A ratings: Automatic Data Processing (ADP), Johnson & Johnson (JNJ), ExxonMobil (XOM) and Microsoft (MSFT). Even Berkshire Hathaway, whose bond yields are LOWER than Uncle Sam's, does not qualify for this very small club.
Yet, Triple A ratings on collateralized mortage paper was given out freely.
There is no need to even have this industry. The bond market, including the Credit Default Swap (CDS) market, is much more accurate in pricing in true credit risk at NO cost to the issuer. CDSs reflect the cost of "insuring" debt against default and have an excellent record of reflecting the latest information. By comparison, credit ratings are adjusted very infrequently and only "rubber-stamp" what the market already knows and has already priced in.
If the financial system is truly to be restructured to eliminate the unbridled greed and conflicts of interest which imperil investors, one component of reform should be to eliminate any requirements that bonds be rated and paid for by the issuers. A better system would be to have the rating agencies provide information to the investor community and get paid if their information proves valuable. It isn't. No sophisticated investor would pay to know what S & P, Moody's or Fitch thinks. Therefore, the problem will eliminate itself.
Marko's Take
Want to know you to fix the ponzi-scheme/FRAUD known as Social Security? Tune in to our new video, entitled "Social In-Security: The Solution", which will be posted shortly on You Tube. To get more background on this heinous, unconstitutional and immoral program, click here http://www.youtube.com/markostaketv#p/u/0/twFn9XyP2rI.
Amid the financial crisis which enveloped the global financial system in 2008-2009, Standard & Poors (S & P) and Moody's played a central role. So much paper with sub-prime mortgages defaulted that were originally given Triple A ratings, that any scintilla of crediblity these agencies had has vanished.
The meaning of an AAA rating is that the likelihood of default is virtually nil. Yet, in the 2008-2009 period, thousands of Collateralized Debt Obligations (CDOs) not only defaulted, but suffered principal losses of up to 90% of face.
The problem with the entire business of rating credit has been that issuers "pay" to have their bonds rated to make them marketable to institutional investors, who often base their asset allocations on how highly rated an issuer is. Since S & P and Moody's are paid by the issuers, they're beholden to their customers and not the investors that will ultimately rely on the ratings themselves.
Another side-effect is that the rating agencies are incredibly slow to issue downgrades. A recent example is Spain, which was just downgraded by Fitch to AA+ from AAA. Spain's bonds already trade at levels more akin to comparable issuers rated either A or BBB with yield spreads in excess of 150 basis points. When issuers ARE about to be downgraded, they often fight the downgrade, delaying it further.
Credit ratings have ZERO informational content. Studies performed by my own firm, Helix Investment Partners, indicated that the yield spreads needed to compensate investors for the probability of default were highly correlated with 3 market driven variables: a company's market capitalization (share prices times shares outstanding), its market-adjusted DEBT/EQUITY ratio (debt divided by market capitalization) and the volatility of the issuer's common stock.
Once these variables were considered appropriately, a company's credit rating was absolutely meaningless statistically, In all likelihood, the 3 aforementioned variable captured imputed information much more accurately since money is on the line. A credit rating imperfectly captures these market indicators and is, therefore, nothing but a poor cousin.
Last week, in a Senate hearing, former Moody’s and S&P employees admitted that the agencies tried to please investment banks that were paying big fees to get high ratings. The three largest ratings companies, Moody's, S&P and Fitch (a unit of France's Fimalac SA), generated combined revenues of $3.6 billion on bond ratings last year.
Nowhere has the failure of the rating agencies been more prounced than in the mortgage securities market. Of all the issues assigned Triple A ratings in both 2006 and 2007, a full 90% have been downgraded to junk or defaulted!
On the corporate side, there are now only 4 issuers carrying Triple A ratings: Automatic Data Processing (ADP), Johnson & Johnson (JNJ), ExxonMobil (XOM) and Microsoft (MSFT). Even Berkshire Hathaway, whose bond yields are LOWER than Uncle Sam's, does not qualify for this very small club.
Yet, Triple A ratings on collateralized mortage paper was given out freely.
There is no need to even have this industry. The bond market, including the Credit Default Swap (CDS) market, is much more accurate in pricing in true credit risk at NO cost to the issuer. CDSs reflect the cost of "insuring" debt against default and have an excellent record of reflecting the latest information. By comparison, credit ratings are adjusted very infrequently and only "rubber-stamp" what the market already knows and has already priced in.
If the financial system is truly to be restructured to eliminate the unbridled greed and conflicts of interest which imperil investors, one component of reform should be to eliminate any requirements that bonds be rated and paid for by the issuers. A better system would be to have the rating agencies provide information to the investor community and get paid if their information proves valuable. It isn't. No sophisticated investor would pay to know what S & P, Moody's or Fitch thinks. Therefore, the problem will eliminate itself.
Marko's Take
Want to know you to fix the ponzi-scheme/FRAUD known as Social Security? Tune in to our new video, entitled "Social In-Security: The Solution", which will be posted shortly on You Tube. To get more background on this heinous, unconstitutional and immoral program, click here http://www.youtube.com/markostaketv#p/u/0/twFn9XyP2rI.
Saturday, May 29, 2010
World War III Continued
Inevitably, difficult financial times lead to more militarism. Currently, there are more than 50 military conflicts that are active and some, like the Middle East and the Korean Peninsula, are threatening to explode into all-out multi-nation wars.
The continent of Africa has been plagued by no less than 20 civil wars in the last few decades, although these are primarily tribal conflicts which are very localized. The MAJOR conflicts include the U.S. presence in Afghanistan and Iraq, the threatened nuclear showdown in the Middle East over proposed sanctions against Iran and the recent escalation of tension in North Korea. Lesser conflicts, tame for now, include the Chechen and Georgian civil wars which have threatened Russia.
Global military spending has grown sharply at a time when few countries can afford it given the massive budget deficits so many of them face. World military expenditures in 2008 are estimated to have reached $1.464 trillion in current dollars versus just over $1.2 trillion in 2005 adjusted for inflation.
This represents a 4% increase in real terms since 2007 and a 45% increase over the 10-year period since 1999. Put differently, worldwide military spending equates to 2.4% of world Gross Domestic Product (GDP), or $217 for each person in the world.
The U.S., with its massive spending budget, is the principal determinant of the current world trend and its military expenditure now accounts for 41.5% of the world total.
After Washington, the next highest spenders are China (5.8% of world total), France and Britain (4.5% each) and Russia (4.0%). The next 10 countries combined represent about 21.1% of the total with the rest of the planet making up the remaining 18.6%.
The total U.S. military budget of approximately $700 billion, if completely wiped out, would not even cut the budget deficit in half! It represents more than 50% of the entire discretionary portion of the budget. Of that total, about $200 billion is being spent annually in Iraq and Afghanistan.
Sadly, rising tensions in two key areas of the world, the Middle East and Korea, suggest that a reduction in military spending is very unlikely in the intermediate term.
Korean tensions have resulted from recent revelations that North Korea is responsible for the sinking of South Korean warship Cheonan in March. Because nuclear power North Korea shares a border with China, Beijing has been restrained about supporting sanctions against Pyongyang. That seems to have changed.
During a visit to Seoul yesterday, China’s premier Wen Jiabao said that China would not protect “whoever sank” the South Korean warship, offering Seoul some encouragement that Beijing might not block moves to punish North Korea at the United Nations Security Council for killing 46 sailors.
South Korea has given China the complete technical report on the sinking and has said it would welcome a Chinese delegation should they want to inspect the shattered hull and corroded torpedo retrieved from the seabed.
North Korea has put its oversized army on alert and has threatened to invade South Korea if Seoul breaches any restricted areas. The last thing China wants is a nuclear civil war on its southern border with millions of Korean refugees seeking asylum.
Russia also has a keen interest in the Korean Peninsula. Moscow said on Thursday that it would stage large-scale naval exercises off North Korea next month that were planned before the stand-off on the peninsula. Sailors “will be on a high level of alert and capable of reacting adequately to any threat”, the Russian Navy told Interfax.
Iran sits on the second largest oil reserves on the planet and is vying to join the nuclear club, a policy vehemently opposed by Israel and the United States as well as the United Nations Security Council. Opposition to Tehran's plans now includes France, China, Russia and Britain - making it virtually certain that sanctions will be imposed. Iran has responded to the possibility of sanctions by threatening military action in the region and cutting off oil exports which need to go through the Straits of Hormuz.
The criticality of maintaining oil flow virtually assures a multi-nation armed conflict and the possibility of the use of nuclear weapons by Israel or Iran with the inevitable rise in global terrorism. It is also likely that any regional conflict would draw in nations such as Syria, Pakistan, Turkey, Yemen and Egypt who will oppose any action taken by Israel.
Unfortunately, the militarism witnessed today is only likely to grow worse. As nations become more determined to "look out for number one", the ability to cooperate diplomatically will be less likely. Otherwise, passive domestic populations will become more supportive of military actions to protect their countries economic interests. Defaulting debtor nations will incur the wrath of their creditors. Protective trade restrictions, which were utter failures during the Great Depression, will become more politically popular.
This is yet another reason to maintain a heavy stake in Gold. If free trade becomes restricted, currencies will be less useful as a means of exchange and the use of the only globally recognized currency will increase exponentially.
Marko's Take
Our latest video blog which proposes a 7-Step solution to fixing Social Security will be posted in the next day. If you want to know the important aspects of that fraud and ponzi scheme called Social Security, check out our video entitled "Social In-Security: The Problem' by clicking here http://www.youtube.com/markostaketv#p/u/0/twFn9XyP2rI.
The continent of Africa has been plagued by no less than 20 civil wars in the last few decades, although these are primarily tribal conflicts which are very localized. The MAJOR conflicts include the U.S. presence in Afghanistan and Iraq, the threatened nuclear showdown in the Middle East over proposed sanctions against Iran and the recent escalation of tension in North Korea. Lesser conflicts, tame for now, include the Chechen and Georgian civil wars which have threatened Russia.
Global military spending has grown sharply at a time when few countries can afford it given the massive budget deficits so many of them face. World military expenditures in 2008 are estimated to have reached $1.464 trillion in current dollars versus just over $1.2 trillion in 2005 adjusted for inflation.
This represents a 4% increase in real terms since 2007 and a 45% increase over the 10-year period since 1999. Put differently, worldwide military spending equates to 2.4% of world Gross Domestic Product (GDP), or $217 for each person in the world.
The U.S., with its massive spending budget, is the principal determinant of the current world trend and its military expenditure now accounts for 41.5% of the world total.
After Washington, the next highest spenders are China (5.8% of world total), France and Britain (4.5% each) and Russia (4.0%). The next 10 countries combined represent about 21.1% of the total with the rest of the planet making up the remaining 18.6%.
The total U.S. military budget of approximately $700 billion, if completely wiped out, would not even cut the budget deficit in half! It represents more than 50% of the entire discretionary portion of the budget. Of that total, about $200 billion is being spent annually in Iraq and Afghanistan.
Sadly, rising tensions in two key areas of the world, the Middle East and Korea, suggest that a reduction in military spending is very unlikely in the intermediate term.
Korean tensions have resulted from recent revelations that North Korea is responsible for the sinking of South Korean warship Cheonan in March. Because nuclear power North Korea shares a border with China, Beijing has been restrained about supporting sanctions against Pyongyang. That seems to have changed.
During a visit to Seoul yesterday, China’s premier Wen Jiabao said that China would not protect “whoever sank” the South Korean warship, offering Seoul some encouragement that Beijing might not block moves to punish North Korea at the United Nations Security Council for killing 46 sailors.
South Korea has given China the complete technical report on the sinking and has said it would welcome a Chinese delegation should they want to inspect the shattered hull and corroded torpedo retrieved from the seabed.
North Korea has put its oversized army on alert and has threatened to invade South Korea if Seoul breaches any restricted areas. The last thing China wants is a nuclear civil war on its southern border with millions of Korean refugees seeking asylum.
Russia also has a keen interest in the Korean Peninsula. Moscow said on Thursday that it would stage large-scale naval exercises off North Korea next month that were planned before the stand-off on the peninsula. Sailors “will be on a high level of alert and capable of reacting adequately to any threat”, the Russian Navy told Interfax.
Iran sits on the second largest oil reserves on the planet and is vying to join the nuclear club, a policy vehemently opposed by Israel and the United States as well as the United Nations Security Council. Opposition to Tehran's plans now includes France, China, Russia and Britain - making it virtually certain that sanctions will be imposed. Iran has responded to the possibility of sanctions by threatening military action in the region and cutting off oil exports which need to go through the Straits of Hormuz.
The criticality of maintaining oil flow virtually assures a multi-nation armed conflict and the possibility of the use of nuclear weapons by Israel or Iran with the inevitable rise in global terrorism. It is also likely that any regional conflict would draw in nations such as Syria, Pakistan, Turkey, Yemen and Egypt who will oppose any action taken by Israel.
Unfortunately, the militarism witnessed today is only likely to grow worse. As nations become more determined to "look out for number one", the ability to cooperate diplomatically will be less likely. Otherwise, passive domestic populations will become more supportive of military actions to protect their countries economic interests. Defaulting debtor nations will incur the wrath of their creditors. Protective trade restrictions, which were utter failures during the Great Depression, will become more politically popular.
This is yet another reason to maintain a heavy stake in Gold. If free trade becomes restricted, currencies will be less useful as a means of exchange and the use of the only globally recognized currency will increase exponentially.
Marko's Take
Our latest video blog which proposes a 7-Step solution to fixing Social Security will be posted in the next day. If you want to know the important aspects of that fraud and ponzi scheme called Social Security, check out our video entitled "Social In-Security: The Problem' by clicking here http://www.youtube.com/markostaketv#p/u/0/twFn9XyP2rI.
Thursday, May 27, 2010
Plunging Money Supply Has Ominous Implications
The lifeblood of the world financial system is money. When there's more of it sloshing around, times are typically good unless there TOO much of it, causing inflation. Econometric studies have shown that of the 10 components of the Index Of Leading Economic Indicators (LEI), 2 are the most predictive of future economic activity: growth in the Money Supply and changes in the Stock Market.
It can be argued, quite convincingly, that the Stock Market is itself is highly dependent on growth in money. In fact, it's possible, that ALL 10 components of the LEI are driven by growth in money.
The money supply is SCREAMING! Is anyone out there listening?
The broadest measure of money, called M3, is contracting at an accelerating rate that now rivals the average decline seen from 1929 to 1933, despite near zero interest rates and the biggest fiscal orgy in history.
The M3 figures - which include a broad range of bank accounts and are tracked by monetarists for warning signals about the direction of the US economy a year or so in advance - began shrinking last summer. The pace has since quickened.
The stock of money fell from $14.2 trillion to $13.9 trillion in the three months to April, amounting to an annual rate of contraction of 9.6%. The assets of insitutional money market funds fell at a 37% rate, the sharpest drop ever. While a rising money supply does not always translate into boom times, a FALLING M3 has historically ALWAYS been followed by an economic contraction and a falling stock market.
Record stimulus spending has been an utter failure in triggering job growth and has barely produced any economic recovery. First quarter Gross Domestic Product (GDP) was revised lower to 3% from 3.2% this morning. The economy has lost more than 8 million jobs since the downturn began.
The Obama Administratio has an entirely different explanation for the failure of stimulus measures to produce the hoped for results. They are opting instead for further doses of Keynesian spending, despite warnings from the IMF that the gross public debt of the US will reach 97% of GDP next year and 110% by 2015.
Larry Summers, President Barack Obama’s top economic adviser, has asked Congress to approve another $200 billion stimulus package to produce economic growth.
Federal Reserve head Ben Bernanke no longer pays attention to the M3 data. The bank stopped publishing the data five years ago, considering it too erratic to be of much value.
Mr. Bernanke has conveniently forgotten that double-digit growth of M3 during the US housing bubble gave clear warnings that the boom was out of control. The sudden slowdown in M3 in early to mid-2008 - just as the Fed talked of raising rates - gave a very clear warning that the economy and stock markets were about to go into freefall.
The White House appears to have reversed course just weeks after Mr Obama vowed to rein in a budget deficit of $1.5 trillion (9.4% of GDP) this year and set up a commission to target cuts. Mr. Obama, clearly a reader of "Marko's Take", has now understood that the second dip of this Double-Dip Hyperinflationary Depression is imminent.
The dominant voices in US policy-making, Nobel laureates Paul Krugman and Joe Stiglitz, as well as Mr Summers and Fed chair Ben Bernanke are all Keynesians who reject monetary theory and have an extreme distaste to any mention of the quantity of money. Once they read "Marko's Take", perhaps they ought to open up their copies of "The Monetary History of the United States" by Milton Friedman and Anna Schwartz.
The die is cast. The crash in M3 has ominous implications. It means the second dip is imminent, the stock market will have trouble and on the plus side, interest rates will NOT rise for a long time.
Marko's Take
Interested in ideas on how to fix Social Security? "Social In-Security: The Solution" will be posted in the next 24-48 hours. To familiarize yourself with the ponzi scheme called Social Security, please check out our video entitled "Social In-Security: The Problem" by clicking here http://www.youtube.com/markostaketv#p/u/0/twFn9XyP2rI.
It can be argued, quite convincingly, that the Stock Market is itself is highly dependent on growth in money. In fact, it's possible, that ALL 10 components of the LEI are driven by growth in money.
The money supply is SCREAMING! Is anyone out there listening?
The broadest measure of money, called M3, is contracting at an accelerating rate that now rivals the average decline seen from 1929 to 1933, despite near zero interest rates and the biggest fiscal orgy in history.
The M3 figures - which include a broad range of bank accounts and are tracked by monetarists for warning signals about the direction of the US economy a year or so in advance - began shrinking last summer. The pace has since quickened.
The stock of money fell from $14.2 trillion to $13.9 trillion in the three months to April, amounting to an annual rate of contraction of 9.6%. The assets of insitutional money market funds fell at a 37% rate, the sharpest drop ever. While a rising money supply does not always translate into boom times, a FALLING M3 has historically ALWAYS been followed by an economic contraction and a falling stock market.
Record stimulus spending has been an utter failure in triggering job growth and has barely produced any economic recovery. First quarter Gross Domestic Product (GDP) was revised lower to 3% from 3.2% this morning. The economy has lost more than 8 million jobs since the downturn began.
The Obama Administratio has an entirely different explanation for the failure of stimulus measures to produce the hoped for results. They are opting instead for further doses of Keynesian spending, despite warnings from the IMF that the gross public debt of the US will reach 97% of GDP next year and 110% by 2015.
Larry Summers, President Barack Obama’s top economic adviser, has asked Congress to approve another $200 billion stimulus package to produce economic growth.
Federal Reserve head Ben Bernanke no longer pays attention to the M3 data. The bank stopped publishing the data five years ago, considering it too erratic to be of much value.
Mr. Bernanke has conveniently forgotten that double-digit growth of M3 during the US housing bubble gave clear warnings that the boom was out of control. The sudden slowdown in M3 in early to mid-2008 - just as the Fed talked of raising rates - gave a very clear warning that the economy and stock markets were about to go into freefall.
The White House appears to have reversed course just weeks after Mr Obama vowed to rein in a budget deficit of $1.5 trillion (9.4% of GDP) this year and set up a commission to target cuts. Mr. Obama, clearly a reader of "Marko's Take", has now understood that the second dip of this Double-Dip Hyperinflationary Depression is imminent.
The dominant voices in US policy-making, Nobel laureates Paul Krugman and Joe Stiglitz, as well as Mr Summers and Fed chair Ben Bernanke are all Keynesians who reject monetary theory and have an extreme distaste to any mention of the quantity of money. Once they read "Marko's Take", perhaps they ought to open up their copies of "The Monetary History of the United States" by Milton Friedman and Anna Schwartz.
The die is cast. The crash in M3 has ominous implications. It means the second dip is imminent, the stock market will have trouble and on the plus side, interest rates will NOT rise for a long time.
Marko's Take
Interested in ideas on how to fix Social Security? "Social In-Security: The Solution" will be posted in the next 24-48 hours. To familiarize yourself with the ponzi scheme called Social Security, please check out our video entitled "Social In-Security: The Problem" by clicking here http://www.youtube.com/markostaketv#p/u/0/twFn9XyP2rI.
Wednesday, May 26, 2010
Euro-Zone Debt Auctions Yield Mixed Results
As Global stock markets recover from the sudden volatility of the last few weeks, the Euro-Zone nations have been tapping into the bond markets to raise funds to finance their growing budget deficits and maturities on the external debt.
Germany had difficulties selling its 5-year bonds this morning, as record low yields curtailed demand, but the sale of a small issue of Portuguese bonds was well received, helped by more attractive yields.
Berlin's 5-year bonds fell in post-auction trade, driving the yield to a session peak of 1.524% versus 1.492% ahead of the auction. However, it remained near a record low of 1.402% reached on Tuesday.
Portugal sold €1 billion of 2015 bonds at an average yield of 3.70%, drawing demand of 1.8 times the amount sought, steady from the previous auction in February.
Italy will sell up to €1.5 billion of inflation-protected bonds on Thursday and up to €9.5 billion of nominal bonds on Friday.
Spain struggled to issue debt on Tuesday amid rising tensions in the new issue markets after the seizure of one of the country’s savings banks over the weekend.
Spain had to pay a big premium to sell €3.06 billion in 3-month and 6-month bills on Tuesday, reflecting investor anxiety about its growing debt and weakening financial sector, prompting worries that the country could suffer a bond auction failure, where not enough investors turn up to buy its debt.
The yield on Spain’s 6-month bill rose to 1.32% compared with 0.76% in April, while the yield on the 3-month bill rose to 0.7% from 0.549% .
In a sign of how investors are increasingly selective over Euro-Zone debt, the Dutch successfully raised €1.02 billion.
The Netherlands, which has a triple A credit rating with relatively strong public finances, raised the money in 5-year bonds at an average yield of 1.74% and 7-year bonds at an average yield of 2.305%
The debt problem is hardly unique to Europe. The United States is also facing a massive budget deficit and very onerous levels of external debt. In fact, Moody's has warned that the U.S. faces the loss of ITS triple A credit rating if the debt situation is not brought under control. Readers of "Marko's Take" know that the worldwide and domestic debt situation is going parabolic.
Recent statistics on external debt to Gross Domestic Product (GDP) reveal how fragile the global financial structure is. Sometime in the next 12 months, the ratio here in the U.S. will exceed 100%, which will put Washington in a club whose membership is growing rapidly.
Countries with Debt/GDP ratios in excess of 100% include Japan, Britain, Zimbabwe, Sweden, the Netherlands, Greece, Ireland, Belgium, Denmark, Austria, France, Portugal, Finland, Norway, Spain and Italy. Japan, is the highest among the G-20 with a ratio well in excess of 200%.
The proposed solution to the deteriorating situation has been to raise more debt. Would anyone propose assisting a cocaine addict by giving them more cocaine? As a result, the liklihood that the debt problem will be fixed is NIL. The only approach which can solve the problem is a dramatic restructuring of these countries' economic systems, including getting a handle on runaway social welfare programs which are exploding with the aging population structures.
Temporarily, the crisis in Sovereign Debt has taken a back seat with the much better reception in the credit markets. This will prove to be quite fleeting, with a more severe crisis inevitable, especially as the global economic weakness re-asserts itself.
Marko's Take
For new readers with a political bent, come visit us on You Tube. Our new video blog series covers such topics as The Federal Reserve, Social Security, Peak Oil and Personal Income Taxes. To access our videos click here http://www.youtube.com/markostaketv.
.
Germany had difficulties selling its 5-year bonds this morning, as record low yields curtailed demand, but the sale of a small issue of Portuguese bonds was well received, helped by more attractive yields.
Berlin's 5-year bonds fell in post-auction trade, driving the yield to a session peak of 1.524% versus 1.492% ahead of the auction. However, it remained near a record low of 1.402% reached on Tuesday.
Portugal sold €1 billion of 2015 bonds at an average yield of 3.70%, drawing demand of 1.8 times the amount sought, steady from the previous auction in February.
Italy will sell up to €1.5 billion of inflation-protected bonds on Thursday and up to €9.5 billion of nominal bonds on Friday.
Spain struggled to issue debt on Tuesday amid rising tensions in the new issue markets after the seizure of one of the country’s savings banks over the weekend.
Spain had to pay a big premium to sell €3.06 billion in 3-month and 6-month bills on Tuesday, reflecting investor anxiety about its growing debt and weakening financial sector, prompting worries that the country could suffer a bond auction failure, where not enough investors turn up to buy its debt.
The yield on Spain’s 6-month bill rose to 1.32% compared with 0.76% in April, while the yield on the 3-month bill rose to 0.7% from 0.549% .
In a sign of how investors are increasingly selective over Euro-Zone debt, the Dutch successfully raised €1.02 billion.
The Netherlands, which has a triple A credit rating with relatively strong public finances, raised the money in 5-year bonds at an average yield of 1.74% and 7-year bonds at an average yield of 2.305%
The debt problem is hardly unique to Europe. The United States is also facing a massive budget deficit and very onerous levels of external debt. In fact, Moody's has warned that the U.S. faces the loss of ITS triple A credit rating if the debt situation is not brought under control. Readers of "Marko's Take" know that the worldwide and domestic debt situation is going parabolic.
Recent statistics on external debt to Gross Domestic Product (GDP) reveal how fragile the global financial structure is. Sometime in the next 12 months, the ratio here in the U.S. will exceed 100%, which will put Washington in a club whose membership is growing rapidly.
Countries with Debt/GDP ratios in excess of 100% include Japan, Britain, Zimbabwe, Sweden, the Netherlands, Greece, Ireland, Belgium, Denmark, Austria, France, Portugal, Finland, Norway, Spain and Italy. Japan, is the highest among the G-20 with a ratio well in excess of 200%.
The proposed solution to the deteriorating situation has been to raise more debt. Would anyone propose assisting a cocaine addict by giving them more cocaine? As a result, the liklihood that the debt problem will be fixed is NIL. The only approach which can solve the problem is a dramatic restructuring of these countries' economic systems, including getting a handle on runaway social welfare programs which are exploding with the aging population structures.
Temporarily, the crisis in Sovereign Debt has taken a back seat with the much better reception in the credit markets. This will prove to be quite fleeting, with a more severe crisis inevitable, especially as the global economic weakness re-asserts itself.
Marko's Take
For new readers with a political bent, come visit us on You Tube. Our new video blog series covers such topics as The Federal Reserve, Social Security, Peak Oil and Personal Income Taxes. To access our videos click here http://www.youtube.com/markostaketv.
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