Guest post by Peter Tchir.
Is Europe really going to let Greece go and risk a series of exits? That was my concern last week when I invoked quotes from Planet of the Apes. Nothing much has happened since then to change that view.
Greece has a vote that may or may not pass. If it doesn’t pass, the process of a nasty Greek exit and full default is likely accelerated. If they pass it, which I expect they will, then that process is likely just delayed. Until the “official sector” takes losses on all of its dumb purchases of Greek bonds and restructures the loans that were made that never had a chance of getting paid back, there will be no other course for Greece. The fact the European officials either don’t see it, or are just ignoring it is a major concern. Greece and the risk of a painful and chaotic exit for Greece that affects the other weak countries is a real risk. I expect a small pop when the vote is done and it “passes”. If it doesn’t pass I will quickly get very nervous about the markets, but history tells us it will pass and everyone will pretend this time it will work. At least for a couple of days we can live that fairytale.
Then there is Germany. The comments coming out of Germany are growing more hostile. Germany today mentioned direct influence on other country’s budgets. Draghi specifically tried to point out to Germany that the European debt crisis is hurting Germany already and will hurt it more. He is clearly trying to make it easier for Germans to get on board with some aggressive ECB action. If you are truly an optimistic, you can think Draghi said this as a warning shot before he acts “independently”. While not completely at the beck and call of Germany, the ECB is far less independent than our Fed. Draghi has already made it clear that the IMF would be a model for any new programs, so he has given away some independence. He won’t just act unilaterally and aggressively. That leaves us with the conclusion that he is pushing Germany, and that Germany needs to be pushed. Back in September, Merkel sounded downright dovish. She pointed out even to her own finance people that the ECB had to remain independent. That is not the message that came out last week when she appeared to backtrack on letting banks get direct bailout money, and that message was further diminished by today’s comments. Germany will be hurt by not supporting more aggressive action, but people know smoking is bad, and yet many still do.
Picture of the day, courtesy Bloomberg Business Week.
And a few thoughts via The Economist.
Barack Obama has just won re-election, but America remains a country bitterly divided, as it has been for well over a decade. The divide is simultaneously very narrow in numerical terms, and gaping in ideological or partisan terms. This is what strikes one most strongly looking back at America from across an ocean: the country seems repeatedly embroiled in savage 51-49 electoral campaigns, and it seems to be increasingly paralysed by irresolvable rancour between right and left.
And think about it for a second: this is bizarre. If Americans are in fact divided between two extremely different political ideologies, it would be an extraordinary coincidence if each of those philosophies were to hold the allegiance of nearly equal blocs of support. That situation ought not to be stable. Adherence to these two ideologies ought to shift enough just due to demographics that the 50-50 split should deteriorate. And yet the even split seems to be stable. What’s going on?
Full article here.
Guest post by Azizonomics.
I wondered during the final debate whether Mitt Romney might steal a phrase from Ronald Reagan and ask Americans if they were better off than they were four years ago. It has worked for the Republicans before, and all the polling data pointed to the idea that voters were looking at the economy as the top issue.
Yet Romney did no such thing. Perhaps that was because by a number of significant measures, many Americans are better off than they were three or four years ago when America was mired in the epicentre of a global economic crisis. While America is in many cases just catching up to ground lost in the 2008 crash, and while many significant and real doubts remain about the underlying fundamentals of the American and global economies, the American economy has reinflated since early 2009.
Obama has another four years, but the Fiscal Cliff is soon here. So, what is the fiscal cliff. Here a quick explanation if you still haven’t heard about “IT”. From Wikipedia.
The United States fiscal cliff refers to the effect of a series of enacted legislation which, if unchanged, will result in tax increases, spending cuts, and a correspondingreduction in the budget deficit. These laws include tax increases due to the expiration of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 and the spending reductions (“sequestrations”) under the Budget Control Act of 2011.
The year-over-year changes for fiscal years 2012-2013 include a 19.63% increase in revenue and 0.25% reduction in spending.
Some major domestic programs, like Social Security, federal pensions and veterans’ benefits, are exempted from the spending cuts. Spending for federal agencies andcabinet departments, including defense, would be reduced through budget sequestration.
The deficit for 2013 is projected to be reduced by roughly half, with the cumulative deficit over the next ten years to be lowered by as much as $7.1 trillion. However, it is also projected to cause a double-dip recession in the first half of 2013.
The Budget Control Act of 2011 was passed under the political environment of a partisan stalemate, in which Democrats and Republicans could not agree on how to reduce the deficit. It was thought that the blunt cuts of budget sequestration and sharp revenue increases would be mutually undesirable to both parties and provide an impetus and deadline to bring the sides together to solve the deficit problem.
Guest post via Gold Silver Worlds.
During an interesting interview on PracticalBull.com, David Morgan made the statement that the silver supply squeeze of 1980 could look like a warm-up compared to what could be coming in the not too distant future. The bull run in the 70’s took the price of silver from less than $5 to almost $50 dollar. Of course, there is nothing shocking to this statement for long term followers of the precious metals markets or for people that understand today’s monetary catastrophe that is unfolding. But still it’s worth one’s time to look at the analysis of a respected person like David Morgan which leads him to such a conclusion. His analysis is based on today’s demand / supply structure and the dynamics in the silver market.
On the demand side, the driving forces are the industrial and investment demand. David Morgan points to the fact that 54% of the silver market comes from industrial demand. That’s huge and raises the question what would happen in case of an economic recession or depression. In David’s view, the demand for silver will fall but not significantly like most people think. The key driver behind that thinking is the fall will be offset by a faster rise in the demand for wealth preservation. Moreover, as 70% of silver today is obtained via base metal miners (through copper, lead, zinc mining and related base metals), decreasing economic activity will lead to less demand for base metals and hence less supply. Even under very bad economic conditions most miners will continue their activities (even if they are operating with losses) although less mining would be the result, because it’s cheaper to operate with losses compared to closing a mine. Important insights from the expt!
In case of economic contraction, the run to assets that are free of counterparty risk (like gold and silver) will outpace the decline in industrial demand.