The ECB will be visiting Spain but it will not be heading to the beaches. The EUROPEAN DEBT markets were a problem today and not because of the SPANISH 10-YEAR. Today it was the SPANISH TWO-YEAR NOTE that bore the brunt of investor angst. The short-duration paper was 88 BASIS POINTS higher as the 2/10 curve collapsed 55 basis points: FRANKFURT WE HAVE A PROBLEM. President Draghi, as an ex-GOLDMAN banker you well understand that when the markets sense weakness an attack on the soft spot is imminent. The action in the SPANISH DEBT markets is the first warning sign.
Late in the afternoon, MOODY’s assigned a negative outlook to Germany, Netherlands, Belgium and Luxembourg. This outlook change is meaningless at this time for the financial system needs collateral and for the moment the best of breed is the so-called European core. Regardless of what the “analysts” at MOODY’S opine, the 2-year notes of the Netherlands and Germany are and will remain negative. So a NEGATIVE OUTLOOK WILL NOT DISSUADE THOSE SEEKING SHELTER FROM THE STORM. Adding further stress on the Spanish and Italian debt markets was the announcement by the LCH.CLEARNET that it was raising the charges on Italian and Spanish bonds. The headwinds are gathering force as the strength of the JUNE 29 agreement in Brussels is being tested. Hey Mario, will you allow the ECB to be swimming naked?
***It was announced over the weekend that east coast farmers were buying “CHEAP” Brazilian corn to feed their livestock. This is a worrisome development for it reveals how severe the drought is in the U.S. The Brazilian corn is cheap because of the recent depreciation in the Brazilian real but if U.S. farmers think Brazilian corn is cheap what are the Chinese thinking? In a further development, U.S. ethanol producers are beginning to shut down production as the high price of corn means that many ethanol plants are operating at a loss or very slim profit. Early in the year, ETHANOL was being shipped to Brazil as the cheap price of corn was forcing Brazilian fuel sources to buy U.S.-based ethanol.
Now that the U.S. import tariffs have been removed look for an increase of Brazilian-based ethanol to find its way into the U.S. markets as proscribed mandates are met with sugar-based ETHANOL. Watch sugar prices for confirmation. In a BLOOMBERG article today, it was reported that meat and poultry farmers were lobbying the EPA for a waiver for the U.S. oil refiners to use 13.2 BILLION gallons of renewable fuel. So far Secretary of Agriculture Tom Vilsack has said he prays for rain everyday. Well Tom, I pray for you to have the wisdom to get ahead of what can easily become a very difficult food situation.
***As interest rates go negative on short-dated sovereign debt, a question arises as to why credit markets would utilize that paper for collateral. It appears that cash would be a better form of collateral for it doesn’t cost the repoer anything to own cash, for after all it is only cash. Yes, real interest rates are of course NEGATIVE, but we are now in a situation where NOMINAL RATES ARE ALSO NEGATIVE. In such a situation wouldn’t it behoove investors to OWN GOLD TO PLEDGE AS COLLATERAL. By taking NOMINAL AND REAL RATES NEGATIVE, THE GLOBAL AUTHORITIES ARE TELLING THE MARKETS THAT THE DEBT CRISIS IS SO SEVERE THAT THE ONLY WAY OUT IS INFLATION AND CURRENCY DEBASEMENT.
Deleveraging and fear are the operative actions in the financial realm, but at some point somebody is going to do the math and figure out that the slower fool is going to be left holding the proverbial bag. Remember, the way to avoid the ROGOFF/REINHART debt trap is through a nice comfortable rate of inflation of about 4% to 6%, an added elixir of Carmen Reinhart’s work on FINANCIAL REPRESSION. The GOLD/EURO CROSS WILL BE THE CHART TO WATCH TO SEE WHEN INVESTORS BEGIN TO MOVE TO GOLD AS THE ULTIMATE COLLATERAL AND PROTECTION FROM THE WORLD’S CENTRAL BANKS NEED TO MONETIZE DEBT. AS MARIO DRAGHI TOLD LE MONDE NEWSPAPER OVER THE WEEKEND—”THE ECB HAS NO POLICY TABOOS IN ITS FIGHT AGAINST THE DEBT CRISIS.” Hey Mario, is that a GOLD BAR IN YOUR SPEEDO OR ARE YOU HAPPY TO SEE A PRIVATE-SECTOR SPANISH BOND BUYER?