When the Greeks under Papandreou suggested a referendum on the GREEK AUSTERITY plan, the Greek PM was met with great consternation by the ruling elites in Brussels. A giant don’t-you-dare-call-a-referendum greeted PM Papandreou and basically forced his abdication. I warned then that the idea of a referendum on any issue of economic austerity was anathema to the EUROCRATS for the denizens of Brussels were/are fearful of testing the “PUBLIC WILL.” Every time a referendum was held it resulted in a decision opposite of the elite’s will: Another referendum was called until the “correct” result was realized. (It was usually preceded by warnings that all financial and budgetary agreements would be rendered null and void.)
This weekend had reports that the leader of the Social Democrats would push for a referendum in Germany over the principle of a FISCAL UNION COMPLETE WITH EUROBONDS. The domestic political situation is heating up in Germany and it is going to result in the ultimate NUCLEAR OPTION. The outcome of a GERMAN NATIONWIDE VOTE ON THE EU, EURO AND EUROBONDS COULD WELL PULL THE PLUG ON THE ENTIRE EU PROJECT. It is early in the process and so far mere political rhetoric but is a potentially destabilizing factor for markets. Mario Draghi has opened up a debate that he failed to anticipate. Ultimately, the German polity will be the decision maker on which path Europe will take. For now the SOVEREIGN DEBT MARKETS will be the recipient of investors’ angst.
***Quick hitter: The Canadian unemployment report was released Friday and the initial reaction was that the number was weak as the jobs number showed a loss of 30,000 versus a projected gain of 10,000, while the jobless rate increased to 7.3%. The breakdown showed that all the job losses were in part-time employment while full-time workers actually gained 21,300. Wages also grew larger than expected, thus the overall number was not as negative as the headlines reflect.
***I will continue on my theme that the Reserve Bank of Australia (RBA) made a mistake by not cutting rates at last week’s meeting. The AUSSIE YIELD CURVE is inverted on the short end (out to 3 years), reflecting a looming slowdown in the AUSSIE ECONOMY. In the release of the RBA’s quarterly statement on Friday, it revealed that the RBA is very concerned about the high level of the AUSSIE DOLLAR. Well, if the RBA is so concerned then it should have cut the rate and removed the inversion in the short end and the recent flattening in the 2/10 part of the curve.
There is talk of some type of SWISS LIKE PROGRAM OF CURRENCY INTERVENTION BUT THAT WOULD BE FOOLISH FOR LIKE THE SWISS THE RBA WOULD HAVE TO INVEST ANY OF THE INTERVENTION INTO MORE RISKIER CURRENCIES. The RBA need not entertain such a plan as it has plenty of room to cut rates before a program of intervention.
***G-20 is concerned about recent rise in food prices … really. The food for energy program was a great idea as long as global crops were not met by drought. Now that the U.S. is in the midst of a severe drought the use of grain to make fuel is causing fear of political upheaval in food-importing nations. The G-20 is looking for ways to preserve present supplies but if the U.S. crops continue to deteriorate then there has to be a fear that the world’s largest grain exporter will cut back on global supplies. The Middle East political situation is already fragile. A rapid rise in food prices would create even more uncertainty.
The markets have been worried about rising energy prices but history has shown that food shortages are the major political destabilizer. Prices have already risen to record levels but continued crop destruction will be the wild card for the next six months. Let’s hope that South America plants fence post to fence post and gets rain.