As the end of September approaches it seems that the global financial markets are again buffeted by the egomaniacs who crowd the corridors of power. This weekend has brought news that Silvio Berlusconi (Captain Viagara) has forced his party’s minister to resign from the coalition government, headed by Enrico Letta. Mr. Berlusconi was angry about losing another court appeal and in reprisal has decided to bring down the government. This will of course unnerve the Italian debt markets and send the Italian bond yields higher. Berlusconi will hope that he can craft a compromise with the government and receive some clemency and relieve him of his continued legal problems. The ability to hold the Italian financial markets hostage to instability is an expensive way to play for a legal reprieve. The U.S. markets are being subjected to a similar sort of hostage taking as the Republicans in the House are looking to negotiate away Obamacare by holding the U.S. debt levels and credit ratings hostage to political machinations. Being sympathetic to the long-term designs of the Republicans I understand there concerns but question their methods. Each time the House Republicans go down this path they ultimately cave and suffer politically at the ballot box. Better to draw up a genuine budget plan and educate the public to the destructive future budgetary problems.
The next generations have to be enlightened as to how the baby boomers are going to bankrupt the country and force economic pain on the succeeding generation. However, threats to shut down the government only antagonize many independent voters and allow the President to utilize the “bully pulpit” and gain the political high ground. The massive U.S. deficit will not be resolved in the near term,so better to check as much spending as possible now and make in-roads into the massive social programs with each new budget. Before the recent efforts by the House to attack Obamacare, for which the Republicans have a massive hard-on, independent voters were moving back to voting for the Republicans in next years off-elections. The madness of egomaniacs can make for the policy of madness. The financial markets are behaving as if the Republicans will regain their senses, but the financial impact can be costly in the near term. Watch the Italian markets for an immediate tutorial.
***In tomorrow’s Financial Times, political op-ed author Wolfgang Manchau has a piece, “Eurozone Is Far From Recovering.” When one of the main cheerleaders of the EU project raises a cautionary flag it is important to take note. Manchau states: “The monetary and banking data are telling us that the economy will teeter on the brink of zero or low growth for the foreseeable future because the financial sector is not supplying the economy with sufficient funds to expand.” Mr. Manchau is noting what a been a consistent theme of NOTES: Beware of the pundits proclaiming that the European recovery is underway. Economic growth is anemic at best and with unemployment remaining high and non-performing loans still plaguing Eurozone banks, the credit markets are not in expansionary mode. In fact, last week ECB President Draghi raised the issue of possibly undertaking a new LTRO program (long-term refinancing operation). While the U.S. budget process is center stage, European credit markets remain calm–although the Portuguese 2/10 curve remains a subject of concern. Tomorrow will show if the Italian political situation is impacting the entire sovereign bond market or merely an Italian affair. There are others who are pointing to the improvement in the Spanish trade data as signs of an improving Europe.
However, I caution that an unemployment level of 25%+ will act to curb a trade deficit as Spanish consumers have no money to spend on imports and the high levels of unemployment are having a deflationary impact on wages. With the consumer and the Spanish government both in austerity mode, Spanish production is forced to be sold as exports (but is it a fire sale with no profits for corporate Spain)? In last week’s FT piece by Martin Wolf, “Germany’s Strange Parallel Universe,” the issue is raised in regards to Ireland. “Ireland’s plight is a warning: it has long since restored its competitiveness and is running a large current account surplus. Yet its GDP has stagnated for four years.” Beware of the sell side analysts pushing the all clear signal for Europe.
***In an interesting turn of events , the FT reported on September 25 that CIC, the Chinese sovereign wealth fund (SWF) was going to take a 12.5% stake in the world’s largest POTASH producer, Uralkali of Russia. Uralkali sent world POTASH prices plunging this summer when it quit an export cartel it was in with Belaruskali over a political conflict between the Russian and Belarus shareholders. We will watch to see if Chinese investment stabilizes Potash prices. I wonder why the Chinese haven’t moved to purchase the Canadian potash producers as its share price plummeted following the Uralkali news back in the summer. I think the gap on the chart of POTASH[POT] left from July 25, 2013 will be very telling for global potash stocks.The gap is left from $36.00, but I think it will be a good barometer of Chinese intentions in an effort to continue to acquire the important prerequisites for agricultural production.
***Important for Japan will be Prime Minister Abe’s decision on the sales tax issue on October 1. Many believe the increase is a done deal but that PM ABE will also put in a very aggressive fiscal stimulus package to soften the impact of the sales tax increase and thus not undermine whatever economic growth has been created by the massive liquidity injection from earlier in the year. The Japanese financial markets have performed very well. (The NIKKEI is up almost 35% on the year; there is some growth in GDP and even inflation has shown positive momentum.) We will do further analysis and put forward a more comprehensive view tomorrow night. But the ABE proposal can be a market mover for YEN traders and investors.