The news out of central Europe is that Russian oil is again flowing to Belarus and heading through the Druzhba Pipeline and the refineries were working normally. As our readers are aware, we believe this energy situation will be an on-again, off-again story as Putin and company flex their well-oiled muscles to let the world know that they are indeed a”player.” Word later came that Belarus had threatened to retaliate by cutting electricity to Kaliningrad, a Russian region of the Federation, under the precepts that no agreement had been reached on the pricing of the electricity produced by Belarus. This was more tit for tat but will be resolved amicably. It is important to keep in mind that Russia supplies Germany with 350,000 barrels per day (15% of German consumption), and Poland with 400,000 barrels per day (three-quarters of its consumption). While oil is fungible, it still lets Europe know that Russia will have a voice in its affairs and this growing dependence will magnify that voice going forward.
Greece was also back on the radar today as the European ministers are going to meet with Greek officials to analyze the effort to reduce the deficit to more tolerable levels. This is all show as the Greek politicos don’t have the fortitude to take on the unions. The German-Greek 2-10 spread narrowed to 235 basis points but we will watch this as the EURO seems to sell off when the spread widens.
We want to revisit the analysis we did last week on the nationalization of Fannie and Freddie under the stealth of Christmas Eve. Secretary Geithner’s move was the greatest act of subterfuge since George Washington crossed the Delaware and attacked the Hessians long ago on Christmas Eve. This event will not pass lightly, for the Treasury’s action will have severe ramifications. The Obama administration has created the largest slush fund ever as it now has taken it upon itself to absorb a huge chunk of the bad debt in the housing market and make the U.S. taxpayer liable to an undefined amount–and it was done without Congressional oversight.
The audacity of this action is the fallout from Hank Paulson’s original TARP proposal that called for no judicial review of Treasury’s actions. As usual, the republicans will blame the democrats, but this is the cause of all in Congress who abdicated their authority under the stress of financial system meltdown. This arrogance of power cloaked in the darkness of Christmas EVE and holiday festivities make us question the governing intent of the administration. It makes us leery of dollar assets but we will await to see how the market treats it. This year sets up to be very difficult because there is so much turmoil both politically and financially. If the problems in Europe weren’t so great, selling the DOLLAR would be easy, adding to the global strains are the nascent attempt at currency controls by some of the emerging market countries. Throw in Iran and Middle East and the situation gets cloudier–nowhere to run, nowhere to hide.
In Washington D.C. today, we heard from Fed Governor, Elizabeth Duke. We wish that the FED could get on the same page. Yesterday, we had Bernanke discussing the Taylor rule and today Ms. Duke was back to the output gap argument. As long as unemployment stays high and capacity utilization is low (negative output gap), the FED will keep the Federal funds rate at a low level for an extended period of time. This constant vascillating in speeches between meetings is going to confuse the credit markets and further undermine the FED’s credibility. It would be alright to have different opinions but we have to ask then why all the votes are unanimous.
Also out tonight is a story about a $2 trillion pension shortfall in the U.S. It was previously thought that state and local governments had a projected shortfall of $400-$500 billion but Orin Kramer, chairman of New Jersey’s investement council, believes the number to be quadruple the amount if you include future obligations. Do you think this country could really take a deflationary period? And is there any wonder as to why the FED and the Treasury are so desirous of the carry trade pushing up equities? A slumping equity market would make this pension shortfall all the more painful, adding to the pain of this past decade.
January 5, 2010 at 2:53 pm |
Yra,
Excellent Piece, thanks for calling them as they are. Here are some quotes that go along with your theme:
“The problem with fiat money is that it rewards the minority that can handle money, but fools the generation that has worked and saved money.” Adam Smith
“The most important thing about money is to maintain its stability… You have to choose (as a voter) between trusting to the natural stability of gold and the natural stability and intelligence of the members of the Government. And, with due respect to these gentlemen, I advise you, as long as the capitalistic system lasts, to vote for gold.” George Bernhard Shaw
“This means, also, that the government must never try to prop up unsound business situations; it must never bail out or lend money to business firms in trouble. Doing this will simply prolong the agony and convert a sharp and quick depression phase into a lingering and chronic disease.” Ludwig von Mises
“Read, every day, something no one else is reading. Think, every day, something no one else is thinking. Do, every day, something no one else would be silly enough to do. It is bad for the mind to continually be part of unanimity.” Gotthold Ephraim Lessing