Notes From Underground: Single, Sovereign Country Looking for a Co-Signer

Let’s delve into the news that caught our attention during the weekend. The Ukrainian election has now been certified as Ms.Tymoshenko withdrew her court appeal, making Viktor Yanukovich the new president. Also,  from Europe we received word that the Dutch Government has fallen over a decision regarding its role in Afghanistan. The result seems to be a new election in the next three months, so the impact on the EURO should be nil.

The Greek government is working hard to raise money to get it through its March funding period. It has a bond offering this week so we will watch to see if investors are willing to step up. Big PAPA, the prime minister, believes that what Greece needs more than anything right now is a co-signer for its debt. This will help Greece borrow at the same rates as the rest of the debt-stressed nations of Europe. A co-signer would help stop the negative feedback loop that is now plauging Greece, as the budget is severely stretched and its cost of borrowing has increased. We warned of this weeks ago and it now seems as if the Greeks have come to the same conclusion. Let’s see if any country or lending group steps into the breech. If this were to happen, the German/Greek spread ought to narrow considerably.

Interestingly, George Soros weighed in on the Greek situation, blaming the lack of a political union for the problems of the debt stressed PIIGS. For years Soros put on his cheerleading outfit to praise everything that Europe did but now seems to find fault that the entire concept of it being a true union is called into question. This latent critique from the same man who claimed at Davos that GOLD was the new large bubble, while simultaneously acquiring a very sizable position in Gold ETF, GLD. Hmm, is anybody paying attention to his ramblings? George, please exit the stage pursued by a bear.

In the commodities world, we found two stories to be more than passing interest. The LME announced the launch of two new derivatives contracts on industrial metals. Cobalt and molybdenum–a metal alloy used to make stainless steel–will be listed so that there is greater access to price stability and transparency. The most dominant player in Cobalt is Glencore, the huge mining and metal supplier, that is reported to be controlled by Marc Rich. The Financial Times article stated that if Glencore does not participate, the contract has little chance. It will be interesting to see if investors use it to to offset risk in iron ore or use it as a speculative vehicle in its own right. The stock, GMO, has previously been the vehicle for speculating in Molybdenum–we own some for that reason–but it will be interesting if this attracts a new form of speculator.

Secondly, the FT also reported that China imports more Saudi oil than the U.S. Over time, Canada, Venezuela and Mexico have become the mainstays of U.S. imports. The question that it raises is that the Chinese have gotten a free ride on the back of the U.S. Navy as it is the U.S. fleets that keep the world’s shipping lanes safe. If we were going to bring pressure on the Chinese we would certainly be raising this issue, but unfortunately the old, tired U.S. security establishment seems to like the monopoly of U.S. sea power. Nothing like living with a Cold War mindset in a global world. Another issue from our perspective is that Mexico needs to ramp up investment in its energy sector. The Mexican oil fields need a huge amount of foreign investment to upgrade the productive capacity. The 1938 Mexican Constitution prohibits foreign investment in the energy sector but this needs to change. We thought President Calderon would work toward this change but he did not have enough political strength. The revenue from oil and gas funds is almost 40% of the Mexican government budget so change is going to have to come as the existing fields are rundown. If Mexico would make this change, we would become very bullish of the Peso. But until real change comes, it is strictly a trade and not an investment.

Tags: , ,

One Response to “Notes From Underground: Single, Sovereign Country Looking for a Co-Signer”

  1. spdbrnr34 Says:


    Re Mexican oil, it’s quite noteworthy, and a bit scary for our import situation, how fast their huge Cantarell field is depleteing. Here’s a link to the decline:

Leave a Reply