Notes From Underground

Buried in the health care legislation was the takeover of Sallie Mae, the guarantor of student loans. Sallie Mae will no longer be an independent agent of the loans but will actually be under the control of the executive branch. So now we have it: Fannie, Freddie and Sallie all under the protective blanket of the Treasury. Do we really have to wonder who winds up getting screwed? The FED may attempt to clean up its balance sheet, but the Treasury’s load keeps on getting bigger and its political aspects may be financially overwhelming.

This is the a very dangerous path that we are heading down as the loan programs are becoming more politicized than ever. The socialization of the large lending programs has moved much of the securitized debt markets into the hands of a totally political entity, be it democrat or republican. It is this situation that makes the currency trade so difficult. Even though Europe has the PIIGS, the US has an administration and legislative branch trying to involve itself in every element of the economy. It is politics wrapped in economics, which makes such troubling bedfellows.

President Obama was in Prague today to sign an arms control agreeement with the Russians on the reduction of nuclear warheads, which is always a good thing. While Medvedev embraced Obama, Putin recently returned from a trip to Venezuela on an arms selling junket to Hugo Chavez. The Russians proclaimed that if the US wasn’t going to sell the needed weaponry to Venezuela, then they were going to “because the arms market abhors a vacuum.”

We put this on our readers’ radar screens for the weaponry involved is not defensive but offensive in nature. Hugo Chavez would like nothing more than to ship his oil to China but at this time he does not have a Pacific outlet and the large tankers cannot traverse the Panama Canal. Plus, the trip through the Straits of Magellan is always risky and expensive. The best way to send oil to China would be a pipeline through Colombia or the western side of the Panama Canal. Chavez is not on good terms with the Colombian government as the Uribe group has been very close to the US. During the Bush years, the Venezuelan dictator tried his hand at supporting the FARC but was rebuffed as Uribe was able to rally the Colombian Army and beat back the Chavez-supported FARC offensive. When it appeared as if the Colombians could be toppled, Chavez was trying to offload the Citgo refineries that are owned by the Venezuelan Oil Company. Citgo refineries were built to refine the heavy oil that Venezuela produces so it is a very good business fit. When Chavez’s mischief proved fruitless, the refineries wound up not being sold and things calmed down. Now Putin and company are ensuring that Hugo will have the needed arms so as to be more successful he desires to stir the pot in the southern hemisphere. Oh well, let’s drink to the fact that we should always beware of BEAR hugs and celebrate that 2+2=5.

To close we will have to return to the Greek debt situation.The German/Greek 10-year spread widened to 435 basis points, a new record. The EURO did not make new lows for the year, though, and that we find interesting. The problem is and will be for the Europeans that the Greek debt is creating a negative feedback loop for the Greek treasury. The higher rates go, the greater the interest expense, and the more fiscal tightening that will have to be done. So far we have gotten nothing but rhetoric from the ECB and the EUROcrats, and the market is saying you have got to show us some real results and not just jawboning. This is the role that the global bond vigilantes play. Governments and economists fail to understand that the markets will exact their pound of flesh and this will come from continuing higher rates until some power comes to the rescue in real terms. We caution all those who rely on MODELS to beware that the market is a vengeful mistress, even for those engaging in ménage á trois.

Tags: ECB, Euro, Fed, PIIGS

This entry was posted on April 8, 2010 at 10:58 pm and is filed under Regulation. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.