Notes From Underground: The Meaninglessness of IOWA and Other Thoughts

While the mainstream media desires to fill time it seems that Iowa has become less important this year as a barometer of the national mood. The agrarian sector of the economy is very healthy and with their stomachs full, the people of Iowa can ponder and think and be much more philosophical in terms of candidate selection. Rick Santorum can play to the high-mindedness of the social conservative agenda because in Iowa those voters have two loaves of bread under each arm. It is much tougher to be concerned about the ideological nature of life when you are fighting in a line to pick up an unemployment check or applying for a job.

New Hampshire will prove a better barometer but will also be skewed by its New England bias to Brother Romney. Politics is and will always be an important part of my analysis but at this juncture there is not much to dissect and will wait until the voting turns to states that are truly suffering from the Great Recession. The Ohio and Michigan primaries will give us a look at the mindset of voters in deeply stressed economic states and that will not be until late February and early March. Until then Congress will have to do to satisfy  our political appetite.

***Following up on yesterday’s piece about the flows out of GIIPS and into safer havens, it was reported today by Bloomberg that British gilts by foreign investors reached three-year highs. Last month, foreigners purchased $25 billion worth of GILTS. The British-based debt instruments were the best performing bonds in Europe, outperforming BUNDS by 7%. This strong performance is taking place even as U.K. inflation has continuously exceeded the BOE’s target of 3% over the last two years. For reasons of safety, foreign investors are willing to accept a 2% yield on a 10-year instrument solely for the purposes of diversification away from the European banking system. It should not be a surprise that the EUR/GBP cross made 16-month lows today as it traded down to 0.8270. The negative yield is being overcome by the gains of the POUND VS EURO.

***In support of the view that the RISK-ON/RISK-OFF paradigm is changing, we had another day where the EURO was under pressure against all major currencies but the GOLD, EQUITIES and other assets all held up very well. The EURO is seeming to take on the status of a funding vehicle which will distort the previous ALGO patterns. It was always the zero interest rate currencies that were the FUNDERS but now it seems that the negative bias about the EURO is leading investors to use the badly flawed EURO as the new CARRY TRADE VEHICLE.

***Greek Prime Minister Lucas Papademos warned today that a Greek DEFAULT was possible by March if the government did not come to some type of agreement with international lenders. Papademos knows that with French elections in May 2012 and Sarkzoy polling numbers very low, the troika will do all it can to prevent a  EUROPEAN DEBACLE. The Greek PM is playing a strong hand as he attempts to secure the best deal and he knows that Sarkozy will come to his aid. If Greece were to default, the short-term impact would be a severe European bank crisis which would bring the French financial system to a grinding halt. As the old adage goes: OWE THE BANK A MILLION DOLLARS,THE BANK OWNS YOU; OWE THE BANK A BILLION, YOU OWN THE BANK. Throw in political expediency and all caution goes out the door. Mr. Papademos, you have a very good friend in Paris.


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