The Rathole

  Here in America, we have a saying: "Don't throw good money after bad". It means don't put money into a situation that has no clear resolution. Apparently this phrase does'nt translate well into Italian.


  Mario Draghi, the head of the European Central Bank, and Mario Monti, Italy's Premier {together called the Super Marios} have asked that the EU's upcoming bailout fund, called the ESM {European Stability Mechanism}, be doubled in size to €1 trillion from it's current €500 billion. They say it's needed to restore confidence in Southern European {ie.. Spanish and Italian} debt. The ESM essentially will go into the secondary market and purchases Spanish and Italian bonds, which has the effect of lowering the interest rates that Italy and Spain pay when they need to borrow money. Spain's foreign minister Jose Manuel Garcia {not surprisingly} added his voice to those supporting this. 


  There are a few issues with this: first of all, for those investors who don't have confidence in Spain or Italy, they're going to sell their bonds to the ESM. In short, every time the ESM begins purchases, there is a wave of investor selling. All this really is doing is transferring risk from these investors to the European Central Bank. Hot potato, hot potato..  


  Secondly, this plan has been tried before-- the ECB's SMP Program was a big buyer of Greek debt as well as Portuguese debt. It did'nt save either nation, and now the ECB itself will be taking a big hit when Greek and Portuguese bonds go belly up. In short, this plan has helped only one group-- investors who were stupid enough to buy Greek debt years ago, but smart enough to unload it onto the ECB before it became worthless. It did'nt help Greece or Portugal or their people. 


  Thirdly, these nations-- including Italy and Spain-- have lived beyond their means for the better part of a decade. The ESM simply enables them to go on doing this; it simply delays the Day of Reckoning. These nations will, in one fashion or another, have to face the fact that their standard of living is going to be lower. It's not the end of the world for these nations-- far from it. These nations are, as nations go, fairly rich countries. Italy and Spain have per person incomes of roughly $35,000/yr. If they were to balance their budgets and live within their means, this would go down to, say, $27,500 or so. Painful yes-- but not the end of the world. For me {and China's leaders as well} it's the height of arrogance to ask China, who's citizens average $5,000/yr, to bailout much richer nations who refuse to live within their means and face reality.  Is globalization partially to blame ? Absolutely. Their powerful unions will have to bend to reality, something they absolutely have refused to do up to this point. Making painful cuts to pension plans and cutting the number of public employees is also needed. 


  It's long past time that the peoples of Southern Europe begin to face reality. They can start by balancing their budgets and enacting some labor laws which make it easier to hire people to produce goods and services. Throwing another half trillion into the abyss isn't the answer. Will they make the needed changes ? I highly doubt it. These nations, like Greece before them, are world class Ratholes on a one way train headed for a cliff, with Portugal next in line to cross the River Styx.


Update 7pm: Germany's Fin Min Wolfgang Schauble has already nixed this plan; it did'nt even make it to Monday morning. Wow. There is no plan. Iceberg dead ahead. 

Economic War on Iran

  In the Middle East, there is a lot of things that go on that most Americans don't see or is under reported. Espionage games-- assasinations, spying, covert bombings by drones and spies.. these things have been going on for decades. It's all part of "The Game". As former CIA chief Leon Panetta said "kick 'em in the toes".

  But what's happening in the last week or so is a new, much more serious thing. On New Year's Eve, President Obama signed the defense authorization bill, which funds the military. However, in this authorization bill there was a provision which sanctions companies which use the Iranian Central Bank to purchase their oil. There was also an agreement among the EU nations to stop the purchase of Iranian oil, which is set for a vote on January 31st. The action by Obama was an attack on the Iranian currency; the EU action would seriously harm Iranian oil exports. These are serious economic sanctions. Iran itself contributed to the mess when it announced that it was cancelling all trade with the United Arab Emirates a few weeks ago.. a decision they have since rescinded.

  The effect was immediate. By Monday January 2nd, the Iranian rial was down 12% on the black market. The Mehr news agency reported that housing prices were down 20% in the last few weeks. There are reports that people are beginning to sell assets and then converting the rials for USD and other foreign currencies. On Tuesday January 3rd, the rial was trading at 17,800 per USD.. which compares with the official rate of 11,000 on the Iranian Central Bank's website. The Iranian Central Bank is holding meetings almost daily now. On Wednesday, the decline continued. I don't have any more information since then. Although this is only the last few days-- and the situation could very well reverse itself-- this has the feel of capital flight. If it goes on much further, the people themselves will lose confidence in their own currency. Prices of basic goods will soar. This is worth keeping an eye on. If it gets serious for Iran's economy, expect them to retaliate.

  This has happened before; Argentina in the 1990s to be exact: http://themeanoldinvestor.blogspot.com/2011/11/remembering-argentina.html

Update 1/10 4pm: Seems like the inflation rate in Iran is continuing unabated. "TEHRAN, Jan 10 (Reuters) - Iran's currency has slid 20 percent against the dollar in the last week despite central bank intervention, and some Iranians concerned about the economy said on Tuesday that attempts to send text messages using the word "dollar" appeared to be blocked... On New Year's Eve, U.S. President Barack Obama signed into law by far the toughest financial sanctions yet against Iran, which if fully implemented could make it impossible for most countries to pay for Iranian oil. The Islamic Republic responded to the growing international pressure by warning last week that it could shut the Strait of Hormuz, the shipping lane for the Gulf's oil, if sanctions were imposed on its oil exports"
http://www.reuters.com/article/2012/01/10/iran-currency-idUSL6E8CA2MQ20120110

Predictions for 2012-- The Flames of War

  1. There Will Be No Recovery in the US: Just like last year, we as a nation will {again} borrow $1.6 trillion  between the Federal and State Governments, about half of it via Bernanke's printing press. The US Government will {again} borrow about 40% of all the money it spends. This can't last forever-- but it can last much longer than you might think. This year, Japan's central government (4th year in a row) will borrow above 50% of it's total spending.

2. Greece will default-- hard: Greece's government will finally give up on being bailed out and hire a firm to represent it in a bankruptcy type scenario. This will cause a few ugly things for the Greeks-- their banking system will collapse to begin with, and the problems will reverberate throughout the EU banking system. Greece will immediately have to balance it's budget and will go back to the Drachma. Since the civilian government is unable to make the hard decisions, a military government will take over.

3. European Banking  System Will Be Rescued: Last week, the ECB engaged in what was called an LTRO-- it was, in short, a sly way of providing cash to it's very cash strapped banks. This operation was just under $500 billion. These people are amateurs. Bernanke did this for US banks to tune of over $7 trillion. Between Draghi and Bernanke, they'll make sure the system itself will survive Greece's default and any other major problems by additional LTROs. There will be rumors of some very large European banks close to collapsing, most of which will be true. France's Agricole was near collapse a month ago.

4. Deflation: Thanks to the Basil III agreement, European banks need to raise a substantial amount of Tier 1 cash-- some estimates are $400 billion, to meet the Basil III capital requirements. They have already started to curb loans and sell assets in an effort to meet Basil standards. Also, European nations will need to borrow and roll over a huge amount of money. This, in combination with losses from a slowing economy and Greece, will create a serious cash crunch. Perversely the Euro, which is on it's last legs, will rise in value vs the USD. It'll hit $1.50 this year at some point. Gasoline in the US will go below $2.50/gal. In the US, deflation will come about for many of the same reasons.. bank losses due to a slowing economy & losses in Europe. This will bring about..

5. QE3-- Bernanke Unleashed : With a friendlier group of Fed governors, The Bernank will not hesitate to unleash the printing presses in the form of both MBS and Bonds. I look for it in the first half of this year. There will be criticism from Republicans, but Obama will give him the cover he needs as the money velocity measurement plummets.

6. Bernanke's EU Rescue: I look for one of the big two EU problem kids.. Spain or Italy.. to get into some very real trouble this year. As of this writing, Italy looks like the weaker of the two, but Spain has some very real issues and an ongoing Depression to begin with. I think the ECB and the EFSF will have to be given a quick assist from The Bernank as the situation looks as though it will get out of hand. Bernanke will purchase the bonds of an EU sovereign this year directly or through a 3rd party such as the EFSF. Republicans will use this to crucify both Obama and Bernanke.

7. EU Treaty Changes: At the last meeting between Merkel and Sarkozy, there were some drastic changes proposed to the EU's constitution, the most radical of which is a balanced budget amendment which must be added to each members' constitution. Most of this will not get done this year. But something else is afoot-- last week, it came out that only nine of the 17 members of the Euro currency nations need pass this for it to become law. By this year's end, at least three of these current members will reject the changes. It will leave them in an akward position to be in a currency union, yet having rejected the changes. It is, at it's heart, a backdoor way to invite nations to leave the Euro currency. At least one nation {other than Greece} will take the hint.

8. Bashar Assad Overthrown, War in Lebanon : There is much more going on here than meets the eye. What is not being reported here in the West is the extent that the Saudi Crown is involved in supporting the Sunni Syrian rebels against the Alawite Assad regime. They're also involved in supporting Sunni insurgents in Iraq, which has slowly become an ally of Iran right under Obama's nose. As Syria's economy begins to implode and rebel attacks increase in intensity, Syria's junior Sunni officers will overthrow the Alawite regime by seizing control of company and battalion level units. As Assad begins to falter, Iran's Hezbollah friends in Lebanon will launch attacks in Israel, hoping to ignite a regional war to save the Assad regime. Israel will not take the bait, and will only retaliate sporadically. Iraq will again run the risk of civil war as the Saudi supported Sunni rebels continue with their terror campaign to destabilize and weaken Al-Maliki. Unfortunately for Israel, Syria's new regime will be no friendlier.

9. Israel, US, Saudi Attack Iran: It will be a combined air, naval and missile attack. Unfortunately, it will be too late as most of Iran's nuclear facilities are hidden too far underground. Iran's air force and navy are destroyed, as well as a number of nuclear related sites. Crude goes up slowly, hitting $150 before the US declares victory. The Saudis will quietly give financial, military and other support-- even to Israeli planes. They'll also pump more oil to ease the pain. Obama will go along with this as he realizes that America hates a wimp and he needs the Jewish vote if he wants any chance to win. Look for this nearer the election.

10. Mitt Romney wins US Elections: Between the stalled economy and Bernanke's bailout of Spain instead of California, the Republicans will emerge with the Presidency and the Senate by the slimmest of margins.

PS: Japan's Fukushima reactor is still a very dangerous situation, and will be very expensive to fix. It could still go very wrong, but I think it will be OK.