Saturday, October 29, 2011


First and foremost, lets start with the Euro Summit: A deal did indeed get done as the German Parliament {the Bundestag} passed a measure allowing the EFSF {Europe's rescue fund} to be leveraged up-- there is some question as to how much; the early reports are that it will be $1.4 trillion. Of this, about $135 billion will be used to recapitalize banks, some of this is already committed to Greece, and the rest is to be used as a backstop for other EU countries in trouble, notably Italy and Spain. Greece's creditors will be taking a 50% "haircut". This haircut should trigger credit default swaps.. and while the IIF has determined that this is not a "credit event", I actually believe that they will allow this event to trigger the CDS's because there is only a few billion dollars of these on Greece. Overall, this buys them some time, likely well into next year. Greece's haircuts are a first step in the right direction as this is, at it's heart, a problem of too much debt. Up until now, their answer has been more debt. But the bigger problems remain-- way too much debt, especially in Italy, Spain and Portugal. The next country in line on the plank is Portugal, but the EFSF should have enough money to cover this. Further down the road, Italy looks to be in the worst shape and seems at this point pretty resistant to any form of austerity.

Update Sunday 10/30 2pm: Apparently the new agreement is pretty much like the previous ones-- full of holes. Here's the Telegraph's Liam Halligan with some of the devils in the details: The question of who will lend to the EFSF, on whose collateral, and who will ultimately repay the loans, was barely addressed last week. Such tricky questions will apparently be answered at the next European summit in December. Meanwhile, the fundamental disagreement between France and Germany regarding who should take the biggest losses – eurozone governments or private creditors – remains unresolved. Since Thursday's announcement, though, Germany's powerful constitutional court has issued an injunction requiring the country's full Parliament to approve any EFSF bond-buying.\.

Onto the topic du jour-- megatrends. We as humans, alone amongst the creatures that crawl upon the earth, are fascinated about the future. It's in our DNA; we're hot wired this way. In the late 1990s and early 2000s, I myself traded commodities, also known as futures. To be successful, you need to anticipate market moves, whether they be up or down. This is called "futures trading". For centuries, the kings and courts of the middle ages had their court astrologers who looked to the skies for answers and signs from the Gods. Nostradamus was the most famous of these, making startling predictions. Other less known seers from that time have made even more startling accurate predictions; chief among these is the legendary witch Mother Shipton.

Here in the digital age, our curiosity with the future has taken on a more sophisticated approach. Two attempts in our own age spring to the forefront. The first one was known as the "web bot project", which used website searches as a way of measuring human consiousness-- what we collectively are thinking. After the 2008 crash, the terms "economic collapse" rushed to the top of the list. In my opinion, this is more of a backward looking method. The project did score some hits, but many more were not so accurate.

The second was by a gentleman named Bruce Bueno De Mesquita, a Stanford mathematician. He developed a sophisticated algorithmic computer program used to predict certain events when inputed with certain variables about a certain situation. The CIA hired his firm and gave him a series of scenarios, which the CIA then ran by their own analysts simultanously. The CIA determined that Mesquita's programs were far superior, and as I understand it they continue to consult him. His accuracy is pretty good, though not perfect. His program also suggests policies that might positively affect outcomes. His work determined that the top priority of the North Korean regime was self preservation and that they were terrified of being taken out by the US. He therefore suggested a policy that would allow the North to keep their ability to produce nukes, but would require they dismantle any they have already produced in return for economic aid, primarily oil. Most of his predictions are not well known; you have to pay a pretty penny to get this information.

A lot of what Mesquita predicates his predictions on is mega trends and the affect these will have on nations and their peoples. While we don't have Mesquita's computer algo's, we can take a look at a few of the biggest issues facing the planet and it's people and perhaps come to our own conclusions thereof. I've hereby present six megatrends that, for good or bad, look like they will take large parts in shaping our future.

1. Climate Change: While at this point there is some dispute about the causes of it, there is no doubt that the planet is getting hotter and that the ice sheets at the North and South poles are rapidly melting. The effects of this are not entirely understood, but what there is is rather disturbing. Weather will become more extreme, especially heat. This will affect crop production as crops wither in the heat and lack of rain. In other regions, it will produce more numerous and more violent hurricanes and tornadoes. Another, more disturbing, trend is that with the sheer amount of water shifting from the polar ice caps to the oceans, ocean levels are slowly rising. Given enough time, cities like New Orleans and Amsterdam are likely to be lost to the sea. Another disturbing problem this brings is that this extra water puts extra pressure on tectonic plates, which will likely produce more (and more violent) earthquakes.

2. Overpopulation: While some nations have come a long ways in this area, a lot have not. The population of Nigeria in 1980 was 74 million. Today it's 154 million. By 2031 (twenty years from now) it will reach roughly 250 million. Africa is especially problemetic here, and this is compounded by another megatrend I'll discuss below, the declining amount of agriculturally viable land. The most overpopulated nations are also the most destitute. This will result in ever increasing waves of hungry immigrants washing ashore elsewhere, especially in Europe and America, though increasingly Latin America as time goes on. Islamic nations are amongst the worst offenders due to cultural reasons. This will, as we have seen, help to create instability. The problem for the new leaders of Egypt, Tunisia and the others is that their ever growing populations are encountering flat lined world grain production. Here's an article on Nigeria's problems and what life is like for the people in Lagos:

3. Soil Erosion: Approximately 40% of the world's agricultural land is seriously degraded. According to the UN, an area of fertile soil the size of the Ukraine is lost each year due to deforestation, drought, city expansion, desertification, salination and overuse. In Africa, if trends continue, the continent might be able to feed only 25% of it's ever growing population by the year 2025.. a scant 13 years from now. This should alarm everyone. But in my view, correcting the misuse of land would help quite a bit. I live in Minnesota, and my house sits on what was once a very large corn farm. My uncle sold the family farm near Red Wing to the local Indian casino, who paved it over to expand parking. My house sits on 1/3 of an acre of very fertile soil-- if I wanted, I could plant a few nut or fruit trees and use the front yard to grow corn instead of pretty grass and ugly weeds. But this trend, if left unattended, will cause mass hunger, instability and misery on a global scale. What we saw in this year's "Arab Spring" began as food riots to protest the record prices of grains in Tunisia. Another answer might be to cut down on meat production-- it takes about 15 pounds of grain to produce a pound of chicken. Beef and pork are worse. Putting a halt to America's addition to corn based ethanol would also help, and perhaps quite a bit.

4. Technology: In 2008, a Beaverton, Oregon boy of 12 named William Yuan developed a "\Highly Effecient 3D Nanotube Solar Cell for Visible and UV Light". This device, is it were capable of being produced, would be 500 times as efficient as current solar cells. It would, in a single stroke, revolutionize power production the world over and would negate the need for coal, nuclear and other types of power plants. Al Gore's nightmare of global warming would overnight be solved as cars could run on a solar cell on the roof the size of a keyboard. Another energy technology is based on Thorium, which envisions a reactor using Thorium instead of Uranium. It would be much safer than nuclear technology and thorium is incredibly abundant-- here in America, the coal miners extract the stuff and let it lie in useless heaps as they dig out the coal, stepping on it as they go to the coal mines. By 1961, India was on the brink of famine. In 1960 India, with the help of the Ford and Rockefeller Foundations, established the IRRI (International Rice Research Institute), which came up with the IR8 brand of rice. Although IR8 would need pesticides and fertilizers, this new type of rice could produce two crops per year instead of one; rice production in India went from two tons per hectacre to six by the 1980's.. and in optimum conditions upwards of ten tons. It's these types of breakthroughs which can revolutionize life on the planet-- for the better. Just today this came out--

5. Peak Oil: Everything we produce-- including the food I ate for breakfast, uses oil in it's production. Look around you at the number of plastic devices. The problem is, the world's oil production is in decline. Apocalyptic  writers such as Michael Ruppert suggest that this decline will be very steep very soon, affecting the world's food production amongst other things. But my view here is that this is a problem that is avoidable due to a number of reasons. First is the aforementioned technology. Due to advances in drilling technology, oil companies are able to extract ever increasing amounts of oil from "oil sands", which are really just glorified tar pits. In the last couple of years, the state of North Dakota and it's Baaken Oil Sands are becoming the next Saudi Arabia. Unemployment there hovers around 2.5% as drilling companies hire any able bodied person willing to locate there. I also believe that technology will develop a new and better biofuel.. with the Pongamia tree taking the lead {video below}. I also believe that if push comes to shove, the people of the world will learn to use less plastics in unimportant things such as toys and plastic milk cartons and go back to the early 1900s when glass and wood {both renewable resources} were used. 

6. Debt: In 2002, the world's total debt hovered around $60 trillion. At the end of 2010, this figure reached $188 trillion. Most of this debt was incurred by advanced countries like the US which lived far beyond it's means and much of the creditors were newly industrialized nations like China, which was looking for a place to store their hard earned cash and get a decent return on their investment. The problems have been discussed ad nauseum on my blog and others. At worst, this explosion of debt threatens to collapse the world's monetary system, the means by which we all exchange goods and services. If such an event did take place, the world's living standards would collapse and the instability it produces would be frightening, even in places like the US. As of this writing, there appears to be no political will nor the foresight needed to deal with the problem. What's needed is for the world to come up with a better monetary and banking system, one based on a botton-up credit based system instead of the debt based, top-down system we currently employ. Implementing such a system would be enormously challenging, and would mean that advanced nations like the US and Europe would suffer a decline in living standards at the expense of {mostly Asian} nations that produce more and cheaper. I doubt that America and other advanced nations will willingly enter into such an arrangement, no matter how obvious the need. As I've always said, unless something dramatic and on a global scale changes, the world's economic system will collapse-- and it will be very sudden and total. I myself see this as the most dangerous of all the trends. Here's my article on what happens when this collapse occurs:

For me, and Mesquita from what little information is out there about his future predictions, see is a race between technology and the growing food situation, vastly complicated by an unstable monetary system. I fully believe that better usage of land, conservation techniques and birth control in places like Nigeria can overcome the challenges ahead. A credit based monetary system can be introduced. But will they be implemented on a global scale before the problems become apocalyptic in nature ? 

Sunday, October 23, 2011

Euro Summit v37.0

There is a very important meeting going on in Brussels, including the Prime Ministers and Finance Ministers of all major European nations. Their mission is to try to save their banking systems as well as keep insolvent nations like Greece from defaulting in their debts, which might be disasterous for the undercapitalized banks in Europe.

But, we've been here before. And before. And before. And this is part of the problem.. the markets simply bowl over any solution they have come up with previously because they are all too small. The political leaders are three steps behind the markets, and have been since 2008. Their solutions have proved to be nothing more than bandaids placed on an open, sucking chest wound because they refuse to recognize the scale of the problem. Because of interbank lending schemes and credit default swaps, it's actually quite a complicated mess.

This time, however, they seem to realize the scale of the problem. Tim Geithner has proposed a solution that would essentially make Europe's Bailout Fund {called the EFSF} into a bank, and then leverage it up by 10-1. The EFSF currently has about $440 billion.. leveraging it up would put it's power over $4 trillion. The problem with this is that if the "EFSF Bank" loses more than the $440 billion, the European Central Bank {ECB}would be responsible for simply printing the difference. Thats what we here in the US do. In a worst case scenario, the ECB would print a couple of trillion dollars and this would greatly weaken the Euro currency. This plan is backed by France, Italy, the US, Spain and a few others.

The problem is that Germany strongly opposes such a measure. Worse, the German Supreme Court has ruled that this cannot be done without the approval of either the Bundestag {Germany's Senate} or a direct vote of the people. As I type this, neither the Bundestag or the German people will approve anything like this. Nor will they approve simply putting more money into the EFSF. The plan the German Chancellor Angela Merkel is putting forth is threefold: First to force a 50% "haircut" on Greek debts. Second is to use $125 billion from the EFSF to recapitalize some European banks that would be in trouble when these haircuts take place. Third is to use the remaining amount of the EFSF to guarantee that if Italy, Spain or any other European nation's bonds go into default, the EFSF will cover the first 20% of the loss. Overall, it seems the Germans are trying to use the existing $440 billion as wisely as possible without threatening the worth of the currency or committing more money-- which, at this point, it looks like Chancellor Merkel would not be able to deliver anyways-- the German Supreme Court has made sure of that. The German people feel {rightly} that they should not be made to pay or guarantee the losses of other nations problems.. and they are not alone. The Dutch, Austrian and Finnish governments fully stand behind Germany.

Chancellor Merkel has already said that the summit will last until Wednesday.

This summit is a very high pressure situation. Here is an article on what it's like for the participants there, including the name calling, cat fights, and illegal cigarette breaks:

Here's what I expect-- I think some sort of deal to recapitalize banks will get done by later today; I look for it to be in the neighborhood of $125 billion. From there, I fully expect that the German Plan is what's going to pass-- for no other reason than Merkel cannot deliver anything more, which I actually believe she herself wants to do. Since part three of the German plan will cover 20% losses with the remaining $275 billion, they're going to nerd wrestle the numbers and announce that a $1.375 trillion plan has been agreed on {this represents the $275 billion x 5}. It's hard to say how the markets will take this come the end of the summit. I thought they would be in the gutter over the last two weeks, but the opposite happened-- mostly based on rumors and a couple decent economic reports. Initially I think they'll be up.

Will this work ?
For the short term, possibly.
But come 2012, this will not be nearly enough.

Update Sunday 430pm: The Eurozone Summit could'nt accomplish a single thing.. “A broad agreement is taking shape,” Sarkozy said. “Today, we will not undertake any decisions, but will undertake preparatory work,” German Chancellor Angela Merkel told reporters Sunday. 

Update Thursday 6am: Looks like a deal has been reached. 50% haircuts on Greek debt + $130 billion to recapitalize banks + $1.2 trillion to backstop Spain & Italy. In the short term, this will work. By next year more will need to be done. You still cannot solve a problem of debt with more of it, but Greece's haircuts were at least a first step in the right direction. 

Thursday, October 6, 2011

A Dangerous Moment

This BBC video should explain to any who have doubts just how dangerous this European mess really is:

Here is a Telegraph UK article about this crisis quoting Bank of England's Mervyn King:

Update 6:30pm: Apparently Germany and France can't agree on the EFSF:

Tuesday, October 4, 2011

Dexia Bites the Dust

The governments of Belgium and France today came out announced that they were going to stand behind Dexia Bank, and there was talk that Dexia would be split into two entities.. the "Good Dexia" Bank and the "Bad Dexia" Bank, where all of the bad debt will be offloaded to. Nobody's sure at this point how much Dexia's losses will cost; the total might not be known for some time as a lot of their loans were to Greece and other insolvent countries. Belgium and France also said they would be covering most of the losses. Over enough time, these losses could be substantial, possibly as high as $100 billion. There was talk that the bondholders and other creditors would have to take at least a 21% haircut.

Problem is, it's a tad more complicated that this, as we ourselves found out when Lehman Brothers collapsed. Many of these bondholders bought insurance on these bonds, called Credit Default Swaps. Companies who wrote these insurance policies will take an ugly torpedo to the stern.. this is how AIG went under-- writing these insurance policies. Worse, the Belgian and French government debts might be downgraded due to the amount of bad debts they just insured. Many of Dexia's debts were outright loans-- and it's an open question if any of these will be paid, thus damaging those who foolishly loaned to this floating hulk of steamy compost.

Equally important, this will damage confidence in other European banks. Remember, Dexia passed the EU's "stress test" with flying colors. Other major banks in Europe, such as France's Societe Generale and Italy's UniCredit, have already had a couple of near death experiences. This will not help.

At the closing bell on Wall Street approached today, the Financial Times newspaper came out with a rumor that a Europe-wide plan was being developed at the European Commission meeting going on in Luxembourg. There were no details; only a vaguely worded statement from the group. It was enough to send stocks soaring at the close. The markets are getting used to such pronouncements-- most of which are little more than hot air-- and with Italy's downgrade in the after hours, I fully expect the markets to head south again at the opening bell. The upcoming Belgian and possibly French downgrades will only make it worse.

Meanwhile here in the US, here's how things are going with Bank of America, where their website has been down all week long, their stock is crashing, and finally this-- not sure if it's true, but this is a video of a SWAT team in front of a BofA branch in St.Louis..

Saturday, October 1, 2011

The Final Battle for Europe Approaches

In my humble opinion, the Final Battle for Europe draws near. Simply put, a good many {if not most} of Europe's biggest banks are essentially insolvent. In addition to the banks, many of the governments are hopelessly indebted, led by Greece, Ireland and Portugal.

Over the last 16 months {since the very unreported but serious crisis in May of last year} the European Union, the European Central Bank and governments have tried one bailout plan after another, each having to deal with a more serious crisis because the previous plan was inadequate. Europe's leaders have been one step behind each and every time, including this week when the Bundestag {Germany's Senate} finally passed a small expansion of the EFSF {Europe's bailout fund}which was proposed in July. Since then, Italy's biggest banks and their government bonds have crumbled apart, making the EFSF passed just this week woefully inadequate.

A week ago, US Treasury Secretary Tim Geithner formulated a plan to essentially leverage the existing EFSF by about five times, from about $450 billion to $2 trillion. This expansion will be backstopped by the European Central Bank, which essentially puts the entire Euro currency at risk-- and the governments thereof, since they have agreed to backstop the currency. This plan demands that the EU nations pass this plan by the next G20 Meeting in Canne, France the first week of November. This week, the markets have risen nicely in anticipation of this massive plan to finally deal with the problems.

The problem is, Germany {Europe's biggest, richest nation} seems to be balking. Chancellor Merkel, the nation's President, the head of their central bank, and the top judge of their version of the Supreme Court has all come out and said this is not only not happening, but is very likely unconstitutional. Worse, the German people themselves are, by large margins, dead set against this.

Geithner's Plan is a bold one, a big one. The problem is that, in proposing a plan this big, you also acknowledge the size of the problem. Worse, nobody has asked the question-- what happens if it does not pass in Germany after finally acknowledging how serious the problem really is ? As noted above, there are serious doubts whether the Germans will pass this. Confidence in the markets {European ones especially} will be crushed.

And here we are. As this month of October progresses, Geithner's Plan will be making the rounds in Europe. I believe that this story will be the prime mover of the markets this month; if there is good news, stocks will soar. Similarly, bad news will cause stock markets to sink. At some point, this plan will reach Berlin and the Bundestag. If there are delays in the vote or legal complications, look out. If the G20 Summit arrives and the measure is not passed, the markets will be in some real danger. Delays in the Bundestag vote will {rightly} be seen as a sign that the votes to pass the measure are not there.

If the markets begin a serious skid as the delays mount, we will quite probably have arrived at what I call the Final Battle. In order to stop the market carnage, I forsee multiple central banks co-ordinating action, including The Fed and probably the Peoples Bank of China. The Final Battle will have arrived. Who will win ? I'm not sure-- but I can tell you who will lose.. us serfs. One clue as to how the Europeans ultimately plan to deal {or not} with this might well come very soon-- Belgium's Dexia Bank, a huge bank, looks like it's going to have to be nationalized. The problem is, Dexia is nearly twice the size of the country it's located in, Belgium.  The ECB {well, someone anyways} will have to do something because the Belgian state not only has no government at the moment, but would be completely unable to save Dexia-- it would be rather like a ground squirrel attempting to catch a falling hippo. Keep an eye on this potential mini crisis for clues.