Europe, Arabs & Hunger

  Sorry for the delay in posting recently; I was helping a relative a fair distance away from my house and was unable to keep up with the world due to lack of the internet where I was staying. It's a tad disconcerting just how dependent I've actually become on the internet for information, news and entertainment. Watching the CBS evening news and the local news afterwards has given me a whole new perspective on why most of my countrymen are ignorant of what is really happening around them.

  Anywho, it seems that the deterioration in Spain and Italy has stopped as determined by the lowering of the interest rate on their respective ten year bonds. Not that anything has been solved, mind you. Both of these nations' economies are slowly grinding out negative GDP readings and their debt levels continue ever skyward. I'm not too sure why their bond yields have come down in recent weeks; nothing meaningful has been done to remedy their respective situations. I sincerely hope that the situation remedies itself, but I highly doubt it. Ultimately the basics of mathematics will consume these nations as it already has Greece.

  The upcoming election in France this weekend could have large implications. The candidate leading the pack is the Socialist Party's Francois Hollande, who has loudly declared that Germany's insistence on austerity as a cure for the EU's problems is flat out wrong, and he has declared he plans to rewrite the newly rewritten EU treaty to allow greater budget deficits. He's calling this the "Growth Bloc", and ultimately I believe his intention is to begin the monetization of debts, something Germany vehemently opposes. "It is not for Germany to decide for the rest of the Europe" declared Hollande. While I don't believe that over indebted nations should be borrowing more, the current program of austerity is clearly not working either. In the end, those who cannot repay their debts will not repay their debts. If Hollande is able to bring about the treaty changes he believes in, this will leave Germany's Angela Merkel is a most delicate position, in between her own electorate and her high court on one side and the rest of Europe pulling away in the other direction.

  This is not the only election coming up with possibly very bad consequences. In Egypt, there is an upcoming election where there are essentially two candidates backed by the military and two other Islamist candidates. The Islamist candidates have large leads in recent polls. Things in Egypt have not gone well since Mubarak's departure. There are rumors and anecdotal evidence of large scale capital flight, likely by those tied to the last regime who have any money. The Saudi's have withdrawn their ambassador. Egypt has cut Israel off from natural gas. But these things are minor in comparison to what might become a perfect storm that looks like it is approaching. It seems that the Egyptian Central Bank has been rapidly burning through their reserves in an effort to defend the value of their currency. Worse, there seems to be problems with grain production in Latin America and Asia, and this has led to a serious spike in the price of grains-- soybeans in particular. Taken as a whole, the prospect of capital flight, a weakening currency, an Islamist government and possibly a drastic increase in grain prices {exacerbated by the aforementioned weak currency} makes for a dangerous witches brew worth paying attention to.

  In Syria, the regime of Bashar Assad is slaughtering its own people to stay in power. Despite the Assad regime throwing all it has into the fight, the Free Syrian Army is still in the field fighting. It has apparently been reinforced nicely by Al Qaida, which has decided to leave Iraq and is sending the troops to fight Assad. There has been a spate of bombings in Syria lately; most seasoned observers believe these have Al Qaida's signature all over them. One must remember that the most successful American general of the Revolutionary War was one Horatio Gates, who lost each and every battle he fought against the British-- but always kept his army in the field fighting. This constant fighting is indeed wearing down the Assad regime, most especially economically. Tourism has all but dried up, as have loans from foreign bankers. Paying and equipping an army fighting in the field is an expensive thing; by all accounts, Syria's cash reserves are dwindling painfully thin. Now comes the aforementioned rise in grain prices. One report from Debka has Syrian soldiers on the Golan Heights (just opposite Israel)  going up to the Israel fence and asking for food, and Israeli soldiers throwing bread over the fence. Desertions are still happening. Syria a couple of weeks ago "invited" the Russians to purchase around $20 billion in Syrian Gov't Bonds. To my knowledge, the Russians have not taken them up on the "invitation". For this to be public knowledge is a sign of weakness. Today the Obama administration imposed new banking sanctions against both Iran and Syria. At this point, the Syrian Army and security forces have won all the battles. But so did the British. Stay tuned. 

Mathematics and Spain

  Up until this week, the European Central Bank's LTRO operations have kept the lid on the problems facing Spain and Italy. Since December, the yield on these nations' ten year bonds dropped a couple of points and were holding steady the last couple of months. Champagne corks were heard popping everywhere as politicians and bankers stupidly celebrated their victory over the basic tenants of mathematics and cascading debt. Unfortunately for the landed gentry, the basics of mathematics have staged an ugly comeback.

  The first torpedo from Madrid came on 3/27, when the Bank of Spain reported that the Spanish economy would contract by 1.7% this year. Spain's Prime Minister Rajoy, the next day, announced  €27 billion in budget cuts to Spain's federal budget to meet EU budget targets, as well as some tax hikes on electricity and corporations. The reaction in Spain was immediate and ugly-- roughly half a million workers went on strike, and in a number of places the protests turned into riots. The next day, nearly 900,000 people marched in Madrid to protest the budget measures, again with some of these turning violent.

  On Tuesday, Spain's budget minister announced that Spain's national debt will spiral much higher than anticipated. Fresh data from Spanish authorities also showed that unemployment again rising to a brutal level of nearly 23% and that tax revenues collected were less than anticipated due to "contractionary conditions". An March forecast from Spain's Labor Ministry suggested that unemployment would rise to 24.3 %. I myself see an even 25% number. The percent of people under 25 who are unemployed is above 65%-- yes, two thirds of Spain's young people are sitting at home. That or throwing molotov coctails. 

  Yesterday the Spanish government went to the bond markets to borrow money, and the results were ugly-- the interest rate demanded by creditors was much higher than forecast. As a result of this ugly bond auction,. yields on Spain's Ten Year Bonds, which were under 5% at the beginning of March, have soared to 5.81% as of this writing. This is the market's way of sending a shot across the bow. Short sellers will dogpile onto Spain's misery and unless something is done, we'll see above 6% next week. 

  Today, Spain's PM Rajoy uttered the nastiest of all words in Europe-- the word "bailout". He said that the new budget measures were better than a bailout, but the markets were again spooked that he even uttered the word. There will be no bailout for Spain-- it's too big to bail out, and everyone knows it. The current EFSF would only be able to manage to fund about half of Spain's bailout needs. The market reaction was also ugly-- in addition to the aforementioned bond debacle, stock markets near and wide are sinking and as people and institutions begin losing faith in the Euro currency itself, they are piling into the Swiss Franc at such a rapid rate that this morning the Swiss National Bank (again) had to intervene to keep it's currency from appreciating too rapidly. Others are selling the Euro because they (rightly) expect another LTRO. 

  The battle is far from over between Europe's bankers versus the basics of mathematics. It might take a while, but always bet on basic math, folks. 

The Price of Gas

  First of all, so sorry for the delay in posting; a few technical difficulties cascaded into a tidal wave and ended in my having to cough up for a new computer.

  This morning as I drove up to the gas station with an empty tank, I was a little perturbed to see that gas has hit $3.74 here in Minnesota, with the summer driving season still ahead of us. Unless things change, gas go above $4.00 per gallon here in the MidWest. If the situation in Iran blows up, we'll see $5.00 in short order. With an election coming up, President Obama knows that nothing makes Americans angrier than a bad economy and soaring gas prices. There has been talk of releasing some oil from the SPR {Strategic Petroleum Reserve}, a 60 day reserve of oil our nation keeps in case of an emergency. Obama's re-election is not an emergency.

  But we do need to ask ourselves why this is happening and will it continue. Simple question, complex answer. The first part is that the world's production of petroleum is plateauing and as time goes by will begin to decline. There is already some serious doubt whether Saudi Arabia can supply the additional 2 million barrels per day {bpd} they say they can and if so for how long. The oilfields in other nations like Mexico and the UK's North Sea are in a steep decline. Both Canada and the US are ramping up production via oil sands, but producing oil in this fashion is very expensive. Worse, environmentalists are upset at how this is produced and the EU is threatening sanctions against Canadian oil sand production.

  The situation in Iran and the Gulf of Hormuz is another concern-- and while a number of people are just blowing this one off, my opinion is that Israel's PM Netanyahu will not sit idly by as Iran obtains a nuclear weapon. In Israel there is a saying-- "Never Again" and it refers to the Holocaust. A war is coming folks-- bet on it. Obama knows it's coming-- and is trying to delay it until after the election. He might well do it. Looks like the Mayans might've got the date of Armageddon right after all.

  There's more to this story. In the emerging nations of Asia, oil comsumption is growing by leaps and bounds, especially in China and India. In an article recently posted by Ambrose Pritchard, he relates that China will have an additional 125 million cars on the road within 5 years. India will put another 35 million. Then we come to the other rising economies like Indonesia, Malaysia & Vietnam. It's not only cars either-- the average peasant in China and Vietnam are switching from bicycles to scooters. Water buffalo are giving way to gas powered tractors. The implications of this are mind boggling. If these numbers are even close to the truth, the globe is looking at a rise in crude consumption of nearly 20% by 2020. And the world's non oil sand production is going to begin declining next year. Rock. Hard Place. Here in the States, that Rock will be when gasoline goes above $4.50 for an extended period of time. That's when the US economy will blow another piston.

 Is it within the Wit of Man to avoid this ? Yes it is. But it'd take a global effort and coordination that simply does'nt exist today. For example we can all agree not to produce consumer goods like toys and plastic bags. If we get really ambitious, we can limit car engines to 800 cc on a global scale-- which would leave us with only having very small mini cars available, but would dramatically reduce oil consumption. Will any of these things really happen ? No. What is far, far more likely is a war for control of those resources. That and $5.00/gal gas when the shooting starts.