Brent crude oil futures surged above $100 a barrel for the first time in 28 months on Monday on concerns that anti-government protests in Egypt could create instability across the Middle East, possibly disrupting oil shipments through the Suez Canal.
Every time that OIL has passed $100 a barril in the past it has caused damage to the Global economy…Will it happen again ¿?¿?
Courtesy of David Rosenberg
Obama’s State of the Union 2011:
“Two years after the worst recession most of us have ever known, the stock market has come roaring back. Corporate profits are up. The economy is
growing again.”
Herbert Hoover, May 1st 1930, US Chamber of Commerce Meeting:
“While the crash only took place six months ago, I am convinced we have now passed the worst and with continued unity of effort we shall rapidly recover.”
Obama’s State of the Union 2011:
“Thanks to the tax cuts we passed, Americans’ paychecks are a little bigger today. Every business can write off the full cost of the new investments they make this year. These steps, taken by Democrats and Republicans, will grow the economy and add to the more than one million private sector jobs created last year.”
Herbert Hoover, October 22, 1932, campaign speech in Detroit:
“It can be demonstrated that the tide has turned and that the gigantic forces of depression are today in retreat. Our measures and policies have demonstrated their effectiveness. They have preserved the American people from certain chaos. They have preserved a final fortress of stability in the world.”
Obama’s State of the Union 2011:
“But now that the worst of the recession is over…”
Herbert Hoover, June 1930, to a delegation requesting a public works project:
“Gentlemen, you have come sixty days too late. The depression is over.”
Obama’s State of the Union 2011:
“The steps we’ve taken over the last two years may have broken the back of this recession…”
Herbert Hoover, State of the Union, December 6, 1932:
“The unprecedented emergency measures enacted and policies adopted undoubtedly saved the country from economic disaster…”
Spanish bond yields rose and bank stocks fell, indicating that Investors have concerns about yesterday´s Finance Minister Elena Salgado words.
Salgado said lenders require no more than 20 billion euros ($27 billion) of extra capital, “all or part” of which they will be able to raise in financial markets. The amount is lower than estimates from analysts, including those at Moody’s Investors Service, who say they may need as much as 89 billion euros in a stressed case. Analysts were calculating a a maximum of 120 B euros…
Inflation, Not Here, Not Now
Courtesy of John Taylor.
January 20, 2011
By John Taylor
Chief Investment Officer, FX Concepts
Commodity prices are flying higher, interest rates are near zero, base money growth is staggeringly high and inflation expectations are going to the moon. It looks like inflation is back, but it isn’t the kind of inflation the Germans worry about or the kind that leads to high interest rates followed by a deep recession. If this is not the inflation of post-WWI or the 1970′s, then what is it? Although the current bout of food shortages and price increases have helped topple the government in Tunisia and led to food riots in Algeria, these commodity price increases and the excess money being spread around should not have any impact in the G-10 countries, unless some central bank makes a big mistake and hikes interest rates. Why is it so different this time around?
Because the global economy is suffering from excess manufacturing capacity and a deficit of consumption, history tells us there is little chance that inflation will be a problem. If we just look at the second half of the 1930′s, the prime example of a consumption shortfall, when interest rates were exceedingly low and base money was growing sharply (because Roosevelt had changed the price of gold), many were worried about inflation but it never arrived. Fed Chairman Bernanke’s QE efforts are only a pale shadow of Roosevelt’s powerful inflationary stroke, but prices stayed subdued back then and they will now. With still climbing excess manufacturing capacity, and so much of it located in low- wage China, there is little or no wage pressure in the developed world. The situation was exactly the opposite in the 1970′s when there was not only a shortage of skilled workers but many contracts were inflation adjusted as well. Now these inflationary adjustments are history except in some public pension plans (which are on their way to insolvency). Labor’s pricing power has been declining since the 1970′s. In the US the number of hours necessary to buy a car bottomed in 1972 and it now takes about twice as long for the average worker to buy the average car. Although monetary growth is a necessary condition for inflation, without tight labor markets it just cannot find the traction necessary. When the price of oil or food goes up, the weakened worker will drive less or eat less, he/she cannot drive wages up. Final demand stays the same but it is just spread around differently.
If commodity prices climb higher and higher, the American and European worker will tend to spend more for food and fuel, cutting down his purchases of manufactured items and locally produced services. Units of food and fuel purchased will drop as well, as each one is more expensive, cutting final demand and lessening the upward pressure on commodity prices. The raw material producers, generally the emerging markets, should prosper in relation to the manufacturing countries, shifting the balance of global power. This change in relative economic dominance matches the concept of the Kondratieff cycle and fits very well with MIT’s capital investment cycle. The current period seems to fit nicely with 1937, and if we use that as a base date, the commodity producers will prosper for another 13 to 15 years as they did back then. Although the western countries will have a growth problem, not an inflation problem, the commodity producers will have plenty of growth and plenty of inflation. Although Australia, a perfect example in the early 1950′s, with high growth and high inflation, controlled its overheating problems fairly well, this time around there will be many countries that have not tasted “capitalist” freedom before. As many of these newly wealthy countries have managed currencies with exploding reserves and money supplies, the next decade or so should see dramatic inflationary booms and busts, plus plenty of political turmoil. With the G-10 consumers facing a difficult 2011, global commodity prices should peak soon and inflation fears will melt away in the US and Europe.
COURTESY OF WALL STREET JOURNAL.
Spain plans to pour billions more euros into its troubled savings banks and force them to be more open about their lending practices, people familiar with the matter said, an acknowledgment that previous efforts to fix the banks have fallen flat as the country seeks to ward off an international bailout.
In a first step, Spain is preparing to issue €3 billion ($4 billion) in debt in coming days, the people familiar with the matter said. Government officials are putting plans in place to eventually raise as much as €30 billion, according to these people, though some say the final tally will be less.
The hope is that a series of capital injections will quell investor jitters about the savings banks, known as cajas (literally, “boxes”), which have been a thorn in Spain’s side as it seeks to convince investors that the country’s finances are stable.
The fate of the cajas is inextricably tied to the fate of Spain and potentially to the euro itself. Fear that the savings banks can’t raise funds on their own and will need a government bailout was one reason ratings agency Moody’s put Spain’s rating on review for a downgrade last month.
Another step the government is taking to boost investor confidence in the cajas is simplifying their complex structures, making them more like traditional banks. The cajas have long had confusing ownership and governance structures and disclosed far less financial information than other banks. Their boards consisted of local politicians, union members, clients and, in some cases, Catholic priests, many of whom were reluctant to relinquish their influence over lending decisions.
The Spanish government last year forced a wave of mergers among the cajas—reducing their number from 45 to 17—but confusing, unwieldy structures persisted, scaring off investors. Another part of last year’s rescue attempt was an injection of €11 billion via the newly formed Fund for Orderly Bank Restructuring. At the time, Spain said it could put up to €99 billion into the fund, but until recently had said further injections wouldn’t be necessary. Now, it’s reversing course.
Going forward, people close to the matter say, the idea is to force the cajas to transform themselves into centralized, transparent entities that more closely resemble traditional banks by placing all of their assets into a central holding company and streamlining management. The changes would be made either through legislation or by making it a condition of accessing government funds.
“We think that the restructuring and recapitalization of the savings bank sector is probably the most important issue for the government at this juncture,” said Antonio Garcia Pascual, an economist at Barclays Capital.
Raising any new capital for the cajas carries risks, as it comes on top of Spain’s existing financing needs. Economists estimate that the country needs to borrow €125 billion this year just to finance its deficit and roll over maturing debt.
Many of the cajas, which account for €1.3 trillion in assets—or 42% of total bank assets in Spain—used liberal lending practices to fuel a decade-long housing boom that went bust and left many of the institutions holding billions in bad loans and facing heavy losses.
The new moves reflect the fact that last year’s fixes didn’t stick. The shotgun weddings forced by the government proved difficult to execute in practice, with the governing boards of merged cajas bickering over issues like labor, salaries and operating hours. In most cases, the new banks only partially merged their assets.
Some investors were skeptical. Private equity firm J.C. Flowers, which in July committed to buying €450 million in debt from the newly formed Banca Civica, put its investment on hold until it sees what the bank’s final merger looks like, said a person close to the fund. Banca Civica couldn’t immediately be reached for comment.
By the end of November, with Spain’s borrowing costs soaring, the Bank of Spain publicly urged the cajas to move faster in combining businesses and cutting costs. In recent days, the government has been more aggressive. Last week, Spanish Prime Minister Jose Luis Rodriguez Zapatero said recapitalization of the banks was an “urgent objective.”
Already, some of the savings banks, urged on by government officials, have decided to abandon the decentralized model, and transform themselves into entities resembling regular banks. Cajastur, for example, in its merger with three other lenders, announced at the end of last month it would be pooling 100% of its assets.
The government will wait to give any ultimatum to the cajas until it sees the results of detailed disclosures about the type and quality of loans that savings banks have made to the real-estate sector, said people close to the matter. Those will be made public for the first time later this month and in February.
The Spanish government is also studying changes to allow the Fund for Orderly Bank Restructuring to inject capital in the banks through direct stake purchases, considered the safest kind of investment and one that would give the government more control over the entities, in contrast to the nonvoting preferred shares it bought in the past.
Government officials are also weighing the possibility of setting up a government-administered “bad bank” for the toxic assets of some of the cajas, according to one of the people familiar with the matter, although it is unclear how that would be funded and structured.
Spain’s government debt isn’t that high compared to other troubled countries in the euro zone, such as Greece and Ireland. But borrowing costs for Spain soared at the end of last year after Ireland received a €67.5 billion bailout from the European Union and the International Monetary Fund. After a successful bond issuance by Spain earlier this week costs have ebbed some. Nonetheless, investors worry that the authorities haven’t come clean on the problems of the savings banks, which will leave the government with a big bill down the road. Analyst estimates of the amount of capital needed are less conservative then that of the government’s. UBS AG estimates banks could need anywhere from €20 billion to €120 billion.
—Stephen Fidler, David Enrich and Dana Cimilluca contributed to this article.
Ben Bernanke in November´s article in the Washington Post explicitly spelt out the policy – “higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion”. And so it came to pass. From the end of August stocks rallied. Leading indicators recovered. Spending increased. Jobs picked up. A virtuous circle indeed.
Unfortunately, though, policy makers have yet to learn the lessons of the Great Recession. Basing economic growth on loose monetary policy driving up asset prices is simply doomed to failure.
If we pay attention to the graphic above, we can see that even with all the INTERVENTION from the FED, US path is eerily similar to JAPAN lost decade…
Courtesy of Pring Turner Capital Group
““If the current bear does follow the average path in a broad sense, our historical study suggests 2011 could be a challenging year. We are in no way predicting that a new down leg to the secular bear is about to get underway because that would require evidence of a new emerging cyclical bear and that is not yet on the table. What we are saying, is that confidence is still excessively high by traditional standards, valuations are still too expensive and therefore, investors need to be on alert for a resumption of the secular bear trend.”
2011 it´s going to be an interesting year to follow…
