Periphery Watch

     

 

 

Devaluing from Afar

Hugo Chavez hasn't been heard from for a while. To be precise, he hasn't been heard from since December 11, when he underwent surgery in Cuba. However, he apparently still directs economic policy from his sickbed.

His most recent action was to make Venezuela the latest entrant in the 'currency war' by devaluing the official exchange rate of the Bolivar by 32%. Venezuela's inflation rate is at about 22%, and the new Bolivar exchange rate of 6.3 to the US dollar still has a long way to go until it reaches the black market rate of 19.53.

The main reason for the – quite unpopular – official devaluation appears to be the country's growing budget deficit. Venezuela's government mostly lives off the country's oil revenues. Ever since Chavez replaced the former management of the state-owned oil company with his cronies and confiscated the oil assets owned by foreign companies, oil production has been in free-fall, but oil sales still provide the biggest chunk of government revenue even so. By devaluing the Bolivar by 32%, the dollar revenue from crude oil sales will increase commensurately in Bolivar terms. Presto, budget deficit problem solved.

 

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Greek Election Speculations

The upcoming election in Greece over the weekend has become subject to intense speculation. First a 'secret poll' purported to reveal a lead for New Democracy in Sunday's election (no polling is allowed in Greece in the two weeks leading up to an election). However, political parties conduct their own polls and apparently it was thought politic to leak one:

 

„At this coming Sunday's elections, the centre-right Nea Dimocratia Party, led by Antonis Samaras and in favour of the Memorandum signed between Athens and its international creditors, should obtain 29% of votes, against 26% due to go to the far-left Syriza party, that intends to re-negotiate the agreements. These figures emerge from a poll carried out in secret by Nea Dimocratia and released in Athens last night.“

 

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'Emergency' Invites Draconian Measures

In what the Atlantic magazine called 'one of  Europe's dumbest moves yet', the euro-group finance ministers apparently let it be known via leaks what kind of contingency 'emergency measures' they are considering to implement in the event of a Greek exit from the euro area.

We are actually glad this has come out into the open, as this demonstrates the enormous price citizens are likely to pay in the end if the ongoing bailout charade fails. As always, a perceived emergency is getting to the point where it is ever more likely that it will be used as an opportunity to severely limit individual liberties and in this particular case interfere massively with peoples' property rights to boot – all 'for their own good' of course.

As Reuters reports:

 

“European finance officials have discussed limiting the size of withdrawals from ATM machines, imposing border checks and introducing euro zone capital controls as a worst-case scenario should Athens decide to leave the euro.

EU officials have told Reuters the ideas are part of a range of contingency plans. They emphasized that the discussions were merely about being prepared for any eventuality rather than planning for something they expect to happen – no one Reuters has spoken to expects Greece to leave the single currency area. [that almost guarantees it will, ed.]

But with increased political uncertainty in Greece following the inconclusive election on May 6 and ahead of a second election on June 17, there is now an increased need to have contingencies in place, the EU sources said.

The discussions have taken place in conference calls over the past six weeks, as concerns have grown that a radical-left coalition, SYRIZA, may win the second election, increasing the risk that

 Greece could renege on its EU/IMF bailout and therefore move closer to abandoning the currency. No decisions have been taken on the calls, but members of the Eurogroup Working Group, which consists of euro zone deputy finance ministers and heads of treasury departments, have discussed the options in some detail, the sources said.

Belgium's finance minister, Steve Vanackere, said at the end of May that it was a function of each euro zone state to be prepared for problems. These discussions have been in that vein, with the specific aim of limiting a bank run or capital flight.

As well as limiting cash withdrawals and imposing capital controls, they have discussed the possibility of suspending the Schengen agreement, which allows for visa-free travel among 26 countries, including most of the European Union. "Contingency planning is underway for a scenario under which Greece leaves," one of the sources, who has been involved in the conference calls, said. "Limited cash withdrawals from ATMs and limited movement of capital have been considered and analyzed."

Another source confirmed the discussions, including that the suspension of Schengen was among the

 options raised.

"These are not political discussions, these are discussions among finance experts who need to be prepared for any eventuality," the second source said. "It is sensible planning, that is all, planning for the worst-case scenario."

The first official said it was still being examined whether there was a legal basis for such extreme measures.” [thanks for the laugh, ed.]

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Zwangswirtschaft Becomes Full-Blown Socialism

First make the company unprofitable by price controls, then blackmail it by revoking its concessions, then steal it – that seems to have been the playbook of  Argentina's government regarding YPF Repsol.

President Christina Fernandez-Kirchner noted in her press conference on the seizure that

 

Argentina will manage YPF “professionally,” Fernandez said, adding that the country is one of the few that doesn’t control its own oil.

Deputy Economy Minister Axel Kicillof will help De Vido to run the company, according to Fernandez.

[..]

Argentina is expropriating YPF for the “public good,” a government official said in yesterday’s speech.

 

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No-One is Safe – A Fascistic 'Zwangswirtschaft' is Implemented

The government of Christina Kirchner is well-known for its interventionism, protectionism and disregard of property rights and freedom of expression. Anyone doing business in Argentina today or contemplating an investment in its stock market must realize that their property and assets could end up confiscated at anytime. Moreover, the high dividend yields of Argentine stocks are clearly no longer safe.

Even the many businesses that remain nominally the property of their owners are often subjected to some form of fascistic 'Zwangswirtschaft' in Argentina, with the bureaucratic interventions ranging from mild to extremely aggressive. This is to say, while business owners may still 'own' their businesses on paper, the government bureaus decide who may do what and when. Among the restrictions imposed by government are decrees that all export earnings must be repatriated, that numerous companies from oil producers to banks may not pay dividends but have to reinvest their profits in Argentina instead, and that farmers may only sell a certain percentage of their output abroad. On top of these decrees there are numerous additional restrictions on foreign trade, in the form of often ludicrous taxes on exports (for example, crude oil exports are subject to a 100% tax for every barrel that is sold above a price of $45/bbl.; agricultural exports are also subjected to high export taxes).

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More Evidence of a Sharp Slowdown in China Emerges

As an update to our recent missive on China, there is now more evidence of a bursting property bubble as well as a more general economic slowdown.

BHP Billiton is reconsidering its planned iron ore related investment expansions as imports into China are declining due to falling steel production and a slowdown in car sales. 

Meanwhile, house prices have lately been falling in 45 of 70 Chinese cities, with property sales in free-fall. As the FT Alphaville Blog reports on this, quoting from a Societe Generale report:

 

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Financial Transaction Tax to Distract from Spain?

The Telegraph had an interesting article on the financial transaction tax, linking the attention it is now getting with a desire to detract from Spain's defiance regarding this year's deficit target. As always, Telegraph articles must be viewed with a bit of critical distance due to their tendency to contain a fair amount of hyperbole, but we thought the following snips were worth relating:

 

„So why – with Greece’s €130bn bail-out signed but probably inadequate and a raft of sinner states teetering under their debt loads – have European leaders said today’s summit in Brussels will focus on a bank tax?

Summit groupies will have seen this before: it can mean leaders have reached deadlock, need more time – and almost always that they need to butter up the northern European electorate.

In the face of any hurdle the FTT is the technocrats’ box ticking dream: look busy; raise money; smack banks; tackle a complex, cross-border issue; and kick over-achieving London while you’re at it.

So what are they hiding this time? In a word Spain. In a few words, the stirrings of a radical retaliation of “sinner states” against the German-led imposition of austerity and central rule.

[…]

At the beginning of March, leaders gathered in Brussels to sign their "non-negotiable" fiscal pact, binding all European countries (except Britain and the Czech Republic who opted out) to tough rules on budget discipline. Angela Merkel was tickled pink: the deal would last forever, she said.

But with sensational timing, Mariano Rajoy announced Spain would break the rules, immediately.

[…]

After days of silence, last night in Brussels finance ministers asked Spain to set a deficit target of 5.3pc. Not only is the figure a massive leap in Madrid’s direction, but the language was completely different too.

In a statement, the ministers expressed hope rather than demand: “The Spanish government expressed its readiness to consider this in the further budgetary process,” it said.

 

(emphasis added and we corrected a few typos)

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1. Japan's Trade Surplus – Disappearing Act

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Japan's Scary Budget

While all over Europe, governments are forced to face up to the fact that the markets have suddenly become alert to the dangers posed by the huge debt loads carried by modern-day welfare states, Japan's government just piles on more and more debt on its existing debtberg with seeming impunity.

In Italy, Mario Monti's 'honeymoon' is already over. He just passed a fairly strict 'austerity' budget (recently denounced by the Northern League as a 'recessionary budget' – and rightly so, as it leaves the bulk of spending untouched and mostly imposes new taxes), but Italian bond yields are already back on the rise.  Note here as an aside that the current level of the yield on Italy's 10 year note is not directly comparable to the time when a similar level was first reached, as the benchmark bond used by data providers has in the meantime been changed to a higher-yielding one – alas, it is the direction in which yields are heading that is relevant. Monti's real fight meanwhile is still ahead – he will have to challenge powerful vested interests as he attempts to implement structural reform.

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A Little Bit of Sensationalism …

As we observe the markets and the economic news backdrop, converse with other observers about what is happening and let it all gel at the back of our mind, we are sometimes struck by an off-hand comment someone makes that induces some….let us charitably call it lateral thinking :).

This is to say, we sometimes consider out-of-the-box possibilities, even though they are not necessarily very  probable.

As we have pointed out over recent days, the stock market has produced some momentum divergences, as has the t-note yield. This suggested that both were in for a retracement bounce of undetermined size. In today's trading this view was confirmed further, as both markets continued to move in a manner consistent with these divergences. So it appears on the surface that the stock market bulls and t-note bears (and the gold bears, for that matter) now have the upper hand, at least in the short term. Consistent with this is also the behavior of the smallest option traders, who have turned (relatively) bearish. Consider this the disclaimer for what follows below.

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Hoping For the Helicopter Pilot

Funny enough, a few hours after we noted that wounded stock bulls were likely pinning their hopes on Bernanke's upcoming Jackson Hole speech, the WSJ reported that 'stocks jump on hopes for Fed action'. 'Hope' is of course the worst possible investment strategy. Also, if true, then this is an interesting case of Pavlovian conditioning. It apparently took only a single instance of inflationary promises emanating from this otherwise rather sleep-inducing gabfest last year (a gathering of people whom the market economy would undoubtedly be far better off without) to induce an advance reaction in stock traders one year later. This year the patellar reflex, otherwise known as the 'knee-jerk', went into action even before the chief printer had a chance to add to his already ample stack of promises of free money forever and ever.

The market rally, though impressive for a single day,  once again seems to rest on weak foundations. This is not to say that the bounce can't or won't continue, we are merely++ noting that similar to previous rally attempts, it was marked by decreasing volume relative to the preceding sell-off. However, volume was better than on the immediately preceding rally attempts, and the divergences we have recently discussed  have solidified. So it certainly seems possible that the bounce will live beyond a single day.

 

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The Nature of Capital

We wanted to expand a bit on a theme we have often discussed here, namely the fully predictable recent failure of the central economic planning agencies in the regulatory and nominally 'capitalist' democracies of the West.

As our regular readers know, we have asserted for a long time that the attempt to 'rescue' the economy by means of Keynesian deficit spending and money printing would not only fail, but would in fact make the economic contraction worse.

As we explained, the economy's problem has been misdiagnosed by the prevailing economic orthodoxy, mainly due to the fact that both the various branches of Keynesianism and monetarist theory lack a well-developed theory of capital. Keynesians believe – and Nouriel Roubini has once again confirmed this in the course of his recent bizarre attempt to resurrect and validate Marx – that the economy's central problem is a 'lack of aggregate demand'. As the term already implies, in Keynesian theory economic data are generally aggregated. So it is also with capital, which in the Keynesian world (and the monetarist world for that matter) is simply yet another aggregate – 'K' (for 'Das Kapital' :)).

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