Free Markets, Free People

Daily Archives: January 13, 2012

Here come the Euro credit downgrades

The credit rating companies have had a number of European countries on a credit watch for a while.  And they made it pretty clear that what the leaders of the EU had cobbled together late last year didn’t answer the mail.  So really, this should come as no surprise:

Standard & Poor’s has downgraded France’s credit rating, French TV reported Friday, while several other euro zone countries face the same fate later in the day, according to reports.

On the more optimistic side:

"The consequence (if France is downgraded) is that the EFSF cannot keep its triple-A rating," said Commerzbank chief economist Joerg Kraemer.

"That may irritate markets in the short term but wouldn’t be a big problem in a world where the U.S. and Japan also don’t have a triple-A rating anymore. Triple-A is a dying species," he said.

Wow, that’s wonderful, no?  “Triple-A is a dying species?”  Oh well, moving on…

Triple-A is a dying species because of the obscene spending of welfare-state politicians.  We’re supposed to shrug and accept it per the Kraemer’s of the world.  This is just an “irritation”, you see.

In reality it is much more than that:

John Wraith, Fixed Income Strategist at Bank of America Merrill Lynch told CNBC the confirmation of a mass downgrade would be another serious step in the crisis and would lead to a serious worsening of sentiment.

"To a large degree it’s widely anticipated," Wraith said. "However, we think the reality of it is going to have a knock-on, ongoing impact on these markets."

“It clearly deteriorates still further the credit worthiness of a lot of the European banks and just keeps that negative feedback loop between struggling banks and the sovereigns that may have to support them if things go from bad to worse in full force,” Wraith added.

A downgrade could automatically require some investment funds to sell bonds of affected states, making those countries’ borrowing costs rise still further.

"It’s been priced in for several weeks, but the market had been lulled into complacency over the holidays, and the new year began with a bounce in risk appetite, thanks partly to a good Spanish auction," said Samarjit Shankar, Director Of Global Fx Strategy at BNY Mellon in Boston.

"But the Italian auction brought us back to earth and now we face the spectre of further downgrades."

Italy’s three-year debt costs fell below 5 percent on Friday but its first bond sale of the year failed to match the success of a Spanish auction the previous day, reflecting the heavy refinancing load Rome faces over the next three months.

As we’ve said for some time, the key to whether this works out or not lies in the bond markets.  And this will make the bond markets very uneasy.

Oh, and just to add fuel to the fire.  From Zero Hedge:

Last week, when we pointed out what was then a record $77 billion in Treasury sales from the Fed’s custody account, in addition to noting the patently obvious, namely that contrary to what one hears in the media, foreigners are offloading US paper hand over first, there was this little tidbit: "The question is what they are converting the USD into, and how much longer will the go on for: the last thing the US can afford is a wholesale dumping of its Treasurys. Because as the chart below vividly demonstrates, the traditional diagonal rise in foreign holdings of US paper has not only pleateaued, but it is in fact declining: a first in the history of the post-globalization world." Well as of today’s H.4.1 update, the outflow has increased by yet another $8 billion to a new all time record of $85 billion, in 6 consecutive weeks, which is also tied for the longest consecutive period of outflows from the Fed’s Custody account ever. This week’s sale brings the total notional of Treasurys in the Custody account to just $2.66 trillion (down from a record $2.75 trillion) and the same as April of last year. And since the sellers are countries who have traditionally constantly recycled their trade surplus into US paper, this is quite a distrubing development. So while the elephant in the room could have been ignored 4, 3 and 2 weeks ago, it is getting increasingly more difficult to do so at this point, especially with US bond auctions mysteriously pricing at record low yields month after month. But at least the mass dump in Treasurys explains the $100 swing higher in gold in the past month.

Click on over and check out the chart.  Lots of questions to be answered for which, apparently, only a few are chasing  answers.

While the media is dominated by political races and urinating Marines, this little drama is passing by almost unnoticed.  But trust me, it’s effect, should everything collapse as it may, will be profoundly noticed.

~McQ

Twitter: @McQandO

Economic Statistics for 13 Jan 12

Today’s economic statistical releases:

The US trade deficit widened sharply to $-47.8 billion on both rising oil imports and falling exports.

December export prices fell -0.5%, but were up 3.6% on a year-over-year basis. Import prices also fell -0.1% for the month, but were up 8.5% for the year.

Consumer sentiment continues to rise to 74.0 at mid-month January from 69.9 at the end of December.

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Dale Franks
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Iran, the Straits of Hormuz and “Armageddon”

Iran is supposedly being sternly warned that attempting to close the Straits of Hormuz will not be tolerated.  The Iranians have put forward a bill in their Parliament which would require warships from any nation desiring to transit the Straits to get the permission of Iran first.

Of course, the Straits are considered by the rest of the world as “international waters” while the premise of the Iranians is they’re national waters subject to the control of Iran.

Most experts believe that this has been precipitated by sanctions imposed on Iran by much of the world, but especially the Western powers.  Closing the Straits of Hormuz would be viewed by most of them as an act of war.

So, per the New York Times, a secret channel has been opened with Iran’s top leader, Ayatollah Ali Khamenei, in which he has been informed the US would consider any such attempt to close the Straits as “a red line” that would provoke a response.

DoD has made the position publically official:

Gen. Martin E. Dempsey, the chairman of the Joint Chiefs of Staff, said this past weekend that the United States would “take action and reopen the strait,” which could be accomplished only by military means, including minesweepers, warship escorts and potentially airstrikes. Defense Secretary Leon E. Panetta told troops in Texas on Thursday that the United States would not tolerate Iran’s closing of the strait.

So the line is drawn.  The hand is closed into a fist with a warning.  Bluff or promise?  Will Iran test it to see?

Here’s why some think they won’t:

Blocking the route for the vast majority of Iran’s petroleum exports — and for its food and consumer imports — would amount to economic suicide.

“They would basically be taking a vow of poverty with themselves,” said Dennis B. Ross, who until last month was one of President Obama’s most influential advisers on Iran. “I don’t think they’re in such a mood of self sacrifice.”

Of course fanatics often don’t think or reason in rational terms, but Ross has a point.

Meanwhile, as the sanctions continue to bite, Iran’s president is finishing up a South American swing to shore up support (and resources one supposes) for his regime from the usual suspects – Chavez, Ortega and their band of merry socialists.  China is also a player in all of this, although not a particularly enthusiastic one.  Iran exports 450,000 barrels a day of oil, which is now not being bought by Europe or the US.  So it sees an opportunity here to up its share of that total.  John Foley thinks China will fudge on sanctions, at least partially.  That, of course, could extend the drama.

And while all of this is going on, Iranian nuclear scientists are blowing up pointing to some sort of effort by some nation(s) or group to slow and frustrate what everyone believes is Iran’s push for nuclear weapons.  That, by the way, may be part of the discussions in South America if you get my drift.

Don’t know if you noticed recently, but the Doomsday Clock has added a minute, the first since 2007 when it subtracted one.  We’re no 4 figurative minutes from “Armageddon”.  Iran certainly figures in the move.

So far, the “reset” is going just swimmingly, isn’t it?

~McQ

Twitter: @McQandO

Obama asks for another increase in the debt ceiling

If you wonder why there is this focus on the left on taxing the ‘rich’, part of it can be found here:

President Barack Obama asked Congress for another $1.2 trillion in government borrowing authority, the third and final request under an August deal with lawmakers that averted a U.S. default.

The president’s notification to congressional leaders yesterday starts a 15-day countdown for lawmakers to consider and vote on a joint resolution disapproving of the increase.

An “August” deal and we’re already on the “third and final request”?  August for heaven sake.  5 months.  Does that at all demonstrate how absolutely unconcerned this administration is with out-of-control spending?  Does it help explain the class-warfare, anti-Wall Street, shift-the-blame campaign in which the President has been engaged?

We’ve already exceeded the national yearly GDP with our debt under Obama and now he’s going for more.

Well, except at DoD.  There’s he’s slashing muscle and bone on the one hand while proposing a pay-hike for other federal employees on the other.

The debt ceiling increase is to meet commitments already made by the government. The Treasury Department has been relying on accounting maneuvers, similar to the ones employed during the year’s earlier dispute, to ensure that the previous $15.194 trillion limit wasn’t breached.

Since the budget law was approved, the debt limit has been raised twice, by a total of $900 billion. In the latest request, the limit would rise to $16.394 trillion, which the Treasury Department estimates will fund the government until late 2012.

We are so ill served by our current crop of politicians that it almost defies description.  We’re past the generational theft of our grandchildren’s money and are working on that of our great-grandchildren.

This is simply inexcusable, yet like an alcoholic or drug addict it seems our politicians can’t help but do whatever is necessary to obtain their next fix of borrowed money.  Meanwhile the credit rating for the country has been downgraded and is at risk for further downgrade.  And the economic drag on the economy in general this sort of a debt load carries continues to increase.

You want a national tragedy … here it is.  You want a national nightmare … its playing out right in front of you and there doesn’t seem like anyone is able to stop it.

But most rational people understand that at some point it has to stop … it has to come to an end.  And when it does, this recession will look like child’s play, all thanks to the selfish short-sightedness of our political class.  Oh, and yes,  the gutless votes who keep rewarding this sort of behavior because it benefits them.

At the risk of sounding like some sort of extremist fanatic, the end is near.   And it isn’t going to be a pretty end either.

~McQ

Twitter: @McQandO