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Thursday, February 29, 2024

Wednesday’s Worry – World Wide Cash Crunch

Hugo Chavez is running low on cash

Should you care that he just had to withdraw $5Bn from reserves, sending them to a 10-month low and down 19% to $28.35Bn?  Well it’s not just Venezuela but they are a good example of what’s happening around the World as even oil-rich nations can no longer prop up their economies and will have to begin competing with the US, Europe and Japan to borrow money on the international markets.  Venezuela may have external debt financing needs this year of as much as $19 billion and as much as $22 billion in 2011 should authorities choose not to use non-reserve savings estimated at $41.1 billion, according to Morgan Stanley.  “Short of some break in Venezuela’s current dynamic, the economy may be faced with a severe dollar crunch as early as this year,” Pardelli and Volberg said. “The dollar crunch may prompt the authorities to attempt to buy time by drawing down their hard currency savings, issuing debt or significantly ratcheting up policy heterodoxy.”  

Greece needs $15.6Bn by the end of May and that much again in August and November.  Seven-year notes sold by the government this week fell even after the European Union and the International Monetary Fund crafted an aid package that would be triggered should the nation be unable to raise sufficient cash from capital markets to cover its financing needs. Greece may pay about 13 billion Euros more in interest on the debt it sells this year than it would have to had yields stayed at their pre-crisis levels relative to Germany’s.

The UK will be spending 10% of their tax revenues just to pay the interest on their debt as debt itself soars to 90% of GDP with debt now costing the UK more than their Defence and Transportation budgets combined.  Neighboring Ireland is looking at a $110Bn bill over the next 12 months to stabilize it’s bad banks – and that’s AFTER giving the banks a 47% haircut on the value of the assets the government will be picking up.  This will not be counted as an addition to Ireland’s already $95Bn in debt for 2010 because, technically, they are buying an asset – even if the asset is toxic.  It’s the same trick our Fed uses every month to pretend things are fine…

Fed President Richard Fisher says the U.S. can’t ignore the effect of the growing federal deficit on Treasury yields and the outlook of investors.  “Even under the most optimistic of scenarios, large deficits will be run for as far as the eye can see,” Fisher said in the text of a speech today in Tucson, Arizona. “The markets, fearing the consequences of runaway deficit financing, have bid up longer-term nominal rates, resulting in a yield curve that is now historically steep.”  

Fisher’s remarks underscore the view expressed last week by former Fed Chairman Alan Greenspan, who told Bloomberg Television that he’s “very much concerned” about the financial situation of the U.S. Greenspan said higher yields are a “canary in the mine” that may signal further interest-rate gains and reflect investor worry about the “huge overhang of federal debt.”  

To recap so far – Emerging markets need money, Greece, Dubai, Ireland, England, Spain, Turkey, Potugal and lots of other countries we don’t care about need money, the US needs so much money it’s almost impossible to concieve of (but here’s a video that helps and another fun one).  Understanding Trillions is very important for Americans because our states are approaching that magic number in their own debts.  Now it’s getting closer to home, isn’t it.  Remember, the closer to home it gets the closer they are to taxing your home to collect it!  

Every time you hear that someone on this planet is spending another $1Tn, that means they need $150 from every man, woman and child on the planet.  Unfortunately, 80% of the people on this planet don’t have $150 so that pretty much kicks the bill up to the 1Bn of us who can pay it at $1,000 each.  If you are unfortunate enough to live in a small country like America, with only 300M people, when your Government runs a $1.5Tn annual deficit like ours does, that means they will be needing all 300M of us to send in $5,000 to cover the shortfall.  If we don’t pay it now – then we’ll have to pay it later, plus the prevailing rates of interest. 

Now for the bad news.  Our banker is having a bit of a cash crunch.  It seems this brilliant global strategy of bailing out the banks and artificially keeping prices high has led to a commodity rally that has given China it’s first trade deficit in 17 years.  China’s trade gap is projected to reach $100Bn this year, driven by a 45 percent climb in imports as China’s demand growth outpaces that of other major economies, said Glenn Maguire, chief Asia- Pacific economist at Societe Generale in Hong Kong. He said yields on benchmark 10-year U.S. notes will hit 4.5 percent by the end of 2010, capping the biggest two-year increase since 1980-81.

We’re looking at a medium-term move of China into the red on the trade account,” Maguire, a former economic adviser to Australia’s cabinet, said in a telephone interview yesterday. “The automatic funding of the U.S. twin deficits that has come from China reinvesting its trade surplus will cease — and probably reverse,” he said, referring to the American budget and current-account shortfalls.  China’s Treasury purchases have already fallen for three consecutive months, to $889 billion at the end of January, according to U.S. Treasury Department data.  What?  China won’t even give us a lousy Trillion?  OK then, who can we tap out next?  We already killed Japan…

This is not a one-off dip into deficit,” Maguire said. “This is going to be one of those clear turning points where the entire economic debate changes.”  The 2009 Thomson Extel survey named Societe Generale as the top economics and strategy research firm for a third straight year.  Domestic U.S. investors will have to step up to fill the funding void for the U.S. deficit left by China’s absence, Maguire said. In order for them to do that, yields on Treasuries must rise to between 4.75 percent and 6 percent, he added.  Have I mentioned I like TBT lately?

Chinese markets sold off on the last day of the month with the Hang Seng dropping 135 points (0.6%) to finish the month at 21,239, which is up about 1% but still 3% shy of the Jan 4 open for the year (21,823).  The Shanghai Composite matched the mainland fall and finished the month at 3,109 also down about 3% for 2010 so far.  The Nikkei, on the other hand, flatlined today but that’s 11,089 – up 9% for the month of March and up 4% for the year, matching the BSE’s strong showing as they also flatlined into the end of the quarter – almost as if some invisible force was keeping them afloat…

Europe had a good open but went right off a cliff on a disappointing ADP report for US (-23K), which is funny because we had a terrible Consumer Comfort Report (-45) last night and none of the people pumping up the futures seemed to care.  Probably because, as I explained above – it doesn’t really matter if the US consumer doesn’t WANT to go another $5,000 per person into debt this year – our Government is spending the money for us and, so far, we haven’t gained a single job to show for it.  Inflation in Europe rose sharply, from 0.9% in Feb to 1.5% in March

We talked about real inflation in yesterday’s post and here’s a cool chart that illustrates the problem, comparing the price of Big Macs (a commodity consumers must choose to consume) and oil (a commodity consumers are forced to consume) over the past decade.  It’s much worse today as oil is flying back near $84 in pre-market trading (hey, oil traders need to make their quarters too) and until retailers like McDonald’s wise up and start spending the same Billions in lobbying dollars to get oil prices down as is now being spent to jack them up – then larger and larger portions of consumer’s "discretionary" income will continue to be chewed up by rising commodity prices.  Remember, Uncle Hugo needs a new pair of shoes! 

Speaking of oil, Obama says "drill baby, drill" as the administration proposes to open vast expanses of water along the Atlantic coastline, the eastern Gulf of Mexico and the north coast of Alaska to oil and natural gas drilling. The proposal — a compromise that will please oil companies and domestic drilling advocates but anger some residents of affected states and many environmental organizations — would end a longstanding moratorium on oil exploration along the East Coast from the northern tip of Delaware to the central coast of Florida, covering 167 million acres of ocean.  I think he’s just messing with the Republicans to find out if any of them are actually capable of voting yes on any legislation he proposes…

Last chance for window dressing today to end our first quarter of 2010.  Overall, our indexes are up right around 5% for the year other than the Russell, which is leading us with a 9% gain and up 15% since Feb 8th.  We’ve had a very dull week in cash on on the sidelines and that’s unlikely to change today or tomorrow but we are still loving our disaster plays over the weekend and we’ll have to get through the next weekend before we change our generally bearish stance. 



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