Periphery Watch

 

Editor’s Note: As you know, Bill believes the U.S. is about to experience a violent monetary shock. So today, we’re sharing with you a classic from the archives. It’s Bill’s firsthand account of Argentina’s monetary crisis. But as an American, you may eventually experience a very similar situation …

 

Cash Only

One of the things that vexes just about everyone in Argentina is money. The value of the peso changes rapidly. There is the official rate. And there is the unofficial rate.

Nobody knows what a peso is worth. Many people – including your humble editor – have to do some pretty serious calculating. The parts of his brain that do math must be swelling from overexertion.

 

cash_only_inline

 

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Fixing the Dollar Drought

Say you are a socialist, and you have intervened heavily in the economy. Suddenly, things don’t work as you thought they would. Somehow, economic laws seem to refuse to bend to your will. However, you cannot really believe that since according to your convictions, wealth is a byproduct of government plans and decrees. Moreover, your predecessor (also a socialist revolutionary) had the best advice oil money can buy – even from people who are now advising socialist parties over in good old Europe. So the solution to the unintended consequences of the initial intervention is to intervene further, in an attempt to refine the plan, so to speak.

You may have heard about a certain proverb attributed to Einstein about insanity, but you can’t quite recall what it was. So you try again. And again. And again. Chances are, your name is Nicolas Maduro. But eventually, you quit trying – sort of.

 

 pear-shaped-bodyImage via diyconfessions.com

 

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Governments in Dire Straits

A number of governments find themselves in severe financial trouble – these represent the fringe of the fiat money bubble, the fraying edge of it, if you will. They will provide us with a preview of what is eventually going to happen on a global scale. It would actually be better to say: what is going to happen on a global scale unless significant monetary and economic reform is undertaken in time. Obviously, we cannot be certain what the future holds in store – however, we can certainly extrapolate the path we are currently on.

Looking at efforts that have been undertaken in this respect thus far, they are partly insufficient and partly extremely wrong-headed. For instance, the euro zone received a rather clear wake-up call in the sovereign debt crisis of 2009-2012. The effort to create a “fiscal compact” that forces governments to limit their deficits and public debt to specific percentages of economic output is a laudable attempt to bring the problem under control. However, the effort is lacking in many respects. For one thing, the accord will likely prove unenforceable when push really comes to shove. It is already meeting with considerable resistance, and one suspects that enforcement against core countries like France will continue to be lax.

Secondly, there are many ways in which such fiscal targets can be achieved, and we can be certain that in many cases European politicians will opt for the worst methods. Simply hiking taxes and bleeding the private sector dry is not a workable or sustainable policy. What is required are massive cuts in government spending, combined with economic liberalization on a vast scale. In other words, the kind of reforms that the ruling classes of the European socialist super-state project are most unlikely to consider. Even if they were considering them, they would have to overcome a plethora of vested interests to implement them.

Thirdly, one of the methods chosen to get a grip on government finances is financial repression, aided and abetted by the central bank’s ultra-loose monetary policies. This is certain to lead to capital consumption and impoverishment, thus making the long term success of the fiscal compact strategy even less likely.

 

Venezuela supermarket

Empty shelves in a supermarket in Caracas. The government has tried to counter spiraling inflation with price controls – this is the inevitable result.

Photo credit: Getty Images

 

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$5 Billion Down the Drain

Russia’s Gazprom has finally thrown the towel on the South Stream pipeline, after spending $5 billion on it. This follows repeated attempts by the EU to shoot itself in the foot using its “competition rules” as a pretext. These nonsensical rules are employed as a pretext for a great many things, but the protection of consumers ranges most definitely at the very bottom of priorities. South Stream would have circumvented the Ukraine and brought Russian natural gas to a number of countries (many in the Balkans, plus Austria and Italy) which are nearly 100% dependent on Russian gas already. Germany presumably doesn’t care because, tada! – it gets its gas via “North Stream”. For unknown reasons the “competition commission” had nothing against that pipeline. One wonders why? We think the only European newspaper that came closest to the truth was the Italian paper La Republicca. While it (wrongly) blamed the decline in energy prices for the decision, it wrote in an aside:

 

“The latest jolt sweeps away South Stream. The maxi-pipeline – dear to Vladimir Putin, supported by the former Berlusconi government, opposed by the United States – will not be built”

 

The truth is, the EU’s “competition commission” rigmarole was a pretext for what is at its core a political, not an economic decision. The US opposes South Stream solely for geopolitical reasons, as it has zero commercial importance for it. The EU has neither valid commercial and nor indeed valid political reasons to oppose the pipeline. Europe has been buying energy from Russia even back when it was still part of the evil Soviet Union, the communist empire that was an actual enemy. And yet, as German vice chancellor Sigmar Gabriel remarked in an address (in which he admitted that German subsidies for various “alternative energy” nonsense needed to end), Russia has never reneged on its energy deliveries, not even in the most tense moments of the cold war.

 

south-stream-in-bulgaria

A piece of South Stream in Bulgaria, now a memento of a missed opportunity

Photo credit: Gazprom

 

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A Brief Technical Update

This is a brief addendum to our recent update on the gold sector. Since then, a few interesting things have happened. Initially, gold stocks bounced from the 61.8% retracement level of the preceding rally in spite of the fact that gold and silver weakened further. The action reversed however on Thursday, with gold and silver bouncing, while precious metals shares lost some ground again. The HUI failed at the 200 day moving average, and it remains to be seen if it once again turns into an impenetrable barrier (we believe it won't). The HUI-gold ratio has strengthened a bit recently. Note also the divergence between the HUI and the ratio that has developed at the most recent low.

 

HUI and HUI-Gold ratio

HUI and HUI-gold ratio – divergence at the recent lows – click to enlarge.

 

HUI-Fibos

HUI with Fibonacci retracement levels of the December-March rally – click to enlarge.

 

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Ukrainian Hryvnia Crashes

Bank runs, lack of reserves, danger of default – these were the sound bites lately emanating from the post-revolutionary Ukraine. Amid reports of intensifying bank runs during which some 7% of all bank deposits have reportedly been withdrawn, Russia let it be known that it believes the Ukraine is on the brink of default. This has some weight, as Russia was poised to extend an emergency loan amounting to $15 billion to the Ukraine. Shortly after the government of former president Yanukovich and the opposition had agreed on a truce and just prior to the confrontation on Maidan square turning bloody, Russia had announced it would release a $2 billion tranche of the loan. One assumes that the Russians are well informed about the Ukraine's financial condition. Moreover, the new interim government already let it be known that it needs at least $35 billion in aid.

For more details on these developments see this write-up on the situation by Mish. On Monday we pointed out that the hryvnia had oddly failed to appreciate in spite of a sudden urge by investors to load up on Ukrainian stocks and bonds. Later on Monday, the currency started to move lower quite quickly. Come Tuesday, and the currency has basically crashed (and the move may not be over yet).

 


 

Hryvnia-crashThe Ukrainian hryvnia crashes – click to enlarge.

 


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Muslim Brotherhood Designated a Terrorist Organization

It has become quite a steep fall from grace. Within 18 months, Egypt's Muslim Brotherhood has moved all the way from winning the presidency and ruling the country to once again becoming outlawed. During the Christmas holidays the military council currently administering Egypt saw fit to declare the Brotherhood a 'terrorist organization'. Anyone taking part in demonstrations on behalf of the Brotherhood or otherwise supporting it henceforth faces a minimum of five years imprisonment. Its leaders face imprisonment for life, and perhaps even the death penalty. This includes former president Mohammed Morsi.

The pretext used for the promulgation was an attack on a police station (the Daqahliya Security Directorate in Mansoura)  that killed 16 policemen and left an estimated 140 people injured. However, a different organization actually claimed responsibility for the attack, namely the Sinai-based radical Islamist militant group Ansar Beit al-Maqdis. In August the Egyptian army let it be known that the group had been 'dealt with', so we are evidently looking at a case of miraculous resurrection here (it's either that, or the army wasn't entirely truthful). Reuters reports on the outlawing of the Brotherhood:

 

“The Egyptian government intensified its crackdown on the Muslim Brotherhood on Wednesday, formally listing the group as a terrorist organization after accusing it of carrying out a suicide bomb attack on a police station that killed 16 people. The move marked a major escalation in the army-backed government's campaign to suppress the Islamist movement that propelled Mohamed Mursi to the presidency 18 months ago but has been driven underground since the army toppled him in July. It gives the authorities the power to charge any member of the Brotherhood with belonging to a terrorist group, as well as anyone who finances the group or promotes it "verbally, or in writing".

"This is a turning point in the confrontation. This is an important tool for the government to close any door in the face of the Brotherhood's return to political life," said Khalil al-Anani, a Washington-based expert on the movement. The Brotherhood condemned the attack on Tuesday in the Nile Delta city of Mansoura, north of Cairo. Earlier on Wednesday, a Sinai-based militant group, Ansar Bayt al-Maqdis, had claimed responsibility for the attack that wounded some 140 people.

In Washington, the State Department also condemned the attack but urged Egypt to have an "inclusive political process." "We condemn in the strongest terms the horrific, terrorist bombing yesterday. There can be no place for such violence. The Egyptian people deserve peace and calm," State Department spokeswoman Jen Psaki said but added: "We also note that the Muslim Brotherhood in Egypt condemned the bombing shortly after it occurred yesterday. We are concerned about the current atmosphere and its potential effects on a democratic transition in Egypt," she added.

The Brotherhood, which estimates its membership at up to a million people, was Egypt's best organized political force until this summer's crackdown. A political and social movement founded in 1928, it won five elections after the downfall of President Hosni Mubarak in 2011.

"The government decision aims to liquidate its political opponents," Mohamed Touson, a member of the Brotherhood's Freedom and Justice Party, told Al-Ahram online, a state-run news portal. Since Mursi's overthrow, the state has killed hundreds of his supporters in the streets and arrested thousands more. Mursi and other top Brotherhood leaders were last week charged with terrorism and plotting with foreign militants against Egypt. They could face the death penalty. A court ruling has also formally outlawed the group.”

 

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The Outlook for Brazil

"What's the outlook for Brazil?" we asked our colleague Rodolfo Amstalden of Empiricus Research in Sao Paulo. It was raining outside. We were in his new digs, overlooking the fashionable Itaim district.

"That depends on who you talk to," he began. "But to us it looks terrible. We're warning investors to watch out for a 'perfect storm' that could flatten share prices on the Bovespa

"You have to realize that shares have lost 17% this year. And they're down 30% from their high set in 2008. But that doesn't mean they're cheap. The average P/E is still about 17 – not too far away from the US average. And here's what could happen in 2014…

"First, we're very sensitive to US monetary policy. And it's likely that the US Fed could begin to taper in 2014. Even if it doesn't, the fear of tapering is likely to send Brazilian stocks lower.

"Second, if you've been following the story closely, you may have learned that the government is on a spending spree and Brazil's bonds could be downgraded.

"They're currently two grades above the investment level threshold. So a single downgrade wouldn't hurt us much. But it could do a lot of damage to the stock market. And two downgrades, taking them below investment grade, might be catastrophic.

"To make things worse, there's a national election next year. Unless Brazil loses in the World Cup Soccer Championship next year, Dilma (current president Dilma Roussef) will almost certainly win. She's buying votes all over the country by giving money away. She's not going to be good for business or the stock market.

 

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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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