by Kirk Elliott, Ph.D.
Are any of you watching what is happening in Europe? Greece just withheld the most current payroll check to government employees creating yet another round of riots and civil unrest. Germany is not going to give them any more money, and is not going to pull out of the European Union. Italy is on the verge of bankruptcy and is possibly relying on China to purchase its junk bonds. The European Union is in complete shambles.
Remember Putin? Remember the old Soviet Union before it was dismantled under the Reagan administration? Well, it looks like it is coming back. Soviet Union 2.0! Putin hates the west. Putin has a lust for power. Putin is going to run for Russian President again, and he will win in a landslide. His stated goal is to create a Euro-Asian union of sorts and merge Russia, Belarus, and Kazakhstan politically and economically. This is a re-emergence of the old order, and may culminate in another cold war. I am not too concerned about the cold war aspect as Russia’s total GDP is $1.7 trillion. The U.S. GDP is about $14 Trillion, and China’s is about $7 Trillion in comparison. So they are basically a third world economy now. But the problem is their vast amounts of resources in oil and gas, and the fact that they have the potential to shut off supplies to Europe, thus creating massive amounts of turmoil.
And what about the Middle East? The following is an excerpt from Joel Rosenberg’s Flash Traffic Blob:
Earlier this week, a senior U.S. official flew to Israel to apply this very same pressure, and do so in a surprisingly high profile manner. “U.S. Secretary of Defense Leon Panetta visited Israel Monday with a clear message from his boss in Washington: The United States opposes any Israeli attack on Iran’s nuclear facilities,” reported the Israeli newspaper Haaretz. ‘The United States, he said, is ‘very concerned, and we will work together to do whatever is necessary’ to keep Iran from posing “a threat to this region.’ But doing so ‘depends on the countries working together,’ he added. He repeated the word ‘together’ several times in this context.”
Panetta’s strong-arm tactics towards Israel was likely overlooked by most Americans, who are currently focused on high unemployment, surging foreclosures, anemic growth, skyrocketing national debt, the 2012 presidential campaign, and final days of the Major League Baseball season. But it was certainly noticed by the people of the Middle East who are growing increasingly concerned about the prospects of a major new regional war.”
Obviously, tensions are rising, and we must not forget China and the ongoing currency war being waged. A couple of weeks ago Bernanke delivered the twisting speech and subsequently the twisting mechanism took place. The mechanism: SELL short term U.S. Treasuries and BUY long-term U.S. Treasuries with the proceeds. This will increase the interest rates on ST debt, and reduce interest rates on LT debt. The hope of this failed policy from the 1960s is to reduce the cost of borrowing in order to stimulate the real estate market. The problem: China has already dumped 97% of its short term treasuries, but still own about $1.7 Trillion of other debt, and we just lowered their return. So, what are they doing? They are starting to SELL long term treasuries too. Oh my! The U.S is buying them, China is selling them, thus making the entire mechanism very ineffective. Except, the one effect it did have was ticking off the rest of the world as global stock markets came down 5-15% within the few days following that decision.
There is a geo-political nightmare unfolding. You and I can’t change these trends in the short and medium term. So what do we do to conquer the chaos? We MUST act quickly, we MUST act decisively, and we MUST be students of the markets to identify the fundamental causes of the trends. The ball is in our court to act. Identify the trends that are going down and GET OUT OF THEM NOW! Identify the trends that are going up and GET INTO THEM NOW! Make sure your paper/tangible asset ratios are as they should be. We are about to enter a firestorm of geo-political madness and the economy will suffer. Take action NOW!
