Monday, June 20, 2011

"The First Casualty of War is Truth"

The EMU is unwinding, with Greece its first jettison.

The 20th Century will eventually be viewed as the Century of social/fiscal experimentation... with the conclusion being something we adults knew all along - there is no such thing as something for nothing. NOTHING is free, and anything free is NOTHING worth having. Unfortunately, this won't stop people in the future from believing in something for nothing or stopping others from trying to take advantage of people by promising them something for nothing.

I had a nice conversation with Stu Staniford of earlywarn.blogspot.com the other day. I share his view that a Greeek contagion slow down could spread to the other PIIGS... and drop European demand for Oil to its knees (it is my sense that that will be the time to buy Oil).

But I think the Greek thing is small potatoes when compared to the international Corn Crop and Demand picture.  In fact, a powerful recession in Europe might be helpful in taking pressure off of Food prices in addition to Oil prices.

Its all about the weather in the growing regions. World inventories of grains (outside of rice... rice is in pretty good shape at the moment) are at multi-decade lows. A weather catastrophe in a major producing region would be very, very interesting politically - even here in the U.S. If you think $5 gasoline is problematic for the 2012 election pols, try $10 per gallon milk.

11 comments:

Anonymous said...

The Sovereign debt problem is the EU will destroy the eurozone, and may take a good portion of the EU with it. Once Greece defaults, the others will be close behind. Investors in any of the PIGGS' paper will bail. And, bankers be damned, once there is one default none of the PIIGS' governments will withstand the call for the same. Their populations are sick of being tax slaves for the sake of the banks. US banks are very exposed. The people are also used to getting something for nothing. Those days are ending. It will be huge financial shock to the world's economy. Civil wars and strongman governments in Western Europe are not out of the question.

Corn will destabilize the third world. especially important is China. It will eat into disposable income and income available for saving, just as oil did here in 2007-2008. It could just push them into recession, and burst their asset bubble.

I'd rank the two events at about the same severity. It is interesting that a meltdown in Europe might ease the pressure on the third world. High corn prices will not help anyone.

Regards,

Coal Guy

Anonymous said...

The silent elephant in the room as far as global growth and demand for commodities and the stock market in the second half of 2011 is going to be China. Everyone knows about the EU problems,but investors have been shrugging off the continuation of reserve rate hikes from PBOC ( nine of them in the last ten months, each 50 basis points) as well as the other actions from the Chinese government aimed at curbing housing prices and speculation and cooling off inflation. The Chinese are sitting on a powder keg of dynamite as far as social stability is concerned, and the government is increasing its authoritarian hold on the population in order to prevent the type of unrest we see in the Middle East. They will do whatever it takes to rein in prices and curb inflation. Make no mistake - this hasn't shown up yet in the GDP growth figures coming out of China yet (they are probably manipulating the economic reports) but it will. The Standard and Poors analysts downgraded the Chinese development sector to negative. Glencore, a major commodities producer said they are already seeing signs of slowing demand for commodities from the US and China. This has already impacted oil as most of the marginal demand for oil has come from the Chinese adding to their emergency stocks of oil this year. it will also impact gold, the Australian and new Zealand dollars and the total global growth rate.

As far as the EU and the PIGGS? The best thing would probably be to let the banks lose money. It sets a very bad precedent when financiers and bankers can blackmail the politicians into doing their bidding.

slow cooked frog said...

Uh... whole organic milk is already pushing $9/gallon in many parts of this county.

Anonymous said...

Anon,

The banks have been bailed out at the taxpayer's expense all over the world since the US crash. Our TBTF banks should have been taken into receivership, their management fired and their assets distributed to responsible institutions. But that wouldn't be popular among the ultra rich, now would it? The precedent has already been set. It is what the IMF does. Period.

Regards,

Coal Guy

Anonymous said...

Anon,

The same banks that had to be bailed because of their MBS exposure are believed to be badly exposed to PIIGS debt because they have sold a bazillion $ of Credit Default Swaps against sovereign debt of these countries. CDS exposure is one of those "off books" things, so the is really little public information on how serious the problem is. Here we go again.

Regards,

Coal Guy

Anonymous said...

Coal Guy:
The IMF, like the World Bank, acts as a charitable institution most of the time - they don't always get paid back for the loans they make.

Will the EU break up or the eurozone be destroyed? I tend to think not although no one really knows how bad the problem will get.Politics trumps finances over the long run course of human history, although that is not what we are led to believe by the financial institutions in the world today. And Germany has been trying to take over the rest of Europe for over 1000 years. They finally got what they wanted, and are not likely to give it up all over again.
There may be some bank failures in the EU, although I personally think the UK is in a more vulnerable position as far as their banks are concerned. Since the Germans and French are putting up the money for the European Financial Stability fund, their banks are going to have first lein on any assets of the Greeks. Take a good look at the pound, it could have a long way to fall.

Donal said...

This is just the end game of kicking the can down the road, until it stops at the concrete wall of reality. The bailouts didn't work, and QE is just a shell game.

I'd say that two worlds overlap at this point. There's the everyday world of work and wages (or food production, in your case Greg), and then there's the world of bankers and politicians and international debt.

The fiat money system is collapsing (and it won't be just the PIIGS or the Euro that goes!) and the Pound is no more vulnerable than the dollar. When it blows, then the support and legitimacy of top-down government will go with it.

Most people have a foot in each camp. I'd say the trick is to try to keep your balance and be ready to shift.

Regarding demand for food and oil in Europe, I'd mostly disagree. I'd say demand for basic food like grains and bread is inelastic, although meat and dairy will rise in price (and demand fall).

Similarly 90% of oil demand is inelastic in the short term, and Europe has pretty good alternative transport based on nuclear and renewable electricity. I wouldn't compare European transport vulnerability to the U.S. situation.

What will collapse are property prices, tourism, air transport, non-essential asset values, etc.And the banks are so stuffed!

Interesting times!

Anonymous said...

Greg,

Thought you might be interested in this.

http://news.yahoo.com/s/ap/20110620/ap_on_re_us/us_aging_nukes_part1

Greg T. Jeffers said...

The infrastructure issues facing nuclear plants and particularly nuclear waste holding and disposal seem to me to be nothing short of mind-boggling.

Anonymous said...

Anon,

In what sense is the IMF charitable? If a country gets into debt trouble, the IMF swoops in and offers them a deal that includes piling on even more debt in exchange for sales of assets and draconian austerity measures. If they succeed, the country being "bailed out" has it's citizens turned into tax slaves for the banks for a generation. If the country defaults, the taxpayers of the funding countries are on the hook. If that is charity, what is your definition of robbery. The IMF exist to protect banks at the taxpayer's (somewhere) expense. These guarantor organizations encourage bad investment and bad debt. The mega-banks are holding the whole world hostage. Fortunately, it can't last.

Regards,

Coal Guy

Anonymous said...

Since Fukashima you can bet more stories like this will surface giving the nuke industry more and more black eyes and driving more and more citizens into the camp of not in my back yard:

http://finance.yahoo.com/news/AP-IMPACT-Tritium-leaks-found-apf-1051548629.html?x=0