Consider what game Spain may be playing

Today’s Detailed Commentaries Eurozone >> Spain: Consider what game Spain may be playing That Spain will request – likely in weeks and not months – financial aid from its eurozone partners seems a certainty. Why Spain is playing a ‘wait and see’ game is an interesting question.

My current thoughts are that Spain is waiting on – very likely among other things:

• the audit reports on its banks scheduled (so far) for release this month, and that the Spanish Government must by now have received at least interim reports from those completing said audits;
• finalization of what it may hope to be precedent setting negotiations with Greece in respect of the Greek financial bailout; or,
• further developments in Italy; and,
• knowledge of the maturation of Germany’s thinking and position(s) in all of this.

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Postponement of dealing with Eurozone and Eurozone country specific problems is, from everything I have read and heard to date, doing nothing but exacerbating what almost certainly is becoming an ever more difficult and ‘hard to solve’ problem. Topical Reference: Spain urged to clarify aid needs at euro zone meeting, from CNBC from Reuters, September 14, 2012 – reading time 3 minutes. North America >> United States: Fed Chair introduces new quantitative easing – can it succeed? By the time you read this you will have been over-exposed to the news that yesterday Fed Chair Bernanke announced further U.S. ‘quantitative easing’ without a stated end-date. Mr. Bernanke announced the U.S. Federal reserve will purchase up to U.S.$40 billion of mortgage-backed securities each and every month until it saw ‘a sustained upturn in the weak U.S. jobs market’. Say what you will, from my perspective for any such a plan to succeed:

• I have to be wrong that the United States suffers from structural unemployment, as I believe that the greater is U.S. structural unemployment, the less is the probability of meaningful U.S. job creation in the next 27 months – and, of course, vice versa;
• I have to be wrong that manufacturing jobs are more important to economic growth than are service jobs, as I do not believe that as a consequence of globalization and loss of U.S. manufacturing jobs the U.S. will be able to create enough ‘average-pay’ service jobs to bring the U.S. unemployment rate down significantly from current levels over the next 27 months, particularly as the U.S. population grows over that period; and,
• I believe the only way it is likely for the U.S. employment rate to be as low as 7% by the end of 2014 (see following) is if the U.S. Federal Government, pursuant to bipartisan agreement, in the next few months finds funding for Federal Government sponsored infrastructure programs, and quickly overrides the views of vocal minorities to enable large energy projects such as the Keystone Pipeline project to go ahead.

Following from introduction of this new quantitative easing, the Fed has reduced its expectation of year-end 2014 unemployment to (at the mid-points) 7.0% from the 7.35% estimate it made in June. Consider:

• that it is (not including this current month) 27 months to and including December 2014. Assuming no changes to this new quantitative easing and that it extends to that date, the new Federal Reserve expenditure will total just under U.S.$1.1 trillion by the end of 2014; and,
• what is going on in the world generally (witness the current maelstrom in North Africa and the Middle East, and the many other societal problems that seem to appear with more regularity every month), and among other ‘economic things’:
• the world economy generally,
• the Eurozone financial crisis,
• the increasing concerns over further slowdown in China’s economic growth,
• the economic uncertainty of the U.S.,
• United Kingdom economic recession and uncertainty,
• ongoing globalization generally; and,
• what seems to be the economic unpredictability of globalization as it evolves.

After considering the foregoing, I suggest you:

• determine what odds you would give that any prediction made today of one country-specific economic statistic at December 2014 will prove to be accurate;
• consider how much of your wealth you would bet on such a thing; and
• consider whether all of this is something worth discussing with your investment advisor.

For me any prediction for a specific U.S. economic statistic forecast today for December 2014 invokes a vision of a man pulling his car over to the side of the road, unzipping his fly, and facing squarely into the ‘proverbial breeze’ as he goes about his business. Topical Reference: Fed bets big in new push to rescue economy, from Reuters, Pedro da Costa and Allister Bull, September 13, 2012 – reading time 4 minutes, thinking time longer. Brief Commentaries prompted by world headlines (collective reading time 2 minutes) Eurozone >> Germany: Germany and the latest ECB proposal An article Wednesday expresses the view that Germany is potentially advantaged by the underlying terms of the proposal announced last week by the President of the European Central Bank that the ECB would ‘do all that it takes to support the euro’. This is an important proposal, and I think the views expressed in the referenced article are worth reading and thinking about. Topical Reference: Germany Has Extracted Stealth Victory Over ECB, from Resource Investor, John Browne, September 12, 2012 – reading time 4 minutes. Financial Markets: BlackRock head trader on financial markets liquidity I suggest you read the referenced article that speaks to what the head trader at BlackRock sees as today’s reduced financial markets liquidity and depth as contrasted to pre-2008 financial markets. It is a comparatively quick read, and I think something worth thinking carefully about whether one is a trader or an investor. Topical Reference: Days of tight bid-ask spreads gone, BlackRock tells investors, from The Financial Post, David Pett, September 13, 2012 – reading time 3 minutes, thinking time longer. North America >> Canada: Canada not suffering economically – yet! With what may prove to be open-ended U.S. quantitative easing based on U.S. Federal Reserve Chair Bernanke’s announcement yesterday, combined with general slowing in world economic growth, Canada’s economy seems likely to be impacted negatively going forward. The two referenced articles deal with different aspects related to that likelihood, and make for quite straight-forward reading. Topical Reference: Why the Fed’s stimulus measures could hurt Canada’s economy, from The Financial Post, John Greenwood, September 13, 2012 – reading time 3 minutes. Also read Global headwinds to slow Canadian growth: OECD, from The Financial Post, from Canadian Press, September 13, 2012 – reading time 2 minutes. Brief Country Risk Commentaries prompted by world headlines (collective reading time 2 minutes) Africa >> Cote d’Ivoire: African countries look to increase shares of mineral extraction revenues/profits West African Cote d’Ivoire (Ivory Coast) is reported as saying (or presumably its government is) that it intends to increase ‘a windfall tax’ on gold miners. Burkina Faso, Democratic Republic of Congo Guinea and Senegal are also reported looking to increase their shares of mining revenues in their respective countries. Topical Reference: Ivory Coast to raise Gold output, tax miners, from Bullion Street, September 13, 2012 – reading time 2 minutes.