We had a great meeting! We had a comprehensive conversation on many matters including the crisis in the Eurozone, geopolitics, and, of course, the global financial markets. We had a total of 5 attendees: (from left to right) Andrew Whatley, Shelley Gomez, VJ Arjan, Jeff Harrington, and Tommy Schultz.
The Crisis in the Eurozone
There is no surprise here according to long naysayers to the Euro like George Soros and Jim Rogers. The PIGS (Portugal, Italy, Greece, and Spain) may bring down the Euro as a currency altogether. During the formation of the Eurozone, the former Soviet “colonies” (Estonia, Latvia, etc.) tried to protect themselves from Mother Russia after the collapse by joining the European Union. The problem lies more for the industrialized countries like France and Germany as there is a wealth transfer from the rich countries to poorer ones. To make certain that the poorer countries could not ruin the rich, they imposed a strict metric that the total government debt could not exceed beyond 3% of the GDP. Well it turns out that the richer countries (PIGS) did not heed their own admonition. Greece and Spain have both run government deficits of more than 10% of GDP. Jeff Harrington suggested that Greece, being a smaller economy, can be managed, but Spain’s government debt poses a greater problem for the ECB (European Central Bank). Being the 9th largest economy in the world, Spain default on its debt would lead to the collapse of the Euro. What may occur is a cooperative like NATO within the Eurozone, a sort of federalism. There is too much ethnic pride among different countries for them to become one nation. Before creating a European cooperative, it is essential for each country to restructure and align itself to adopt a standard political framework that is exactly the same for all other members and that stands for mutually shared accountability.
The Fall and Decline of Politics in America
“Trust me, November is going to be fun.” – Jeff Harrington
Recently, Evan Bayh, Democratic senator for the state of Indiana, resigned his Senate seat citing the bipartisan polarization that has deadlocked Congress. This is very significant given the fact that Indiana has historically elected largely Republic senators since the Reconstruction of 1866. The Democratic Party is fractured amongst itself: there are liberal Democrats, conservative Democrats, and then those in between. All the efforts of President Obama to rally the nation to the causes of issues like a public healthcare option and the future economic stimulus packages may crash to the ground if he cannot unite his party. Jeff Harrington “guarantees” (if there is such a thing to rely upon) that 60-80% of the current incumbent candidates in the House of Representatives will lose their spots to newcomers in the upcoming election in November.
Geopolitics and the economy
We all discussed the role geopolitics plays in the global economic environment. VJ Arjan discussed the future geopolitical environment to come based on a recent book he is reading, Does America Need a Foreign Policy? by Henry Kissinger. According to Dr. Kissinger the geopolitical world order in the western world has largely been unchanged since the Treaty of Westphalia in 1648, which ended the Thirty-year war and resulted in a series of agreements between the European countries assuring the mutual “benefit of the other’. In other words, each sovereignty would not infringe upon another. This general agreement has only been briefly breached during the Napoleonic Wars, World War I, and World War II. It is very likely that this order will continue. The changing faces on the map are likely to occur in the Middle East and many African countries.
In the near future, there appears to be some major global players and alliances to appear. It is clear that China and India will butt heads. It is also probable that China will butt heads with Russia over natural resources and with the United States over Taiwan. Clearly China will be playing a much more dominant role in the near future. And this is already occurring. For example, in the last month, the U.S. Treasury reported that China had dumped $35 billion of its U.S. Treasuries (or roughly 5% of its total holdings) after the U.S. had completed an arms sale to Taiwan for approximately %5 billion. Of course, China is trying to convey its displeasure in such proceedings, but it also cannot keep dumping its holdings without jeopardizing its other U.S. holdings.
The “Bank Tax”
Recently, President Obama proposed a “bank tax” on 50 banks operating in the U.S. to recover the TARP funds. The truth of the matter is that all of the TARP funds have been repaid by J.P. Morgan, Bank of America, and Wells Fargo, and Citigroup still carries a portion of the initial TARP funds. The truth of the matter is also that the FED recently reported a nice profit on these funds, which we may add was paid back with interest. The “losses” on the funds the President is speaking of is more relating to the bailout of AIG and General Motors. We all know the repayment from AIG will be long in coming. But, inadvertently, the President was trying to pander the auto union workers at GM who voted him into office, and who surprisingly enough, cannot repay the bailout funds as of yet. He is distracting the American taxpayers from the problem and incredibly unsustainable cost of the labor unions and shifting attention to the banks and blaming the “losses” on them. There is no dearth of anger being directed towards banks anyway, so it turns out to be a convenient scapegoat.
Actual Unemployment
It is not a secret that the government statistics represent an incomplete picture. It has also been stated by reputed investors (Marc Faber, Jim Roger, etc.) that the government repeatedly doctors its statistics as well. This is nowhere more prevalent than in the way the government reports its unemployment statistics. Recently the unemployment figures that came out suggested that the rate of unemployment had remained steady at 9.7% month-over-month. However, the U.S. government fails to mention that these statistics only include the unemployed as those who are unemployed and “actively seeking employment”. There are droves of workers who are unemployed and are termed “discouraged” or “not actively seeking employment” who are not counted at all as such a person is not counted in the labor force. According to this method of reporting, the actual unemployment is much more severe. The Washington Post claims that this figure approaches closer to 16.8%! (http://voices.washingtonpost.com/economy-watch/2010/03/truer_unemployment_rate_rises_1.html)
The reason why the numbers may be reported in this fashion is to avoid panic in the market place were the real numbers to come out. Were it reported that the situation is worse than anticipated, there may ensue a negative spiral of companies firing more and more employees. The false or incomplete unemployment numbers, unsurprisingly, are promoted very well by clueless news pundits who, in reality, have no idea what is going on or what the numbers mean, but achieve the objective of ensuring confidence in the marketplace.
The Market in the Coming Months
VJ Arjan was explaining that the market indices suggest tests of very strong levels. The 10,400 level on the DJI (Dow Jones) has been tested multiple times in the past and the market recently broke through this level last Friday. The key question will be whether or not it will decide to create another upward bar break above this level, or whether the market will turn sour on Monday and fall below the 10,400 level. (The 10,400 level is clearly marked with two blue rectangles on the chart). He also stated alarm that there is still the scepter of commercial real estate that still has not reared its head, but has been heralded by Kevin Day as the next potential asset class bubble.
The next meeting will be on Sunday, April 11th, 2010 instead of April 4th due to Easter Sunday falling on the 4th. For those who have not attended a meeting, but would like to attend, please email your wish to VJ Arjan at scarletkings@gmail.com
