The Financial World According to Inya
While perusing weekend financial press, I could barely smother a chuckle. Again the economists and various experts are puzzled over how something relatively small, and thus presumed insignificant, can threaten to bring down an entire institution. The first time this question arose three years ago, it was the U.S. subprime mortgage mess that had almost choked the global economy to death. This time it is tiny Ireland with a population of less than five million that is threatening the survival of the entire Eurozone.
Ireland’s taking the bailout from the European Financial Stability Facility, put together by the European Union (EU) and International Monetary Fund (IMF) when Greece was in trouble this summer, brought little comfort to the global markets. If nothing else, it has actually elevated fears of government debt default. The alarm bells have gone off for Portugal and Spain, while risk premiums, insuring the bondholders of Irish, Greek, Portuguese and Spanish bonds, have gone considerably higher. At the same time, you could say that the market mood has gone considerably darker.
Volatility abounds and it is coming from every which direction. The Eurozone’s fiscal problems unfortunately persist. Inflation has become a real threat in China and other emerging markets. The U.S. Federal Reserve’s second round of quantitative easing is controversial and, as such, has only dialed the knob on volatility up.
The past few months have given investors a crash course in what makes commodities tick. Your PROFIT CONFIDENTIAL editors have discussed quite a collection of factors that drive commodity prices, such as currencies, emerging markets, economic output, supply and demand imbalances…even weather was mentioned as swinging a few punches.
The Fed has really been put through the ringer after it decided to push its way into the Treasury market one more time and unleash Quantitative Easing II (QE2) onto the U.S. financial systems in an effort to keep interest rates low and stimulate lending, borrowing and spending. In other words, everyone and their mother think that the Fed is back at its old tricks—fighting the debt mountain and dead economy with easy money.
Germany’s dominating financial power in the European Union (EU) is indisputable. The region’s most thriving economy has earned its right to seek higher moral and financial ground than the majority of its fellow Eurozone members. These days, Germany is the Eurozone’s lord and master, it carries a huge stick in the form of a healthy checkbook, and it is the glue that keeps the Eurozone experiment together.
For most of the year, oil prices have offered little excitement, hovering at about $78.00 per barrel. The primary reason for such a non-eventful performance was the global economic growth that just did not have enough momentum to push up the demand for oil. In addition, inventories have been aplenty and major oil producers have been pumping enough oil to meet whatever demand there was. But this boring status quo might be changing now, as world central banks are pumping cash into global financial systems in efforts to jump start economic growth.
Ireland and Greece’s sovereign debt problems have sent credit markets into turmoil again. Hardly surprising, considering that both countries are dealing with mountains of prime fiscal problems and have been reduced to Europe’s pariahs in more ways than just monetary. This is bound to have an adverse impact on the euro despite Germany’s export-driven soaring growth pushing it to new highs.
Time to fess up to things again in eurozone, as Ireland finally admits that it is talking with its fellow eurozone members. Although, allegedly, Ireland and the others are not talking about Ireland’s potential need for a bailout, because Ireland insists it does not need a bailout. Which begs the question, what is Ireland talking to the European Union (EU) about? The weather?
You would have to be living in a cave not to notice the bull market in commodities. As with any bull market, the logical question is whether it is sustainable or not and, if it is sustainable, what is its lifespan? Some of the top economists in North America are comparing the latest market stampede into commodities with people lost in a desert seeing a mirage and are warning of a rude awakening in the coming months. So, which is it: a sustainable secular bull market or a mirage of precious water in the desert for thirsty men?