The world is seemingly under stress from almost all sides. Lets take a look at a couple of the cross currents in the world, some of which no one is talking about yet. While the US has real problems, we forget that the rest of the world is actively faking it, or worse is starting to break apart at the edges.
My 3 most interesting Cross Currents in the World
• China just bailed out its muni governments, and almost no one seems to have noticed or commented on the size of their own internal TARP program. The fact that China is bailing out their city governments, should be indication of what is happening below the news fold, as it were.
The reality is that even China is feeling the global slowdown pain. They don’t spend a lot of time in public wringing their hands. They knew they had an issue and took action. The problems in China however, will continue to grow as China tries to grow out of its problems via global exports.
This bail out is estimated to be in the $400 Billion plus range, not bad for an economy 1/3rd the size of the US. This puts the Muni’s in China in a better position to weather the coming economic storm that is showing up everywhere in the globe.
• You only have to look at the latest OPEC meeting to see between the lines. Iran and Saudi Arabia have drawn lines in the sand, and sides are being taken. It is my expectation that Saudi will now try to flood the world with oil, to drive down the Iranian revenue available to fight a war with Saudi Arabia.
This will be a rerun of the end of the Soviet Union, when Saudi Arabia helped to drive prices on oil down to $10 per barrel. The level of animosity between leaders and the latest nuclear proliferation stories being released about the status of Iran’s nuclear intentions, make me wonder if a joint Israel &amp; Saudi war on Iran isn’t in the making.
• The European Sovereign risk story continues to grow worse, as the Troika report clearly lays out why the primary funders of the last bail out should refuse to fund any additional tranche’s until Greece puts up hard physical assets.
The IMF has gone on record that it does not plan on releasing new funds until there is a major change in the Greece asset to capital loan mix. Their expectations are a release of new funds in July.
This would be almost to the day, when Greece is expected to run out of working capital. This puts the whole Greece vs European Union on a hard and fast deadline for reality to break out.
When the original bail out was designed, it was expected that Greece would raise some of the bail out funds itself. This hasn’t happened, and now leaves the whole package underfunded. This puts the pressure back on the side of Europe to find the capital or kick Greece out.
If Greece is kicked out, or for that matter leaves on its own, the most obvious implication is that the ECB will need to be recapitalized. The hit to the value of its PIIGs holdings are such that it would lose all of its member states invested capital.
This leaves the ECB as the next bank that will need a capital call on its investors, in this case its whole nations that will be bailing out the banking system itself. The ECB is in a game of blind man’s bluff, with no exit strategy and a ticking clock. Reality arrives in Europe this summer, it is just a matter of when, and how hot it gets.