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Pondering Some of the Global Markets

When I look at the capital markets in the United States, and for that matter the world, a new view is becoming clearer. What was weak is stronger and what has been the dominant story of growth is no longer driving demand as it was.

The U.S. economy is growing at a slow but steady rate. The bifurcation of the U.S. work force has been absorbed, with former workers now regularly falling off of the government unemployment indices. The new reality is based around growth sectors in the economy again.

North Dakota has almost no unemployment. If you want to work, you just have to be willing to live in a trailer until you can afford to have a house built. The rate of growth in jobs in the region is staggering.

This has all been driven by the unlocking of abundant energy sources in the near term.  The State of North Dakota has seen its oil production increase from 342k boepd, to 546k boepd from Jan 2011 to jan 2012.

The hydraulic fracking is changing the fundamental picture for energy in the US. The U.S. is the world’s largest producer of natural gas again and has been growing its oil production year-over-year. Refined energy products leapfrogged every other export to lead the U.S. in total dollar value per product exported. Domestic gasoline consumption is significantly down from before the financial crisis.

With natural gas at decade lows, entire transportation fleets are quietly being converted to run on compressed natural gas and propane. The U.S. is adapting, and with it, a new economy is starting to grow.

The era of cheap Chinese labor is ending, with double-digit salary raises built into yearly expectations of Chinese corporations. In the States, cheap energy supplies are driving new capital investments.

When it comes to U.S. manufacturing, says Kristina Hooper, head of portfolio strategies at Allianz Global Investors, “It’s time to stop looking in the rearview mirror and start looking ahead.”

The warm winter has left the U.S. with extra supplies of natural gas in storage, which will impact the price until winter, as storage capacity won’t be able to absorb the new supplies coming online.

The Australian Enigma

Australia appears to be the poster child for future economic pain, as the most levered nation to China’s previously insatiable need for raw inputs. Chinese demand for endless Australian commodities will wane and, when it does, the turn in their domestic capital markets will be interesting to watch.

The impact of slower compounded growth targets will change how Australia and China approach the future. Australia is going to have a China-sized hangover from relying too heavily on commodity exports to them.

This was obvious when Australia invited the U.S. Government to station U.S. Marines near Darwin. The base gives the U.S. a prime location in the region from which to stage additional assets on demand. The Australian Defense Minister, made this clear when he greeted U.S. Marines this week.

“The world needs to essentially come to grips with the rise of China, the rise of India. The move is strategic and political and economic influence to our part of the world.”

The Brazil Conundrum

Brazil, another of China’s largest trading partners, has seen its economic growth rates drop from emerging to developed market rates. Particularly, China has relied on imports of Brazilian iron ore.

Brazil’s relationship to China is the same as Australia’s – both nations have found themselves in a raw-to-refined product market relationship.  China has developed a colonial relationship with Brazil just as it has Australia. One particular example is Vale, the world’s largest iron ore producer.

Vale has found itself paying China to build the world’s largest ships. These vessels are so large, China won’t allow them to ship iron ore to China. This has depressed the value of the ships, before they have been put into service.

Vale paid $133.3 million each for another 12 ore carriers under construction in China that are now worth $63.7 million apiece, according to VesselsValue.com data.

A second major issue for Brazil is their previously seeming offshore oil and gas miracle. It has become an interesting battle ground, as Brazilian Federal Prosecutors appear to be focused on stopping the near-term development of the energy sector.

Charges brought against Chevron and Transocean are part of an intentional strategy to stop current development plans. While Brazil is attempting to start a world-class energy development sector, as is Houston, arresting contractors is not a smart strategy.

While Brazil has stated it would pour $225 billion into its oil and gas sector by 2015, it seems the nation has announced a growth strategy that is larger than its capacity to fund. Consider that preparations for  hosting the next World Cup and Olympics are behind schedule and Brazil looks even worse.

The European Riddle

The great collapse in Europe was averted when the European Central Bank rolled out its own quantitative easing labeled Long Term Recapitalization Operation (LTRO). While LTRO was not designed to explicitly end the crisis, it has provided the European Union banking sector with enough balance sheet liquidity to calm the crisis waters for now.

The ugly truth is that Greece has played its role perfectly. The markets no longer have any expectation of a real fix. Europe now talks about how the International Monetary Fund needs to increase its bailout fund, so it can help match the EU increase in their bailout funds.

When you have a global drive to build up new bailout funds from the same financially stressed sources of capital, you start seeing  socially driven moment of cognitive dissonance.

Issuing debt to refund debt that can’t be marked to market will not work as a viable long-term solution.

Historically, when Europe becomes this fractured over its economic agenda, a military event is not so far away. The players may change names and the borders may move, but the results rarely deviate.

A Middle East military conflict now, while China growth is slowing down, could cause real inflationary events in Europe. What is the real price of oil in Europe, if the Euro drops while the U.S. dollar returns to a safer haven status?

What are your thoughts about the global macro market of today?

Sources:

WSJ: The Great Reversal: Playing the U.S. Manufacturing Boom

NPR: U.S. Marines in Australia, what’s the message?

Bloomberg: Vale Ore Ships plunge 36 percent in value

LAHT: Brazil’s Petrobras Approves $225 Billion Investment Plan Through 2015