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(an email from my brother)

>   
>   Hi
>   Hope things are going well
>   

yes, thanks!

>   
>   Laugh:
>   I asked Rachel what percentage of her friends thought Russia invaded USA
>   state of Georgia. She said when she heard it the first time she thought he
>   US was invaded. Even now she says over half still think the US was
>   invaded-the other half don’t pay attention!!
>   
>   

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There’s nothing credit issues can do to GDP that fiscal policy can’t handle.

Congress has seemingly figured that out and probably the rest of the world as well as evidenced by the new proposed fiscal packages popping up around the world.

Yes, we can lose a bank or two, and lending standards tighten further, but GDP will continue to muddle through even if that means a series of fiscal measures.

And Congress was born to spend; so, they are all over this one.

The only thing that might slow them down is inflation, and so far they’ve seemed to support the Fed trying to step hard on the inflation pedal, rather than ‘tighten’ which presumably helps inflation.

And no one seems to notice the 8000lb bear in the room.

Our response to Russia reminds me of Monty Python’s coconut clapping Arthur trying to intimidate the French defenders of the fort with his credentials.

We threaten them with diplomatic isolation, trade sanctions, etc. as if they care.

They don’t care.

They do care about the new missiles going into Poland.

And we are committed to considering an attack on Poland or any other NATO member as an attack on US soil, as Rice reminded them and even maybe dared them to try something.

We can’t defend anyone against against Russia with our own troops without risking nuclear war.

And Russia will be a lot quicker to that trigger than we will.

And they still have maybe thousands of nuclear warheads aimed our way.

Their next step for Russia is probably to make an offer to the rest of the ex-Soviet Union members they can’t refuse.

Russia sells the Eurozone something like 30% of their oil and gas and can do it at any price they want, and demand any real terms of trade they want.

The risk is we try to draw a line in the sand in some nowhere place over there, and it escalates to where we back down or get involved in lobbing nukes.

I suppose it’s just another case of this administration not seeing the forest for the trees.

We’ve let Russia be reorganized by the ex-KGB leadership that’s a lot smarter than ours, and now we’re paying the price.

Both the inflation and cold war of the 1970s is back, except this time our opposition is far stronger.

There is no even semi-quick supply response to dislodge the Saudis and/or Russians from setting any terms of trade they want.

The Russian consolidation is on the way up supported by a bath of capitalist type riches rather than crumbling under its own weight of a failed socialist economy.

Apart from that, I’m optimistic.

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My current assessment is that the crude sell-off has caused the USD’s strength.

Lower crude prices make the USD ‘harder to get’ as oil producers get fewer USD for the same volume of crude (and product) exports to the US.

Likewise, this also brings down the US trade gap which is about half directly related to oil prices, so nonresidents have fewer USD to meet their USD financial asset savings desires.

Crude has been brought down by technical selling, which also brought with it technical buying of USD as trend following trading positions were unwound.

The crude market has gone into contango as would be expected with a futures sell off and tight inventories.

Tighter US credit conditions made the USD ‘harder to get’ while increased deficit spending makes the USD ‘easier to get’ resulting in GDP muddling through at modest rates of growth.

The Russian invasion probably helped the USD today.

Eurozone credit quality erosion with the onset of intensified economic weakness may be triggering an exit from the euro. The lowest risk euro financial assets are the national governments which carry similar risk to US States, and are vulnerable in a slowdown that forces increasing national budget deficits that are already in what looks like ‘ponzi’ for credit sensitive agents.

Eurozone bank deposit insurance is not credible and therefore the payment system itself vulnerable to an economic slowdown.

With the Russian army on the move, public and private portfolios may not want to hold the debt of the eurozone national governments that they accumulated when diversifying reserves from the USD.

I expect the Saudis to resume hiking crude prices once the selling wave has passed. I don’t think there has been an increase in net supply sufficient to dislodge them from acting as swing producer. And I also expect them to continue to spend their elevated revenues on real goods and services to keep the west muddling through at positive but sub-trend growth.

And the Russian invasion will linger on and help support the USD as a safe haven in the near-term

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Comments about this post from email:

MIKE:

Again, its very likely you have permanently damaged demand at prices that are still over 100-

It’s possible the growth of crude consumption has slowed, but I still think it’s doubtful if consumption had declined enough to dislodge Saudi price control. July numbers still not out yet.

in addition asset alligators around the world are actually or synthetically short the dollar after 8 years of dollar selling…

Agreed. The question is the balance of the technicals, and if the CBs no longer buying USD has been absorbed by others.

For now, yes, short covering has mopped up the extra USD sloshing around from our trade gap, but it’s still maybe $50 billion per month that has to get placed. Not impossible for non-government entities to take it but it’s a tall order.

The Russian invasion helps a lot as well. That could be a much more important force than markets realize. Looks like a move to further control world energy supplies. A middle-eastern nation could be on the bear’s menu. I doubt the US could do anything about a Russian takeover of another neighbor. Certainly not go to war with Russia. and they know it.

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Medvedev May Seek to Assure Merkel on Russian Energy Supplies

by Lyubov Pronina and Brian Parkin



(Bloomberg) Russian President Dmitry Medvedev may seek to assure Europe of Russia’s reliability as an energy supplier and allay German Chancellor Angela Merkel’s human- rights concerns in a one-day visit to Berlin today.

Medvedev will meet Merkel and President Horst Kohler and address about 1,000 business executives and lawmakers in his first trip to Western Europe as Russia’s leader.

“Energy will be at the forefront of talks and they won’t be easy,” Yevgeny Volk, a Moscow-based analyst for the Heritage Foundation, a U.S. research group, said in a telephone interview. “Russia wants to increase its energy influence in Europe, while Western countries would like to get more guarantees from Russia that deliveries will not fail.”

Note there is no discussion about price. The euro negotiators want to ensure deliveries with an agreement that is necessarily unenforceable in any case. Russia does have 25,000 nuclear weapons, for example.

Russia, which supplies 25 percent of Europe’s energy, has clashed with Europe over concerns that it abuses its role as Europe’s main energy source to further its political agenda. It opposes further eastward expansion of the North Atlantic Treaty Organization, U.S. plans for a missile-defense shield in Europe and Kosovo’s secession from Serbia.

Looks to me that Russia is in full control, and is using its position to enhance its real terms of trade, something never even mentioned by the Eurozone.

Germany and the European Union have pressed for guarantees that Russia will follow a uniform policy for supplying oil and gas across the bloc, weakening its capacity to wield energy policy as an arm of diplomacy. Russia briefly cut off gas to Ukraine in 2006 in a pricing dispute.

As if quantity ‘guarantees’ would ‘weaken’ anything. Apart from being unenforceable, it all misses the point of price and relative value.

Good luck to the Eurozone!!!

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As suspected, the political response to high food prices is to assist with government funding.

Yes, it’s inflationary, but politically there is little choice.

In the case of a relatively rich exporter of energy like Russia, they are helping their citizens outbid poorer nations for food:

Russia’s Putin promises to hike wages, pensions

by Gleb Bryanski

(Reuters) Russian Prime Minister Vladimir Putin has said he will hike wages, pensions and social benefits to compensate people for rising prices and smooth the effects of anti-inflation policy.

“Through raising wages, pensions, social benefits and subsidies we will try to minimise negative consequences of our anti-inflation policy for the people,” Putin said in an interview with the French Le Monde daily attended by Reuters and released on Saturday.

Missing the annual inflation target by a wide margin has become the biggest policy failure of Putin’s last year as president in 2007 and is likely to turn into a major headache for his cabinet this year.

In his nomination speech in parliament this month, Putin said he was prepared to tolerate double-digit inflation for a few years. His cabinet has yet to present a comprehensive anti-inflation policy.

Putin said his cabinet was aware of inflation dangers and kept a close call on the situation. Inflation is running at 15 percent, making the cabinet’s goal of 10.5 percent for this year unlikely to be attained.

Seems Putin isn’t as worried about inflations as various critics would like him to be.

Russia’s inflation is a result of global food price rises but also a consequence of capital inflows from abroad as well as lavish budget spending ahead of parliamentary and presidential elections last year.

A more prudent budget policy would have helped Russia curb price growth this year but Putin signaled he was not yet prepared to risk his high popularity ratings. “We understand that this (rising wages) means an inflow of money into the economy but we are simply obliged to do it and we will do it,” Putin said.

Yes, politicians do respond to popularity ratings, and Putin is one of the best.

As I’ve written before, don’t underestimate Putin:

Wages grew by 28 percent year-on-year in April and some officials have warned that Russia risks falling into an inflationary spiral as Latin American countries did in the 1990s and have said that wage controls could be necessary.

Food makes up over 40 percent of the basket of goods and services used to calculate Russia’s consumer price index (CPI), a typical feature for poorer nations where the population spends a large proportion of income to feed themselves.

“We understand that food price growth hits those of our citizens who have low incomes. The share of their family budgets spent on food is big,” said Putin.

Putin, who is still coming to grips with his new role as premier, mentioned a recent rise of the refinancing rate — a symbolic ceiling of official interest rates hardly used in practice — among anti-inflation measures.

The central bank has little leverage over the economy, swelled with petrodollars, with its interest rate policy, but the market takes guidance from its deposit and repo rates rather than the refinancing rate.

Echoing his foreign policy statements, Putin blamed the West for Russia’s inflation problem too: “Inflation has been exported to Russia from developed economies, including Europe,” he said.

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