US economy muddling through, growing modestly, particularly given the output gap, but growing nonetheless.

Lower crude prices should also help some.

I had guessed the Saudis would hold prices at the $120 Brent level, given their output of just over 10 million bpd showed strong demand
and their capacity to increase to their stated 12.5 million bpd capacity remains suspect. And so with the Seaway pipeline now open (last I heard)
to take crude from Cushing to Brent priced markets I’d guessed WTI would trade up to Brent.

But what has happened is the Saudi oil minister started making noises about lower prices and when ‘market prices’ started selling off the Saudis ‘followed’ by lowering their posted prices, sustaining the myth that they are ‘price takers’ when in reality they are price setters.

So to date, contrary to my prior guess, both wti and brent have sold off quite a bit, and cheaper imported crude is a plus for the US economy. Which is also a plus for the $US, as a lower import bill makes $US ‘harder to get’ for foreigners.

But the trade for quite a while has been strong dollar = weak US stocks due to export pricing/foreign earnings translations, and also because US stocks have weakened on signs of euro zone stress, which has been associated with a weaker euro. So when things seem to be looking up for the euro zone, the euro tends to go up vs the dollar, with US stocks doing better with any sign of ‘improvement’ in the euro zone.

It’s all a tangled case of cross currents, which makes forecasting anything particularly difficult.

Not to mention possible dislocations from the whale, which may or may not have run their course, etc.

And then there’s the news from Greece.

First, they made a full bond payment yesterday of nearly 500 million euro to bond holders who did not accept the PSI discounts. This is confounding for the obvious reasons, signals it sends, moral hazard, credibility, etc. etc. But it’s also a sign the politicians are doing what they think it takes to keep the euro going as the currency of the euro zone. Same goes for the decision to fund Greece as per prior agreements even when there is no Greek govt to talk to, and lots of signs any new govt may not honor the arrangements.

Even if that means tricking private investors out of 100 billion, rewarding those who defy them, whatever. Tactics may be continuously reaching new lows but all for the end of keeping the euro as the single currency.

It also means that while, for example, 10 year Spanish yields may go up or down, the intention is for Spain, one way or another, to fund itself, even if short term. Doesn’t matter.

And more EFSF type discussions. The plan may be to start using those types of funds as needed, keeping the ECB out of it for that much longer, regardless of where longer term bonds happen to trade.

As for the euro zone economy, yes, growth is probably negative, but if they hold off on further fiscal adjustments, the 6%+ deficit they currently are running for the region is probably, at this point, enough to muddle through around the 0 growth neighborhood. The upside isn’t much from there, as with limited private sector credit growth opportunities, and substantial net export growth unlikely, and strong ‘automatic stabilizers’ any growth could be limited by those automatic fiscal stabilizers. Not to mention that this type of optimistic scenario likely strengthens the euro and keeps a lid on net exports as well.

And sad that this ‘bullish scenario’ for the euro zone means their massive output gap doesn’t even begin to close any time soon.

For the US, this bullish scenario has similar limitations, but not quite as severe, so the output gap could start to narrow some and employment as a percentage of the population begin to improve. But only modestly.

The US fiscal cliff is for real, but still far enough away to not be a day to day factor. And it at least does show that fiscal policy does work, at least according to every known forecaster with any credibility, which might open the door to proactive fiscal? Note the increasing chatter about how deficits don’t seem to drive up interest rates? And the increasing chatter about how the US, Japan, UK, etc. aren’t like the euro zone members with regards to interest rates?

Same in the euro zone, where discussion is now common regarding how austerity doesn’t work to grow their economies, with the reason to maintain it now down to the need to restore solvency. This is beginning to mean that if they solved the solvency riddle some other way they might back off on the austerity. And now there is a political imperative to do just that, so things could move in that direction, meaning ECB support for member nation funding, directly or indirectly, which removes the ‘ponzi’ aspect.

30 Responses

  1. May I ask how you know what the Saudi posted oil price is? You you tell us where to find it, please.

    1. @John Wilkins,


      “and when ‘market prices’ started selling off the Saudis ‘followed’ by lowering their posted prices, sustaining the myth that they are ‘price takers’ when in reality they are price setters.”

      No chance of you revising your claim that the Saudis are price-setters, huh? You know, based on the empirical evidence and all.

    2. @John Wilkins, Google “Saudi price differentials” to find the current releases. They post prices for loading by port, by variety of crude oil and as a differential to index prices, like the argus index. Here is a bloomberg release on loading June 12 oil from a port in Egypt on the Mediterranean Sea.

  2. An urgent message from the Polish Finance Minister, Admiral General Colonel Doctor Jan Jack Vincent-Rostowski,rostowski-wzywam-grekow-do-opamietania

    whatever… blah blah blah the Greeks must come back to their senses blah blah blah…

    Janina Paradowska [a journalist] asked whether Europe was ready for exit of Greece from the Eurozone – I have to say that not yet and this is my biggest worry – Rostowski stated.
    – To safely lead Greece out of the Eurozone – if such a need arises – we must have a convincing and secure firewall. There is only one institution which can ensure that this is the case – the European Central Bank, but it would need to use means not specified in the treaties and statutes – predicted Rostowski.

    – It would have to do everything, including buying an unlimited quantity of Italian and Spanish bonds, to make sure that a domino effect is avoided, maybe outside of the treaties, but the treaties also don’t include the procedure for leaving Euro, so non-standard actions are needed – reckoned [Rostowski]. – If removing Greece from Euro is implemented in a chaotic and unsecured manner, this will ricochet to also hit us – [he] warned.

    “They” know perfectly well how the monetary system operates but usually don’t talk about that. It is like a little dirty secret of an old emperor that he is naked.

    1. @Adam (ak),

      my feelings exactly! i really don’t believe they are clueless. just think about it, why doesn’t every country just crash?

      they always seem to just “muddle along,” as warren puts it. i just don’t think that’s accidental…

    1. @Dave Begotka, Dave, I found it hilarious they let the Indian guy Graham Greene talk about the “merciless indian warfare” the king brought down on them, While declaring thier right to independence, they destroyed the independent indians, what a bunch of hypocrites eh?

  3. Warren,

    I hear the word is that the ECB has cut off at least 4 Greek banks from liquidity assistance. They claim these banks are insolvent and their rules prevent them from lending to insolvent institutions. This will force these banks to seek Emergency Liquidity Assistance from the Greek Central Bank, but there are also strict limits on low much can be lent via this channel.

    With a slow motion bank run going on in Greece and at least 4 banks running out of liquidity options to meet depositor demands, how much longer before the Greek Central Bank is forced to choose between printing up new Drachmas and watching its banking system implode?

      1. @Neil Wilson,

        The ones I can see are effectively a vote to kick Greece out of the Euro

        “The alternative is for Greek banks to be allowed to issue more government guaranteed paper but the ECB can, with a 2/3rd majority, block a steep and unsustainable increase in Bank of Greece’s ELA. This would effectively cut Bank of Greece off from TARGET2 and force it to eventually issue its own money.”

      2. @Neil Wilson,

        It’s all just crazy. They’ve created so much uncertainty because they sometimes follow their own rules and then other times ignore them. Are they really going to take all the assets off Greece’s banks books to fund the capital flight/bank run – because that’s what they created with all the uncertainty? It’s a game of chicken with not pretty ending.

        I was also just reading this pretty ditty…

        Maybe it’s not chicken, it’s Russian roulette. Who ends up with the unlucky trigger?

    1. @Adam1, as far as i understood the ecb cutting off GR banks has to do with the fact that the banks did not yet recapitalize. There has been transferred ear 27bn or so from efsf and another 25 bn ear is waiting to be sent too, but the greeks somehow cannot allocate it. Probably has to do with currently no govt. ECB expected this to be solved within days……
      Let’s see if it’s just a matter of formalities…

  4. Interesting thoughts Warren…i tend to agree, the need for some sort ECB support for member nation funding is becoming more obvious, this and a loosening on auterity could completely change things.

  5. The Chinese real estate numbers from the first four months of the year are disastrous. As always China is hard to get a clear handle on (maybe the old commies understand that they have a sovereign currency?), but it won’t help any of the above if growth there slows below 5% as looks inevitable.

    1. @KD,

      No there are not – this is exactly what the doctor has prescribed.

      I had an interesting discussion with my Chinese friends about this topic about 6 months ago. The market has crashed but then cheap housing will be promoted by the government – don’t worry, the workers will not sit idle. The fact that the so-called “middle class” is going to burn their fingers is a part of a rather sophisticated social management strategy – negative equity in banks is rather easy to be fixed if the state owns these banks.

      China is not and will not be a Westernised pseudo-democratic consumerist society ruled by the banking sector and corporate plutocracy. The “markets” do not dictate macroeconomic policy there.

      1. @Adam (ak), “China is not and will not be a Westernised pseudo-democratic consumerist society ruled by the banking sector and corporate plutocracy. The “markets” do not dictate macroeconomic policy there.”

        Are we living in the same universe? Roger Erickson could probably get behind this meme:

        ‘The apparent convergence towards a unique network shape in the temporal limit suggests the existence of dominant, universal mechanisms governing the evolution of these structures.'”

        The same goes for human populations, they are going to self-organize similarly – wether in shanghai, NY, or sao paulo.

        I once saw a special on this chinese couple that moved from the interior to the coast, cause the wife wanted the daughter to be near good schools and get a good education so she could have a good job. At the interior they were poor farmers but had clean air and good health, once moving to the coastal city, the mom caught cancer, the husband was having severe lung problems, and the daughters health began to decline and she was getting bullied a lot. The husband tried to convince the mother for the family to return to the poor farming village with clean air and give them all better health, she would hear none of that, they would all perish for the daughter to have the better education and more opportunity in the polluted city that was killing them all. Fascinating! Show me a chinese mother or any mother that doesn’t want better for her daughter and will do practically ANYTHING within thier power to get it? Its simple human nature.

      2. @Save America,

        I strongly disagree. There some features, attributes and values which are common in all modern human societies but being middle-class in the Western sense is not among them. Globalisation has nothing to do with that. There is a myth that American (or Western in general) values are “universal” and they need to be enforced on anyone else (like in Iraq or Afghanistan). This deadly meme came from Christianity and other similar religions I believe.

        Universalism is a DELUSION, just look at how well it worked after the initial military victory in Iraq of Afghanistan. The same happened elsewhere in a less dramatic fashion – e.g. in Ukraine.

        People in China may want to accumulate wealth but in general they don’t really care and they don’t need the Western corrupt model of absolute individual property rights set above the interest of communities, the so-called religious liberties (that is the right to brainwash people to believe in rubbish if you have enough money), multi-party democracy offering a fake choice or American litigation culture – to name just a few most obvious features. But the difference is much deeper. It is difficult to explain – it is like talking about colours to somebody who can only see the world black and white.

        Please have a look at:

        The Chinese, Indian or Middle Eastern cultures existed long before the British established their colonies in America. I dare to say (and this is not only my view) that they may outlive the new “third Rome”…

        It is not to say that I didn’t grow up in a liberal European culture, that I am not an individualist or that I personally prefer living in a 100% Asian country. I like a healthy mix of cultures which Australia can offer…

      3. @Save America,

        A chart (minus the middle eastern countries) of long term 2000 year growth of most of the big nations today.

        Another chart showing how much concrete china is using v peers. Seems china wants lotsa cities and concrete structures like detroit or london to me. Chinese people I know telling me they like lotsa cars and roads and air conditioning and tv, that all takes lotsa energy, something I hear china is raising big fuss about with philippines and others, hainen island, etc.

        What does aussie guy say about china fears and NEW us base in gum tree land:

        Bob Carr, the Australian Foreign minister, said he was grilled about the new base during three high-level meetings in Beijing, including in one with Yang Jiechi, his Chinese counterpart.

        “The most objective way of saying it is my three Chinese partners invited me to talk about enhanced Australian defence cooperation with the United States,” said Mr Carr. “I think their view can be expressed that the time for Cold War alliances have long since past,” he added.

        “Australia’s view of course is that an American presence in the Asia-Pacific has helped underpin stability there and created a climate in which the peaceful economic development, including that of China, has been able to occur.”

        “People in China may want to accumulate wealth but in general they don’t really care”

        Give all your wealth away and live homeless at the whims of your social safety net in your society. I find few people willing to really do this. Something about human nature that when you have power and wealth, you don’t want to go back to living like an animal. Also something about female human nature that if ms. watanabe has a nicer car, hairdo, kids going to better schools, etc etc, others want as least as much. Universal, the love of money is the root of all evil, round eye, slant eye, black eye or yellow or white, or at least that is what my travels have shown.

        Funny story, during the gulf oil spill when we sent in robots to clean up the mess, chinese grandson of 10 greatest chinese heroes sent me pictures of china men being thrown into chinese rivers filled with oil and other pollution to clean stuff up and die shortly thereafter, he said the CHINA PRICE of human life is cheap, that is why china will conquer ultimately, americans put way too much value on one mammal that stand up straight with 2 legs 😉

        I just watched special on nature about koala bears in queensland, all that housing and suburban development killing off thier habitat, all the forests being destroyed. Human beings are pretty much the same anywhere you go dude.

  6. Oil down, but wti and brent still not converging.
    Usd/jpy again low in the 79.

    Euro attractiveness not high with political uncertainty high, foreign reserve mgrs (CIC, Norway etc) reluctant, negative growth. Question rises though who are next sellers?
    Probably germany and ez do not mind a lower euro for export.
    At which point the FED will take action?

    What kind of ecb support for member nation funding you think of?
    All I can think of at the moment is PSI 2 for Greece. But that has little to do with ecb support.

  7. How do you see a Greek exit, good or bad for the euro?
    There will be some domino effect, but remaining team will be stronger or beginning of the end?


    Schumer and the rest of the government seem to be gearing up for a mccarthyism tax witch hunt Warren. How you and the rest are going to keep 3% tax rates in the USVI going forward will be interesting to watch. Do you USVI people have a powerful lobby in DC that will keep them pacified when they come to raise your taxes? How much will all you offshore hedge fund guys have to spend on congress so they will keep the consituents off your backs and keep your tax loopholes in play? Why aren’t you living in singapore like Severin and Jim Rogers and getting 0% tax rates? 3% a year you are having took from you that could be spent on more mosler car racing fun…

    So many posters here have decided to vote romney simply because he will do more to keep taxes as small as possible, how sad, certainly not in the spirit of the founding fathers? Maybe instead of leaving for america they should have said what english nobles should we support to keep our oppression the most minimal? No they said to hell with all of them and started anew.

Leave a Reply

Your email address will not be published. Required fields are marked *