A World Of Ones And Twos

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–Maybe the modern world is just too big, urban, and indebted for governments to effectively manage it—especially given the obligations they’ve taken on. That’s what we’re pondering in rainy Melbourne this morning. And our thoughts continue to be with all the folks up in Queensland dealing with the floodwaters.

–Many miles away, in Lisbon, financial markets continue to wreak their own kind of havoc on the best laid plans of European bureaucrats and central planners. Both the Wall Street Journal and the Financial Times are reporting that the European Central Bank (ECB) stepped up its purchases of Portuguese government debt yesterday.

–The yield on 10-year Portuguese government debt is 7.18%. That’s not epic. But it’s 3% higher than where they were year ago. And more importantly, yields continue to rise compared to German 10-year government bonds.

–Portugal’s public debt isn’t as bad as some other economies in Europe. And its banks aren’t as bad off as Irish banks. But when your economy doesn’t grow much, and you have budget deficits and debt servicing costs, the money has to come from somewhere. It doesn’t help that rising rates—driven by investors who’ve had enough—make debt service and future borrowing that much expensive.

–Who’s going to pay for all of this? Will taxes be raised? Will bondholders be forced to take a haircut? Or will China save the day?

–Back in November, on a State visit to Portugal, Chinese President Hu Jintao said,” We are ready to take concrete measures to help Portugal overcome the global financial crisis.” That meant, presumably, buying Portuguese government bonds. The Chinese have given similar assurances to Spain and Greece since then.

–Portugal has to borrow about €1.25 billion tomorrow and another €20 billion this year. That’s chump change to China, with over $2.6 trillion in foreign exchange reserves. But is it a lousy investment idea? Why would any sane investor loan money to bankrupt and demographically challenged Western governments for more ten or thirty years? Hmm.

–Is it boring to read about what’s going on in Europe when you’re sitting here in Australia trying to figure out what shares to buy on the stock market this year? Probably. So why do we bother writing about things that are happening thousands of kilometres away? Good question!

–As a major importer of capital from Europe and America, what happens in those places matters a lot to Australian banks. And what happens to Australian banks determines what the price of money is for small businesses and households in the Australian economy.  Portugal may be a long way away. But another debt crisis originating in Europe will hit you in your wallet just the same.

–Markets aren’t doing much in the presence of this uncertainty and the absence of any other compelling drivers. Everything is drifting…while everyone tries to work out what the world will look like when it goes off the dollar standard…and what changes to make before that world gets here.

–One investment category to think about for a dollar crisis world: energy. As a popular investment idea, oil has never fully recovered from its 2008 fall from grace. But as a scarce commodity vital for everyone in the global economy, it’s never gone away either. And like all commodities, it’s traded in dollars, meaning it’s directly impacted by systemic dollar devaluation in America.

–Australia is energy rich (coal and uranium) but crude oil poor. That makes your investment choices pretty slim, when it comes to crude. But we’ve picked over the patch before and have a few ideas. Stay tuned.

–In the meantime, did you see that Alaska oil pipeline has been shut down? It’s kind of a big deal, when it comes to the oil price. The Alaska pipeline—operated by the good people at British Petroleum—accounts for 15% of America’s daily oil output. That’s a significant disruption to the oil supply of the world’s biggest user. No wonder crude prices were up 1.5%.

–And finally, today is a binary day where all the numbers signifying the day, month, and year are either zero or one. It doesn’t matter if you sort them by day/month/year, or month/day/year either. That probably has no significance at all. But it’s kind of unusual. You can learn more here.

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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Comments

  1. ” No wonder crude prices were up 1.5%.

    Brent broke out from its boundary of $89 a few weeks ago and has traded within $2-3 of that number since. When news of the pipeline broke it moved it and is trading between 97 and 99. I don’t believe that alaskan oil is priced against WTI (feel free to prove me wrong.). Besides Texas, there are only a few other places in the world that price against light sweet.

    Chris in IT
    January 16, 2011
    Reply

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