Apr 25, 2012
Mitt Romney all but ended the Republican Party primary yesterday by sweeping all east and northeast venues. Today he finds himself to be the lucky man to jump into the ring against heavyweight champion Barak Obama in a battle for the next four years. Governments control markets (read chapter 2 of my book for more info)- which makes elections huge "market indicators" and extremely helpful in determining the future course of Markets and Investment. Congratulations to Romney.
This comes at a time where the International Monetary Fund (IMF) demanded another $400 billion to "secure global financial stability and put the world economic recovery on a sounder footing," said IMF chief Christine Lagarde1.
Absent from the list of donors was the United States of America. That’s point number one: the U.S. is reducing its commitment to the IMF.
This occurred while U.S. Treasure Secretary Tim Geithner encouraged the European Central Bank (ECB) to take more aggressive action to settle the crisis that continues to plague the region. Geithner told the IMF, "The success of the next phase of crisis response will hinge on Europe’s willingness and ability, together with the European Central Bank, to apply its tools and processes creatively, flexibly and aggressively to support countries as they implement reforms and stay ahead of markets."2
As part of the IMF’s new capital raise, it has agreed to structural changes to its future governing structure, where emerging markets and strong donors will gain more say in where and how contributed funds will be spread throughout the world. These votes of power will come at the expense of Euro Zone countries, which are expected to lose two of their eight seats, or 25% of their governing weight.
That’s point number two: Euro-Zone countries are losing power in the IMF.
This comes at the same time that the French people are taking to the polls to determine if current President Nicolas Sarkozy deserves another term in office. If not, Sarkozy will be the first French President not to win a second term in more than three decades.-- And he’s in some real trouble over there. So much so, Sarkozy breached an important European pledge not to insert ECB politics into country campaigns, by promising that if elected he would ‘lobby for a more activist ECB’3.
Okay, so what does this mean?
First, the world currency crisis is alive and well. Second, and since debt is only borrowed currency, if there’s a currency crisis somewhere then there’s also a debt crisis somewhere. And third, we all know where the problem is: in Europe and the United States – and both are distancing themselves from the IMF.
Right now both currencies (the U.S. dollar and the Euro) greatly impact world markets, and both are weakening world currencies by massively over-spending and over-borrowing. Lest we not forget that America is at least 100% leveraged right now, sporting a $15 trillion debt-load on top of a $15 trillion economy – this to go along with massive European debt loads.
By moving away from the IMF, large scale IMF contributors – China, Russia, and India, move into the driver’s seat to manage that currency fund. Perhaps this may someday lead to the creation of a third world currency, an IMF dollar, and perhaps travel on a completely different course than the American and European bond. Who knows for sure.
But what we do know for certain is that a currency crisis is going on right now, a government spending crisis is going on right now, and a debt crisis is spreading throughout the world today – during an important election year. This makes for a hostile stock market ahead.
These lessons can easily be learned in the over-spent and over-borrowed Spanish Market, which at last look tallied 154% in debt – or in other words, more than twice the prudent amount. So what do governments do when caught in the quagmire of lost hope and diseconomies of scale?
They finally cut budgets and with dramatic fashion. After many false promises and failed attempts at austerity, the Spanish government recently slashed healthcare and education spending amid a contracting economy (-.4% in the 1st quarter 2012). Their condition will only get worse when inflation, caused by persistently irresponsible monetary and fiscal policies, will raise their cost of debt – a.k.a. interest rates. This will only put more strain on fragile economies like theirs and world currencies.(Gold should continue a long-term upward trend because of it.)
Like so many in Europe, and soon America, Spain must come to terms that it can’t afford itself and change its operating model. Spending cuts alone can’t fix it – and it’s mathematically impossible to do so with worldwide currency games and debt-load charades. Growth, which begins with investment capital, is greatly required to begin fixing the problem.
And that begins with more freedom – not more ECB debt. That’s point number 3: Markets remain under hostile condition, surrounded by weak currencies and great uncertainty about their future course.
That said, expect more volatility from here and throughout the election cycle that will define Market governance, and therefore Market condition, for the next four years.
The road to financial independence.™
1.(see: IMF Tops $400 Billion in Pledged Funds, Wall Street Journal online, April 20, 2012)
2.(see: Geithner to Europe: Take Strong Action on Debt Crisis, Wall Street Journal online, April 21, 2012)
3.(see: French Take to the Polls, Wall Street Journal online, April 22, 2012)
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