The Economy Guy

Stocks went sideways, but bonds are very near the 4% rate right now – something to watch closely.
The Dollar moved sideways, and gold is now at a spot where it could go much higher – we’ll see.
Oil and gasoline are near near term highs, so also worth watching.

In the news today….

FED Meeting Minutes – were released today and interestingly, they contained comments about the FED watching for speculative bubbles being caused by the low FED Funds Rate.  There is no doubt in my mind that low interest rates are causing and have been causing speculative bubbles.  How about the commodities markets?  How about the stock market itself?  Ever wonder how stocks could be recovering so well after the crash of 2009?

Bond interest rates – have jumped into the 3.90% range for the 10 year Treasury note.  This is very close to my worry that a 4% 10 year Treasury note would be the first sign of increasing interest rates.  I believe we are seeing the first minute signs of rising interest rates.  As long as the FED Fund rate is zero, the prime rate will remain historically low.  Longer term rates are the ones that will rise – like mortgage rates and auto rates.  However, increasing 10 year treasury note rates have upward pressure on the FED Funds rate because the FED is worried about causing inflation and strains in the economy – and their tool for fixing it is increased FED Funds rates.

Australia raised interest rates – again 0.25%.  It has raised interest rates in 5 our of the last 6 Central Bank meetings held.  Their key interest rate (equivalent to our FED Funds Rate) is 4.25%.  Just a sign of the times, and inevitable that the US will be doing this sometime too.

Greece wants to change EU aid deal – Greek officials reportedly want to change the terms of an EU aid deal reached last month in order to bypass IMF involvement. Sources said Greece is concerned the IMF will impose tough conditions in exchange for aid that “might cause social and political unrest.” Instead, the Greek government will try to arrange a clearer European mechanism that would sidestep the IMF. Said one Greek official: “There is a strong chance that Greece might be forced to ask for financial support after all, despite official statements to the contrary, and it is essential that the terms and conditions be clear.” Separately, Greece is marketing itself as an emerging economy and is targeting U.S. investors in a $5B-10B bond sale to help cover its May borrowing requirement of about €10B ($13.4B). It will be Greece’s first issuance in the U.S. in nearly two years.  My comment “Beware of Greeks who bare gifts!!!”

Tonight’s Dinner Conversation…..

Our Southern Border – Mexico is having its own revolution between the government and the drug cartels.  The Cartels have won the battles in the north of Mexico along the US border, and the Mexican government doesn’t seem to care much about that.  The government of Mexico is located in the south of Mexico – far away from the violence in the north.  The question for tonight is WHY?

Well, I believe this is logical and to be expected.  Mexican drug cartels are selling about $30B to $40B worth of drugs in the US each year.  Now that’s chunk of money.  Where does that money go?  Obviously, it goes to the cartels.  What do they do with it?  They launder it – so they can reinvest it and make more profits, but legitimately this time.  

A normal company with $30B sales would have a 10% profit margin, and be able to reinvest (or launder?) its $3B each year into the economy of its home nation.  The drug cartels don’t have a 10% profit margin, they have something like an 80% profit margin.  So, their $30B sales translates into $24B profits.  And these profits are plowed back into the Mexican economy through money laundering.  However, because the laundered money is legit this time around, it actually counts toward the GDP in Mexico.  The government undoubtedly likes that – and so it is fairly easy to turn a blind eye, or to just plain ignore the violence on its northern states.  As an aside, a profit of $24B translates into a “normal” industry which produces 10% profits of $240B in size – and this is big enough to be seenn in the “too big to fail” category – if seen through the lens of Mexican eyeglasses.

Throughout this discussion I have ignored the blackmail and bribery that goes on in Mexico within the Mexican government – but that only greases the skids for the cartels to carry out their business – as business expense is the easy way to look at this.

What can the US do about this?  There are only two avenues available to the US – ignore the problem or stop the drugs from entering the US.  The options of legalizing drugs isn’t politically viable, so I won’t consider this one.  Many Americans think our government is actually ignoring the problem, and has been for many, many decades.    A changing political landscape could cause the US government to consider the alternative solution – stop the drugs.  The would take the form of greatly increased border presence, and possibly an invasion of Mexico by US troops.  Remember the good old days when cops could chase someone across the border if they were in “hot pursuit?”  Well, maybe we could get a deal with Mexico that allowed that to happen.  Also Preditor UAVs could do some great damage to cartels like they do to Al Qaeda and the Taliban in Afghanistan and Pakistan today.  However, we should not expect the Mexican government to be very accommodating in these ideas as their GDP would be adversely impacted.

I am bringing this up to the economyguy readers because violence exists on our border today.  Solders being killed in Afghanistan is no difference than American citizens being killed in America by cartel members.  It isn’t a giant mental step to see public opinion swing over to “solving this problem.”

Here are the last numbers for today:
Dow Jones 30 Industrial – 10.970 (down 3)
10 Year Treasury Bond – 3.97% (down 0.01%)
Euro – $1.3407
Gold – $1135 (up $2)
Oil – $86.74 (down $0.12)
Gasoline – $2.35  (down $0.02)