Economic Outlook

Divisions Remain as Eurozone Finance Ministers Meet Over Greece Deal

Screen Shot 2015-06-24 at 4.33.55 AMGreece at June 24, 2015 6:53 a.m. ET

Uncertainty sparked an outflow of deposits from its banks that reached about €1 billion per day late last week before slowing Monday.

 Key points of disagreement are corporate taxation, the overhaul of Greece’s pension system and value-added taxes. For instance, Greece had planned to increase corporate taxes to 29%, but in the document creditors limited the increase to 28%.

That may cause new budget shortfalls that need to be plugged with other measures.

….Updated June 24, 2015 6:53 a.m. ET, read more of the Wall Street Journal article HERE

The Eurozone Crisis by the Numbers

The financial crisis in Greece and other eurozone countries has been dragging on for years. We take a closer look at how hard some countries were struck, and how they’re trying to get back into shape.

eurozonedebt

….more charts & analysis HERE

Inside Tesla’s $5 Billion Gigafactory

The potential impact:

– cutting the car price in half 

– Consuming more battery grade graphite commodity than currently produced

– click chart for larger view and much, much more

inside-teslas-5-billion-dollar-gigafactory1

With $5 billion in capital expenditures and 6,500 high tech jobs, several states continue to court Tesla Motors to build their next megaproject within their borders. The Tesla Gigfactory, slated to open doors in 2017, will set a new precedent for economies of scale in battery production.

Tesla’s new factory will produce more lithium-ion batteries under one roof than all of 2013’s global production combined. As a result, the electric car company estimates this will cut costs per kWh by 30%. 

Tesla’s product strategy relies on it. The Gen III is supposed to retail for only $35,000, which is only half the cost of the more upscale Model S.

UBS notes that raw materials make up 70% of the cost of each lithium-ion battery, so sourcing and procuring these minerals will be a very important component of their overall strategy. In the infographic, we break down the potential impact this will have on these commodities. Special thanks to Simon Moores and The Gold Report, who had a great interview recently on the subject.

Graphite:

In 2013, flake graphite production was 375,000 tonnes. The Gigafactory alone would add another 126,000 tonnes (34% increase) over 2013 production. Even more significant, the increase on battery-grade graphite demand would be 154%.

Cobalt:

55% of cobalt comes from the Democratic Republic of the Congo.  Tesla says they do not source from the Congo, so this makes getting cobalt a little more difficult. 42% of cobalt demand is from batteries, making it the blue metal’s #1 use. Current Tesla batteries use about 9% cobalt by weight (NCA formulation).

Lithium:

There has been a steady supply of lithium in Chile since 1996, so this will likely be the easiest commodity to source.

Chaos In Greece

Screen Shot 2015-06-18 at 6.08.06 AMGeopolitics Will Trump Economics

Based on the continued failure of the negotiating parties to make any substantive progress in the talks over Greek debt payments, the financial world is tied up in knots over a possible Greek exit from the European Union. The uncertainty has manifested in both high and low finance, with a sharp sell-off in bonds, particularly EU and Greek government debt, and heightened retail withdrawals from Greek banks as depositors become wary of capital controls that would be imposed in the case of an exit. All concerned parties should likely breathe easier. Despite Greece’s almost complete lack of financial integrity, neither NATO nor the EU can afford the political cost of a Greek exit from the EU.

The unacceptable specter lurking behind the EU negotiators is that, if Greece is shown the door by the EU, Russia or even China might step in to provide financing to Greece in return for a strategic foothold in Western Europe and gateway to the Eastern Mediterranean. This is a

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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        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In short, international political ramifications will trump any economic or financial issues.

 

As reported several months ago in this column, modern Greece has been used continuously by Europe as a bulwark against unwanted incursions. In the 1820s, Greek independence from Ottoman Turkey was financed and supported by Western powers as a way to contain and rollback Turkish influence in the Mediterranean. In the 20th Century, Greece became a key battleground of the Cold War, with the West expending considerable blood and treasure to ultimately keep socialist Greece from falling into the Soviet orbit.

Although the Greeks received countless sums from abroad, Greek governments have been notoriously feckless, and have been instrumental in ensuring their nation’s economic demise. By opting for generous socialist entitlements and blatantly anti-capitalist regulations, Greek governments decided to borrow irresponsibly to meet its obligations.

With the formation of the European Union (EU), strenuous efforts were made to include Greece to prevent the rise of Communism. This encouraged the surreptitious acceptance of untruthful economic statistics to facilitate Greek membership, both of the EU and the Eurozone.

Eurozone membership gave Greece access to vast amounts of cheap debt, offered largely under the false assumption that an early conclusion of a single political union would offer an implied EU guarantee for Greek debt. It was similar to investors assuming, erroneously, that the debt of Freddy Mac and Fannie Mae carried the ‘implied’ guarantee of the U.S. Government.

But, as was the case with Fannie and Freddy (whose collapse many believed would have plunged the U.S. into deep Depression), the political cost of failure was too great to accept. Therefore, the financial costs of technical failure had to be borne by citizens. In addition, over the past few years, much of the Greek debt has been transferred from EU banks to EU governments that have the much abused ability to pass the bad debt onto future generations of their citizens.

Likely aware of this, the Greek government has faced off repeatedly against some of the world’s most powerful politicians and central bankers, winning time and yielding little.

Even more importantly, when Greece’s socialist Prime Minister Alexis Tsipras faces Germany’s Chancellor Angela Merkel, he knows that she is acutely aware that any soft deals offered to Greece may be seen as a precedent encouraging Portugal, Ireland, Italy and Spain to push (even acting as a united block) for similarly favored treatment. Furthermore, any perceived increase in the prospect of a potential break-up of the EU might encourage voters in Great Britain, in the 2017 referendum, to vote to leave a sinking ship. A British exit could put an end to the European dream and place at risk trillions of dollars’ worth of European debt and even the Euro-currency itself.

In addition to these serious concerns, Merkel has one overriding fear. Should talks break down, Greece will likely go searching for other sources of funding. It may find many willing givers, all with strings attached. Russia may offer funding to Greece in return for a naval base. If not Russia, even China might attempt to offer a vast, soft funding rescue package in order to buy entry to the European and NATO landmass. It is no secret that China has a strong interest in taking over operations of the Port of Piraeus, one of the largest ports in the Mediterranean.

While Merkel and her supporting fellow EU leaders may talk tough to Greece’s leaders, they know it is politically unacceptable to allow a financial default to open the way to EU dissolution or the slightest possibility of a Russian or Chinese strategic incursion.

As a result, whatever the eventual financial costs to EU taxpayers of a Greek default, the political costs of a Greek exit are likely to be seen as unacceptable. Therefore, after much posturing, delays and threats, I believe that the chances of an actual Greek exit are far lower than are commonly believed. Most likely the EU will allow a covert Greek default, disguised for the time being by extended repayment schedules, bogus refinancing formulae and possible delayed haircuts as bonds mature. They may insist that such moves are not a technical default. Despite that absurdity, our obedient press corps may even concur with such a characterization, and investors may be so thrilled that a relief rally occurs in stocks and bonds. Extend and pretend will once again be the only acceptable manner to confront our intractable problems.

###

Jun 17, 2015
John Browne
Senior Market Strategist
Euro Pacific Capital, Inc.
1 800-727-7922
email: jbrowne@europac.net
website: www.europac.net

John Browne is the Senior Market Strategist for Euro Pacific Capital, Inc. Mr. Browne is a distinguished former member of Britain’s Parliament who served on the Treasury Select Committee, as Chairman of the Conservative Small Business Committee, and as a close associate of then-Prime Minister Margaret Thatcher. Among his many notable assignments, John served as a principal advisor to Mrs. Thatcher’s government on issues related to the Soviet Union, and was the first to convince Thatcher of the growing stature of then Agriculture Minister Mikhail Gorbachev. As a partial result of Browne’s advocacy, Thatcher famously pronounced that Gorbachev was a man the West “could do business with.” A graduate of the Royal Military Academy Sandhurst, Britain’s version of West Point and retired British army major, John served as a pilot, parachutist, and communications specialist in the elite Grenadiers of the Royal Guard.
 
In addition to careers in British politics and the military, John has a significant background, spanning some 37 years, in finance and business. After graduating from the Harvard Business School, John joined the New York firm of Morgan Stanley & Co as an investment banker. He has also worked with such firms as Barclays Bank and Citigroup. During his career he has served on the boards of numerous banks and international corporations, with a special interest in venture capital. He is a frequent guest on CNBC’s Kudlow & Co. and the former editor of NewsMax Media’s Financial Intelligence Report and Moneynews.com. He holds FINRA series 7 & 63 licenses.

“Old people, they should be killed at birth.”

                                                         Boris Vian

Still nothing to report from the financial markets. The Dow and S&P both ticked up about a half a percentage point yesterday. And gold has been hovering around $1,190 for over a week.

Is everyone at the beach already? Are investors waiting for something to happen? We don’t know…

Meanwhile…

“France is a dead country.”

A young man gave it to us straight.

“If you are young and you have any ambition, you leave France. You go to London, or the U.S.A., or China. There’s no point staying in France. I am French. It breaks my heart to leave. But I can’t stay. I don’t like being dead that much.”

Our friends in Paris tell us the same thing. Their children have left. If they want to visit their grandchildren they have to travel overseas.

Meanwhile, prices of top properties in London, Vancouver, and New York are higher than ever. But prices in Paris are soft.

“We’d like to sell our house [in Paris],” says a friend. “It’s perfect for a young family. But the young family we would sell it to has moved to London.”

Maybe it’s the weather. Maybe it’s the economy. But the capital of the Fifth Republic seems depressed. And old.

“The Biggest Scandal in France”

Yesterday, we took the train out to Normandy. We bought first-class tickets, hoping to have some extra space to work. But the first-class

compartment was the same as second class. Only shabbier. The seats were grimy. The upholstery was worn and greasy.

“What is the difference between first class and second class?” we asked the ticket taker when he went down the aisle.

“Well, there really isn’t any, except that first class is more expensive, so there are fewer people.”

We looked into the second-class compartment. It had no more people than the first.

But we are not writing to pass along travelers’ tales. We keep our eyes open in the hopes of learning something. And what we are learning here in France is that it has the same problems as the U.S. – maybe worse.

Young people do not leave the country only because it is sluggish and stale; they leave because it is rigged against them.

This is “The biggest scandal in France,” as the magazine Le Pointcalls it. It calls its young “The Generation of Pigeons.”

In France, as in America, older people have used government to give themselves money and privileges… and turned the young into chumps.

For example, the average income tax rate on a 30-year-old is nearly three times as high as the rate on a 65-year-old.

The unemployment rate for young people aged 15 to 24 is two to three times higher than the rate for older people.

For those who dropped out of high school, barely one out of two has a job.

And French employment law is infamously favorable to people who are already in the system – but vicious to those who aren’t.

We spoke to a friend of ours who works for the EDF Group – the big power company. “How many weeks of vacation do you get?” we asked.

“Ten…” came the answer. And recently, his fellow workers went on strike when the company tried to reduce it. Nearly two and a half months of paid vacation! Good grief… he could take the whole summer off.

Again, this may be great for existing employees, but it makes the company very reluctant to bring on new ones.

Our Generation Has Failed Its Own Children

The poor jeune Frenchman also has the burden of debt. In this sense, at least, he has an advantage over the American. French schools – even university studies – are paid by the taxpayers. So graduates do not leave school with student debt as they do in America. Still, they have their share of government debt on their shoulders.

A young person in Germany has about $30,000 worth of government debt to look forward to. In France, the figure is closer to $40,000.

By way of comparison, the U.S. total is about $57,000 (according to our back-of-the-envelope calculation). And if we include the financial obligations not included in the official “national debt” figures, the sum rises to about $700,000.

Most, but not all, of this debt comes from reaching into the future in order to give things to old people today.

But wait. Le Point brings up another way in which the old – our generation – has failed its own children.

It cites the work of American sociologist Robert Putnam and his book Our Kids: The American Dream in Crisis. Putnam points out that almost all old people grew up in families with two parents present.

They weren’t necessarily good parents. They weren’t often rich parents. They smoked. They drank. They referred to homosexuals in terms that would be regarded as hate crimes today. But they gave their children something that many of today’s young people will never have.

In 1960, only 6% of American children lived in a household with only one parent. Since then, says Putnam, American society has split apart. Only a third of today’s children live in traditional families, where they are encouraged to do well in school, get jobs, and form “normal” families of their own.

The other two-thirds live less orderly, less purposeful lives. And about half of today’s children spend at least part of their childhood in single-parent households, with higher rates of school failure and subsequent unemployment.

What to make of it?

Regards,

Signature

Bill
June 03, 2015
Paris, France

Greece Could Be the Next Lehman Moment by the End of Next Week Hints IMF Boss

The long-running Greek debt tragedy is almost over. The International Monetary Fund may be the first to blink at the end of next week, triggering another global financial crisis. Not surprisingly for financial markets the worry at the moment is Greece, Greece, Greece. 

International Monetary Fund CEO Christine Lagarde told Germany’s Frankfurter Allgemeine Zeitung she could not ‘preclude’ a Greek exit, after four months of tortuous bail-out talks that have failed to get both sides closer to a deal to release aid to the country.

Optimism fades

‘No one wishes the Europeans a Grexit,’ said Ms Lagarde, hinting that Greece is closer to leaving the single currency than ever before. Extinguishing recent hopes in Athens that the two sides were ready to draft an agreement by the end of the week, Ms Lagarde said recent optimism over the country’s future had ’sobered’.

‘It’s very unlikely that we will reach a comprehensive solution in the next few days’, Ms Lagarde told the newspaper during a summit of G7 leaders in Dresden on Thursday.

Peter Rosenstreich, chief FX analyst at Swissquote Bank, explains why he thinks the market is finding the Greece deal situation ‘numbing’ right now…

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Video link click here!