Weekend Update for August 29

 Courtesy of Gainsville Coins:


ABSTRACT:With very low volume on the markets this week, the persistent geopolitical risks in Europe, Ukraine, and the Middle East, as well as the rioting in Ferguson, Missouri, finally had a pronounced effect on investor behavior. The late-week rally in precious metals on safe haven fears coincided with a retreat from equities across the board. Meanwhile, Burger King’s purchase of Tim Horton’s in order to secure Canadian residency for tax purposes adds to an already crowded M&A column in the local Business section.


With most markets experiencing thin trading volume as is usual for the summer months, various geopolitical tensions had an amplified impact on gold and stocks, especially late in the week.

Impending ECB Action as Economy Worsens; ECB President Draghi May Consider QE

At a global central bankers conference held in Jackson Hole, Wyoming on Monday, European Central Bank President Mario Draghi indicated that monetary policy ought to incorporate stimulus measures rather than austerity policies. If this is to be taken at face value, we may very well see some form of quantitative easing employed in Europe in order to battle deflation.

Elsewhere in the European banking sector, two of Switzerland’s oldest banks, Lomard Odier and Pictet, both with headquarters in Geneva, are making their financial records available to U.S. and European authorities for the first time since 1796. This spontaneous act of transparency comes on the heels of a series of massive fines for Swiss banks–notably, Credit Suisse–that aided Americans in evading taxes. Pictet remains embroiled in an investigation by the U.S. Justice Department, while Lomard Odier, Switzerland’s longest-standing wealth management firm, has been voluntarily cooperative.

Sanctions Against Russia Having Drag on German, Eurozone Economies

In addition to cutting off European access to Russian energy supplies, the absence of Russian demand for European agricultural products due to economic sanctions is beginning to take a serious toll on exports from the Eurozone. This lack of a major trading partner is no trivial loss, as the EU has responded by providing €125 million to fruit and vegetable producers to cover their buyer shortages.

IMF data shows that Russia added 300,000 oz of gold to its reserves in July; over the past 5 years, their gold reserves have nearly doubled from 550 tonnes to 1,104 tonnes. Such gold accumulation is likely a maneuver to help insulate Russia from the effects of economic sanctions. Russia’s cooperative neighbors such as Kazakhstan, Azerbaijan, Kyrgyzstan, Tajikistan, and perhaps Belarus have also been adding to their own gold reserves. This is seen by many analysts as a tactic to undermine the hegemony of the dollar, not unlike China’s even more massive buildup of gold reserves over the same period.

On the Ukrainian battlefront, authorities in Kiev charged Russia with embarking on fresh military incursions along the border on Wednesday. This came after hopes for a resolution were high on Tuesday, when Vladimir Putin met and spoke with Ukrainian President Petro Poroshenko in Minsk, Belarus. Alas, the conflict instead escalated on Thursday when, after weeks of dubiously claiming non-involvement, Russia sent 1,000 ground troops, anti-aircraft missiles, tanks and artillery across Ukraine’s eastern border to aid the pro-Russian separatists. Rather than an “incursion,” this is tantamount to a formal declaration of war. It appears that Putin has no interest in bowing to Western sanctions and will press forward with what is looking more and more like a grab for territorial expansion.

Outcomes in Middle East Remain Uncertain

Islamist militias have captured an international airport in Tripoli, which had been under nationalist control for three years following the ousting of Gaddafi. This latest development could plunge Libya into a civil war. Despite the upheaval in Libya, one of the world’s largest suppliers of oil, crude oil still sits near 7-month lows. If civil war ensues, the Libyan conflict is likely to draw attention from the rest of the big players in the Middle East (such as Egypt, the United Arab Emirates, and Saudi Arabia). Jets from Egyptian and Emeriti forces have already been dropping bombs on rebel positions in lieu of American military involvement.

The slump is oil prices is also somewhat counter to the continuing disruptive presence of ISIS in Iraq and Syria. President Obama has authorized targeted airstrikes on ISIS in Syria, which has elicited some criticism for the perceived duplicity of supporting a regime that has recently been hostile toward the U.S. It does, however, fit the maxim that “whomever is my enemy’s enemy is my friend.” In order to mitigate the ire of America’s international partners, the President has been clear that no unilateral action will be taken in Syria.

More grim news arrived when it was reported on Thursday that an al-Qaeda group, the al-Nusra Front, captured 43 U.N. peacekeepers near the Syrian border. Al-Nusra Front forces had already taken control of Syria’s border crossing with the Israeli-occupied Golan Heights region, raising concerns that the effects of the ISIS insurgency in Iraq-Syria could begin to spread and destabilize the surrounding region (which is hardly stable to begin with). This represents yet another red flag in a geopolitically invaluable region that is becoming increasingly enveloped in violent conflict.


Calm Seas for Gold and Stocks, Dollar Looks Waterlogged

It began as a dull week on Wall Street as stocks remained relatively stagnant from Monday’s market open. As of Friday morning, the Dow Jones Industrial Average was trading at 17,080, up from its Monday opening of 17,011, a gain of 0.4 percent. The S&P 500, while pushing all-time highs over 2,000 earlier in the week, has done so with small gains; it traded at 1,997 at Monday’s open, up 6 points, or less than half a percent, since Monday. The Nasdaq saw a shaky Monday, but recovered Tuesday and Wednesday to 4,569. It subsequently gave back its modest gains to sit at 4,558 during Friday trading, largely unchanged for the week.

The tepid performance of the U.S. stock exchanges was echoed by gold and silver, each of which only saw marginal gains this week. Gold recovered slightly from last week’s losses to trade just below $1,290 per ounce on Friday. Silver remained stable at around $19.60 per ounce after posting a loss of over 2.5 percent this month as it retreated from prices over $20.00 per ounce. On low supply, palladium remained above the $900 threshold, sitting at $904 on Friday morning.

Global markets proved to be a bit more dynamic. The European DAX and FTSE 100 exchanges echoed one another as they each plateaued Wednesday to cap successive gains on Monday and Tuesday, part of a two-week rally, before easing slightly on Thursday. European stocks jumped over 1% on the news of potential QE from ECB President Draghi.

Asian markets fared worse, as the Nikkei and Hang Seng both posted in the red for the week as of Friday morning. The Nikkei saw weekly losses of over 1.1 percent, or 185 points from its Monday opening of 15,609. The Hang Seng showed only minor weekly losses, as profit-taking and shedding of shares in poor performers erased Monday’s sharp gains.

FOREX saw some activity as the dollar experienced a slight dip this week. The DXY dollar index was down nearly 0.2 percent for the week on Wednesday before again approaching 82.5 on Friday. The euro saw a slight gain as well, popping above its recent 13-month low.

Tim Horton’s Hears a “What?!”

Canadian coffee and doughnut chain Tim Horton’s was recently bought for $11 billion by Miami-based fast food giant Burger King, leaving many Canadian consumers scratching their heads and many American analysts expecting another corporate inversion. Canadian patrons of Tim Horton’s generally see the move as potentially compromising the Canadian charm and identity of one of the nation’s most iconic brands. That may be an unfounded fear, however, as many expect Burger King to use their new acquisition to legitimate the company’s move to Canada to take advantage of lower corporate taxes. (The corporate tax rate in the U.S. is currently 40%, while it is markedly lower in Canada, at 26.5%.)

It was also reported that super-investor Warren Buffett contributed $3 billion to the acquisition, sparking debate over both the soundness of the investment and the ethics of the inversion strategy, which the Obama Administration has denounced. As Canadians voice their concern over this move, we will see if American consumers join them as they watch one of their most widely-recognized brands jump ship for a more favorable tax environment.


With Tensions in Ferguson Still High, the Debate About Police Militarization Begins

The recent events in Ferguson, Missouri have led to seething debates about race relations, police brutality, and gun control in the United States. However, one discussion that is starting to pick up steam is the debate about the militarization of our local law enforcement agencies over the last decade and a half, particularly since the attacks of 9/11. Since that time, due to the general buildup of armaments within the U.S. military, local police departments around the nation have been given nearly unfettered access to an array of military-grade weapons and vehicles at little to no cost. All over the country, police departments are gradually beginning to look less and less like civilian law enforcement agencies, and more like wartime military brigades.

But why? Is all this increased firepower and armored mobility necessary to meet our domestic security needs? Or, are overzealous law enforcement agencies taking advantage of an unprecedented availability of weapons and vehicles that does not fit the mandate of a civilian policing agency?

In California, several school districts have approved their resource officers (police officers that are stationed within the schools themselves) to carry semi-automatic assault rifles, including the AR-15, a high powered semi-automatic weapon that is typically used by military personnel and S.W.A.T. teams. The various school boards in question have noted they are looking to provide their resource officers with more “flexibility.” In fact, a total of 8 school districts across the Golden State have approved resource officers to carry these high powered assault rifles.

In Michigan, the arming of civilian police with military style weapons has been growing since 2006, when the federal program that distributes surplus military equipment to local law enforcement agencies first began. Across the state, a litany of military equipment has been put in the hands of local law enforcement in areas afflicted with high crime and population rates, and even many that are not. While figures for the breakdown of where particular weapons have gone are not available on a county-by-county basis, aggregate numbers for the entire state tell a story that sounds like it should have been told in Afghanistan rather than Michigan.

The results are simply staggering: in total, law enforcement agencies across Michigan have received 17 Mine Resistant Ambush Protected vehicles; 1,795 M-16 rifles; 696 M-14 vehicles; 530 bayonets; 32 twelve-gauge riot shotguns; 9 grenade launchers; and 3 military-grade observation helicopters. If you find you are asking yourself, Why do the police need grenade launchers?, you’re not alone.

Domestic security concerns have certainly changed since the terrorist attacks on 9/11, but have we really reached the point that we need this kind of militarization to control our own population? Interestingly, issues like these make strange bedfellows considering that many gun control advocates are incensed by the increasing militarization of local police forces, as well as more conservative elements within the federal government, such as Kentucky Senator Rand Paul.

A LOOK AHEAD:With various sources of domestic and international strife still at play, it may be a more eventful Labor Day holiday than usual when the markets open on Monday. Economic data from Japan and the U.S., who have been engaged in monetary easing, may influence the course of looming decisions by the ECB in instituting its own form of QE.

By Terrence Campbell, Marty Menz, and Everett Millman

Thanks to Gainsville Coins!

The Deviant Investor