Weekend Update February 27

By Everett Millman, head content writer at Gainesville Coins, a leading gold and silver distributor.

 

ABSTRACT: It was a volatile yet rangebound week for the markets, with U.S. shares, precious metal prices, and oil prices all seeing choppy activity. European and Asian stock markets rose to fresh highs, the former amid an improving outlook for Greece and the eurozone.

 

GOVERNMENT & POLICY

Net Neutrality Gets a Whole Lot Murkier

There are few current policy issues that seem to be less understood, and more shrouded in ambiguity, than the “Network Neutrality” debate. That being the case, the discourse surrounding net neutrality has essentially been split down ideological lines.

For starters, the FCC vote this week on the supposed net neutrality measure, endorsed by the president and others in his cohort, was divided by party affiliation, yielding a narrow 3-2 partisan decision in favor of expanding internet regulation.

On the left, proponents of the newly-passed measures are crying foul about the absence of any rules preventing internet services providers (ISPs) from charging exorbitantly high fees for different content providers to use a “fast lane” of dissemination. The lack of regulations opens a can of worms, as ISPs (predominantly Comcast and Verizon) can theoretically shakedown companies that provide content by slowing down their data transmission speeds, and extorting them for faster speeds.

Although the evidence that such a scheme is–or will eventually be–taking place is inconclusive, the point is taken.

Meantime, Libertarian-leaning conservatives on the right have pointed out that over-regulation of an industry as reliant upon innovation and dynamism as the internet will be especially worse off for such constraints, effectively forcing ISPs to freeze their business models in time and resign themselves to only investing in innovation and growing infrastructure at the dear expense of profitability.

This second scenario sounds no less disastrous for the long-term vibrancy of the net, nor does it bode favorably for the U.S. to remain competitive with the rest of the world in regard to harnessing the immense power of the internet.

The firebrand billionaire Mark Cuban, a wildly successful entrepreneur who cut his teeth on the commercialization of the web, had choice words for how he envisages the government will bungle the internet, conveying something closely akin to “mucking it up.” Especially with his direct experience in the field, I’m inclined to hew to his concerns.

I disagree, however, with the stance that Cuban and FCC Commissioner Ajit Pai have taken–that nothing at all should be done. Reining in the statist desire to federalize everything about internet regulation is the overarching problem here, dwarfing the relatively less odious problem of light internet regulation in general. The crucial question at hand is, What kind of regulation fits the bill to uniquely suit the web? Specifically, how do we protect a free internet while leaving space for innovation and new business models that emerge?

When a free market produces an oligopolistic environment, as is inexorably the case in some industries, proper regulation to prevent powerful firms from gaining too much influence in indispensable industries simply makes sense. Within an ideal framework of minimal regulation, this is one area that does need some kind of restraints and guidelines. Think back to the trust-busting of railroad companies and oil barons in the late 19th and early 20th century; would anyone argue that the internet is any less vital to our present and future economic goals than an efficient, long-distance freight system by rail was to our forebears? This antitrust ethos still ought to be a part of any thoughtful, pro-business regulatory regime put in place, in spite of the lamentable fact that we can trust the government to do so little correctly.

It is unclear that the current FCC rules will adequately address the problems outlined above. One can at least hope that it is only the first clumsy step in an increasingly well-rounded and sophisticated effort to regulate the internet properly without strangling normal business operations under a free market. This ought to be the ultimate goal for any independent-minded government agency, as the FCC purports to be, with the country’s best interests at heart.

Playing Fed Whisperer: Distortion By False Contrast

Fed Chair Janet Yellen gave her semi-annual testimony in front of the Senate Banking Committee on Tuesday and the House Financial Services Committee on Wednesday. Yellen offered a more hawkish outlook for monetary policy, saying the Fed would now consider its rate hike on a “month-by-month basis.” This prompted St. Louis Fed President James Bullard to assert that any “patience” language should be struck from the FOMC’s next policy meeting in mid-March, a motion seconded by San Francisco Fed President John Williams. As a result of their comments–essentially in line with Yellen’s–being highly publicized, the media is spinning a false dichotomy narrative, whereby the Fed Chair is taking a dovish stance in opposition to her colleagues.

Make no mistake, this is just more of the country’s central bookie creating sufficient speculative action on both sides of the “possible-rate-hike” betting line.

MARKETS

Take Your Pick From the Mixed Bag

The U.S. markets resembled a well-played table tennis match this week, with equities, commodities, and bonds all ping-ponging back and forth–albeit in a fairly tight range.

Crude oil prices exemplified this oscillatory trend, alternating between trading in the red and the green on not only a day-to-day basis but even, at times, on an intraday basis. Some expect crude to recover nicely in the medium-term, citing the 30% decline in active oil rigs between the U.S. and Canada over the last 3 months; this brings the number of rigs in the region to their lowest levels in 5 years. Nonetheless, plenty of oil is still being pumped, as stockpiled U.S. inventories haven’t been higher since the 1920s.

The effects of the supply glut will stretch on until at least the third or fourth quarter, keeping prices stuck. Although Brent crude–Europe’s principal supply–has remained steadily above $60/bbl, West Texas Intermediate has been bottled below $50/bbl, widening the gap between the two benchmarks. February was the first month of gains for Brent since last July. Comparatively cheap gas in the States, in fact, placed the largest drag on last month’s weak consumer price index (CPI) numbers, holding down the apparent pace of inflation. It remains to be seen how President Obama’s veto of the Keystone XL Pipeline will impact oil prices, if at all.

CPI slipped 0.7% in January, the biggest monthly drop in over 6 years. Although all three U.S. stock indices traded at or near all-time highs all week, including a 10-day winning streak (and 15-year high) for the Nasdaq, equities turned modestly lower by week’s end on the piling up of underwhelming economic data. In addition to CPI dropping, existing home sales fell by 4.9% to a 9-month low; weekly jobless claims climbed by over 30,000, their largest increase in more than a year; the Chicago Manufacturing Index (where values below 50.0 indicate contraction) sank to 45.0, a 5-year low, after impressively registering above 59.0 the month previous; and 4Q GDP was revised downward from 2.6% growth to just 2.2%. The only good news was the 2.8% increase in durable goods orders, following an ugly 3.7% drop in orders in December.

In the world markets, the beginning of quantitative easing measures in Europe and Japan has been boosting both country’s stock markets while devaluing their currency. European shares advanced across the board toward a 7-year high partly due to the accord reached between Greece and its creditors, especially Germany. Germany’s bellwether economy has also picked up steam, and has seen a surprising drop in unemployment.

In Japan, stronger industrial production numbers lifted the Nikkei 225 index to a 15-year high near the end of the week. The country is experiencing a similar trend of weak inflation and consumer spending at home, but stronger exports due to a weaker currency. The yen is trading above 119 per dollar, while the euro is now approaching $1.11.

This was bullish for the dollar, which also jumped on the hawkish signals from the Federal Reserve. After sliding recently, the greenback advanced above 95.0 on the DXY index, an historically strong showing for the dollar. Treasury yields followed the rest of the markets and played ping-pong as well. 10-year yields fell as far as 2.10% a few weeks ago, then surged back below 2% to 1.98% by midweek on strong demand. By Friday, yields eased back to 2.01%.

As for the precious metals, Thursday and Friday saw each of the metals pare their losses earlier in the week on the rebalancing and short covering that predictably followed the gold options expiry on Tuesday. After trickling back to about $1,200/oz, spot gold managed to settle back in the $1,215 range by week’s end. Silver saw the most volatility, posting significant losses early in the week before adding about 25 cents apiece on Thursday and Friday to close near $16.70/oz. In relative terms, a 50-cent jump over two days for silver is analogous to gold moving $35 over that span. Platinum, the weakest of the metals as of late, remains well below the gold price but made strides on Friday to poke past the $1,190 level. Palladium has been stronger than any of its counterparts, resisting the past two week’s downtrends and advancing above $820/oz by Friday.

GEOPOLITICS & WORLD EVENTS

Ukraine, Russia Remain At Odds Over Donetsk

With the fragile truce between Ukraine and the pro-Russian insurgents in its eastern provinces precariously shaking in the wind, it is worth noting that unrest and violence in Ukraine has persisted for more than a year now. Russia has been involved at every step of the way, reinforcing the perception that Russia is reigniting its imperial ambitions long buried with the rubble of the USSR.

Especially with Russia’s forceful annexation of the strategic area of Crimea earlier this year, it would appear that Vladimir Putin is willing to use the country’s military might to advance his government’s geopolitical interests. Nevertheless, the Russian premier has gone on record saying that an all-out war with Ukraine is “unlikely” from his vantage point. As part of the ceasefire agreed by both sides in Minsk, Belarus just a few weeks ago, heavy arms have been backed away from the frontlines of the most intense areas of fighting. How long this de-escalation holds up is still dubious.

Aleksandr Zakharchenko, the head of state and prime minister for the unrecognized Donetsk People’s Republic in eastern Ukraine, gave a fiery press conference this week. He intimated that he feels Kiev is actively flouting the Minsk agreement, and vowed that the DPR’s forces will respond with vigor if the Ukrainians continue to shell the rogue republic.

Zakharchenko has Russia at his back, while Ukrainian president Petro Poroshenko has received only tepid support from the country’s purported Western allies. This lack of adequate backing for Ukraine can ostensibly be attributed to NATO’s reluctance to be dragged into a proxy war with the Russians. Yet, the Ukrainian economy is crumbling, as its GDP and the strength its currency, the hryvnia, have both suffered gravely. Whether or not Kiev has behaved properly through the conflict is still highly questionable; this is evidenced by the IMF’s threat that unless the violence ends, it will stop issuing financial assistance to Ukraine.

Though it is understandable that the global community would be wary of Ukraine’s role in the war, the IMF has essentially handed a ready-made playbook to Putin with its ultimatum. All the Russian leader need do is keep the pressure on Kiev, force Ukrainian forces into skirmishes, and drag out the conflict a bit longer. If Russia succeeds in severing the fiscal ties between Ukraine and the Western powers, the fledgling country would largely be Russia’s for the taking.

This places considerable pressure on Europe and its partners: do they cut off funding from a potentially objectionable regime, even if it means letting another independent state fall under the Russian sphere of influence?

The situation may have been best encapsulated by former Deputy Secretary of State and U.S. Ambassador to Russia, Bill Burns, in an interview with Charlie Rose. Burns posited that although Putin and Russia hold a fairly weak poker hand in the long-term, they have outmaneuvered their Western rivals in the near-term and will continue to leverage their strategic interests in Ukraine (as well as Syria) until confronted. For now, no such challenge appears to be in the cards.

 

Will Greece Uphold Its Fresh Promises?

Although Greece missed its Monday deadline for presenting eurozone leaders a list of compromises or concessions the new administration would commit to as part of an extension on its bailout loan, the belated list of reforms offered by the Greeks was summarily backed by the European Commission and accepted by the finance ministers of the euro area. Even Germany’s parliament approved the terms of the latest agreement, a development that looked much dicier (judging from the strong rhetoric on the German side) just a few days ago. In the interest of preserving the European Union, Germany got on board with the 4-month extension of emergency assistance for Greece. In the interim, only one question remains: Will Prime Minister Alexis Tsipras’ new government be able to realistically keep up its end of the bargain?

A LOOK AHEAD: Janet Yellen will be speaking in New York about banking regulation on Tuesday. A mix of productivity data from real economy, including construction spending, the ISM Manufacturing Index, and the PMI Manufacturing Index, will be released Monday. Personal Incomes & Outlays also come out Monday morning, providing more insight into how well the average consumer is faring in this economy.

 

By Everett Millman, head content writer at Gainesville Coins, a leading gold and silver distributor.