Economic and Copper Report (John Mauldin's Outside the Box)

Volume 7 - Issue 24
June 21, 2011



Economic & Copper Advisory Services: Economic Report – June 2011


This week’s Outside the Box is from one of the more interesting thinkers and observers of the markets I know, Simon Hunt. When we get together in London, conversations are lively, as we don’t always see eye to eye; but we can always discuss, in a very civil manner, the affairs of the world. This particular piece is wide-ranging and thought-provoking. Simon is always ready to apply actual times to his predictions, and he has held steady on them for years.

It is late here in Geneva and I have to get up early for a speech. A big thanks to Hervig von Hove of Notz Stucki for hosting one of the more stimulating dinners with 16 people I have enjoyed in a long time, at his home out in the country, on a perfect night. I will probably make the discussion there the topic of this week’s letter. Charles Gave was in rare form. The Swiss gnomes were so very fascinating, and we had such an international table. These are the nights I wish my 1 million closest friends (a few of whom were there) could listen in on. More to come on Friday!

Your living for these moments analyst,

John Mauldin, Editor
Outside the Box

Economic & Copper Advisory Services: Economic Report – June 2011


Simon Hunt

The global economy is facing a difficult period. The US Federal Reserve’s QE2 program ends at the end of the month. Europe’s debt issues continue to roll on as no party wants to pull the plug on Greece. The Middle East is in turmoil and high oil prices, together with food, are a tax on global consumers. Japan’s reconstruction has yet to get into full gear; and there are new concerns about the durability of China’s economy. Any significant slowdown there will send ripples of fear around the world.

The Federal Reserve is likely to sit pat for some months to see how the US economy will be able to perform without the steroids provided by them. Foreign central banks have largely been absent from Treasury auctions. In quarter 1 this year, foreign central banks bought just 16% of the issuances while the Federal Reserve acquired almost 200%, according to Russell Napier. In other words, the Fed’s activities have masked the exodus of foreign central banks including China from these auctions.

If foreign central banks continue to abstain from purchasing US Treasuries, the private sector will have to fund the fiscal deficit, implying quarterly remittances to the US Treasury of some $370bn. The private sector will be able to fund these auctions but at a price. They will demand a higher return on treasury paper and the funding will mean that the free-flow of funds into equity and commodities will come to an end. Many institutions are taking risk off the table.

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