Van Eck On Money And The Economy. September 3, 2013

[ 0 ] September 3, 2013 |

Van Eck Hotline on Money and the Economy 9-3-13
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Van Eck Hotline on Money and the Economy
For: Tuesday, September 3, 2013
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Near-term events continue to dominate the headlines these days. President Obama is headed for Europe later today – with his eventual destination the G20 meeting in Russia (St. Petersburg). Before he leaves the country, the president will be putting pressure on both political parties to line up on his side of the Syrian debate. Obama wants to hit Syrian government forces and infrastructure this week. While the administration has released some evidence to the public, the Congress has seen classified intelligence. So far, the discussions in Washington have been largely along party lines – especially in the House. (There is a concern that rebels in Syria may have been involved in the gas attacks – in order to gain the direct support of American and other Western forces.) At this point, it is too early to say if the president will be able to win approval for military action in Syria. The buzz during the past few days is that enough pressure will be exerted by the leaders on both sides of the aisle so that approval for some kind of attack will be achieved this week. With the British parliament recently voting to keep that traditional American ally on the sidelines, the U.S. could be looking at its first major military action in the Middle East without unswerving UK support in a long time.

Russia and China are still blocking the way for UN debate and action regarding Syria. More likely than not, those nations are going to spend the time ahead (with or without attacks on Syria) pushing for negotiations. It is hard to see how such talks would result in a change to the power structure of the Syrian government. President Assad has some very powerful allies and supporters in Russia and Iran. Those nations do not want to see America gain an inch in the struggle for control and power in the region. There was a time when Barrack Obama would have questioned American military action within such a unilateral environment. However, the president has taken a major credibility hit in the Middle East during the past few years. That is the part of this story that tends to get pushed aside by the media. He is on record as saying that the Syrian government should be punished if it crosses a certain line. That line appears to have been crossed and if the White House does nothing but ask for negotiations, President Obama’s reputation in the Middle East would collapse. Therefore, I have to believe that the president is going to order the military into action – even if the Congress fails give its approval.

The initial U.S. attacks in Syria would likely be limited in scale. If chemical weapons supplies are targeted, it would take highly reliable intelligence on their location and perhaps call for special high temperature bombs to destroy the material and thus reduce the risk of collateral damage and contamination of nearby civilians. More likely than not, the U.S. military would be targeting the traditional delivery systems and infrastructure connected to chemical weapons and their use by Assad’s forces. That would mean cruise missile attacks (and perhaps long range attacks from U.S. aircraft) on the headquarters and support systems for that part of the Syrian government and military. It would also mean attacks on the locations of artillery and rocket units. Again though, such attacks would be of little value if the intelligence falls short. You can bet that the CIA, Israeli intelligence and others are scrambling to update such information on a real time basis.

Russia is spoiling for a fight. That nation has already provided Assad’s forces with cutting edge military technology – especially in the anti-air category. That means U.S. forces would be at greater risk flying into Syria than any other recent action in the Middle East. Russia has also provided Syria with sophisticated anti-ship missiles that would be capable of striking U.S. Navy ships in the Eastern Mediterranean. The P-800 Yakhont anti-ship missile has a range of 180 miles. Russia has reportedly provided even more sophisticated versions of those anti-ship missiles to Syria’s military. Such weapons could compel U.S. Naval forces to keep their distance from the Syrian coast. It is also worth noting that the Russian missiles could easily reach the British airbase at Akrotiri in Cyprus (about 100 miles away from the Syrian coast). The U.S. Tomahawk cruise missile is likely to be the weapon of choice once President Obama orders the military into action. That missile has a long enough range to allow the U.S. Navy to stay out of harm’s way. However, the American military might look at this as a possible test to see how their defensive measures match up against the best that Russia has to offer.

President Obama believes that something must be done. France appears to be on his side. The UK parliament might be asked to vote again on the matter – now that new evidence on the recent gas attacks has been released to the world. The U.S. stock market rallied more than one percent this morning – in part because of relief that military action has been delayed or blocked altogether. If that is true, what goes up will likely come back down during the next few weeks as the White House pushes forward with its plans. The Middle East has become the center of political and military tensions in recent decades. One of these days, Iran will likely have a nuclear bomb. That nation has been expanding its nuclear program at a rapid rate during the past year. It is not hard to imagine a scenario down the line when a U.S. president will be searching for allies to deal with a nuclear armed Iran – or perhaps when that nation is close to developing such a weapon of mass destruction. The events of the next few weeks and months will play a role in that future crisis and the negotiations and possible conflicts that would follow. The Syrian situation certainly does not appear to be bullish for the U.S. economy. It has helped to elevate oil prices and there is a general sense in the country that things could go from bad to worse in a hurry. We all heard similar things about Libya a few years ago. If the president moves forward without the support of Congress, it would leverage the fears that are already taking root in the economy and the financial markets.

With so much of the focus on Syria and the Middle East of late, Wall Street has been distracted from some stories that are likely to prove far more important between now and the end of the year. The Federal Reserve is getting ready to reduce the monthly pace of its quantitative easing efforts. At the end of this week, the Federal government will be releasing the August employment report. The previous release proved to be a bit weaker than expected (+162,000) – but hardly weak enough to convince the Fed to delay tapering until 2014. Weekly jobless claims have remained fairly low of late – suggesting that job creation was running at a relatively strong pace last month. I have been seeing quite a wide range of estimates for the August nonfarm payrolls number – running in a range of roughly +170,000 to +220,000. Any reading above +200,000 would likely jolt Wall Street awake to the reality of Fed tapering. The next FOMC meeting will wrap up on September 18 – two weeks from tomorrow. In the meantime, investors and analysts will have plenty of other things to occupy their attention.

I will be looking inside the next employment report for important clues about not only the Fed’s plans but also about the health of the economy. Manufacturing has faltered this year as an engine of growth. The manufacturing sector added a net 207,000 jobs during 2011 and an additional 154,000 jobs during 2012. Through the first seven months of this year, manufacturing added only 24,000 jobs – putting 2013 on an annual pace to add a net 41,000 jobs this year. We are going to find out soon enough if that important sector of the U.S. economy is turning higher. The ISM report that was released this morning contained some bullish components. It showed that inventories are still contracting – setting up a situation where companies are going to be forced to increase their orders – just to keep up with demand. In fact, today’s ISM report showed a significant jump in the new orders index. Manufacturing activity gauges in other countries have also been improving. Unless things sour in the Middle East, I expect employment in manufacturing to receive a bump during the time ahead – as buoyant demand brings even more new orders and thus a rebuild of inventories. Will the U.S. economy still be in recovery mode a year from now? I believe the odds favor growth. If things break in the right direction, the recovery could actually enter a higher gear. More next week.

Next hotline will be updated no later than 8:00 P.M. Eastern on Monday, September 9, 2013

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Category: Economics