Economic and market themes: 2014-05-20 Spain, China, Russia, Telecom

Today, rather than write to a single theme, I am going to highlight a number of stories that I have seen over the past few days that I think are important.

Spain. Bad debts in Spain are now declining ever so slightly. The latest data for March 2014 put the sum of bad debts at financial institutions in Spain at 193 billion euros or 13.38% of total credit outstanding. This compares to the historic high from December of 13.61%. I think the worst of this phase of the cycle is over for Spain and we will see this number improve unless and until another recession.

China. Bloomberg is reporting that house price gains in China have slowed. New home prices rose in 44 of 70 cities tracked, the fewest cities since October 2012, as developers are starting to discount to the oversupply of housing I mentioned last week. We are seeing 30 months supply in 3rd and 4th tier cities.

Tension between China and the US is mounting. Now, after US comments over territorial disputes between the Phillipines and China, we see a cybersecurity spat. China has halted cybersecurity cooperation with the US after the US accused China of commercial spying. Clearly, both the US and China are spying on each other – and for commercial gain. So I don’t know what the politicking here is. Clearly, irrespective of motives, it is another sign of America’s deteriorating relationship with China.

And speaking of deterioration, a $456-billion-dollar, 30-year gas supply deal between Gazprom and China was expected to be the headline trade deal for Russian President Vladimir Putin’s visit to China. But that deal was delayed yet again over price. Nonetheless, tension over the Ukraine crisis has given the deal new significance as Gazprom needs a another market as a hedge against a potential politically-motivated move to reduce Russia’s role as an oil and gas supplier in European markets, where about 80 percent of Gazprom’s revenue comes. I expect this deal to happen soon.

Russia. And Bloomberg is reporting that Russian Prime Minister Dmitry Medvedev claims Russia is being pulled into a new Cold War with the US. And he says Barack Obama’s lack of “political tact” is a big part of the problem. The money quote was when Medvedev said “This is ideologization of the economy. It’s exactly what we had during a certain period of the Soviet Union when it adopted bans on which countries not to trade with because they didn’t suit our country. That’s exactly what the U.S. administration is doing now.” There you have it, the US is acting like the Soviet Union. It sounds like the US – Russian relationship is seriously broken and unfixable.

My view here is that the US/EU attempts to get regime change in Ukraine is very much responsible for things here. The US and the EU are hiding behind the fig leaf of not having used military troops in Ukraine to make it seem like they were not directly responsible for much of the social unrest that caused the overthrow of Yanokovych. This is nonsense. The EU, US and NATO have been trying to bring Ukraine and Georgia onside for years. The leaked tapes of the State Department’s Victoria Nuland show the depth of involvement there. The goal from the start with Yanokovych was regime change. Now we have that and the chaos that goes along with it. Without troops on the ground, the US and EU have no control over a dangerous situation in Ukraine, one that they are as responsible for as the Russians.

The tactical error in Ukraine was that the US and EU did not expect a military response from Russia. They thought they could roll up Ukraine just like they had the rest of the East Bloc. But they were wrong and now we have a new Cold War as a result. Was Russia’s annexation of Crimea one step to far. Yes, of course it was. But the US and EU had no response to it. ANd had they thought their regime change policy through, they would have realized that this was a potential, even likely, outcome. Now, the Russia pivot to Asia is on. Watch China and Russia close ranks. From a geopolitical perspective, this is just beginning. That’s my take here.

Telecom. The AT&T- DirecTV merger is anti-competitive. The US has allowed so many mergers to go through that we are at a point where regulation will eventually be the only remedy. That’s my prediction, that down the line we are likely to see a re-regulation of this industry on a big scale because of the future abuses that are likely to occur.

Think about it, we used to have Ma Bell and her seven RBOC subsidiaries. Now AT&T owns four of those and Verizon the other two. Both companies have huge mobile offerings and they are now branching out into content. On the other side of the coin, you have the Comcast – Time Warner cable behemoth, looking up the last mile in an anti-competitive way. The concentration in the industry is breathtaking. And we know the only result is that these companies will extract fees. They will make unaligned content providers like Disney, Netflix, Amazon, CBS pay. Companies like NBC Universal, a Comcast subsidiary will get preferential treatment. As a media provider, DirecTV will get preferential treatment from AT&T of course too. I recommend these posts from Level 3 for more on the issue here and here.

It’s telling that the Canadians are saying they avoiding the net neutrality fiasco we are seeing in the US. And they are also saying that even in Canada, a country of 35 million, they need a fourth mobile carrier to increase competition and bring $1 billion in savings. Let’s remember that AT&T tried to merge with T-Mobile and that merger was blocked. Now T-Mobile is the biggest source of innovation and price pressure in the US mobile market, both on the telecom fee side and the handset side. I should note that T-Mobile got a $4 billion breakup fee from AT&T and that DirecTV is not getting one. They need this deal.

And US internet speeds are already lagging globally. That’s not because we don’t have the funds. It has to do with market dynamics.

I am going to have to leave it there. Plenty more topics are queued up for tomorrow.