Category Archives: Economy and Meltdown

Former Defense Secretary Says US Will Probably Enforce "No Fly Zone", "Take Aggressive Action" Over Syria


Three months to the election? Check. Which means war-mongering rhetoric, once considered a staple of the GOP, may very soon become action, first in Syria, and soon, everywhere else. From Bloomberg: “The U.S. and allied forces probably will impose a “no-fly zone” over Syria and take other “more aggressive action” against the Syrian regime, former Defense Secretary William Cohen said. While the U.S. has been leery of another military intervention after a decade of wars, “We’re coming to the point, however, where the violence is getting so severe, I think, that you’ll see a movement towards setting up those no- fly zones,” Cohen said on Bloomberg Television’s “Political Capital with Al Hunt” airing this weekend.” Is war and immediate geopolitical escalation guaranteed? Not yet: “The former Pentagon chief and Maine senator, now chairman and chief executive officer of the Cohen Group consulting firm in Washington, said any U.S. military action would depend on participation and support from allies.” Although desperate times, and by that we mean unfavorably trending popularity ranking, will certainly require desperate measures. Such as the continued massive build up of US naval assets in the middle east.

More from Bloomberg:

“I think that the United States is not going to go into this alone,” said Cohen, who served as defense secretary during the NATO air strikes in the Kosovo conflict during the Clinton administration. “That’s why we’ve been working with the Gulf states.”
 
John Brennan, President Barack Obama’s top homeland security and counterterrorism adviser, said on Aug. 8 the administration is studying the option of a no-fly zone with air protection “very carefully, trying to understand the implications, trying to understand the advantages and disadvantages of this.”
 
Cohen, a Republican, also criticized the presumptive Republican presidential nominee, Mitt Romney, for promising to issue an executive order on his first day in office labeling China a currency manipulator.

Then there is Iran. And Israel:

On Iran, Cohen said the odds are increasing that Israel will strike the Islamic regime’s nuclear facilities to prevent the Persian Gulf state from being able to produce a nuclear bomb.
 
“I would say it’s a little bit better than 50-50 that the Israelis would take action,” Cohen said. “The rhetoric is starting to get ratcheted up,” he said, though the sharp language may be a “tactical” move to pressure Russia and China to sanction Iran.

Which they won’t as both see Iran, as well as Syria, precisely as the fulcrum points in an anti-US/Israel axis. And from there, where the escalation takes us, is anybody’s guess.

The good news is that if and when Syria is finally “liberated”, following what is sure to be a barrage of daily media propaganda including the gratuitous includsion of “weapons of mass destruction” for old time’s sake, when brent and crude soar to new record highs, at least the market can be finally assured that no QE will be coming any time soon. Or not so soon.

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Presenting The Ultimate 'Muppet' Indicator


Today’s MANU fiasco tipped the scale for us on the dichotomy between the seeming exuberance that occurs on the stock exchange floors (and the incipient media attached to it) and the reality of what an IPO is and what exchanges do.

Since the middle of last year – when the impossible was suddenly made possible by the US debt downgrade and markets realized that Keynesian arithmetic was an academic version of three-card-Monti – Bloomberg’s IPO index has dramatically diverged in performance from the ever-exuberant S&P 500. This index of post-IPO performance sends an ominous signal. It must be clear by now that IPOs now occur when when MANAGEMENT want to cash out – simply put they are trying to maximize their gain; unlike the textbook role of markets to provide capital to new entrants to enable growth in a win-win relationship (that every underwriting broker will sell you), the IPO index clearly signals management’s knowledge that ‘it ain’t getting any better than this’ by the dismal reality of its performance.

 

 

The stock market itself is levitated (a la JPM whale-trade in IG and bottom-less pockets of vol-selling exuberance currently) to maintain the appearance of order as Muppets are stripped bare of their remaining cash in IPO after IPO while management exits, piles cash, and hunkers down. With underlying fundamentals leaking everywhere, the IPOs are crushed since there are no comps to manipulate to and hide fair-value with.

 

The divergence between new-money weakness and stuck-money strength highlights more than ever the Muppet-fleecing purpose of ‘our markets’.

 

(h/t Brad Wishak of Newedge)

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Guest Post: The Other Side Of Sanctions


Submitted by Felix Imonti of OilPrice.com,

Iran has been pushed into a corner and is fighting for its life.  The safest weapon in its arsenal is an economic strategy; and it is the one point where the United States is vulnerable. 

There is no doubt about it.  Section 1245 of the National Defense Authorization Act that was signed into law by President Obama on December 31, 2011 is having the intended effect upon Iran.

Unlike previous sanctions, Section 1245 attacks the foundation of the Iranian economy.  The provisions of the law seek to stop the sale of crude oil and to block transactions between the Iranian central bank and the rest of the world.  About fifty percent of the national budget is funded from the sale of exported crude oil that provides eighty percent of the foreign exchange.  “Crude (oil) sales are a trap which we inherited from the years before the (1979 Islamic) Revolution,” Khamenei told a gathering of researchers and scientists at the end of July.  

An immediate consequence of the legislation has been the plunge in the exchange rate of the Iranian Rial that has lost half its value against the U.S. dollar.  A combination of devalued currency and a break down in international bank transfers has created shortages of imported products, including basic food grains.  The result is seen in an official inflation rate of 25 percent and an unemployment rate of 12.3 percent.

Before the implementation of the sanctions, Iranian oil exports were the second largest in OPEC at 2.2 million barrels per day.  Today, the current level is around 1.1 million barrels, but that does not take into account the oil leakage through the sanction barriers.  A friendly government in Baghdad makes Iraq one of the easier routes to the world market.  Shipments of gold bullion through Turkey to Iran indicate that the Iranians are selling to someone.

After nearly thirty years of dealing with American sanctions, the Iranians have developed methods of evading some of the restrictions, but the current application goes far beyond anything faced earlier.  The National Iranian Oil Company has been forced to relinquish its monopoly of sales and authorized private traders to market the crude.  The Oil Products Exporters Union expects to manage a fifth of exports and claims to have completed arrangements with refiners in Europe.

In spite of the evasive measures that are being employed, The Iranian treasury is still losing about thirty billion dollars per annum, a decline from seventy-two billion in 2011.  Beyond that, reduced exports are causing a problem of what to do with the surplus.  On shore facilities have been filled.  Seven million barrels are being held at Sidi Kerir in Egypt.

That leaves the tankers as the only other storage choice.  Half the Iran tanker fleet of forty-seven ships is already sitting at anchor with tanks full and no place to go.

The less attractive possibility is for the National Iranian Oil Company to continue shutting down wells.  Already, production has declined from 3.5 to 3.3 million barrels per day.

Once they are shut down and the pressurizing of the aging neglected wells stopped, salt water seepage will make it costly and difficult to reactivate them.  When they are reopened, production is likely to be reduced.  This is the long term damage that the sanctions will have upon the economy. 

How long can they endure the losses?  That is the question that the Ayatollah has to be asking.

So far, there are no signs that people are starving from food shortages, and there is no indication that people are taking their grievances into the streets.  Regardless, Tehran cannot ignore the long term damage to the economy and the potential for social disorder.

Right now, the bombs are not falling.  Sooner or later, though, the risk of war must be resolved.  They cannot ignore that Section 1245 is a declaration of war; and must be treated accordingly.  The Ayatollah has said, “Threat for threat.” 

Ayatollah Khamenei compares the present situation of Iran to Mohammed and his early followers who were besieged for three years in the desert of Saudi Arabia.  When there seemed to be no hope, they struck the surrounding superior army and defeated it at Badr and Kheybar. 

He sees Iran is also surrounded by an enemy.  They are being confronted by two carrier battle groups with a formidable destructive capacity that Iran cannot hope to stop or to match; the repeated threats from politicians in the United States and Israel to attack Iranian nuclear facilities; the newest sanctions that are slowly strangling the economy; and Khamenei believes that it is all for the sole purpose of regime change.

That raises the question.  How does a minor military power contend with the forces available to the United States?  The leaders in Tehran talk about closing the Straits of Hormuz and developing new missiles.  It is all bravado that Khamenei hopes will calm anxieties at home and frighten potential aggressors.

Over the three decades of the Islamic Republic, the Iranians have been careful about pushing Washington to the point that it would retaliate militarily.  The Ayatollah is not going to provoke the U.S. to destroy the theocratic regime and his political career.

“….to defend ourselves we will attack on the same level as the enemies attack us,” Khamenei said on television in March.  Section 1245 is economic warfare.  That is most likely to be the battlefield that Khamenei will choose and it fits perfectly into the strategies employed over the centuries by the persecuted Shia minority

Where is the United States vulnerable economically?  It is the draconian character of the sanctions.

At the end of June, Washington did what was expected.  All twenty of Iran’s regular buyers were granted six month wavers that will push the next decision beyond the November election.  To have found any of the twenty governments to be in violation of the sanction restrictions would have compelled Washington to deny access to the U.S. financial system.  That would have Sparked an economic war with countries taking sides in support or in opposition to the United States.

It is no secret that many governments object to the sanctions and are willing to deal outside of normal channels for a reduced price.  If the Iranians should use the new private traders to dump a few million barrels of oil onto the market at a sharply discounted price, they just might encourage one of these governments to openly defy the United States for a bargain.  Should the United States imposes restrictions upon the offender, that could trigger an unwanted trade war,  while ignoring the challenge would render the sanctions meaningless and invite everyone else to go bargain hunting.

As a persecuted minority, the Shia have learned that the weaker in a conflict must employ cunning rather than muscle.  The philosophy is the core principle of the Iranian Revolutionary Guard that focuses upon the use of asymmetric warfare.  Employing economic tactics is just another form of the asymmetric warfare.

It is the inherent weakness of the alliance that is Iran’s strength.  The unwillingness of Washington to pressure supposed allies and the simple fact that there are buyers willing to defy the sanctions secretly reveals the cracks in the system.  If the Iranians can break through the weak point in the American siege, they will be able to repeat without firing a shot the triumph of Badr and Kheybar

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Guest Post: A Step Towards Gold Confiscation


Submitted by John Aziz of Azizonomics,

In attempting to stimulate risk appetite by taking “safe” assets out of the market, the Fed has actually achieved precisely the opposite of stimulating productive investment. First, it has turned bond markets into a race to the bottom as bond flippers end up piling into the very assets that the Fed is trying to discourage ownership of  — because who care about low yields when the Fed will jump in at an even lower price floor, thus assuring the bond flippers a profit? Second it has energised other safe asset markets (such as gold) as longer term investors look for alternatives to preserve their purchasing power in the context of a global economic depression.

The Fed is firing at the wrong target; the real problem — the thing that is causing investors to scramble for safe assets — is an economic depression brought on by (among other non-monetary causes) the deleveraging costs of an unsustainable debt bubble. Without addressing the problem of excess total debt — and quantitative easing aims to increase lending — the Fed is firing blanks.

However, there seems little prospect that the Fed will listen to the debt-watchers who actually predicted the crisis. The likelihood is that the Fed will continue to attempt to take safe assets out of the market. And after treasuries, what will the Fed try to take out of the market?

Izabella Kaminska writes in FT Alphaville:

Fed purchases are the equivalent of hoarding the system’s supply of safe assets on the Fed’s own balance sheet, and in so doing preventing private investors — especially money market investors – from investing in the assets on favourable terms.

While this is mostly the point of QE — the idea, after all, is to stimulate risk appetite and cause investors to change their portfolios — a continued lack of risk appetite means the money created, rather than flowing into risky securities as hoped, is only crowding out the last remaining safe securities in the market instead. The consequences are negative rates and principal destruction — a lethal combination that is arguably far more dangerous and deflationary than no QE at all.

The idea that the Treasury could once again become the gold buyer of last resort, in exchange for liquidity, is interesting to say the least. Not only would such a strategy ease the squeeze in the Treasury market, it would do so without compromising the liquidity effects of QE.

What’s more it could help to support and stabilize the gold price, while taking zero-yielding safe assets out of the system in favour of yield bearing ones — giving money markets a fighting chance for survival in terms of yields.

While gold purchases have never been communicated as official central bank policy, there’s no denying that a shift in this direction is taking place. Be that wittingly or unwittingly.

A little behind the curve.

Last September I noted:

Bernanke has already heavily targeted yields on treasuries which have absorbed liquidity that has departed from productive ventures. But in recent years gold has offered a significantly increased yield over treasuries.

So what’s a central banker who wants to force investors into productive ventures to do? You can’t print gold — but you can buy it, and take it out of the marketplace.

And as the price of gold (in fiat) continues to rise, buying gold is exactly what central bankers may do.

Just as Roosevelt went out of his way to remove gold from the marketplace, the central bankers of today may eventually determine to do the same thing.

The main question if such an event were to occur is just how “compulsory” such purchases might be.

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