Archive - Jul 24, 2011

A few days ago, when summarizing the key weakness of the second European bailout, we suggested that the fatal flaw in the entire package (which is predicated upon the expansion of the EFSF to about €1.5 trillion for full efficacy) are the "82 Million Soon To Be Very Angry Germans, Or How Euro Bailout #2 Could Cost Up To 56% Of German GDP." Specifically, we explained, "by not monetizing European debt on its books, the ECB has effectively left Germany holding the bag to the entire European bailout via the blank check SPV. The cost if things go wrong: a third of the country economic output, and the worst case scenario: a depression the likes of which Germany has not seen since the 1920-30s. Oh, and if France gets downgraded, Germany's pro rata share of funding the EFSF jumps to a mindboggling €1.385 trillion, or 56% of German GDP!" Sure enough, as the Telegraph's Ambrose Evans Pritchard confirms, the backlash has now officially begun.

One of the more notable events in the past week was the previously discussed reopening of the Iranian Oil Bourse, an attempt by Iran to launch a venue that bypasses US sanctions against Iran which has prevented payment in the world's reserve currency for Iranian goods. "Big deal", some will say, this is not the first time Iran has attempt to upstage the Great Satan. Well, true, although as OilPrice said last week, "what it would take for Iran’s new exchange to survive and flourish are some heavy-duty customers that Washington would be wary of picking a fight with, and Tehran already has one – China... China, the world's largest buyer of Iranian crude oil, has renewed its annual import pacts for 2011. In 2010 Iran supplied about 12 percent of China's total crude imports. According to the latest report of the China Customs Organization, Iran's total oil exports to China stood at 8.549 million tons between January and April 2011, up 32 percent compared with the same period last year. Iran is currently China's third largest supplier of crude oil, providing China with nearly one million barrels per day." Still, the perceived provocation to Uncle Sam should China go ahead and slap America in the face by accepting the existence of the Kish exchange, would echo around the world. Which is why many don't think much if anything will happen. Until today, that is: according to the FT, China has decided to commence an barter system in which Iranian oil is exchanged directly for Chinese exports. The net result: not only a slap for the US Dollar, but implicitly for all fiat intermediaries, as Iran and China are about to prove that when it comes to exchanging hard resources for critical Chinese goods and services, the world's so called reserve currency is completely irrelevant. The implications of this are momentous, especially for US debt, whose indomitability is only predicated upon the continued acceptance of the currency it backs as a global reserve. If China is now openly admitting to the world that it does not need US monetary intermediation, and by implication, the "debt" backing said intermediation, what then? And who will follow China next?

While the full story can be found here, the cover of this week's Boulder Weekly probably explains most if not all there is to know about the US "recovery"

For those who missed it, here is the full video and summary from Boehner's earlier appearance on Fox News Sunday with Chris Wallace. The "Asian market open" strawman is getting closer, and there is absolutely no resolution yet. Ironically, just like with QE3, the all too habituated market will buy every dip (remember: nothing can possibly go wrong in the global Bernanke put regime) easily validating the republicans' paradoxical case that the market can more than survive a failure to reach a debt ceiling hike consensus. In the meantime, even as the S&P surges to unseen heights the economy is on the verge of cannibalizing itself as the government begins scrambling for every available penny of incremental revenue.

It’s truly illusory for anyone occupying the White House these days to think s/he is the president, the leader of all Americans.  In political legalese, maybe; in reality, not the slightest chance… for we are the prototypical major society split between haves and have-nots.  And to this day in his presidency, Barack Obama talks and acts clueless as to that irrefutable fact. Although the socioeconomic divide between haves and have-nots is the norm in most nations of the world, how Americans view that condition is quite different from the rest.  When have-nots in the United States look in the mirror, the vast majority of them still see themselves as haves, that’s how gullible they have become.  Perhaps it has to do with past economic dominance of the US, still lingering in past glory and an unreal sense of nationalism, often promoted by politicians of the two brands as exceptionalism.

Here is where the all too fluid situation is right about now, 8 hours away from the Asian open, courtesy of Reuters.

Are you putting yourself first? If not , read this and share some stock recommendations with your fellow ZH members...

Update: we have just gotten word that there will be a GOP conference call at 4:30 pm on the debt limit. Apparently the GOP is dead set on the 8pm Asian open and disregarding the much more important FX open.

It may be time to panic... at least on a "transitory" basis. After Boehner essentially said earlier that there are still no details what the "two-tier" plan noted yesterday would look like, we now are 5 hour away to FX open. And judging by the comments of White House Chief of Staff, it is almost as if the administration would like to see a selloff. Per Reuters: "White House Chief of Staff Bill Daley said on Sunday there will be a few stressful days ahead for financial markets but that a U.S. debt deal will ultimately be reached. "In the end, we may have a few stressful days coming up -- stressful for the markets of the world and the American people," he said on the CBS program "Face the Nation. Daley quickly added that he is confident a deal will be reached to raise the debt ceiling. We are confident he is right. We are also confident that if it takes a 200 point plunge in the S&P to achieve that target, well, so be it.

I crunch inflation numbers. It doesn't work.