Archive - Mar 22, 2011 - Story

It seems Egyptians are so enamored with revolting they have decided to do the whole thing all over again. And this just one month after the first peaceful revolution in MENA claimed the 30 year rule of Hosni Mubarak, and everyone thought Gaddafi would step down just as quietly and peacefully. Well, while Gaddafi appears rather set on staying, and protecting his 144 tons of gold, the Egyptians have decided to burn the place down once again.In the meantime we keep awaiting the Bank of Egypt's official updated recount of its gold stash which, admittedly, was half of Libya's.

Whenever you intervene in a country, whatever your intentions, you are intervening on someone’s side. In this case, the United States, France and Britain are intervening in favor of a poorly defined group of mutually hostile and suspicious tribes and factions that have failed to coalesce, at least so far, into a meaningful military force. The intervention may well succeed. The question is whether the outcome will create a morally superior nation. It is said that there can’t be anything worse than Gadhafi. But Gadhafi did not rule for 42 years because he was simply a dictator using force against innocents, but rather because he speaks to a real and powerful dimension of Libya.

Here's a simple test of whether the economic recovery is self-sustaining or not: cut Federal spending back to 2007 levels (a $1 trillion reduction) and cancel all Fed intervention such as quantitative easing. If the economy is self-sustaining, it will move forward without Federal spending and Fed intervention. If "self-sustaining" is a fiction, an illusion, a mere figment of propaganda deployed to enable the Status Quo to feast off the remaining productive elements of the U.S. economy, then the economy will absolutely crater.

And just as oil was trending lower on the day, we receive our now daily news of Israel conflict escalation, as Reuters reports that tank fire has killed 3 Palestinians in Gaza, wounding another four including children. Bloomberg also chimes in:

• ISRAEL ARMY SAYS FOUR PROJECTILES LAUNCHED FROM GAZA HIT SOUTH
• FOUR PALESTINIANS KILLED BY ISRAELI FIRE IN GAZA, OFFICIAL SAYS

The result is an immediate jump in oil as the market apparently, and contrary to our expectations, has to digest this latest piece of geopolitical news.

The linear thinkers that dominate the mainstream media and the halls of power in Washington D.C. are assessing the series of disasters in Japan without connecting the dots of history. Their ideological desire to convince people that things will go back to normal in short order flies in the face of the facts. It makes me wonder whether these supposed thought leaders lack true intelligence or whether their ideological biases convince them to lie. At the end of the day it comes down to wealth, power and control. If those in power were to tell the truth about the true consequences of demographics, debt, disasters, and devaluation, their subjects would revolt and toss them out. Before the multiple disasters struck Japan last week, the sun was already setting on this empire. The recent tragic events will accelerate that descent.

Even as gas continues to creep ever higher, removing substantial marginal purchasing capacity from the US consumer, a topic beaten to death previously, the oil exporting cartel remembers that in a world strapped for energy, oil prices can and will be quite sticky. Which is why now that OPEC has had its refreshed taste for $120 brent after a three year hiatus, it will most certainly not let the price of crude drop into double digit territory absent another massive deflationary shock a la the fall of 2008. To wit, OPEC has just announced that $120 oil is an acceptable level and will "not hinder global growth." Funny - if one pulls OPEC press releases from the summer of 2008, the cartel used verbatim words to describe $150 oil, and its impact on the world economy. Then again, as Dallas Fed's Fisher pointed out earlier today, commodities are now exposed to the same excess liquidity bubble that took crude to its all time highs. We expect nothing less this time around, especially now that for some inexplicable reason, the world believes that the Fukushima situation is contained and thus the "demand destruction" part of the equation can fall out.

Earlier we briefly noted the surge in UK February inflation which coupled with the ongoing decline in GDP, and increased deficits indicates that the UK economy is in dire need of reliquification, which alas won't come (or so the rumor goes) precisely courtesy of ongoing money printing. Just confirming this deterioration visually is the UK Misery index (combination of inflation and unemployment), which has just hit a 20 year high.

The 2 Year Ireland-Bund spread has just hit an all time record wide of 835 bps, following unconfirmed rumors that either Ireland or Allied Irish Bank has missed a coupon payment. Since the latter is backstopped by the former it is rather difficult to see where one ends and the other begins. And confirming that Europe can no longer use MENA or Japan as a smokescreen, Greek 10 year spread to Bunds widens 16 bps to 935 bps. Since pretty much all curves are inverted, we expect Ireland to approach Greek default risk within days. This is especially true since nothing in Europe's fiscal situation has changed and the dire funding requirements for debt rolling and deficit funding, are, well, dire.

With much confusion over just which radioactive isotopes are considered dangerous following the Fukushima explosions, Reuters has compiled a handy overview of the key actors: iodine-131, caesium-134 and caesium-137. For the time being only the far more inert and shorter half-life elements such as Xenon have been dispersed globally, while the more dangerous isotopes have been relatively localized, and their dispersion is limited to wind direction.  Furthermore, metrics such as halflife are relatively irrelevant for now since the release of radiation continues mostly unabated thereby producing a constant source of freshly radioactive substances. This is all the more validated by the just released NHK data indicating a surge in radioactivity as far away as 40 kms from the plant: "Japan's science ministry says radiation exceeding 400 times the normal level was detected in soil about 40 kilometers from the troubled Fukushima Daiichi nuclear power plant. The ministry surveyed radioactive substances in soil about 5 centimeters below the surface at roadsides on Monday. The ministry found 43,000 becquerels of radioactive iodine-131 per kilogram of soil, and 4,700 becquerels of radioactive cesium-137 per kilogram about 40 kilometers west-northwest of the plant. Gunma University Professor Keigo Endo says radiation released by the iodine is 430 times the level normally detected in soil in Japan and that released by the cesium is 47 times the norm."

The U.S. dollar and yen are under pressure again today while gold and silver have taken breathers after yesterday’s gains (see table). Rather than gold and silver rising in price, we are seeing the continual devaluation of the U.S. dollar, the yen and all fiat currencies and thus their prices falling against the precious metals. Incredibly, the dollar has lost 7.5% of its value in less than 3 months (since January 7th 2011) and more than 17% in just 8 months since August 2010. Hence the nominal record highs in gold and silver. The volatility and sharp falls in the dollar are leading to deepening inflation throughout the world (as seen in the UK inflation rate of 4.4% today). Thus, the dollar’s safe haven status is being increasingly questioned. Many market participants are worried because the dollar continues to fall despite the real risks of a recurrence of the Eurozone sovereign debt crisis, a wider military conflict in North Africa and the Middle East and a nuclear catastrophe in Japan.

• Arab Regimes Under Siege (WSJ)
• Rift Over Command of Libya Campaign (FT)
• Premier Wen Jiabao Says ‘Urgent Steps’ Needed on China’s Trade Imbalance (Bloomberg)
• Japan Maintains Threat of Further G-7 Action (WSJ)
• China Central Bank to Lift HK Yuan Clearing Interest Rate (Reuters)
• U.S. Banks Oppose Tighter Money Rules (WSJ)
• How Germany Can Avoid a Two-Speed Europe (George Soros)
• Trichet Signals Rate Increase Likely (WSJ)
• Osborne to Reveal Borrowing Increase (FT)

More bad news out of the UK, where CPI inflation surged from an already nosebleed inducing 4% to 4.4% in February coupled with deteriorating budget shortfalls as public borrowing was nearly double the consensus. The inflation number is particularly worrisome as it was the highest since 2008, driven by a surge in clothing price inflation. It seems at least UK retailers have reached their margin breaking point and have no choice but to hike end prices at this point. From Goldman: "CPI inflation rose from 4.0%yoy to 4.4%yoy in February (vs. Cons. and GS: 4.2%). This is the highest rate of inflation since 2008 and was driven by a sharp increase in clothing price inflation (from 1.3%yoy to 2.8%yoy). The public-sector borrowing data were disappointing on the month (£10.3bn vs. Cons: £8.0bn, GS: £4.3bn) but that overshoot relative to consensus expectations was almost entirely offset by (net) downward revisions to previous months' data."

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 22/03/11

Futures mostly positive this morning, with European stocks rising despite rising concerns over the EMU’s bailout fund. The BOJ announced today that lender’s deposits with the bank will increase 146% to a high of ¥43.6T today v ¥17.7T the day before the earthquake as Japan continues to inject large amounts of cash into the financial system to help speed the recovery. The BOJ announced today that lender’s deposits with the bank will increase 146% to a high of ¥43.6T today v ¥17.7T the day before the earthquake as Japan continues to inject large amounts of cash into the financial system to help speed the recovery. Fiscal pressures worsened in the UK with a new report showing an increased budget deficit rose as revenue fell. Inflation pressures are worsening as well as UK CPI rose 0.7% MoM and 4.4% YoY v 0.6%E MoM and 4.2%E YoY.

The first confirmed US military asset lost over Libya is an F-15E jet, following confirmation from The Telegraph that the plane crashed, supposedly as a result of a mechanical error, not due to being shot down. From Reuter: "A U.S. Air Force F-15E fighter jet crashed in Libya overnight after apparent mechanical failure but its crew were safe, a spokesman for the U.S. military Africa Command said on Tuesday. Libyan rebels rescued the pilot after he ejected from the warplane which came down near the eastern city of Benghazi, Britain's Daily Telegraph newspaper reported on its website. "Just found a crashed US warplane in a field. believe a mechanical failure brought it down," Telegraph correspondent Rob Crilly said on the Twitter micro-blogging site." Well, at least it isn't one of those brand spanking new F-35s.