Guggenheim's Scott Minerd On The Surprising Winner From The Upcoming Domino Collapse

Tyler Durden's picture

Guggenheim's Scott Minerd has released a somewhat controversial piece looking at several steps forward in case the MENA crisis escalates to the point where dominoes start toppling each other. His conclusion: "After all these dominoes fall, global investors will likely find themselves in a world that looks like this: the Middle East is highly unstable, emerging market economies are slowing, and the crisis in Europe has been exasperated by shrinking exports, leading to a decline in the value of the euro. Against this landscape, the U.S. economy and dollar-denominated financial assets will look increasingly attractive on a relative value basis." Needless to say we disagree with this rather simplistic assessment, or rather, with a very large caveat: in nominal terms, Minerd may well be right, but the resultant surge in oil to well over $200 (should his thesis pan out) will cripple the US economy, force the Treasury to turn on the afterburner on debt issuance, and ultimately result in the biggest bout of monetization ever, resulting in the death of the US dollar (and thus, the resurgence of the gold standard). That said, it is a good piece, if one takes the conclusion with a big piece of salt. In our opinion, the only clear winners from the domino collapse will be oil as we have claimed since early January... and the PM complex of course.

The Economic Domino Effect, by Scott Minerd of Guggenheim Partners

The democratic movement erupting across the Middle East and North Africa (MENA) reminds me of the historic political changes that occurred the early 1990s when the Berlin Wall fell, the Cold War ended, and a series of revolutionary events led to the dissolution of the Soviet Empire.

When the populist revolution broke out in Egypt, I happened to be in Moscow speaking at the Troika Dialog Russia Forum. I must admit, being at the scene of the Russian revolution 20 years later made the events transpiring in Egypt feel all the more historic. One morning I watched images of Egyptian protestors standing on tanks in Tahrir square in Cairo, and at a dinner that evening I listened to first-hand accounts of when Boris Yeltzin stood on a tank outside the Russian White House during the 1991 revolution.

While my Russian colleagues recounted the winds of change that brought the collapse of communist regimes in the early 1990s, I could not help but reflect on how the political transformations of that period also precipitated turmoil in the financial markets and severe recessions.

The unification of Germany in late 1990, for instance, led to the European currency crisis in 1992-1993 and essentially plunged the entire continent into a deep recession.

This crisis was a particularly vivid experience for me because at the time I was running European fixed-income trading for Morgan Stanley. Similarly, the 1991 collapse of the Soviet Union was followed by a severe recession and hyperinflation.

History teaches us that the revolutionary road is lined by economic shocks and currency instability. As the events play out in the Middle East and North Africa, I believe the turmoil in the region will perpetuate an economic domino effect that may result in dramatic shifts across the investment landscape over the course of the next year.

The Global Cost of Turmoil: Higher Oil Prices

As we have already begun to see, the mere threat of a disruption to the world’s oil supply has caused the price of crude oil to spike. The extent and duration of the spike in oil prices will depend largely on whether the threat extends beyond smaller oil producers like Libya, Algeria, Yemen, and Bahrain, and into larger players like Saudi Arabia and Iran. Keep in mind that oil prices spiked 15 percent on the perceived threat that Libya’s production of 1.6 million barrels per day might be in jeopardy. Imagine what may happen to prices if investors perceive the possibility of an interruption to Iran’s production of 3.7 million barrels per day, or Saudi Arabia’s 8.6 million barrels per day.

In terms of how high crude oil prices may rise, the summer of 1990 may provide some perspective. During the early stages of Operation Desert Storm, crude oil prices rose 141 percent over a three-month span. It was another five months before prices
returned to pre-crisis levels, which meant that for more than eight months oil prices were, on average, 40 percent higher than pre-crisis levels.

If we apply a price appreciation experience similar to the Gulf War in 1990 to the average crude oil price one month prior to the protests in Egypt (approximately $90 per barrel for sweet crude oil futures on the NYMEX), we arrive at oil reaching as much as  $215 per barrel. If we apply a lower percent increase, say the average increase of 40 percent during the 1990 conflict, crude oil would still exceed $125 per barrel. With crude oil futures currently trading around $98 per barrel, this means it would be possible to see oil prices rise another 25 percent increase from present levels.

Short of a threat to Iran or Saudi Arabia, oil at $200 per barrel is unlikely; however, as the democracy movement spreads across the MENA region, I believe there is a very real prospect that crude oil prices could hit $125 or higher.

Higher Energy Prices Mean Pressure on Emerging Markets

If energy prices linger at such elevated levels, the next domino will be heightened inflationary pressures around the world, but particularly in the emerging markets. Central bankers in Brazil, Russia, India, and China (the “BRIC” countries) are already wrestling with runaway food prices. Surging energy prices are likely to trigger even tighter monetary policy decisions in the near term. The hawkish European Central Bank could even be convinced to move toward a rate hike as well.

But of all the economies impacted by higher energy prices, China may be in the worst position. Recently, China surpassed Japan as not only the second largest economy in the world, but also the second largest consumer of oil in the world. The possibility of a sustained, dramatic increase in energy prices should finally convince the People’s Bank of China that it has a significant inflation problem and is meaningfully behind the policy response curve. With inflation already at 4.9 percent but real interest rates at -1.9 percent, China is facing the triumvirate of price pressures: food, wages, and now energy.

But China is not alone. The other BRIC countries – Brazil, Russia, and India – also need to take dramatic policy measures to cool off overheating markets and fight inflation. We’ve already seen this in Russia, where a surprise rate increase was announced on February 25. This surprise move helped lift the ruble to its highest level in more than two years. Across the emerging markets, exchange rates (including the Chinese RMB) may be valued significantly higher to quash domestic inflation and calm the growing social unrest that has resulted from rising food prices.

Looking ahead, I believe restrictive monetary policy will lead to economic slowdown in the emerging markets in 2011. Since it’s seldom a good bet to fight against central banks, emerging market equities are not the place to be for the next few quarters. For investors looking at these markets, the next entry point should become apparent once there has been a material increase in interest rates and commodity prices begin to trend downward.

Cooling in the Emerging Markets Grinds on Europe

Any economic slowdown in the emerging markets will be especially painful for global economies that rely on exports to those markets for their livelihood in 2011. The prime example of this is Germany, the one economy that must remain strong for the sake of Europe.

Fueled by emerging market demand for autos, industrial products, and machinery, German exports to the BRICs rose 37 percent in 2010. This growth added as much as 1.1 percentage points to Germany’s remarkable 3.6 percent GDP growth for the year. If Germany isn’t able to expand its exports to the BRICs, which is entirely possible given last year’s robust output and the potential economic cooling of the emerging market economies, then Germany’s GDP could fall short of expectations by as much as a half of a percentage point.

Last year, when the German economy was humming along at 3.6 percent, Euro Area GDP was a scant 1.7 percent. In 2011, the economies of Greece and Portugal are projected to contract. Ireland and Spain teeter on the verge of recessions as well. The European Commission is already projecting German GDP to fall to 2.2 percent in 2011. If German GDP falls to below 2 percent, which I think is highly likely, economic growth for the Euro Area will likely dip below 1 percent, or possibly begin to contract. This means the Euro Area could find itself on the brink of another recession and the European Central Bank would be forced into accommodative monetary policy.

The Ultimate Beneficiary: U.S. Markets

After all these dominos fall, global investors will likely find themselves in a world that looks like this: the Middle East is highly unstable, emerging market economies are slowing, and the crisis in Europe has been exasperated by shrinking exports, leading to a decline in the value of the euro.

Against this landscape, the U.S. economy and dollar-denominated financial assets will look increasingly attractive on a relative value basis. By the second half of the year I expect to see a rebound in the dollar, lower bond yields, and the outperformance of U.S. equities relative to Europe and most of the emerging market countries, with the possible exception of Russia. The flight to safety play will also be good for gold prices, which continue to be in a generational bull market despite the recent consolidation (which I view as healthy).

Going Back to the First Domino

Looking back to the beginning of economic domino effect, it’s natural to think of the turmoil in the MENA region as the precipitating event – the hand that tipped over the first domino. But what may be most ironic about this entire scenario is that the dominos falling across the globe, from the Middle East to Asia and then Europe, ultimately end up back in the United States. I say “back” in the United States because the first domino that set these events in motion was actually the Federal Reserve’s policy of quantitative easing.

By printing almost $2 trillion dollars and using them to buy assets, the United States created a rising tide of liquidity that has lifted all asset prices, including commodities, and more specifically agricultural products. Just as chronic food shortages were a major catalyst in the 1991 revolution in the Soviet Union, rising food prices have been a catalyst for the social unrest in the Middle East and North Africa, and it even appears to be spilling over into China under the banner of the Jasmine Revolution.

Regardless of who’s to be blamed (or credited, depending on your perspective) for prompting the social unrest that has swelled into waves of democratic revolutions washing over the Middle East, the moral of the story for investors is that the U.S. financial markets should prove to be one of the most attractive places to invest in 2011.

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jus_lite_reading's picture

If the muslims wanted to take down the whole western domination scheme, all they'd have to do is start a major war amongst the 5 top oil producing nations (throw in Israel for good measure) et voila!

Just think- the whole global financial ponzi scheme is held together with a string and bubble gum...

Popo's picture

Actually, all they need to do is mount a concentrated effort against the world's pipeline and port infrastructures. 


Pipelines alone are an *incredibly* easy target, as pipelines are long and extremely vulnerable.


But here's the thing:  The fact that our pipelines have been safe for so many years is in and of itself, a good indication that the perception of threats is largely overblown.


Similarly -- if there were really a threat of terrorism in the USA, we would see cafe bombings, bus bombings and train bombings -- where the security infrastructure is either non-existant or minimal.


The world's oil infrastructure is unbelievably vulnerable -- particularly when it comes to pipelines and oil-transport. (Small, stationary facilities are more easily defended).  Anyone wanting to crash the first world would have a relatively easy job if they had the coordination and the manpower.   Given that the pre-caliphate has no shortage of either -- one can only assume that the threat is not nearly as large as the military-industrial complex would have us believe.


traderjoe's picture

Must everything be bullish? Absurd...

NotApplicable's picture

Well, all of that 'money' has to go 'somewhere.' </sarc>

The idea that 'vanishing into thin air' qualifies as somewhere just hasn't occurred to him yet.

markmotive's picture

The 2008 financial collapse happened when oil pushed a fragile economy over the cliff. Consumer spending is already beginning to slow and we've barely hit $100.

The boom-bust cycle will continue as economies grow more unstable, governments leverage to the hilt and oil becomes more scarce.

Cash_is_Trash's picture

May the best metal win.

Now touch gloves and fight!

Cognitive Dissonance's picture

While all the turds are swirling around the bottom of the toilet bowl during the flushing process, it's natural for some to sink faster than others. That's to be expected. So while money can be made on handicapping the sinking turds, my question (and Tyler's repeatedly) is how do you maintain the value of the fiat dollars you won in the race to the bottom.

PMs...... until they are confiscated.

BTW I had a thought today about resolution of Ponzis. Remember how the Madoff Ponzi is being resolved. People who received payouts from before the Ponzi was discovered, either as income or lump sum, are now being forced to cough up that money to distribute to those who were all in and never took any money out.

Do you suppose those who extracted Gold and Silver out of the Comex by standing for delivery will be forced to cough up that metal after the Comex finally goes up in flames in order to make whole those who were still "in the game" when it collapsed? 

I know that's an ugly (and unfair) thought folks, but we must be prepared for when the desperate zombies backed by a government who is desperate to deflect blame are pounding on the doors.

rubearish10's picture

Not before a violent revolution unfolds in our own streets.

Misean's picture

Man, what a great rule! They need that in Vegas. This one time, I was on a role at the craps table, and my chips on the table were like $!5K and I had a few too many shots and this dude comes up to the table and starts betting against the hand and BOOOM! all gone in like 15 secs! It would be SOOOO cool if I could get some of my winnings back by taking that other guys.

LawsofPhysics's picture

"I know that's an ugly (and unfair) thought folks, but we must be prepared for when the desperate zombies backed by a government who is desperate to deflect blame are pounding on the doors."


Don't forget, they will be armed with a "world currency".  Fine with me, and my like minded neighbors.  Our wealth is hidden and, depending how many come knocking, who (especially on this website) is going to go looking for another missing government agent or two?

zaknick's picture

That has historically been the true evil connotation of the words "gov agent". It's only on the MSM that the "Feds", the "drug warriors" are glorified.


Cognitive Dissonance's picture

My sentence that you highlighted was talking about the Comex Ponzi, not the PM confiscation that is the ultimate end game that I refer to at the top of my comment.

The sentence was talking about those who stood for delivery on the Comex for Silver and /or Gold. I'm not talking about those who bought coins or small bars.

LawsofPhysics's picture

Yes, but since most won't know the difference, the irony is that they will fight to the death over those bars of lead.

Shameful's picture

I agree with your estimation of keeping something of value. Doesn't make a lot of sense to bet on an unknown when even this gentleman id bullish on the metals in a era of crisis.

However not so sure about confiscation. I cannot believe that they would go door to door to take them. Massive taxes and put in laws to limit their trade, you bet. But even then I have to assume in a collapsed society a black market would exist so it would be roll the dice and take your chances.

Might be wrong with the big players that area easily traced, but usually gov only goes after cost effective means of pillage, IE won't spend $1.5 to get $1 in revenue if revenue is the actual goal. A door to door search for gold, and probably yard to yard, would simply not be cost effective. Plus it would drive quite a few gold bugs into kill or be killed mode, and the tax man does not want people taking shots at him.

Cognitive Dissonance's picture

My comment was broken into two parts seperated by the BTW.

Comex Ponzi collapse is way before the end game. Confiscation is the end game.

Shameful's picture

Well it would have to be the endgame, because confiscation implies disarmed Americans which will take some doing. So would be right around the same time as RADICAL population reduction. And yeah if it's time for that all bets are off. No one will be worried about the market if there are death squads roaming the streets to thin the herd.

Cognitive Dissonance's picture

Yup. Desperate people do desperate things.

I just don't understand why so many here on ZH find the end game so crazy when we are currently seeing insanity to the nth degree by the powers that be. Extrapolate the insanity out. This is a world wide contagion.

Shameful's picture

Part of it is our own normalcy bias. I daresay the vast majority of the ZH population is from the US and Canada, and quite frankly nothing really bad has happened in either place for living memory. Some had parents or grandparents in the Great Depression, but that was a long time ago, and was not as bad as the crises facing the rest of the world since. The economic crisis will be one hell of a wild ride but there are other factors at play.

I suppose it also depends on how far we go down the agenda and how fast. The big boys want a reduced pop, radically. Strange how anyone who has a lot of money talks about our over population, who gets to decide who stays and who goes? Well hate to say it, but most of us will have to go. Now will they do it fast, a mass culling? Or will it be slow (30-50 years), via poisoning of various methods? I don't know, but either way is pretty bad.

As to planning I just assume PMs are the safest place. Are they totally safe no. If we are moving into the pop reduction phase and if it's fast PMs won't save anyone. Hell might not even save people in the slow method.

LawsofPhysics's picture

Add to that "normalcy bias" the sense of entitlement most young Americans have and you get chaos at levels never seen before.  After serving in the ARMY AMEDD corp in Afghanistan and witnessing people in their true "animal" sense it didn't take long to realize I wanted to advance my education.  20 years later I run my own biotech operation and see kids coming in from all these ivory towers demanding to be hired because they have a degree.  Sorry folks it doesn't work that way.  Pretty sure many spend hours online playing MWII and the new "Black Ops" game.  What these radical "I'm entitled" kids don't realize is there are many veterans out there who do not hesitate when confronted with a threat to life and liberty.  Good be a good thing in the end.  A plague would be more random, but this will work just as well.

Shameful's picture

I've talked about the culture issue facing us a lot. It's probably the biggest problem we face. Economic problems happen, but the culture problem is a monster. These people are really contaminated. So in an economic collapse they will follow anyone offering them the freebies they expect. So having any visible wealth is dangerous. The state will use them to do the final phases of looting. After all these people will agree to almost anything to get back to "normal". Hell I'm finishing a degree and the level of student loan debt is epic. I can only imagine what many would do to get goodies and out from under that debt.

Don't care how hardcore you are, a mass of entitled zombies will drag you down. There are simply to many, they will use society and democracy first and physical force second. It's worse for guys like me who are not hardcore or tough :)

LawsofPhysics's picture

"a mass of entitled zombies will drag you down"


Precisely my point.  Most vets will recognize the zombies and use force first.

Popo's picture

"Do you suppose those who extracted Gold and Silver out of the Comex by standing for delivery will be forced to cough up that metal after the Comex finally goes up in flames in order to make whole those who were still "in the game" when it collapsed? "


It's important to remember what happened to the Hunt Brothers.  The story the Street would have you believe is that they were a bunch of evil monopolists, attempting to manipulate the market.   The reality is that they *did* crash J.P. Morgan -- or at least they would have.  Essentially, they played by the rules and gave Wall Street a thrashing with in inches of insolvency.  

So what did the Street do?  They changed the rules, of course.   They altered margin requirements, and destroyed the Hunt Brothers. 

The lesson of the story is clear:  You are playing in a rigged game.   As long as you believe that the market is a fair-trading platform which operates on a defined set of rules, you will believe that you can win.  But that is not the case.  The rules can be changed to favor the House at any time. 

Anyone who was short bank stocks heading into the crisis a couple years ago (me included) learned this lesson the hard way, when new short positions on bank stocks were suddenly banned, driving bank stocks north and creamating the shorts.  (I got my ass kicked.   Was I correct in my belief that the banks were in trouble?  Yes.  Should I have made a bazillion?  Yes.  Did I?  Hell f*cking no.)  

Be very careful betting against the house.   The rules can be changed at any time in their favor.   Yes, it will be unfair -- even illegal.   They will win.

Confiscation is a sticky business.  There are many, many other ways they can effectively conficate the value of your gold and silver -- and they will.   It will either be a 90% cap-gains tax on metals sales, or it will be a tax on allocated/non-allocated fund holdings, or it will be a retail tax on all gold/silver transactions, etc. etc. 

The belief in security is a dangerous form of self-deception.  When the House can alter the rules at any time, loopholes and the very concept of 'security' are meaningless. 

In other words -- spread your risk wisely.  Gold and silver are both tempting -- and wise options -- to an extent.  But they are hardly without risk.  And that risk is extremely real.


rubearish10's picture

US assets to outperform worthlessness? How's that? 

LawsofPhysics's picture

The author is contradictory here.  If rising food costs are behind all the revolutions.  How does the fact that 44+ million Americans are using food stamps and the purchasing power of those same Americans is getting crushed?  Moreover, the government (taxpayer) is broke and still must pay for those elevated food cost with an increasingly worthless piece of paper.  How does this not spell disaster for the U.S.?  The article seems like it is shilling for the financial sector.  We all know that the financial a cancer that the broader sectors of the economy can no longer sustain.  When a parasite extracts too much real nutrient value from the host, the will die.  

MachoMan's picture

The social safety net is basically enough for the person who is reasonably bad at managing money to be able to have all fundamental necessities.  Those that are more adept at stretching dollars can end up with discretionary income...  in general of course.  You can think of the squeeze on the food stamp folks just like the margin squeezes on corporations...  we can get job shedding/cost cutting/etc. etc. for a while, but eventually there are no means in which to operate with any desired purpose.  In other words, your basic thought process is correct, it's just that the margin squeeze hasn't been bad enough yet...

eddiebe's picture

Because the $ is the reserve currency, most people of the world are propping up the$ willingly or not and are subsidizing all americans for the time being.

 Military might is the biggest factor in the strength of the $, which is far from dead. I feel the beast is well and is just starting to flex it's muscle in earnest. Iraq and Afghanistan were warm ups for the coming attractions.

  There are plenty of unemployed young men willing to take a chance with their life for a salary and 3 squares. If that changes all the gov has to do is tighten the screws some more.

Nostradamus's picture

Spot gold just made an all time high and will probably continue higher from here.  Hyperinflation on the horizon anyone?

blind squirrel's picture

And on the S&P futures chart, today's candle is what you call a key reversal day:  take out yesterday's high followed by a close below yesterday's low.

LawsofPhysics's picture

Crash the system, crash it now.  The sooner we do, the sooner compensation will find its way to those that actually bring real value to the economy.  Cheap labor and cheap energy drive economies, not cheap paper.  Always have, always will.

nathandegraaf's picture

Reading between the lines this is what I see:

MENA was the first domino. 

The US will be the last.

2011 will be great for the US.

Now 2012... that won't be fun for anyone. 

Except maybe Russia. 

LawsofPhysics's picture

In many ways, Russia may have actually been the first domino.  Russians have dealt with this before and will be just fine.

Arkadaba's picture

I agree with what you are saying. I saw the signs years ago. Orlov saw it way before me:

Sudden Debt's picture




zaknick's picture

We shall see.....

The gold standard would probably be introduced by Russia, China, and maybe even Europe. The Arabs prefer gold and silver anyways and always have.

Why? Because the gold standard would level the playing field and provide a clean and SOLID slate. Also, lots of these countries that are dismissively called "third world" would become much wealthier than some who have no real gold anymore.

If the US dollar is responsible for their political deaths with all the upheaval, what do these regimes (who have nukes and dont like the US anyways) have to lose? You think they're just gonna go quietly into that good night.....dream on.

Oh regional Indian's picture

Tipping points. 

America will never be a magnet for investment again, except at the barrell of a gun.

Wishful thinking. We'll be at all out war before that ever happens. Or a major natural catastrophe. The signs are there for all to see.


Shameful's picture

Well there is always nuclear blackmail for investment, or a preemptive alpha strike on all nations of the world. That might get us back to investment destination, after all there would be massive need of rebuilding abroad and at home. A world where only the US can make things, like plastic coffins and shelters. Hello construction industry, and grave diggers union!


NotApplicable's picture

Except for the fact that all of the nations with any spare investment money spent it on nukes...

Shameful's picture

It's a good defense choice. A healthy dose of ICBMs will keep all but the most deranged madmen from attacking your country. Assuming they are enemies, allies might still attack, but then I don't think Pakistan has ICBMs so their target list is a bit narrower.

I'm sure there is a RAND report out there somewhere talking about nuclear war and economic recovery, and if their is not I'm sure they are writing it as we speak. So naturally the US would be hit in the retaliation strike, but by what? 1500 warheads, max. I'm sure our most important men would be protected.

Proposal - "I'm not saying we wouldn't get our hair mussed"

Survival - "Mr. President we must not allow a mineshaft gap!"

RECISION's picture

Pakistan could probably get the M/E oil fields though...

Far more bang for the buck.

sabra1's picture


Sudden Debt's picture

Metals are up, banks are down today.

It will be like this till one is landing on the moon and the others are near zero.


Just imagine Bernanke didn't have everything under control and the economy would start to go haywire :)

Manipulism's picture

I am stunned nobody seems to take notice of this:

Karl-Theodor zu Guttenberg, Germany's WAR minister, has resigned over allegations he plagiarised his doctoral thesis, saying he could no longer carry out his duties as minister.

This guy was the hope of the conservatives to follow Merkel.

So this is a big deal.



NotApplicable's picture

Honestly, I can't say I'm surprised. He seemed like the type to plagiarize.

LawsofPhysics's picture

I saw that and went and got Bernanke's thesis.  Still looking for plagiarism, you know it has to be in there somewhere.

Arkadaba's picture

I bet Geithner's thesis might be suspect.

depression's picture

His thesis is based on the wrong assumption that in the currently developing crisis the USD / US Treasuries will be sought as a safe haven.

As Brent spikes to $200, confidence in the USD will collapse sending it into the mid-40's triggering a global currency crisis. The sudden USD collapse will induce a violent  spike in the US Treasury yeild curve triggering a "global default" and crushing any remnant vestiges of confidence in the global system in the process.


disabledvet's picture

"Mad Max:  Beyond Thunderdome."  I'm "revvin' up the Chevy with the 454 big block" with--what do you call him?  a "Turbo-Timmee" on top and a "Bernanke Six Pack"(?) blowin' out the back.  Yeeeeeehawwwww!

gwar5's picture

Then there's this: Financial terrorism suspected in 2008 economic crash - Washington Times

Analyst says Economic war against USA is being conducted. Three phase attack included: 1) rise in oil 2007  2) bank collapse 2008  3) then, ongoing attacks on the USD as the WRC  --- which we are in now.

Considering what Benocide is doing, the attackers (Chinese, Islam?) merely had to do just wait. But maybe inflation is the Bernank's counterattack. Other academics say it has not been economic warefare. The Pentagon now will not touch the story. 

(I say it's the Chinese. I always thought it was peculiar the collapse came just a month after the Olympics were done.)