Crude

With US, and now Canadian and Korean warships all converging on Libya, the developed world is certainly sending Tripoli a very loud and clear message. And with Libyan defense forces obviously a joke in comparison to the offensive being slowly mounted against it, one wonders what if any defense tactic the Northern Africa country has. The answer: oil. From Reuters: "Libya hopes tensions with Western countries over a popular revolt in the country do not reach the stage where the Tripoli government considers oil as a political weapon, a top oil official said on Wednesday. Shokri Ghanem, chairman of Libya's National Oil Corporation,
also told Reuters in an interview that Libya's troubles had
created the country's worst energy crisis in decades and Libyan
supply disruptions to world markets could push oil above $130 a
barrel in the next month if troubles persist." Yet as Saudi Arabia has used every chance to make it all too public, the kingdom supposedly has more than enough capacity to pick up the slack, should war break out and Libya go ahead and set fire to its wells. So it is surprising that the Arab League roundly rejected "foreign intervention" in Libya, putting US offensive forces in a tight bind, should it decided to proceed with an attack.

This is the first in an occasional series examining the end of the American Empire and the global shock waves it will produce. Contrary to popular belief I suspect the unraveling will take place over many years, decades even, with sudden plunges and slow partial recoveries aka dead cat bounces. I call this series of examinations “End Game”.

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.

Reuters presents an interesting chart, which shows the historical correlation between oil (both Brent and Crude) and equities. After we had seen a positive correlation, either weak or strong, between the commodity and the risk asset for two and a half years, the correlation has finally flipped and gone negative. And while many debate whether or not the WTI is relevant at all any more with all the factors that have caused a record spread between it and Brent, one thing is obvious: the last time WTI to Stocks hit a correlation of -0.5 is just after the market peaked in late 2007, early 2008, as the market had started its decline which culminated with the global sell off of everything not nailed down, bringing the S&P to 666. The correlation between the two assets is again -0.5. If Brent confirms the WTI correlation, it may be time to run.

All those naively hoping that Saudi Arabia has suddenly developed some altruistic bent and will act against its own interest by increasing excess production (which according to Jim Rogers it simply does not have), to keep oil prices lower, are advised to reevaluate. According to CBS, citing "the conclusion of an internal report prepared by a major investment firm based on information from its extensive and knowledgeable contacts within OPEC" Saudi Arabia won’t take "significant steps to bring down the price of crude oil until Brent, the grade traded most on the open market, reaches $120 a barrel, about 8 percent above current levels." More from CBS: "In the report, which was made available to MoneyWatch on the condition that the firm not be named because briefings with its contacts are off the record, the OPEC sources reiterate their earlier analysis of the oil market, which has proven to be on the nose. They contend that the delicate political situation  across the Middle East and North Africa - including the fragile state of affairs within Saudi borders - is preventing the kingdom from doing the sensible economic thing and increasing production to keep prices under control." Which simply means that Rogers and all those doubting the veracity of Saudi's motives, not to mention the kingdom's rhetoric that it has boosted output to over 9 million bbls/day, have been correct, and the supply/demand dynamics of the stock market have been largely unchanged since Libya took over 1.6 million barrels of oil from the market.

That didn't take long. From Reuters: "A Saudi Arabian official denied a report on Tuesday in an Egyptian newspaper that the kingdom had sent tanks to Bahrain to try to quell protests there. Brent crude oil hit a session high of $113.15 a barrel on the report before easing to $112.96 by 1337 GMT. The official at the Saudi defence ministry said no tanks had crossed the causeway to Bahrain. The official requested anonymity." Obviously, should a picture or two appear shortly confirming the original rumor, the "anonymous" source's credibility may be jeopardized...

Should the U.S. ban oil imports [except Canada] for energy security and independence? At least that's the policy proposed by a study group at Yale.

It's not quite a triple forward (or inverse) ETF on gold just yet, but it's a start. Capitalizing on the surge in volatility in the commodity space, which together with FX has become the go to arena for day traders seeking volatility, which has been completely eradicated from stocks courtesy of the Bernanke Put, the CBOE and CFE have "announced plans to launch futures and options on the CBOE Gold ETF Volatility Index (Ticker - GVZ). Pending regulatory approval, CBOE Futures Exchange (CFE) will begin trading GVZ futures on Friday, March 25, and CBOE will introduce GVZ options a few weeks later." The reason for this product to be pushed on investors is that after peaking near 25 in December, the ^GVZ has plunged to one year lows as gold has steadily remained just off its all time highs. So if the first volatility derivative isn't generating the much needed commission broker P&L, it is time to break out 2nd and further vol derivatives. We expect a triple or more-leveraged ETF on gold and silver to arrive shortly, then followed by an ETF which tracks the theta in the first ETF , and so forth, until the entire market is dominated by "synthetic CDO-like" derivatives and nobody cares about the actual underlying, just so traders have something to keep them occupied. After all diversion, is half the battle.

It appears we may have misspoken earlier when we suggested that today's peak-lunaticism will be that spouting from the mouth of one ex-Goldmanite Bill Dudley. Here is another current Goldmanite (whose recent GSAM P&L track record is in dire need of public dissemination), vying for today's prize. "If I look at the whole region together, then just at Africa in general,
MENA has the combined potential to be a BRIC-like economic group. In
this spirit, and despite all the horrible things happening in some of
these places, this revolution strikes me as being essentially rather
bullish." If it weren't for my horse...

Entering 2011 as the currency that everyone loved to hate, the Euro has staged a dramatic comeback, much to the chagrin of hedge fund managers and traders alike. Since January, the troubled currency has rallied ten cents from $1.28 to $1.38. Is this the beginning of something big? Or has it shot its wad and headed for a spill?

The paper-driven sell off in the gold market seen in January has been trumped by continuing robust physical demand in January and February. This has resulted in gold rising nearly 6% in February and silver’s strong industrial and investment demand leading to a 19% rise to new nominal 30-year highs. Political, and more importantly socioeconomic, revolutions in the Middle East and North Africa are leading to a degree of geopolitical instability and risk not seen in many years. This is leading to concerns about oil supplies from the region and hence the 14% jump in US crude oil just last week and deepening inflation concerns. With all eyes on the Middle East and North Africa, there has been less focus on the continuing European sovereign debt crisis. However, the crisis continues and recent days and weeks have seen government bonds in Greece and Ireland again come under pressure. The majority of Irish people are seeking that the massive debts of the Irish and European banking systems, incurred against them, be restructured or defaulted. Therefore, the new government will be under pressure to negotiate a fairer, more equitable settlement with the European Commission and the ECB with possible ramifications for the many European banks who lent irresponsibly to Irish banks...Mooted proposals by the Vietnamese Central Bank to ban “gold bullion trading” (see news below) are somewhat bizarre. If true this would be a very important development as the Vietnamese are some of the largest buyers of gold bullion in the world.

Saudi Arabia continues being on an excess capacity roll. After totally butchering the concepts of apples and oranges, specifically as pertains to light sweet and heavy sour, with the market apparently stupid enough not to know the difference, and somehow promising it can make up for lost Libyan output last week when in reality it is in desperate need to export more oil to balance its budget, the increasingly troubled country now is seen as the natural backstop to Oman disruptions. Reuters reports: "Oil prices turned lower on Monday as reassurances from Saudi Arabia that extra supply needs had been met soothed market fears over the spread of protests to oil-producer Oman. Violent uprisings in OPEC member Libya dramatically reduced exports from North Africa, but Saudi Aramco CEO Khalid al-Falih told reporters on Monday the shortfall had been made up. Falih refused to give exact figures, but an industry source on Friday said the top exporter's output had risen to more than 9 million barrels per day (bpd). This compared with roughly 8.3 million bpd in January, according to a Reuters survey." Of course, whether or not there is any actual hike in production in a country long rumored to be vastly exaggerating its spare capacity, we will only know months from now. In the meantime, Saudi will gladly take the few days of stability sub-$100 WTI grants the world, while it decides how to handle increasingly more beligerent neighbors Yemen, Oman and Bahrain.

After two deaths resulted from protests spreading to that other Yemen (and Saudi) neighbor over the weekend, the situation has deteriorated once again, as Reuters reports the death tool has hit 6, and now "Omani protesters
demanding political reforms blocked roads leading to a main export port
and refinery on Monday as the death toll from Sunday clashes with police
in the Gulf Arab sultanate rose to six.  About 1,000 protesters were standing in the road to block the entrance to the industrial area of the coastal town of Sohar, which includes a port, refinery and aluminium factory. Hundreds more were protesting at a main roundabout, angry after police opened fire on Sunday at stone-throwing protesters demanding political reforms, jobs and better pay. Protesters later burned the town's police station and two state offices." Apparently not even Oman's attempt to follow through in Saudi's footsteps and paradrop money is having much of an impact: "The government, under pressure over its response to the Sohar protests,
pledged on Sunday to create 50,000 more government jobs and hand out
unemployment benefits of $390 a month to job seekers." In the meantime, according to Merrill there is little hope of a return to normalcy in Libya for a long time: "With Libya apparently at risk of a civil war, there are reasons to believe that oil supplies in that country could be off for months," it said in a note to clients, received by Reuters on Monday. So now that Saudi Arabia is the only gulf country not to be rioting, maybe someone can update us on what is happening in suddenly very quiet and even more peaceful Algeria.

The GDP numbers are coming in much weaker than expected and Q4 2010 is but another example. The case for stagflation is strong, even without oil prices going through the roof. Mainstream economists have no idea what's coming.

Uprisings in Africa and the Middle East last week trumpeted any and all global investment themes. The hearts and minds of peoples against regimes played out on a global scale. Crude ended the week up 9.1%. CBOE Volatility Index, VIX, rose 15%. Global equity bourses retreated a few percent with the U.S. outperforming by a marginal percent on QUALITY flight. In some ways there is a marriage of both global and domestic themes alike as the peoples yearn for representation and the embodiment of what government REPRESENTS for people. Or doesn’t represent. Played out on a minor scale, one eye this week was on Wisconsin, Indiana, Ohio, New Jersey and the battles of the hearts and minds of public and private employees alike or better quantified as the high profile and human debate of the efficient allocation of private tax dollars and the consequent rate of return of public service. To oversimplify, it seems like the relevant and searching question everywhere in nation(s) is, how effective does government allocate public and private resources and consequently represent its peoples? This is the looming topic in the United States this week as both sides of the Congressional isle try to avert a government shutdown as lawmakers have funded our domestic "obligations?" only through this Friday. I guess obligation is a relative term. Federal agencies are scrambling to figure out how to handle a shutdown of government. Hey, mail would continue but Federal Parks would be closed. There are many other obvious fiscal and market iterations to be learned as to any auxiliary impacts of how a shutdown or our budgetary largess will shut us down from our creditors.