Previously we heard Pimco's thoughts on the matter of an Iranian escalation with "Pimco's 4 "Iran Invasion" Oil Price Scenarios: From $140 To "Doomsday"", now it is the turn of SocGen's Michael Wittner to take a more nuanced approach adapting to the times, with an analysis of what happens under two scenarios - 1) a full blown EU embargo (which contrary to what some may think is coming far sooner than generally expected), and the logical aftermath: 2) a complete closure of the Straits. The forecast is as follows: 1) "Scenario 1: EU enacts a full ban on 0.6 Mb/d of imports of Iranian crude. In this scenario, we would expect Brent crude prices to surge into the $125-150 range." 2) "Scenario 2: Iran shuts down the Straits of Hormuz, disrupting 15 Mb/d of crude flows. In this scenario, we would expect Brent prices to spike into the $150-200 range for a limited time period." The consequences of even just scenario 1 is rather dramatic: while the adverse impact on the US economy will be substantial, it would be the debt-funded wealth transfer out of Europe into Saudi Arabia that would be the most notable aftermath. And if there is one thing an already austere Europe will be crippled by, is the price of a gallon of gas entering the double digits. And then there are the considerations of who benefits from an Iranian supply deterioration: because Europe's loss is someone else's gain. And with 1.5 million of the 2.4 Mb/d in output already going to Asia (China, India, Japan and South Korea) it is pretty clear that China will be more than glad to take away all the production that Europe decides it does not need (which would amount to just 0.8 Mb/d anyway).
While the aftermath of the first 10 day Iranian wargame in the Straits of Hormuz is still lingering, especially in the price of oil, and the world is bracing itself for parallel exercises between a joint US-Israel operation and a concurrent Iranian effort in the weeks ahead, Iran is not waiting and has already started a brand new military exercise, this time inland and far closer to a key US strategic asset - Afghanistan (and its poppies). From Reuters: "Iran launched a military manoeuvre near its border with Afghanistan on Saturday, the semi-official Fars news agency reported, days after naval exercises in the Gulf increased tensions with the West and pushed up oil prices. Mohammad Pakpour, commander of the Revolutionary Guards' ground forces, said the "Martyrs of Unity" exercises near Khvat, 60 km (40 miles) from Afghanistan, were "aimed at boosting security along the Iranian borders," Fars reported." Naturally, this "reason" is bogus. That said, at this point we are at a loss as to which country it is that is desiring a military escalation more, because both sides appear hell bent on moving past the foreplay stage. Regardless, the whole situation is starting to smell more and more like the summer of 2008 when crude would move up in $5 increments on flaring tensions between Israel and Iran, coupled with Goldman predictions of near-quadruple digit Brent, only to have the entire energy complex implode in the aftermath of Lehman. The recent decoupling of oil from all other risk indicators (oil higher is not a good thing for the economy) is vaguely reminiscent...
Despite the barrage of geopolitical headlines involving Iran, and as of today, the US and Israel, especially as pertains to wargame exercises in the Straits of Hormuz, a different, and potentially much more important story is to be found in the country's capital markets, and specifically its currency, which has continued to tumble ever since Obama signed the Iran financial boycott on New Year's Day as reported here. And, as we predicted, it is the aftershocks of the boycott which may have the most adverse impact on geopolitics. Because if the Iran regime finds itself in a lose-lose situation with its economy imploding and its currency crashing, the opportunity cost of doing something very irrational, from a military standpoint or otherwise, gets lower and lower. Then again, something tells us the US administration has been well aware of this sequence of events all along. Here is Art Cashing explaining it all.
- Markets await US Non-Farm Payrolls data, released 1330GMT
- UniCredit experiences another disrupted trading session, trades down 11%, then returns to almost unchanged
- Iran causes further unease with plans to engage in wargame exercises in the Strait of Hormuz
Iran To Hold New "Massive" Naval Exercise Near Straits Of Hormuz, To Run Parallel With Joint US-Israel WargameSubmitted by Tyler Durden on 01/06/2012 08:34 -0400
The selloff in crude yesterday, provoked by this Reuters article stating that Iran is ready to resume nuclear talks with the West, is now well over and the accumulation has again resumed, following (not so) stunning news that merely days after its 10 day Straits of Hormuz military exercise ended, the country is already preparing for yet another, "massive" naval exercise. As RT reports, "Iran is planning to hold new “massive” naval exercises near the strategic Strait of Hormuz within the next few weeks, the country’s Fars news agency has said, as Tehran’s tensions with the West continue to escalate following threats of new sanctions against the Islamic Republic over its controversial nuclear program." And this time the wargame comes with a twist - it will likely occur just across from a comparable drill ran jointly by the US and Israel: "The newly announced Iranian drills, codenamed The Great Prophet, may coincide with major naval exercises that Israel and the United States are planning to hold in the Persian Gulf in the near future. AP quoted on Thursday a senior Israeli military official as saying the drills would be held in the next few weeks." And since the Tonkin Gulf Resolution script is being used point by point, any lost escalation "chances" in the end of 2011 will surely be regained within days.
Fed and/or ECB intervention is coming: whether it is called LSAP, QE x, Nominal GDP targetting, selling Treasury puts, or what have you. A regime that now exists only by central planning intervention, by definition requires ever more central planning intervention to sustain itself, let alone grow further. Furthermore, the banks not only want QE, they need QE. And since central banks serve other banks, not the people it is only a matter of time. Don't believe us? Read anything written by Bill Gross in the past year. So what to do ahead of QE3? Luckily, SocGen has released a complete cheat sheet of not only the dates of the next steps, but what to buy and what to sell ahead of the announcement. In short - one should buy Mortgage Backed Securities, in order to "simply buy MBS before the Fed" - something Bill Gross knows too well and has been hoarding MBS relentlessly as a result, as reported here. More importantly - one should buy gold. Lots of it as "USD debasement restarts." You didn't think the Fed will allow US corporate earnings - the only thing keeping the market alive - to be crushed with a EURUSD that will soon go under 1.20, now did you? And as for crude going to $250 - yes, it may cause huge headaches for regular folks but for banks it means record bonuses, and as a reminder, the Fed works for the banks, not the people, pardon neo-feudal debt slaves...
While Americans were purchasing stuff they don't need with money they don't have to impress people they don't like in the holiday week (but making sure to keep those tags off - you don't get record gift returns if you damage the product or rip the tags off), it appears they did so by walking everywhere. Either that or when it comes to determining real consumer purchasing power, the real answer lies at the pump. According to MasterCard, U.S. gasoline demand sank 14 percent from the prior week to the lowest level in more than seven years of records, as reported by Bloomberg. "Drivers bought 8.16 million barrels a day of gasoline in the week ended Dec. 30, down from 9.46 million the week before, according to MasterCard’s SpendingPulse report. MasterCard’s data goes back to July 2004." So we have just had the lowest gas demand week on record, and that's with gas still at relatively low prices considering what has happened with WTI. One wonders what will happen to end demand when prices finally trickle through. Or perhaps this is all just the central planners' insidious plan to get everyone in America to buy Government Motors magically exploding electrical fire hazard bumper cars? The people demand to know.
As if the situation in the Gulf was not enough on edge, here comes Europe with news, via Reuters, that EU governments have reached a deal to ban Iranian oil imports. The only thing pending is the determination of the starting date and other details. The result, as expected, is another leg up in crude. Sooner or later, this relentless rise higher will spill through to the pump, which according to the Michigan Bizarro confidence indicator will sent consumer optimism to historic levels. And now, the escalation hot grenade is back in Iran's court. Expect more missiles to be fired into the water and more rhetoric about Straits of Hormuz closure in 5...4...3...
Is idiosyncracy the substitute for a fledgling Sovereign Bond Market? Including our recommendations for 2012
There are dim lights at the end of the seemingly darker and darker tunnel. The proposed sanctions legislation allows Obama to waive sanctions if they cause the price of oil to rise or threaten national security. Furthermore, there is the wild card of Iran’s oil customers, the most prominent of which is China, which would hardly be inclined to go along with increased sanctions. But one thing should be clear in Washington – however odious the U.S. government might find Iran’s mullahcracy, it is most unlikely to cave in to either economic or military intimidation that would threaten the nation’s existence, and if backed up against the wall with no way out, would just as likely go for broke and use every weapon at its disposal to defend itself. Given their evident cyber abilities in hacking the RQ-170 Sentinel drone and their announcement of an indigenous naval doctrine, a “cakewalk” victory with “mission accomplished” declared within a few short weeks seems anything but assured, particularly as it would extend the military arc of crisis from Iraq through Iran to Afghanistan, a potential shambolic military quagmire beyond Washington’s, NATO’s and Tel Aviv’s resources to quell. It is worth remembering that chess was played in Sassanid Iran 1,400 years ago, where it was known as “chatrang.” What is occurring now off the Persian Gulf is a diplomatic and military game of chess, with global implications.
- Market talk of a French sovereign downgrade continues to do the rounds – Unconfirmed
- German Unemployment Change (000's) (Dec) M/M -22K vs. Exp. -10K (Prev. -20K, Rev. to -23K)
- EU says the commission and member states have submitted amendments for new EU treaty
Don't look now but oil is spiking as the market is finally realizing that the escalation in the Persian Gulf is more than just for show (which curiously was once again set off by Obama establishing a full financial embargo of all Iranian activity on New Year's Eve, leading the Rial to plunge to a new record low, and about to set a brand new scramble for physical gold in the country on the verge of hyperinflation). At last check WTI was up over $2.50 with the market realizing that either Dalio will be right (central banks going into overdrive) or the Iranian escalation will finally pass the trigger threshold, and Brent was over $110. Today's escalation, just as requested by the US, is not another missile launch but a threat by the Iran military to retaliate if the US carrier John Stennis were to once again cross the Straits of Hormuz and return to the Gulf. As a reminder, as of December 23, as was observed by Stratfor before the hacker takedown and reported here, the Stennis was within shouting distance. From Reuters: "Iran will take action if a U.S. aircraft carrier which left the area because of Iranian naval exercises returns to the Gulf, the state news agency quoted army chief Ataollah Salehi as saying on Tuesday. "Iran will not repeat its warning ... the enemy's carrier has been moved to the Sea of Oman because of our drill. I recommend and emphasise to the American carrier not to return to the Persian Gulf," Salehi told IRNA." Which is interesting because considering that the 5th Navy is stationed in Bahrain, i.e., deep in the Gulf, there is no way that the Stennis or other carriers will not come back, meaning what is likely the terminal escalation has now been set in motion.
If we had to summarize the Status Quo's confidence that no black swans will threaten its control in 2012, we might begin with its faith that the system's self-regulation will resolve all systemic challenges. Just as the Status Quo has placed all its chips on a single bet--that "growth" from debt-based consumption can be resumed with vast public borrowing and saving the predatory financial sector--it also bases its confidence on the system's self-regulation. If the banking sector is riddled with fraud and embezzlement, then some minor tweaking of regulation will solve all issues. If demand for debt has collapsed, then the solution is for the Federal Government to borrow 10% of GDP every year to compensate for the decline of private debt and spending. The faith is that extending and pretending will magically restore the "growth" the Status Quo needs to support its ballooning debt. Extending and pretending offers up the compelling illusion that the system's broken self-regulation is up to the task of fixing systemic problems. In the darkness overhead, we can hear the beating of unseen wings that promise to make a mockery of the Status Quo's supreme Imperial hubris.
As expected yesterday, when the US went out full bore with a Japan-lite approach of McCollum-like strategy of leaving Iran no option but to keep escalating until finally the US has enough public support grounds for a response, in under 24 hours Iran has launched a second missile, this time not a medium-range SAM to a long-range shore-to-sea missile. Needless to say, the US 5th Navy is watching these quite welcome developments with great interest. From Reuters: "Iran said on Monday it had successfully test fired a long-range missile during its naval exercise in the Gulf, flexing its military muscle to show it could hit Israel and U.S. bases in the region if attacked. The announcement came amid rising tension over Iran's disputed nuclear programme which Western powers believe is working on developing atomic bombs. Tehran denies the accusation and last week said it would stop the flow of oil through the Strait of Hormuz if the West carried out threats to impose sanctions on its oil exports." At this point it is glaringly obvious to all but the most confused that the US is consistently pushing Iran to escalate further and further, until such time as the US ships stationed in Bahrain say enough and decide it is time to sink some boats.