Middle East

Given how many unconventional means have been deployed over the last weeks, I wouldn’t exclude some form of stimulus postpartum depression… With nothing in immediate sight, it’d better hold. Why does my heart feel so bad?

Did we say Arab Fall? We meant global fall. From the Star Tribune: "Thousands of Kashmiri Muslims protested Friday against an anti-Islam film, burning U.S. flags and calling President Barack Obama a "terrorist," while the top government cleric here reportedly demanded Americans leave the volatile Indian-controlled region immediately. In the southern Indian city of Chennai, protesters threw stones at the U.S. Consulate, shattering some windows and burning Obama in effigy. Police quickly cleared the area, arresting more than 100 protesters. U.S. Embassy officials in Delhi did not immediately comment." And elsewhere: "In Bangladesh, about 5,000 hardline Muslims marched in Dhaka's streets after Friday prayers, burning U.S. and Israeli flags and calling for the death of the filmmaker. Police prevented them from marching toward the U.S. Embassy several miles away." And elsewhere: "In Indonesia, the world's most populous Muslim nation, about 200 protesters chanted slogans and held up signs in a largely peaceful protest outside the heavily guarded U.S. Embassy in Jakarta. American diplomatic outposts increased security worldwide this week after clips of the film went viral online and sparked violent protests in the Middle East. About 20 protesters outside the U.S. Embassy in Kuala Lumpur, Malaysia, shouted "Allahu akbar!" and handed reporters a letter addressed to the U.S. ambassador expressing their anger over the movie and calling for greater respect for religions."

Bernanke took the plunge yesterday by embarking on QE3 or what would be better described as “Currency Debasement 3”. Improving the U.S. job market and therefore economy was the reason given for the extremely radical measures. However, the scale of the open ended monetary commitments suggests the Fed is worried about another Great Depression and an economic collapse. The move was described as "stunningly bold" by some analysts as it is "open ended" with Bernanke pledging to print or electronically create, with no time limit, an extra $40 billion every single month until the labour market improves. This is the frightening vista we have been warning of for some time. It means that should the US economy enter a recession and or depression, which still seems very likely, that the Fed will continue printing money and debasing the dollar thereby leading to dollar devaluation and inflation - potentially virulent inflation on a par with or worse than that seen in the 1970's. We had long said that QE3 was inevitable - the question was when rather than if. Indeed, we had said that given Bernanke's closeness to Wall Street we expected that QE4, QE5 etc.  were likely.  The "open ended" nature of this new round of QE as enunciated yesterday means that the Fed could if it wished or believes it is necessary print unlimited quantities of dollars.

Today's Zero Hedge articles in audio summary! "Bernanke's announcement made me QE in my pants. Now featuring revised grammar!" Everyday @ 8pm New York Time! 

Fresh out of the flashing red headline-a-tron:

• IMF OFFICIALS SAY GREECE WILL NEED A THIRD BAILOUT
• IMF SAYS GREECE CAN'T FILL FUNDING GAP ON ITS OWN, UP TO EUROZONE AND ECB TO FIND MONEY FOR GREECE
• GREECE MET ONLY 22% OF PROGRAM TARGETS FOR 2011
• EURO EXIT WOULD SET GREECE BACK BY MANY DECADES

Nobody, NOBODY, could have anticipated that fighting record debt with recorder debt, could possibly fail. And cue Germany telling Greece the party is now over, which, is what (a sliding EURUSD for those confused) it has wanted all along.

If 2011's Arab Spring was all about the propaganda "hope" of democracy (driven paradoxically by soaring global good prices as we predicted in early 2011 before the first Tunisian domino toppled), then 2012 Arab Fall, is all about the blowback to US policies and intervention in the region. And while we are amused by the media's narrative that an entire continent can suddenly come to arms against Pax Americana over a YouTube clip, we are confident that what some hate-mongering preacher has to say about Mohammed is about as relevant to what is happening in the Middle East today, as how the global economy performs impact the S&P. Absolutely none. What we do know is that the anti-American revulsion, which started on September 11 in Egypt and has since taken Libya and Yemen by storm, is spreading like wildfire. The NYT writes: 'Protests were also reported at American missions in Morocco, Sudan and Tunisia, where the police also fired tear gas to disperse crowds." It is only going to get far worse, as suddenly geopolitics, and the US response thereto, becomes the biggest issue in the presidential debate.

In the last 30 days (since August 13th), platinum has risen by 18.9%, silver by 18.7%, palladium by 18.4% and gold by 7.6%. All remain well below their nominal record highs (see charts) and more importantly well below their inflation adjusted highs. All will most likely continue to rally especially if the Fed announces QE3 today as investors turn to precious metals to hedge substantial money printing by governments and the real risk of future inflation. "The Euro bailout measures and the opening of the monetary policy floodgates by the central banks are likely to result in higher inflation in the medium to long term," says today's Commerzbank commodities note. The strikes and violence in South Africa's gold and platinum industries are supporting and may contribute to higher prices. Machete-wielding strikers forced Anglo American Platinum, the world's No.1 platinum producer, to shut down some of its operations in South Africa, sending spot platinum to a five month high of $1,654.49. 

Now that the German high court ruling is out of the way and the Dutch elections results produced no real surprises the European equity markets are essentially flat with position squaring evident ahead of the keenly awaited FOMC rate announcement and accompanying press conference. Bund futures have followed a similar trend having ticked higher through the morning with some modest re-widening of the Spanish and Italian 10yr government bond yield spreads, wider by 9bps and 5bps respectively, also in Euribor will did see a decent bid after comments from ECB member Hansson who said the ECB council must now start debating a negative deposit rate. Today’s supply from Italy and Ireland had little impact on the general sentiment, that’s in spite of the fact that demand for debt issued by the Italian Treasury was less than impressive to say the least. Also of note, Catalan President Mas said that Spain should debate staying in the euro, which unsettled the market somewhat. Overnight it was reported that the US Navy have stepped up their security presence in Libya by ordering two warships to the country's coast, according to US officials. This is after the US ambassador to Libya and three American members of his staff were killed in the attack on the US consulate in the eastern city of Benghazi by protesters earlier in the week. Today, there were more reports of demonstrations in the region, however supplies remain unaffected.

Anti-American violence and hatred is spreading: first Egypt, then Libya, with very tragic consequences, now Yemen. From Reuters: "Hundreds of Yemeni demonstrators stormed the U.S. embassy in Sanaa on Thursday in protest at a film they consider blasphemous to Islam, and security guards tried to hold them off by firing into the air. The attack followed Tuesday night's storming of the United States Consulate in Benghazi, where the ambassador and three other staff were killed. President Barack Obama said the perpetrators would be tracked down and ordered two destroyers to the Libyan coast, but there were fears protests would spread to other countries in the Muslim world." And since the US will not retaliate against any of these attacks on what is technically US territory except with "strong condemnation", expect many more retaliations against America in the middle east in the days ahead as blowback finally blows up. Also, will the US warships headed to Libya now be redirected to Yemen or the next country that decided to burn down its US mission?

As requested previously. Cutting to the chase, the murder of a US ambassador is not casus belli. Perhaps because it is not quite certain just whom the US would retaliate against, if it indeed decided to do so...

Neoconservatives Ignored CIA Because They Had Other Priorities

Central bank demand internationally continues and demand for gold in the increasingly volatile Middle East remains robust as seen in data from the Istanbul Gold Exchange. It showed that Turkey’s gold imports were 11.3 metric tons last month alone. Silver imports were 6.7 tons, the data show. Much of these imports may be destined for Iran where imports have surged an astonishing 2,700% in just one year – from $21 million to $6.2 billion. In the first seven months of this year, Turkey's exports to Iran have also skyrocketed to $8 billion, up from $2 billion in the same period last year. And it is widely believed that the major portion of the increase, which is $6 billion, stems from the export of gold. There is speculation that the Iranian central bank is buying gold and that they may be accepting gold in payment for oil and gas in order to bypass western sanctions.  Turkey is paying for the oil and natural gas it is importing from Iran in gold, Turkish opposition deputies have claimed, drawing attention to the enormous increase in Turkey's gold exports to Iran in 2012.  “Gold is being used as an instrument for payment. Under the guise of exportation, gold is being sent to Iran in exchange for oil,” Sinan Aygün, a deputy from the Republican People's Party (CHP), has told Turkish daily Today's Zaman.

SocGen’s Sebastian Galy:

The market decided rose tinted glasses were not enough, put on its dark shades and hit the nightlife.

And the uber-bullishness is based on what? Hopium. Hope that the Fed will unleash QE3, or nominal GDP level targeting and buy, buy, buy — because what the market really needs right now is more bond flippers, right? Hope that Europeans have finally gotten their act together in respect to buying up periphery debt to create a ceiling on borrowing costs. Hope that this time is different in China, and that throwing a huge splash of stimulus cash at infrastructure will soften the landing.

One look at the short squeeze in the EURUSD, coupled with the endless jawboning out of Europe, and one may be left with the faulty impression that Europe has been magically fixed and that Greece couldn't be more delighted to remain in the Eurozone. One would be wrong. This is what is really going on in Europe: "As a pharmaceutical salesman in Greece for 17 years, Tilemachos Karachalios wore a suit, drove a company car and had an expense account. He now mops schools in Sweden, forced from his home by Greece’s economic crisis.“It was a very good job,” said Karachalios, 40, of his former life. “Now I clean Swedish s---." That more or less explains everything one needs to know about the "fixing" of Europe.

XAU/EUR Exchange Rate Daily - (Bloomberg)

Gold at €1,355/oz, just 2.5% from the record high of €1,390/oz, is a sign of a continuing lack of trust in the euro and in Draghi’s stewardship at the ECB.