Middle East

While the geopolitical focus is once again all over Iran and Israel, it may be time to take a quick look Egypt, where the recently elected, and pro-US president Mohamed Mursi is "preparing to use aircraft and tanks in Sinai for the first time since the 1973 war with Israel in its offensive against militants in the border area." Reuters continues: "The plans to step up the operation were being finalised by Egypt's newly appointed Defence Minister General Abdel Fattah al-Sisi as he made his first visit to Sinai on Monday following the killing of 16 border guards on August 5. Egypt blamed the attack on Islamist militants and the conflict is an early test for President Mohamed Mursi - elected in June following the overthrow last year of Hosni Mubarak - to prove he can rein in militants on the border with Israel. "Al-Sisi will supervise the putting together of final plans to strike terrorist elements using aircraft and mobile rocket launchers for the first time since the beginning of the operation," an Egyptian security source said. Another security source said the army was planning to attack and besiege al-Halal mountain in central Sinai, using weapons including tanks, where militants were suspected to be hiding." Of course, what can possibly go wrong in the middle east once a government decides to escalate military expansion against militant terrorists. Look for crude to rise ever higher, and for SPR release rumors to hit the tape daily as yet another market is ensnared in price controls ahead of the election.

No, He Didn’t Say That!

Gold continued gains on Friday receiving a boost from Angela Merkel’s comments saying she supported ‘Super’ Mario Draghi’s pledge “to do whatever it takes” to save the euro. While this sentiment lifted markets and some investors hope ECB action is sooner rather than later - it is also creates the risk of currency debasement and could lead to further falls in the euro. At the beginning of August, the European Central Bank said that it might buy Spanish bonds if the government first applied for the European Financial Stability Facility (EFSF) support. The ECB has said that specific committees within the bank would design the appropriate mechanisms for the bond purchases in the coming weeks, suggesting a possible green light within a few weeks.

The vital question of the moment is whether of not The Bernank will signal an intention of moving towards QE3 in his much-anticipated 'Jackson Hole' conference in two weeks. Citi's Tom Fitzpatrick believes "it would be irresponsible to do so and that we need a more 'responsible fiscal policy' which will not materialize as long as we have an 'irresponsible monetary policy' bailing policymakers out". However, what we think in this regard is totally irrelevant to this discussion for it is what we think the Fed thinks that is critical. Recent data seems to have been a little more supportive of the economy (on the face of it) and may lead the Fed to stay on hold in the near term (September meeting). This will almost certainly raise the bar extremely high for further easing as we head into the Presidential race proper. If this window closes then a move before December will be extremely unlikely barring a major financial/market/economic shock, since after the 9/13 meeting, there are no more meetings until 12/12. However this increases the danger of the Fed getting 'caught behind the curve' which must be balanced with the 'mistake' of one-monetary-step-too-far with very real inflationary consequences.

Just when you thought it was safe to get back in the water of shark-infested algos; just as we hit multi-year equity index highs (with the entire interest rate complex devastatingly divergent still - despite very-recent weakness), we thought it might be at least a little instructive to remember what happened in the late 1970s as analog. These 3 simple charts of Consumer Confidence, Capacity Utilization, and Initial Jobless Claims show just what can happen when you think it's all over. While there are many 'goal-seeked' analogs, we find these extremely timely given the somewhat similar underlying conditions that the world faces; to wit, Citi notes: "A Middle East 'tinderbox' that is very susceptible to a food price shock and a likely cause of an Oil price shock (as we saw in 1973-1974 and again in 1978-1979)."

Think the US has it bad with its "soaring" gas price, which is now back to $3.75 per gallon? Think again. Here, courtesy of Bloomberg, is a list of the countries whose gasoline cost puts what Americans pay at the pump to shame. In order of descending gas prices, below are the 20 places in the world where one does not want to "fill 'er up."

It is just getting stupid. Europe officially enters recession, Japan GDP declines nominally, China admits to food inflation which locks the PBOC out of easing for months, UK inflation is again rising faster than expected which will soon force the BOE to reevaluate its latest easing episode, Brent is once again rising on supply fears and middle east war fears to a 3 month high, corporate revenues have never been worse in this recession cycle and what happens? Futures spike following a very visible invisible finger pushing ES higher by 0.5% at 9 pm Eastern and setting the scene for trading throughout the night. And since the market has reverted back to full retard mode full of hope of an absolution from the Fed, this time at the August 31 Jackson Hole meeting, which will be very disappointing as Ben will say absolutely nothing yet again, why not take the S&P to new 2012 highs? After all well over 100% of QE3 is now priced in. Finally, expect the ES to surge by 10 points should advance retail sales miss wildly the consensus of a +0.3% print. After all, inverted is the NKI.

It is important to note that markets were also unusually calm during the two weeks of the Chinese Olympics in 2008. The 2008 Summer Olympic Games took place slightly later in August than the London Olympics – starting August 8 and ending August 24. Only days after the ending of the Chinese Olympics came massive market volatility in September and then seven months of market turmoil.  Similarly to this Olympic year, in Olympic year 2008, gold traded sideways to down in a period of consolidation prior to further gains. Gold bottomed in September 2008 in euro and sterling terms.  Another brief bout of dollar strength saw gold bottom in November 2008 in dollar terms.  Besides the eurozone crisis (and the significant risk of the German Constitutional Court deciding on September 12th to reject the recently cobbled together alphabet soup response to the crisis (ESM etc etc) and significant instability in the Middle East, there is also the not inconsequential risk from the US Presidential campaign and the upcoming ‘fiscal cliff’.

European equities are trading flat to minor positive territory at the North American crossover having pared losses made following the weaker than expected Japanese Q2 preliminary GDP and reports from Chinese press that China's RRR cut might have been postponed as the People's Bank of China's reverse repo activity still satisfies liquidity needs. Elsewhere, Bank of America cut China's growth forecast from 7.7% to 8.0% for the year, commenting that the country's ability for monetary easing was constrained by house prices. Volumes have been particularly thin, however, and as there is no economic data scheduled for release from the US, it is likely to stay that way. Greek Q2 advanced GDP surprised markets, contracting at a slower pace year-over-year than Q1 and than was expected, boosting risk appetite across the board. As such, Spanish and Italian spreads are seen tighter by 12.6bps and 9.1bps respectively, with the Spanish 10-year yield holding below the key 7% and the Italian's under 6% despite the Italian government debt coming in at a record high of EUR 1972.9bln.

It’s Not Terrorism When WE Do It ….

The first step toward liberty is to see through the masking fog the state engulfs itself in to carry out its deeds of conquest. Using reason to discover absolute truths is an essential part of determining how one should live their life in accordance with sound ethics.  Relativism denies this.  It can deny that evil is committed by the state and that reprehensible acts are perfectly okay when done by individuals with guns and badges.  All it takes to reverse such destructive thinking is the realization that state authority deserves no pass in moral scrutiny.  Withdrawing consent comes next on the path to a free society.

Three months to the election? Check. Which means war-mongering rhetoric, once considered a staple of the GOP, may very soon become action, first in Syria, and soon, everywhere else. From Bloomberg: "The U.S. and allied forces probably will impose a “no-fly zone” over Syria and take other “more aggressive action” against the Syrian regime, former Defense Secretary William Cohen said. While the U.S. has been leery of another military intervention after a decade of wars, “We’re coming to the point, however, where the violence is getting so severe, I think, that you’ll see a movement towards setting up those no- fly zones,” Cohen said on Bloomberg Television’s “Political Capital with Al Hunt” airing this weekend." Is war and immediate geopolitical escalation guaranteed? Not yet: "The former Pentagon chief and Maine senator, now chairman and chief executive officer of the Cohen Group consulting firm in Washington, said any U.S. military action would depend on participation and support from allies." Although desperate times, and by that we mean unfavorably trending popularity ranking, will certainly require desperate measures. Such as the continued massive build up of US naval assets in the middle east.

The Financial Times published an interesting article on Wednesday by a Tokyo-based analyst with Arcus Research, Peter Tasker, entitled of 'Cash out of gold and send kids to college'. The article is interesting as it is an articulate synopsis of those who are either negative on and or bearish on gold. It clearly shows the continuing failure to understand the importance of gold as a diversification and as financial insurance. Tasker incorrectly states that gold is "just another financial asset, as vulnerable to the shifts of investor sentiment as an emerging market." He conveniently ignores over 2,000 years of history showing how gold is a store of value. He also ignores recent academic research showing gold to be a hedging instrument and a safe haven asset. Another fact unacknowledged is how gold has clearly been a store of value since the current financial and economic crisis began in 2007. Since then gold has protected people from depreciating financial assets (such as equities and noncore bonds) and from depreciating fiat currencies such as the dollar, the pound and more recently the euro. 

• Schäuble View on Eurozone at Odds With US (FT)
• Juncker: Euro zone leaders, ECB to act on Euro (Reuters)
• German Banks Cut Back Periphery Lending (FT)
• Monetary Policy Role in EU Debt Crisis Limited: Zoellick (CNBC)
• Bond Trading Loses Some Swagger Amid Upheaval (NYT)
• As first reported on ZH, Deflation Dismissed by Bond Measure Amid QE3 Anticipation (Bloomberg)
• Record Cash Collides With Yen as Topix Valuation Nearing Low (Bloomberg) - but, but, all the cash on the sidelines...
• Greek Leaders Agree Most Cuts, Lenders Stay On – Source (Reuters)
• Chinese Investment in US 'set for record year' (China Daily)

“Humanitarian” War Contradicts 200 Years of Liberal Thought