Middle East

Stop us when this confession from Greg Smith, a now former executive director and head of the Goldman's United States equity derivatives business in Europe, the Middle East and Africa, sounds exactly like everything we have said about the firm over the past 3+ years (and why we just can't wait for the next trading "recommendation" from Tom Stolper). "Today is my last day at Goldman Sachs. After almost 12 years at the firm — first as a summer intern while at Stanford, then in New York for 10 years, and now in London — I believe I have worked here long enough to understand the trajectory of its culture, its people and its identity. And I can honestly say that the environment now is as toxic and destructive as I have ever seen it."

Dear friends at Zero Hedge, consider this your day of total and absolute Goldman vindication...

In the Spring of 2011, when Libyan oil production -- over 1 million barrels a day (mpd) -- was suddenly taken offline, the world received its first real-time test of the global pricing system for oil since the crash lows of 2009. Oil prices, already at the $85 level for WTIC, bolted above $100, and eventually hit a high near $115 over the following two months. More importantly, however, is that -- save for a brief eight week period in the autumn -- oil prices have stubbornly remained over the $85 pre-Libya level ever since. Even as the debt crisis in Europe has flared. As usual, the mainstream view on the world’s ability to make up for the loss has been wrong. How could the removal of “only” 1.3% of total global production affect the oil price in any prolonged way?, was the universal view of “experts.” Answering that question requires that we modernize, effectively, our understanding of how oil's numerous price discovery mechanisms now operate. The past decade has seen a number of enormous shifts, not only in supply and demand, but in market perceptions about spare capacity. All these were very much at play last year. And, they are at play right now as oil prices rise once again as the global economy tries to strengthen.

While hardly an opinion that would be questioned around these parts, it is still good to see that even some of the smart money shares our views about the Schrodinger Economy ('alive' and 'dead' at the same time, depending if the BLS or anyone else is observing it) and we are not totally insane vis-a-vis one-time, non recurring government bailouts, which just incidentally have become perpetual and endless: "The Federal government has manfully stepped up to fill the gap left by consumers who have been forced to retrench and who are trying to repair their finances by paying down debt and increasing their savings.  So the next question has to be:  Is this recovery self-sustaining or is the economy still on life support, held together by periodic massive liquidity injections and ultra low interest rates, and accompanied by a dangerous, if not reckless, expansion of government debt?  We think that if government programs were canceled, the economy would collapse back into severe recession." And here Balestra's Chris Gorgone explains quite astutely why anyone betting on a decoupling or perpetual USD reserve status may want to reconsider: "the U.S. is no longer in complete control of its own destiny.  We exist now in a world of increasing correlation in the arenas of economics, finance, trade, politics, etc.  What happens in Europe, China, the Middle East, etc. will have major impacts on American economic, political, and social outcomes.  The world is changing  rapidly.  The old rules that so many investors rely upon may no longer apply the way they did during the great growth years after World War II." Alas, this too is spot on.

The coming years will be marked by a seismic change in the economic landscape in the US. Firstly and most importantly, we are going to see economic growth slow down dramatically. The reasons for this slow down are myriad but the most important are: 1) Age demographics: a growing percentage of the population will be retiring while fewer younger people are entering the workforce. 2) Excessive debt overhang.

According to the doctrine of pre-emptive war, Iran can be attacked based on its alleged desire to develop nuclear weapons, just as Iraq was attacked in 2003. In fact, Congress is currently debating whether a nuclear capability alone (which Brazil, Japan, and other countries enjoy) could justify the 'preventive' attack. I believe it is time to negate this doctrine by postulating that Iran in fact has a right, as a sovereign nation, to a nuclear capability. Having traveled to Iran recently, I can attest to the Joint Chiefs' General Dempsey's reference to Iran as a 'rational' actor. The Iranians have no interest in destroying America, or Israel, at the expense of one of the oldest continuous civilizations in the world, dating back about 2600 years. Iran is currently surrounded by over 40 U.S. military installations, not counting Israel's still-unaccounted nuclear arsenal. To assert that Iran would jeopardize its culture for a one-shot nuclear attack is a complete miscalculation of the Iranian spirit; that spirit gave rise to a revolution in 1979 against what they perceived as Anglo-American imperialism in the form of the Shah, much as our own revolution opposed British imperialism.

Gasoline consumption in the United States has been dropping for years. In the last decade, vehicle fuel efficiency has improved by 20%, and the combination of that shift and a weak economy of late has pushed gasoline demand to its lowest level in a decade. At the same time, US oil production is at its highest level in a decade. Deepwater wells in the Gulf of Mexico and horizontal fracs in the Bakken shale have turned America's domestic oil production scene around. After 20 years of declining production, US crude output rates started to climb in 2008 and have increased every year since. With production up and demand down, the basics of supply and demand indicate that oil prices should be falling. Americans should be paying less at the pump. Instead, the average US price at the pump reached US$3.80 per gallon on March 5, after 27 consecutive days of gains. That's 26.7¢ above the old record for March 5, set last year. The price of gasoline has climbed 32¢ or 9.3% since February 1; analysts expect prices to continue rising, reaching a national average of something like US$4.25 per gallon. What gives? Is it all about Iran? Are speculators manipulating the market? Do any politicians have good ideas on how to "fix" the high cost of gasoline? And is there relief on the horizon?

Obama Expanding Program Started by Cheney

European stock futures have trended higher today in relatively light volumes as the market awaits key interest rate decisions (BoE & ECB) and with the deadline for the Greek debt swap deal looming. The latest talk this morning has been that the participation in the PSI deal has been well received and coupled with speculation of a Chinese RRR cut overnight and stops tripped in the E-mini S&P and Eurostoxx futures earlier this morning, contributed to a large portion of the move higher. As a consequence, the USD index has weakened (-0.5%) which has lifted the EUR/USD pair back firmly though the 1.3200 level to the upside and Brent/WTI crude futures are seen higher ahead of the NYMEX pit open. Looking ahead we await the ECB press conference as well as the latest jobs data from the US due at 1330GMT.

It would appear, given the actions and rhetoric of the last week or so, that global central bank printing presses have been switched to 'pause' mode and allowed to cool as implicit inflation 'energy' rears its economic-growth-dragging head around the world (as the bears told us earlier). Whether this leads to a slow grind higher or a tactical correction is the question Morgan Stanley considers in a recent note and their answer is that bullish sentiment, 'under-appreciated' risks, and 'tranquil' markets justify a cautious asset allocation. The focus has switched much more to growth, likely why we have not seen a greater deterioration post-printing yet, but this leaves the market much more sensitive to data surprises (as the backstop of QE has been removed for now). Simply put, we tend to agree with MS' view (given our previous discussions of the volatility surface) that as event and growth risks linger, and with valuations no longer cheap in most cases, expectations of a continued grind higher without a tactical correction are overly confident.

In their own inimitable manner, the two bears are back to take on gas prices. Dismissing the higher demand thesis, concerns of the lack of supply, instability in the Middle East, and of course speculators (the same ones who were blamed for financial stocks' deterioration), our favorite speakers-of-the-truth point to what is the only relevant factor - the falling dollar. The Bernank once again stars for his schizophrenic perspective of asset price rises. Enjoy.

All you need to read.

Some of these 15 swans are blacker than others....

Swiss money manager and long term bear Marc Faber, aka "Dr Doom", says political risk in the Middle East has increased significantly with war between Iran and Israel “almost inevitable”, and precious metals and equities investments offer some safety. "Political risk was high six months ago and is higher now. I think sooner or later, the U.S. or Israel will strike Iran - it's almost inevitable," Faber, who publishes the widely read Gloom Boom and Doom Report, told Reuters on the sidelines of an investment conference. Brent crude traded near $123 per barrel in volatile trade on Tuesday on fears of a disruption in Iranian supplies. Israeli Prime Minister Benjamin Netanyahu showed no signs of backing away from possible military action against Iran following a Monday meeting with U.S. President Barack Obama. "Say war breaks out in the Middle East or anywhere else, (U.S. Federal Reserve chairman) Mr Bernanke will just print even more money -- they have no option...they haven't got the money to finance a war," said Faber. "You have to be in precious metals and equities ... most wars and most social unrest haven't destroyed corporations - they usually survive," he said. He said that Middle East markets had largely bottomed out, though regime changes from the Arab Spring revolutions were unlikely to be investor-friendly.

And now for some pure irony, we have a member of the Fed, granted a gold bug, but a Fed member nonetheless, one of the same people who not only enacted ZIRP, but encourage easy money every time there is a downtick in the market, complaining about, get this, Wall Street's "continued preoccupation, bordering upon fetish" with QE3. The irony continues: "Trillions of dollars are lying fallow, not being employed in the real economy. Yet financial market operators keep looking and hoping for more. Why? I think it may be because they have become hooked on the monetary morphine we provided when we performed massive reconstructive surgery, rescuing the economy from the Financial Panic of 2008–09, and then kept the medication in the financial bloodstream to ensure recovery....I believe adding to the accommodative doses we have applied rather than beginning to wean the patient might be the equivalent of medical malpractice." So let's get this straight: these academic titans, who for one reason or another, are given free rein to determine the fate of the once free world with their secret decisions every two or three months, are completely unaware of classical conditioning, discovered by Pavlov nearly 90 years ago, also known as a salivation response. The same Fed is shocked, shocked, that every time the market dips, the red light goes off, and the "balls to the wall" crowd scream for more, more, more free money. Really Fisher? Really? Oh, and let us guess what happens the next time the S&P slides into the tripple digits: will the Fed a) do nothing, thereby letting the market slide to its fair value in the 400 point range, or b) print. Our money, in the form of hard yellow metal, is on the latter, just like we predicted, correctly, back in March 2009 in " Bailoutspotting (Or The Search For The Great Financial Methadone Clinic" that nothing will ever change vis-a-vis the great market junkie until it all comes crashing down.