Middle East

Are countries which want to trade in their own currencies or to own their own central banks getting spanked ?

All you need to read.

The bullishness is rather interesting considering the notable headwinds that exist in the European sovereign debt markets, the geopolitical risk seen in light sweet crude oil futures, and the potential for a recession to play out in Europe.

The geopolitical foreplay is getting ridiculous. At this point it is quite obvious that virtually everyone involved in the US-Israel-Iran hate triangle is just itching for someone else to pull the trigger. And the latest report out of the IAEA will only precipitate this. Who - remember the IAEA? The same IAEA which did not find nukes in Iraq in 2003 only to be overriden by Dick "WMD" Cheney to "justify" an invasion. As RIA reports:  "The International Atomic Energy Agency officially confirmed that Iran has started enriching uranium to the 20-percent level, which can easily be turned into fissile warhead material. "The IAEA can confirm that Iran has started the production of uranium enriched up to 20 percent using IR-1 centrifuges in the Fordo Fuel Enrichment Plant," the agency said in a statement. However, IAEA Spokeswoman Gill Tudor said that all nuclear materials and operations in the Fordo facility are “under the Agency's containment and surveillance."" Naturally, that leaves the "use of uranium" variable quite subjective and in the hands of political manipulation. Which means at this point it is only a matter of days before the meme that Iran already has nuclear warheads becomes actively adopted by warmongers everywhere.

Can Austerity Work?

We have now entered the fifth year of this Fourth Turning Crisis. George Washington and his troops were barely holding on at Valley Forge during the fifth year of the American Revolution Fourth Turning. By year five of the Civil War Fourth Turning 700,000 Americans were dead, the South left in ruins, a President assassinated and a military victory attained that felt like defeat. By the fifth year of the Great Depression/World War II Fourth Turning, FDR’s New Deal was in place and Adolf Hitler had been democratically elected and was formulating big plans for his Third Reich. The insight from prior Fourth Turnings that applies to 2012 is that things will not improve. They call it a Crisis because the risk of calamity is constant. There is zero percent chance that 2012 will result in a recovery and return to normalcy. Not one of the issues that caused our economic collapse has been solved. The “solutions” implemented since 2008 have exacerbated the problems of debt, civic decay and global disorder. The choices we make as a nation in 2012 will determine the future course of this Fourth Turning. If we fail in our duty, this Fourth Turning could go catastrophically wrong. I pray we choose wisely. Have a great 2012.

The folks at Religare Capital Markets have put together one of the better cheat sheets on a region that most of the big banks largely ignore: the Middle East, where day after day we get new and more troubling headlines of escalation, usually involving Iran and Israel. And since at the end of the day, in a resource-strapped world, the bottom line is always about energy, and oil, what happens in the MENA region is arguably far more important at the end of the day than who prints how much electronic paper/linen. But most important is probably the following analysis charting the probability of an attack of Iran by either Israel or the US. We were quite surprised to find that in Religare's opinion the probability of an Israeli-sourced attack on Iran hits a high of 50% sometime in early February, with the US contributing about 20% with a peak in May and just before the presidential elections. This is how they explain it: "The probability of an attack on Iran is now higher than ever. The only solution to the current crisis, diplomacy, is off the table due to politics and the focus is now shifting to regime change. We see the probability dropping mid-year, although US elections could increase the probability of a US attack significantly (unless Ron Paul steams ahead), as will Iran’s likely decision to move their centrifuges to reinforced facilities in Qom if not handled correctly (likely mid-year). We reiterate our view that the fallout may not be as bad as expected from an Israeli strike, horrendous from a US one." And if they are right, what happens to oil will likely be the biggest catalyst of events in 2012 - a topic PIMCO has already had some extended observations on.

Whatever their vitae, dreaming up a buddy relationship [built around Joe Biden] as solution to the troubled U.S.-China relations almost certainly ahead, is, indeed, preposterous. The little soap opera proves, were it not already self-evident, the “lessons” of the Cold War lie buried somewhere in the Library of Congress -- with no remnant at CIA, one surmises.

• So very encouraging - IMF's Lagarde: euro likely to survive 2012 (Reuters)
• Drop Greek bond plan, urges ECB council member (FT)
• Soros says EU break-up would be catastrophic (Reuters)
• Japanese Banks Get 'Stress Tests' (WSJ)
• Hungary Pledges Compromise on IMF Loan (Bloomberg)
• Confidence in London property falls (FT)
• Fed nears an adoption of an inflation target as Bernanke pushes transparency (Bloomberg)
• Seoul and Tokyo seek to ease Iran oil ties (FT)

"I hold a deeply held view of Ron Paul as an honorable, genuine and trustworthy American statesman. In fact, I cannot really think of anyone else in the tepid cesspool of American politics today whom I could even remotely categorize as a statesman as opposed to a run of the mill politician (or ideologue as Mr. Lucas puts it). Mr. Lucas moves on to explain that to an ideologue it is current ideas that matter, while to a statesman it is certain principles that matter. He states that an ideologue’s view of the world and its inhabitants is political, while to a statesman it is historical. These simple sentences are what I believe inherently separate Ron Paul at his very core from everyone else currently running for president. This is merely what separates the man’s character from the others. This is reason enough to consider him, but not reason enough to vote for him. His ideas about liberty, war and economics also separate him from the pack and it is his strongly held principles on these subjects that in my view make him the only one capable and with enough conviction to help heal this country’s wounds, get us back on the right and moral path and foster real change as opposed to a campaign slogan."

Wondering why gold has moved by over $20 in the last few minues? Wonder no more - according to a note just released by Citi analyst Tom Fitzpatrick, the gold correction "has run its course and a rally is now back on the cards." Granted it is not all smooth sailing - "Gold may drop to $1,550 before turning", but when the turn comes, Fitzpatrick sees it as going all the way up to $2,400. He has the following technical observations: "Only a weekly close below $1,535/oz means corrections may be deeper." The result can be seen on the chart below. Incidentally this is a 1:24 scale replica of what will happen once the Fed and ECB proceed with the only logical step which is doing what they do best. Unless, of course, the plan is to have a modest war in the middle east to distract everyone from the economy. Because we have never seen that movie before.

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.

The abysmal hit rate of Byron Wien's predictions over the past several years (ostensibly since the inception of this silly practice nearly three decades ago) has been the source of much laughter on the pages of Zero Hedge: see here and here. It has also been the source of much profit, due to the Blackstone Vice Chairman's uncanny ability to bat just over 0.000 with laser-guided precision and consistency. Below, as reported by Bloomberg, are the latest set of forecasts which are to be faded with impunity as soon as is possible.

While we’re not bubbling over with optimism, we believe the New Year will be anything but boring. 

While everyone is focusing on what empty words and promises will come out of Europe this week which continues to valiantly, yet with utter futility, fight simple math, our friends at Religare Research remind us that there is a whole another theater of operations (pardon the phrase) that many are so far forgetting about located in the middle east which is far closer to what at the end of the day really matters: oil. As Emad Mostaque notes: 'While North Africa is busily transitioning to a set of neo-Islamist, GCC-sponsored Sunni democracies (we are positive on this trend), Shia groups in the Middle East have started to stir. In this monthly we focus on some of the key elements of the Shia tradition that may have a significant impact on global markets in the near future." Below are the key takeaways.