Saudi Arabia

The UK may be out, but Saudi Arabia isn't taking any chances. Moments ago, Reuters reported that the regime which as we reported is behind the entire conflict in Syria (hint: nat gas) has raised its level of military alertness in anticipation of a possible Western strike in Syria, sources familiar with the matter said on Friday.  Saudi Arabia's defense readiness, their version of DefCon, has been raised to "two" from "five", a Saudi military source who declined to be named told Reuters. "One" is the highest level of alert. "It is a must, no one knows what will happen," he said. And so all those who thought there would be no war and sold off gold and crude, are suddenly caught short. More curious is why Saudi is leaking this information to the media: another provocation, and an attempt to accelerate a conflict which is rapidly fizzling? Remember: for Saudi Arabia "no war" is the worst possible outcome. If so, expect more mysterious "chemical attacks" in the coming hours and days to cement the Western resolve to blow up Assad.

Those curious if the Indian Rupee cratered once again in overnight trading will be disappointed: following the previously reported intervention by the RBI in which it would provide US dollars only to crude companies, the currency rose strongly at the open only to fade and trade rangebound before closing in the mid 67 range. In other words, much more will be needed by the central bank to stabilize the currency, the markets and the economy. The main overnight story, however, remains the Syrian conflict and market reactions to it. Stocks traded higher in Europe early today, with credit spreads tightening as market participants scaled back expectations of an imminent strike on Syria after US Defense Secretary Hagel said that the US will act on Syria only with international collaboration. Of note, the G-20 is set to take place next week where Syria is widely expected to be the hot topic for discussion among global world leaders. But while futures ramped in early trade following a spike in the USDJPY over 98, they have since retraced most of their upside, and crude is back to nearly unchanged.

If SocGen is right in its just released oil price forecast in a "Syrian war world", then the global economy is about to undergo an apoplectic shock the likes of which have not been seen since the summer of 2008, when Lehman brothers had to be taken under to generate the deflationary shock sending crude from $130 to $30 in the matter of days. The French bank's forecast in a nutshell: "Base case scenario: $125 for Brent. We believe that in the coming days, Brent could gain another $5-10, surging to $120-$125, either in anticipation of the attack or in reaction to the headlines that an attack had started. In our base case, we assume an attack begins in the next week. Upside scenario: $150 for Brent If the regional spill over results in a significant supply disruption in Iraq or elsewhere (from 0.5 – 2.0 Mb/d), Brent could spike briefly to $150." And if indeed 2008 is coming back with a vengeance, the next question is who will be this year's unlucky Lehman Brothers?

The increasing likelihood of some form of limited US led military action in Syria is compounding concerns about the stability of the world’s key oil producing region and Barclays warns that it will likely exert upward pressure on prices until the nature of the possible military intervention becomes apparent. But the bigger risk for the oil market is the potential for the Syrian conflict to spread to neighboring producing countries and imperil regional output, as the Syrian conflict is fueling broader sectarian tensions across the entire Middle East and has become something of a proxy war. The problem for global oil prices is that all of this Middle East volatility is taking place against the backdrop of a recent rise in unplanned outages in the oil market outside Syria. In sum, Barclays is concerned that with geopolitical tension and physical outages on the rise, crude oil markets are at an inflection point.

Yesterday the Telegraph's Evans-Pritchard dug up a note that we had posted almost a month ago, relating to the "secret" meeting between Saudi Arabia and Russia, in which Saudi's influential intelligence chief Prince Bandar bin Sultan met with Putin and regaled him with gifts, including a multi-billion arms deal and a promise that Saudi is "ready to help Moscow play a bigger role in the Middle East at a time when the United States is disengaging from the region", if only Putin would agree to give up his alliance with Syria's al-Assad and let Syria take over, ostensibly including control of the country's all important natgas transit infrastructure. What was not emphasized by the Telegraph is that Putin laughed at the proposal and brushed aside the Saudi desperation by simply saying "nyet." However, what neither the Telegraph, nor we three weeks ago, picked up on, is what happened after Putin put Syria in its place. We now know, and it's a doozy.

President Bashar al-Assad stressed that "Syria is a sovereign country that will fight terrorism and will freely build relationships with countries in a way that best serves the interests of the Syrian people." As Syrian TV reports, in an interview with the Russian newspaper of Izvestia, President al-Assad stressed that "the majority of those we are fighting are Takfiris, who adopt the al-Qaeda doctrine, in addition to a small number of outlaws." On the alleged use of chemical weapons, President al-Assad said that the statements by the US administration, the West and other countries were made with disdain and blatant disrespect of their own public opinion, adding that "there isn’t a body in the world, let alone a superpower, that makes an accusation and then goes about collecting evidence to prove its point." Al-Assad stressed that these accusations are completely politicised and come on the back of the advances made by the Syrian Army against the terrorists.

Overnight the emerging market rout continued, with the India Sensex down another 3.18%, the Philippines tumbling 4%, Jakarta down 3.7% and Dubai crashing 7%. A driving factor continues to be the fear over an imminent air campaign launched at Syria, leading both WTI and Brent higher by 1%, and gold finally breaking out above the $1400 tractor beam, and printing at $1412 at last check, a hair away from a 20% bull market from the lows. In other news, the market is once again "surprised" to learn that Summers, who as we have been showing for over three weeks is the frontrunner for the Fed chair, is the frontrunner for the Fed chair according to CNBC. Of course, there is nothing preventing this from being the latest trial balloon (and nothing that suggest Summers will actually be hawkish as conventional wisdom seems to think: the guy basically works for the financial sector) but futures aren't waiting to find out, and US traders are walking in this morning to a red screen with ES down just over 10 point and sliding. Any minute now the great unrotation from stocks into bonds (10 Year was 2.77% at last check) is about to be unleashed. And if Obama actually goes to war (without talking to Congress of course), watch the bottom fall from the market.

Following John Kerry's press briefing, it appears the Obama administration seems absolutely determined to help radical Islamic jihadists that have beheaded Christians, that have massacred entire Christian villages, and that have pledged loyalty to al-Qaeda topple the Assad regime and take over Syria.  Yes, the Assad regime is horrible, but if these jihadist lunatics take control it will destabilize the entire region, make the prospect of a major regional war much more probable, and plunge the entire nation of Syria into a complete and utter nightmare.  This is setting up to become a colossal foreign policy disaster for the United States.

Now that the US has made up its mind once more and "knows" that Wednesday's chemical attack in Syria was conducted by the government and targeting the "rebels", even as the "developed" west calls for a UN investigation to determine just that, and as the US (including the CIA), Israel and Jordan have already sent an advance military force into Syria to conduct more false flag provocations and blame it on the regime, the only next step is to soften and prepare popular opinion for what comes next. And what comes next is on the front page of the WSJ this morning: "The U.S. began refining its military options for possible strikes in Syria, officials said... Officers at the Pentagon on Thursday were updating target lists for possible airstrikes on a range of Syrian government and military installations." Then again we have seen all this before. Surely, one of these times the administration will actually go ahead and push the button instead of just talking about it.

Even after seven years of writing macroeconomic analysis and bearing witness to astonishing displays of financial and political stupidity by more “skeptics” than we can count, it never ceases to amaze us the amount of blind faith average Americans place in the strength of the U.S. dollar. One could explain in vast categorical detail the history of fiat currencies, the inevitable destruction caused by inflationary printing and the conundrum caused when any country decides to monetize its own debt just to stay afloat - often, to no avail. The dollar is no more invincible than any other fiat currency in history. In some ways, it is actually far weaker than any that came before. The dollar is entirely reliant on its own world reserve status in order to hold its value on the global market.

Last Friday, King Abdullah fired the first shot in Saudi Arabia's brotherly embrace of the Egyptian military regime when he voiced his support for the (non?) coup. Moments ago he decided to put his nation's crude oil money where his mouth is following an announcement by the Saudi foreign minister Prince Saud al-Faisal that Saudi Arabia would step in to fill the financial gap from any Western sanctions on Egypt, if any of course, since the US still has to admit the country now torn by civil war ever had a coup nearly two months ago, and where as one deposed president is about to spend a lot more time in jail, another is on his way out.

Somehow it is not very surprising that the person who should be most concerned should the Egyptian (non) coup spread, namely the head of the House of Saud, is the one to condemn the previous US-supported regime, and to voice his praises for the current US-supported regime.

Most Americans are probably unaware that over the past two weeks the US has launched at least eight drone attacks in Yemen, in which dozens have been killed. It is the largest US escalation of attacks on Yemen in more than a decade. The US claims that everyone killed was a “suspected militant,” but Yemeni citizens have for a long time been outraged over the number of civilians killed in such strikes. The media has reported that of all those killed in these recent US strikes, only one of the dead was on the terrorist “most wanted” list. Far from solving the problem of extremists in Yemen, however, this US presence in the country seems to be creating more extremism. This cycle of intervention producing problems that require more intervention to “solve” impoverishes us and makes us more, not less, vulnerable. There is an alternative. It is called non-interventionism. We should try it. First step would be pulling out of Yemen.

One of the more surprising news to hit the tape yesterday was that Saudi Arabia, exasperated and desperate by Russia's relentless support of the Syrian regime and refusal to abandon the Syrian army thus facilitating the Qatari plan to pass its natgas pipeline to Europe under Syria, had quietly approached Putin with a proposal for a huge arms deal and a pledge to boost Russian influence in the Arab world if only Putin would abandon Syria's Assad. It will hardly come as a surprise to anyone that in the aftermath of yesterday's dilettante mistake by Obama which alienated Putin from the western world (and its subservient states such as Saudi Arabia of course), has just said no. It will certainly come as no surprise because as we explained previously, the biggest loser from Russia abandoning Syria (something we predicted would never happen) would be none other than Russia's most important company - Gazprom - which would lose its energy grip over Europe as Qatar replaced it as a nat gas vendor. What is shocking in all of this is that Saudi Arabia was so stupid and/or naive to believe that Putin would voluntarily cede geopolitical control over the insolvent Eurozone, where he has more influence according to some than even the ECB, or Bernanke. Especially in the winter.

It seems I arrived in New Zealand just in time to see the country implode over a bit of botulism and bad PR. Good thing I haven't converted all my dollars into kiwis just yet!