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After Nomura released a report two weeks back predicting oil could rise to $220 if the MENA situation escalates, this morning SocGen's Michael Wittner has released his own scenario analysis on the possible outcomes of the 2011 revolutions. His three cases see oil within the following escalating thresholds: $110-$125; $125-$150; and $150-$200. We are fairly confident that the worst case, which as expected involves all sorts of bad things happening in Saudi Arabia, is missing an extra zero somewhere. Some key observations from the report (attached below): "The forward curve for Brent, the better indicator of global oil market fundamentals, is currently in backwardation (nearby premium, forward discount) for the next 5 years, reflecting concerns over growing physical tightness in the crude markets. The oil markets are pricing in an extended Libyan shutdown of crude exports (see below). Even on the WTI forward curve, where prices are still under pressure from local mid-continent US market conditions, the contango has eased and now only extends through 2011; from 2012 through 2015, WTI is also in backwardation. As the Libyan crisis has escalated, the latest US CFTC data show that non-commercial net length for NYMEX WTI futures has reached an all time high. This is a key indicator that a new wave of investor flows is now moving strongly into WTI and the oil complex in general. With the widespread unrest in the Middle East and North Africa (MENA) region expected to continue, and the oil markets worried about further supply disruptions, the attractiveness of commodities and oil to investors has been underscored. With oil prices driving heightened concerns over inflation, oil itself is seen as a good hedge against inflation." In summary, SocGen sees about $15/bbl risk premium built into current prices, which could jump to as much as $110.

Currency debasement on a scale never seen before in modern history continues in the U.S. and other countries. This is leading to a real risk of stagflation and possible even hyperinflation if sane monetary policies are not returned to soon.
The fiat currency experiment of the last 40 years (since Nixon came off the Gold Standard in 1971) grows more precarious by the day. Ironically, Alan Greenspan, the central banker most responsible for the cheap money policies and asset bubbles of the last 20 years, has again warned about the euro and dollar being “faulty” fiat currencies. Greenspan again said how gold is the ultimate form of payment and currency (see interview and transcript of interview in News). "What the price of gold is saying is essentially that there are elements within the marketplace which feel very uncomfortable with respect to what's going on generally," the former Federal Reserve chairman said. "It's not an accident that you're finding that central banks are going in to buy gold."

In his latest edition of the Privateer newsletter, Bill Buckler confirms that he is one of the premier politco-economic commentators, with one of the most devastating expositions on how America, once the land of the brave and the home of the free, and truly a beacon of freedom for the rest of the world, has entered the death spiral of its cilivizational curve, which "beginning of the end" started in 1913 with the introduction of the income tax and the ascent of the Federal Reserve, and now, a century later, has morphed into what can poetically be called the "ending of the end." Recent events in the Middle East and Africa only underscore how rapidly the sun is setting on the world's once undisputed superpower. That China is merely biding its time before it disconnects its mutual life support system to the US (which contrary to conventional wisdom, is far more important to the US than vice versa, now that the Fed is by the far the biggest owner of US debt), and ends its symbiosis with US fiscal and monetary policy, should not be a reason for optimism to anyone. With each passing day, Chinese superiority is becoming ever more palpable (even despite the massive loan bubble currently in process in China), even as desperate US attempts to cling to the last trace of its former superpower status are getting increasingly ignored by virtually everyone. If Buckler is correct, the final nail in the US superpower status coffin could come as soon as the unwind of events in MENA, where the people have made it all too clear the US is no longer welcome. What happens next will indicate just how rapidly the complete fall from grace for the US will transpire: "The Middle East is again in strife. This time, the conflict is between
the regimes which have been installed and supported by the US government
in their march to empire and the people who those same regimes have
ruled with an iron fist. To these people, the US is not looked upon as
an “exemplar” of anything - except political AND economic repression."

The key running theme this weekend is "the flood", specifically that soon to be left in the wake of the Federal Reserve, which is now facing the last days of its ignoble existence. Previously, Egon von Greyerz shared his outlook on why the Pompadour-esque cliche will soon lead to a complete destruction of the dollar, and all other paper currencies. Now, it is the turn turn of Diapason's Sean Corrigan, who in his note from Thursday shares his view on the Fed's "reprehensible policy": "When the Chuck Prince Charleston suddenly stopped in 2008, the initial impact was just as dramatic on the market for machine tools, ceramic magnets, and silicon wafers as it was on lumber, carpets, and dishwashers and, so, the shock hit the surplus nations every bit as hard as the deficit ones as they all realised, to their horror, that they had all become nothing more than imprudent, Rueffian tailors. Since then, of course, the game has been replayed at an even more frantic pace, with governments largely taking pole position as the drivers of deficits, the media of monetization and, hence, the inflamers of inflation...By the time this last blunder works its way through the system, it will not just be the world's tinpot tyrants and biddable client kings who will pay the price for the Fed's reprehensible policy of 'apres moi le deluge', but it will be the ordinary man and woman who will have occasion to rue a programme so replete with intellectual arrogance, power-worship, and a wilful blindness to its awful, unintended consequences that only a Krugman could approve of it."

Some Sunday food for thought on state budgets, education and jobs...

With ICE and CME margin hikes - that last bastion of supply/demand imbalance suppression - no longer having an impact on crude price, it was only a matter of time before the last theatrical measure in the price arsenal was used.  Per Dow Jones: "White House Chief of Staff Bill Daley said on Sunday the Obama administration is considering tapping into the U.S. strategic oil reserve as one way to help ease soaring oil prices." Speaking on NBC television's "Meet the Press," Daley said: "We are looking at the options. The issue of the reserves is one we are considering. ... All matters have to be on the table." There has been support among Senate Democrats for tapping the reserves. Senator Jay Rockefeller on Thursday became the third Democrat to ask President Barack Obama to tap America's emergency oil supply to cool prices that have risen past $100 a barrel on the strife in Libya." What our esteemed politicians fail to realize that tapping the SPR is analogous to Lehman filing an 8K declaring to the world it is now tapping directly into the Fed's discount window for its liquidity - that didn't end too well. The problem with the SPR is that as a non-marginal replacement of supply it is largely a puppet: with a capacity 726.7 million barrels, the SPR holds a 34 day reserve at the US daily consumption of 21 million barrels. The picture is slightly better when considering that the US only imports 12 MMbd, meaning there is a 58 day supply. But the biggest issue that nobody is considering, is that the maximum total withdrawal capacity is physically limited to just 4.4 million barrels per day. In other words, should the MENA escalation flare up, there is no way to physically replace all the lost output. Yet what is most troubling is that even as the US is about to start using up its reserves, Asia is actively shoring up its oil, meaning that as our own oil buffer gets ever smaller, Asia could easily dictate economic terms over the OPEC cartel as soon as a few months from now if the Bernanke liberation wave does not end any time soon.

When discussing central planning, as manifested by the policies of the world's central banks, a recurring theme is the upcoming reversion to the mean: whether in economic data, in financial statistics, or, as Dylan Grice points out in his latest piece, in luck. While the mandate of every institution, whose existence depends on the perpetuation of the status quo, is to extend the amplitude of all such deviations from the trendline median, there is only so much that hope, myth and endless paper dilution can achieve. And alas for the US, whose 3.5% bond yields are, according to Grice, primarily due to "150% luck", the mean reversion is about to come crashing down with a vengeance after 30 years of rubber band stretching. The primary reason is that while the official percentage of interest expenditures as a portion of total government revenues is roughly 10% based on official propaganda data, the real number, factoring in gross interest expense, and assuming a reversion to the historic average debt yield of 5.8%, means that right now, the US government is already spending 30% of its revenues on gross interest payments! And what is worse, is that the chart has entered the parabolic phase. Once the convergence of theoretical and real rates happens, and all those who wonder who will buy US debt get their answer (which will happen once the 10 Year is trading at 6% or more), the inevitability of the US transition into the next phase of the "Weimar" experiment will become all too obvious. Because once the abovementioned percentage hits 50%, it is game over.

Former hedge fund analyst Danielle Chiesi compared insider dealing to an orgasm. If that's true, then Wall Street must be experiencing one giant orgasm...

After serving as the inspiration for the Chairsatan's latest appellation with his February missive, Bill Gross now goes for the jugular with the $64,000 question: with "nearly 70% of the annualized issuance since the beginning of QE II
has been purchased by the Fed, with the balance absorbed by those old
standbys – the Chinese, Japanese and other reserve surplus sovereigns.
Basically, the recent game plan is as simple as the Ohio State Buckeyes’
“three yards and a cloud of dust” in the 1960s. When applied to the
Treasury market it translates to this: The Treasury issues bonds and the
Fed buys them. What could be simpler, and who’s to worry? This Sammy
Scheme as I’ve described it in recent Outlooks is as foolproof
as Ponzi and Madoff until… until… well, until it isn’t. Because like at
the end of a typical chain letter, the legitimate corollary question is –
Who will buy Treasuries when the Fed doesn’t?" Bingo, we have a winner. This is precisely the issue that Zero Hedge has been exposing over the past 6 months, and is the reason why the Fed is now locked in a QEasing corner from which there is no exit. To his credit, Gross attempts to provide an answer: "Someone
will buy them, and we at PIMCO may even be among them. The question
really is at what yield and what are the price repercussions if the
adjustments are significant... What I
would point out is that Treasury yields are perhaps 150 basis points or
1½% too low when viewed on a historical context and when compared with
expected nominal GDP growth of 5%." And the stunner: "Bond yields and stock prices are
resting on an artificial foundation of QE II credit that may or may not
lead to a successful private market handoff and stability in currency
and financial markets. 15% gratuities may lie ahead, but more than
likely there is a negative two-bit or even eight-bit tip lying on the
investment table. Like I did 45 years ago, PIMCO’s not sticking around
to see the waitress’s reaction." Translation: Pimco just issued a "sell" rating on everything.

Gold’s all time record nominal high yesterday was barely reported in most of the mainstream business and financial press today - slightly more online but there was little or no coverage in print. This is an indication that gold and silver remain far from the “bubbles” that some have suggested. Speculative manias and bubbles are characterised by mass participation and widespread enthusiasm and “irrational exuberance” by all sectors of society including the media and particularly the retail investor and the “man in the street”. The majority of investors and savers in the western world do not know what gold bullion is and could not tell you the price of an ounce of gold or silver in dollars – let alone in pounds, euros or other local currencies. The majority are unaware of the huge developments in the gold markets (only reported by specialist financial press) such as China’s emergence as one of the largest buyers of gold in the world (see news and our video below) and the fact that central banks and astute hedge funds are some of the largest buyers of gold in the world today.

Which is as ridiculous as Gaddafi trying to blame the Libyan protests on Osama Bin Laden, or al-Maliki blaming Al Qaeda for the Iraqi protests ...

Perhaps it is time for JP Morgan to revise its estimate for putback liability claims. As a reminder back in October, it was none other than JP Morgan which said: "We estimate putback risk to be approximately $23-$35bn for agency mortgages, $40-80bn in non-agency and roughly $20-30bn for second liens and HELOCs. However, there are a number of reasons why these estimates are on the high end, including losses already taken and loss reserves established." Well, there appear to be a number of reasons of why these estimates may have been on the very low end as well, the first one being that the bank itself just announced "it faces up to $4.5 billion in legal losses, in excess of its established litigation reserves, should its worst-case legal scenario occur." And if JP Morgan is seeing billion more in putback exposure, then what should Bank of Countrywide Lynch say, which just reported that the amount of debt which is being put against the firm for fraud of various types has just doubled from $46 billion to $84 billion. Luckily, according to a DebtWire report, PIMCO and BlackRock are actively doing the Fed's bidding in attempting to form a splinter group within the putback litigants and to settle with BofA for a nominal charge. Will the Fed be once again successful at subverting justice?

Even Bernie Madoff agrees ...

The FT reports some disturbing news for lovers of free information everywhere: JP Morgan's Digital Growth Fund is rumored to be in talks to acquire 10% of Twitter for $450 million, or a $4.5 billion valuation (for a service which we have yet to get confirmation is generating any more than token revenue whatsoever). "It is not clear if the JPMorgan fund will make a direct investment or buy out existing investors and shareholders with Twitter’s approval. But the fund does not intend to buy shares on the secondary market, the people said. The deal has not closed." For those unfamiliar with the DGF, it is merely JPM's way to copycat Goldman into "allowing" its high net worth clients to put their money into the latest tech bubble frenzy. "JPMorgan’s Digital Growth Fund was established this month to give rich clients exposure to fast-growing private tech companies, and follows a similar effort by Goldman Sachs to invest in Facebook. The fund has raised $1.22bn to date, according to a filing with the Securities and Exchange Commission. But it plans to raise $1.3bn in total, and will have a maximum of 480 investors, say the people. JPMorgan expects to earn commission of at least $13m from the fund." And since none of these company are quite public, and all of them supposedly trade on a shadow secondary market, the frenzy for which bank can open up the tech bubble market to most high net worth investors, a race for now headed by Goldman with its Facebook investment, has certainly marked the tech top. One thing that is certain is that those who mostly enjoy using twitter as a free information conduit will now aggressively seek to find a replacement that is not backed, and thus at the mercy, of the Fed's favorite bank.

As regular readers know too well, one topic Zero Hedge enjoys ridiculing with the disdain it deserves is groupthink of any form. The phenomenon, which is nothing but transference of laziness by those who manage other people's money with complete disregard for the consequences of their actions, was among the main reasons for the Great Financial Crash.  As nobody was willing to engage in any form of critical thought, and with the market "only" going up, any investment thesis was predicated solely on what the "other guy" was doing. Of course when it all blew up, it was time to blame the evil rating agencies. After all, heaven forbid someone actually think about the logic behind the credit ratings of hundreds of billions in synthetic CDOs, or worse still, take responsibility for their own stupidity and laziness. We are now precisely in the same place we were when the market peaked last time around, with groupthink rampant, with any attempt at opposing thought squashed for fears it will end the party early, with sellside analyst optimism at all time highs, and with the administration actively encouraging rampant lies and perpetuation of the myths that take hold in the market with no factual footing whatsoever. The "conspiracy of optimism", as dubbed once by James Montier, has once again fully taken hold. As SocGen's Albert Edwards points out "despite another post mortem on forecasting failure, nothing has or will change": this is true... until the next crash. Then the finger pointing will begin anew, theatrics about the change in the Status Quo will resume, and once again the Fed will attempt to reflate the latest bubble crash. Only this time there will be no reflation, as the central planning committee's reign of terror will be over, and the fiat monetary system will have ended. Below we present Edwards' most recent solemn and very troubling thoughts on the latest break out of the great groputhink malaise, which will only last as long as the great chairsatan has some control over events. Luckily, with the amplitude from a stable market equilibrium shifting ever greater in either direction, and as the Fed's very existence (remember: the whole point of the central bank is to contain price stability) is repudiated, the time until the reset is now shorter than ever before in history.