China

What Could Possibly Go Wrong?

I go schizoid.

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.

Brief and concise summary of the week's key bullish and bearish events.

If the pundits are counting on the US to be the engine that drives Global growth - it's going to be a very slow year indeed!  

• Markets await US Non-Farm Payrolls data, released 1330GMT
• UniCredit experiences another disrupted trading session, trades down 11%, then returns to almost unchanged
• Iran causes further unease with plans to engage in wargame exercises in the Strait of Hormuz

• 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)

Those attempting to pressure Iran by increasing "tensions" and thus the price of oil have it precisely backwards. The one sure way to fatally destabilize the Iranian theocracy is to adjust the demand and supply of oil so the price plummets (as it did in December 2008) to $25/barrel, and stays there for at least six months. It has been estimated that the Iranian theocracy cannot fund its bloated bureaucracies, military and its welfare state if oil falls below around $40-$45/barrel. Drop oil to $25/barrel and keep it there, and the Iranian regime will implode, along with the Chavez regime in Venezuela. Saber-rattling actually aids the Iranian regime by artificially injecting a "disruptive war" premium into the price of oil: they can make the same profits from fewer barrels of oil. The way to put them out of business is drop the price of oil and restrict their sales by whatever means are available. They will be selling fewer barrels and getting less than production costs for those barrels. With no income, the regime will face the wrath of a people who have become dependent on the State for their sustenance and subsidized fuel. How do you drop oil to $25/barrel? Easy: stop saber-rattling in the mideast and engineer a massive global recession with a side order of low-level trade war. Though you wouldn't know it from the high price of oil, the world is awash in oil; storage facilities are full, and production has actually increased a bit in North America.

Australia is the sixth-largest country (2.9m square miles) on earth, just a tad smaller than the contiguous United States (3.1m). They are a little short on people (22.8m), which comes handy, since they dig up their entire country and sell the dirt to China. Australia has a remarkably low government dept-to-GDP ratio (29% ), low unemployment (5.2%), a moderate budget deficit (3.4% of GDP) and moderate inflation. However, Australia has been running current account deficits of up to 6% of GDP for more than 50 years. The “mates”, until recently, didn’t like to save, hence most investment has to be financed by borrowing from foreigners. I was curious as to how much of the success was due to exporting dirt to China. From the Australian Bureau of Statistics you get the following data about their top-10 export markets (accounting for 82% of all exports)...

Was Iran born to bluff, or is it really much closer to building a nuclear weapon than anyone really knows? Now that the Islamic Republic has made its intentions clear, one has to assume that it has given away a certain measure of strategic surprise. If it really wants to get the most that it could – militarily – from an attack on tankers moving through Hormuz, it should have never even raised it as a possibility. By discussing it, we figure Iran has given the US “notice” that it might not have had in the event of an attack from the blue. Weren’t the maneuvers in the Straits (by Iran) enough to raise the question without raising alert conditions from the West and from Israel?

The US economic "indicators" have once again entered the magic unicorn-cum-Department of Truth zone as if to prove to China that when it comes to data fudging the US really can be unparalleled. The just released December ADP private payrolls jobs, which has been completely uncorrelated to the NFP for the past several years (R squared of 0.003), came at a ridiculous 325,000 jobs on consensus of 177,000 private jobs. As a reminder this is a carbon copy replica of what happened in December 2010 when ADP soared and the NFP disappointed materially. But all is fair in love and robotic kneejerk reaction stimulation: ES +5 points on this latest ridiculous datapoint. Oh, and proving the "validity" of the data is that the number was about 8 standard deviations above consensus - aka statistical noise.

• ECB Cash Averts ‘Funding Crisis’ for Italy, Spain (Bloomberg)
• Bailout talks in Greece ‘crucial’, Premier says (WSJ)
• Spain sees €50bn of new bank provisions (FT)
• Fed says expand Fannie, Freddie role to aid housing (Reuters)
• France’s Borrowing Costs Rise at Bond Sale (Bloomberg)
• Europe worries linger after French auction (Reuters)
• PBOC Suspends Bill Sale as Money Rates Rise Before Holiday (Bloomberg)
• Turkey warns against Shi'ite-Sunni Cold War (Reuters)
• New capital rules for banks ‘delayed to 2H’(China Daily)

Gold's fifth day of price rises is the longest rally we've seen in two months. Concerns about the solvency of European banks and sovereigns is overcoming the 'risk on' appetite of late 2011 and early 2012. The euro has fallen to 1.2840 USD and to €1,256/oz. Growing tensions with Iran including the European Union's preliminary agreement to ban Iranian oil, will fuel gold's  safe haven status for investors. Gold is trying to consolidate above psychological levels of $1,600/oz, £1,000 and €1,200/oz. The 200 day moving average is $1,631.60 which remains resistance. The intraday high hit $1,624.66, was gold's highest price since December 21. We expect gold demand to pick up ahead of the Chinese Lunar New Year, The Year of the Dragon, which begins on January 23.

And once again, US taxpayers are asked to create high-level jobs overseas. Contenders: Germany, Japan, France, and China....

The fact is that the US has been on a slippery slope for decades, and it's about to go over a cliff. However, our standard of living, while declining, is still very high, both relatively and absolutely. But an American can enjoy a much higher standard of living abroad. On the other hand, if I were some poor guy in a poverty-wracked country with few opportunities, I'd want to go where the action is, where the money is, now. Today, that means trying to get into the United States. The US is headed the wrong direction, but it's still a land of opportunity and a whole lot better than some flea-bitten village in Niger...This is one of the advantages of studying history, because it shows you that things like this rarely happen overnight. They are usually the result of trends that build over years and years, sometimes over generations. In the case of the US, I think the trend has been downhill, in many ways, for many years. Pick a time. You could make an argument, from a moral point of view, that things started heading downhill at the time of the Spanish-American War. That was when a previously peaceful and open country first started conquering overseas lands and staking colonies. America was still in the ascent towards its peak economically, but the seeds of its own demise were already sewn, and a libertarian watching the scene might have concluded that it was time to get out of Dodge –