Iran

Last week we joked that for every downtick in the Obama popularity rating (due to record February gas prices) we would see at least 1 million barrels released from the Strategic Petroleum Reserve. Sure enough, humor promptly becomes reality in United Banana States of Amerika:

• CHU SAYS U.S. WEIGHS USING STRATEGIC PETROLEUM RESERVE
• CHU SAYS U.S. IS `VERY CONCERNED' ABOUT EVENTS IN IRAN

So following the Transcanada fiasco, China is now doubly delighted that it will be able to buy even more cheap crude at America's expense. And yet one wonders why the SPR release: after all didn't we learn just today that Americans have not been more confident in years?

Much has been spun in recent weeks to indicate that as a result of collapsing trade, Iran's economy is in shambles and that the financial embargo hoisted upon the country by the insolvent, pardon, developed world is working. We had a totally different perspective on things "A Very Different Take On The "Iran Barters Gold For Food" Story" in which we essentially said that Iran, with the complicity of major trading partners like China, India and Russia is preparing to phase out the petrodollar: a move which would be impossible if key bilateral trade partners would not agree to it. Gradually it appears this is increasingly the case following a just released Reuters report that "Iran will take payment from its trading partners in gold instead of dollars, the Iranian state news agency IRNA quoted the central bank governor as saying on Tuesday."

It had been a quiet week in terms of geopolitical developments out of Middle East. Too quiet, well aside for that whole US escalating once again bit, and forcing Iran to eventually go over the edge. And while the role of the US and Iran has been extensively digested in the past few weeks, it is Iran that has remained in the shadows recently. No longer: as Al Arabiya reports, "Israeli officials say they won’t warn the U.S. if they decide to launch a pre-emptive strike against Iranian nuclear facilities, according to one U.S. intelligence official familiar with the discussions. The pronouncement, delivered in a series of private, top-level conversations, sets a tense tone ahead of meetings in the coming days at the White House and Capitol Hill. Israeli Prime Minister Benjamin Netanyahu and Defense Minister Ehud Barak delivered the message to a series of top-level U.S. visitors to the country, including the chairman of the Joint Chiefs of Staff, the White House national security adviser and the director of national intelligence, and top U.S. lawmakers, all trying to close the trust gap between Israel and the U.S. over how to deal with Iran's nuclear ambitions, according to The Associated Press." Needless to say, the thoroughly effete and comical US foreign policy has no response to follow up queries: "The White House did not respond to requests for comment, and the Pentagon and Office of Director of National Intelligence declined to comment, as did the Israeli Embassy." And while there may be no comments here, look for more warnings about Israeli citizens being targetted by deranged Iranian around the world. Because when all else fails, fearmonger. Next up: the Status Quo will be telling the world how not attacking Iran would be tantamount to global destruction. The only trade off - will the spike in crude to $150 outdo the surge in Obama's popularity rating as the Nobel Peace Prize winner puts his name in the hat for a nomination in the Nobel War Prize category as well.

Stocks advanced as market participants looked forward to tomorrow’s 3yr LTRO by the ECB where the street expects EU banks to borrow around EUR 400-500bln. All ten sectors traded in positive territory for much of the session, however less than impressive demand for the latest Italian government paper saw equity indices lose some of the upside traction. Of note, the ECB allotted EUR 29.469bln in 7-day operation, as well as EUR 134bln for 1-day in bridge to 3yr loans. In other new, although Portugal's finance minister announced the country has passed its 3rd bailout review by the EU/IMF, this did not stop S&P's Kraemer saying that if there is a probability of default, it is higher in Portugal than in any other Euro-Zone country.

But coincidentally, the ECB’s next Long Term Refinancing Operation (LTRO) is set for February 29...

Sorry, you can't blame dollar and gold for the surging oil and gasoline price.

Like sands through the hour-glass, these are the fears of our lives. Just as we noted last week, the focus of risk is shifting from Greece (where while 'tail-risk' has perhaps receded for now, it is all-but certain that the insolvency predicament will resurface as a source of political, policy, and market tension in the not-too-distant future) to other foot-holds on the growing wall-of-worry. As UBS' Larry Hatheway notes this week, several candidates may replace Greece in the risk headlines, among them rising bond yields, French elections, or a Chinese hard landing. But his sense, and ours, is that oil prices will become the next risk item for market participants. Partly this is because oil prices are already approaching levels where worries have occurred in the past (and the velocity of the move is also empirically troublesome) and partly as the remedy for all global-ills (that of central bank printing) is implicitly impacting this 'risk' in a vicious circle. With global growth expectations already low, the 0.2ppt drop in Global GDP for each $10/bbl rise in oil will do nothing for Europe and US hope - and leaves Central Banks in that dangerous position of reinflating their low core inflation data while all around them is inflating rapidly. With modest schadenfreude, we remind readers of our comments from last week: "Alas, as noted previously, the central bank tsunami is only just starting. Watch for inflation, and concerns thereof, to slowly seep into everything". Given oil's potential 'real' impact, as SocGen notes: "Perhaps Greece wasn't so bad after all."

The IMF data on central bank demand in January showed that Sweden raised its gold reserves by 18.3 metric tons to 144 tons in January. The data on the International Monetary Fund’s website was gold bullish showing continued demand for gold by central banks internationally. Belarus added 5 tons to reserves, Kazakhstan raised reserves by 7.6 tons and Turkey increased gold reserves by 4.1 tons. They were two quite odd minor reductions in gold reserves. Mexico reduced bullion reserves by 0.1 ton and Tajikistan cut them by 0.3 ton, according to the IMF. However soon after the increase in Sweden’s gold reserves was reported by Bloomberg, Sweden’s central bank gold reserves contradicted the IMF data and denied that they had increased their reserves. Joanna Gerwin, acting head of communication for the Riksbank, told Bloomberg that Swedish gold reserves were unchanged at 125.7 metric tons in January. Officials at the IMF’s office in Paris said nobody in Europe was able to comment. Alistair Thomson, a spokesman for the IMF in Washington, didn’t immediately reply to a voicemail and e-mail from Bloomberg outside normal business hours. Interestingly, the Riksbank sold 36.6 tons under the Central Bank Gold Agreement (CBGA) from 2007-2009. An increase in reserves of 18.3 tonnes is exactly half of the amount sold and would mean that the Riksbank had bought back half of the gold sold from 2007 to 2009.

Has Anyone Noticed that the Guy Quoted Looks EXACTLY Like Sean Connery's Evil Twin?

A few days ago, before the latest breakout in crude sent Brent to all time highs in GBP and EUR (and Asian Tapis in USD just shy of all time highs), we said that "we hope our readers stocked up on gasoline. Because things are about to get uglier. And by that we mean more expensive. But courtesy of hedonic adjustments, more expensive means cheaper, at least to the US government." This was due to recent news out of Iran "where on one hand we learn that IAEA just pronounced Iran nuclear talks a failure (this is bad), and on the other Press TV reports that the Iran army just started a 4 day air defense exercise in a 190,000 square kilometer area in southern Iran (this is just as bad). The escalation "ball" is now in the Western court." We were not surprised to learn that the "Western court" has responded in precisely the way we had expected. The WSJ reports: "The Pentagon is beefing up U.S. sea- and land-based defenses in the Persian Gulf to counter any attempt by Iran to close the Strait of Hormuz. The U.S. military has notified Congress of plans to preposition new mine-detection and clearing equipment and expand surveillance capabilities in and around the strait... The military also wants to quickly modify weapons systems on ships so they could be used against Iranian fast-attack boats, as well as shore-launched cruise missiles" Which means the escalation slider was just shifted up by one more level, as Iran will next do just what every actor caught in an Always Defect regime as part of an iterated prisoners' dilemma always does - step up the rhetoric even more, as backing off at this point is impossible. Which means that crude will go that much more higher in the coming days, as now even the MSM is starting to grasp the obvious - from the Guardian: "The drumbeat of war with Iran grows steadily more intense. Each day brings more defiant rhetoric from Tehran, another failed UN nuclear inspection, reports of western military preparations, an assassination, a missile test, or a dire warning that, once again, the world is sliding towards catastrophe. If this all feels familiar, that's because it is. For Iran, read Iraq in the countdown to the 2003 invasion." And the most ironic thing is that the biggest loser out of all this, at least in the short-term is.... Greece.

Silver and Gold remain the major outperformers year-to-date but the rest of commodities - most notably oil is catching up very fast having over taken stocks this week. It appears that the new-found flood of liquidity that we have been so passionately banging the table on for weeks, has found its way into the energy complex as European Sovereigns, European Financials, European Stocks, and US Stocks have all flattened or turned down as Crude and WTI surge. And as a hint to anyone who hasn't jumped on this tidal movement yet, one thing to note is that unlike stocks, commodities always have the risk of marginal or weak hands being shaken out via CME...margin hikes.

As gold strengthens on the back of the extreme experimentation of the world's (now-sheep-like) central bankers' easing and printing protocols, it does no real harm to the world, but as John Burbank (of Passport Capital) notes, the painful unintended consequence of all this liquidity is energy costs skyrocketing - and it won't stop until the economy breaks. The negative feedback loop, that we pointed to yesterday as potentially the only thing to stall a magnanimously academic response to the insolvency we see around the world (and the need for deleveraging at this end of the debt super-cycle), of oil prices into the real economy will be devastating not just for US but for EM economies, though as the bearded-Burbank reminds us - Saudi benefits greatly (and suggests ways to trade this perspective). Flat consumer incomes while costs are rising is never a good thing and while we make new highs in oil in terms of EURs and GBPs, he warns we may soon in USDs also. Summing up, his perspective is rising tensions in the Middle East combined with central bank liquidity provision are a huge concern: "We're actually quite bearish. The only reason all this liquidity is coming into the market is because things are really bad. It's not because things are good. It's hard to know where things are going to go. The point is, just because they're putting liquidity in the market doesn't mean the economy is improving."

Anyone Who Thinks that War Is Good For the Economy Has One Eye Covered ... And Is Only Looking At Half the Picture ...

Yes, the Federal government can cover up the damage by borrowing 10% of GDP each and every year ($1.5 trillion, and don't forget to add in the off-budget "supplementary appropriations"), and the Federal Reserve can add trillions in quantitative easing stimulus, but even adding $8 trillion of borrowed/printed money to the economy over the past four years has had remarkably little effect on the private-sector economy. That does not bode well for the "recovery."

The last six months' market behavior is somewhat breath-takingly similar to the same period a year ago. With global central banks pumping (RoW replacing Fed for now), energy prices soaring, and since the market is the economy - hope is rising that we are doing better; the drivers of the asset price reflation are similar too. While Treasury yields appear to be bucking this sentiment-euphoria, perhaps it is the because the US is the hottest market and all the world's money comes here that we are 'decoupling'. It seems the stakes are higher and scale of known unknowns even larger this time as the can that we are kicking is gathering a lot of trash as it rolls down the road.