Iran

Over the past two weeks we have seen a charade of support for the euro coming from not onlly the insolvent developed sovereigns, but from the BRICs as well (especially China's SAFE), which have hundreds of billions on euro-denominated holdings that would be severely impacted in case the euro continues on its painful slog to parity. Ironically, one country which sees no reason to sugarcoat reality is Iran - the country's Central Bank has just announced plans to sell 45 billion in euros, without providing further commentary. The proceeds? Buy dollars and, wait for it, gold ingots.

As the United States edges closer to issuing a fresh round of sanctions against Iran, foreign investors so far unmoved by international pressure will end up doing business with a Revolutionary Guard that makes even local firms nervous, an analyst warns. The Islamic Revolutionary Guard Corps, known as the IRGC or Revolutionary Guard, is a military branch set up after the 1979 revolution to protect the regime and has become more ingrained in the Iranian economy particularly under President Mahmoud Ahmadinejad’s administration. In recent weeks, the Revolutionary Guard has declared that it can assume control of the energy industry if Westerners flee under the crush of coming U.S. sanctions. Over the last two-and-a-half decades, the powerful force has gradually moved into sectors like construction, energy and telecommunications, said Alex Vatanka, a scholar at the Washington-based Middle East Institute.

As if uncontrollable economic contagion was not enough for the administration, Obama is now willing to add geopolitical risk to the current extremely precarious economic and financial situation. Over at Debkafile we read that the president has decided to "boost US military strength in the Mediterranean and Persian Gulf regions in the short term with an extra air and naval strike forces and 6,000 Marine and sea combatants." With just one aircraft carrier in proximity to Iran, the Nobel peace prize winner has decided to send a clear message that peace will no longer be tolerated, and has decided to increase the US aircraft carrier presence in the region by a 400-500% CAGR.

Just as the White House released a brief note saying the US delegation has walked out on Ahmedinejad's speech at the UN, so Robert Gates was quoted by Reuters saying that "Iran is taking steps to challenge U.S. naval power in the Middle East." The defense secretary added: "Iran is combining ballistic and cruise missiles, anti-ship missiles, mines, and swarming speedboats in order to challenge our naval power in that region." What about weapons of mass destruction? Oh wait... Either way, the only thing from keeping liquidity overflow from taking the Dow to 36,000 is that risk that Oil would hit $1,000/bbl first. And geopolitical events are just what is preventing the JPMs of the world from using the same harsh tactics as they do with PMs. The last thing this administration needs is a middle-east war which would send a gallon of gas to $5, the stock market tumbling, and the clotheless Ponzi economy exposed, as even without paying one's mortgage, if the price of a refill doubles, there are only so many iPads one can buy.

Yesterday we found out that North Korea had, as everyone was well aware, in fact attacked South Korea by sinking its ship using a submarine torpedo, heating up geopolitics in the peninsula. Today we find out that Iran's Revolutionary Guard has started large-scale war games in the strategic Straits of Hormuz via Reuters. Surely, Israel will note this with passing indifference and go back to buying US consumer retail and REIT stocks in bulk, especially after watching Steve Liesman's latest "breaking" expose on Goldman by Goldman.

I can assure you of two things. Israel is definitely planning a strike on Iran, which I’m told may happen this Summer. The country has been having large simulated chemical attack drills, and even my small town has had its own drills (which I’m sure were ordered from above). Number 2 is that I am also hearing that Israel will not attack w/o the OK of the US. Israel needs to fly over Iraq to reach Iran, and it can’t do this w/o US attack codes. I’m not sure what the solution is, but, as someone once said – “a Jew who does not believe in miracles is not a realist.” - Chashmonaim, Israel (West Bank)

According to the Defense Intelligence Chief, Iran could produce enough highly-enriched uranium for one nuclear bomb in as little as a year and has stated that all options to rein in Iran are on the table but military options are not preferable. This is happening as Iran has complained to the UN over a nuclear attack threat by the United States. According to Reuters, "Iran complained to the United Nations on Tuesday over what it called a U.S. threat to attack it with atomic weapons, accusing Washington of nuclear blackmail in violation of the U.N. charter." This ties in rather well, with our report from a week ago in which the Former Deputy Defense Minister of Israel said that Israel may have no option but to attack Israel (with nuclear weapons) by November. After yesterday's evacuation of Israeli citizens from the Sinai Peninsula, the Middle-East is once again heating up... Hopefully it does not reach 6 milllion Kelvin.

Who would have thought that Obama's fate would be decided not by his passage of the "historic" healthcare reform, or his pathological inability to disengage from the kleptos on Wall Street, or even the exponential growth in the US debt, but by what is shaping up to be a November (potentially Nuclear) D-Day out in the middle east. Pakistani newspaper The Nation, quotes former Israeli defense minister Ephraim Sneh, who in an Op-Ed in Haaretz, says that "Israel will be compelled to attack Iran’s nuclear facilities by this November unless the US and its allies enact crippling sanctions that will undermine the regime in Tehran." It appears that Israel is not taking the recent deterioration in its relations with the US lightly. If China and the whole botched CNY issue is any indication of just how incompetent and impotent US foreign policy has become, Obama has about 6 months before the defense/war complex sounds the victory horn (and the president gets to experience first hand just how much better unemployment in this country really is getting) in the shadow of the mushroom cloud.

The “tough guy” approach to Iran. Taking on the “America Bashers”. The spectacular growth of China and India is largely the result of open American trade policies. The biggest threats to American dominance are runaway borrowing and entitlements. “Even our power has its limits.” An exclusive interview with former Secretary of State and Secretary of the Treasury, James Baker III.

In a recently declassified report by the CIA, the agency focuses on some of the core observations from the Iraq-Iran War. While still largely redacted and dated (the original memo came out in 1982), it does provide some incremental data that may be of significance should the recently disclosed bomb shipment, be put into use. Some key points: "Iran's most vulnerable choke point is the Kharg Island oil export terminal. The terminal, designed to export more than 6 million b/d, consists of an oil-loading jetty on one side of the island, a sea island off the other side, and a conventional buoy-mooring system. Approximately 25 million barrels of storage capacity are also located on the island... Other important petroleum facilities in Iran include three mainland booster stations that pump crude from the oilfields to Kharg Island. Iran has more than sufficient capacity to enable it to bypass damage to Gurreh and still maintain export levels."The CIA's views on imminent conflict driven market disruptions: "The oil market has reacted relatively calmly to the Iranian invasion because fighting has inflicted no major new damage to oil facilities or seriously threatened supply routes. The risk to the market is that the conflict will escalate to neighboring regions and disrupt the flow of oil. Surplus capacity, including inventories outside the Gulf, is insufficient to handle the potential loss of supplies if the conflict spreads. Excess oil production capacity outside the Gulf now amounts to about 3 million b/d."

Is It A Bluff Or Is It Battle Preparation? – Several blogs have picked up on reports that the U.S. may be transferring “bunker-buster bombs” to a base in the Indian Ocean. Here’s a part of a story in the Sunday Herald of Scotland:
Hundreds of powerful US “bunker-buster” bombs are being shipped from California to the British island of Diego Garcia in the Indian Ocean in preparation for a possible attack on Iran. - Art Cashin

Is war just around the corner? While in theory it would make perfect sense to distract Americans from the long road to US insolvency, and other more pressing issues such as the endless criminality all around us, in practice we have so far heard merely rumors. The Herald of Scotland, however, may have credible proof that a US-led attack on Iran approaches and could be just days away. The newspaper has procured proof of an arms shipment to Diego Garcia, which consists of "of 195 smart, guided, Blu-110 bombs and 192 massive 2000lb Blu-117 bombs...put in place for an assault on Iran’s controversial nuclear facilities." Additional insight comes from Dan Plesch, director of the Centre for International Studies and Diplomacy at the University of London: “They are gearing up totally for the destruction of Iran. US bombers are ready today to destroy 10,000 targets in Iran in a few hours." Is war imminent? And will Obama repeat Bush's mistake with Iraq, resulting in a huge spike in oil, coupled with a rush to safety in dollars and/or gold? If inflation will not start on its own, its has to be kindled: preferably by a Blu-117 bomb. Is the relatively long period of market stability and low volatility about to come to a sudden end?

The foreign exchange markets were quite volatile Tuesday. Around 4:00 a.m. (EST), the dollar (DXY) was roaring higher. By 7:30 a.m. it was down on the day, allowing stocks, oil and gold to open higher. For much of the day, those assets fluctuated in reaction to the Euro’s strength (or lack thereof). The dollar relationship blurred, ever so slightly, perhaps due to the extreme weakness showing up in the British Pound. It was not currency that caused the late fade in the Dow. That seemed to be a case of fatigue. We wrote that the bulls needed a close in the S&P above 1120. While it did hit 1123 intra-day, the late day fade took the S&P back below the target. That left open the question of a possible retest of the January highs. The bulls may need to regroup if they wish to try again. - Art Cashin

Abu Dhabi Media website The National has disclosed some rather disturbing news about peace "prospects" in the middle east. It appears this past Friday saw a war council convene in Damascus, between Syrian president Bashar al Assad, Iranian president Mahmoud Ahmadinejad and Hizbollah chief Hassan Nasrallah to "devise counterattack plans and assign tasks in the event of an Israeli
offensive on one or all parties, wrote Abdelbari Atwan, the
editor-in-chief of the pan-Arab newspaper Al Quds al Arabi." And more troublingly, "the Iranian president said he expects war to break out somewhere
between spring and summer of this year. Meanwhile, the Hizbollah chief
vowed to strike the Israeli capital, its airports and power stations if
Israel dared to attack Beirut’s critical infrastructure."Let's recall that Goldman's most recent 2010 and 2011 WTI estimates call for prices to rise to $90 and $110/bbl, respectively.

U.S. lawmakers are toughening their stance on Iran’s energy industry with new economic penalties, but experts doubt the Islamic regime will pay much attention and is more likely to open the doors even wider to other players eager to replace fleeing investors.