Iran

One more domino in the dollar reserve supremacy regime falls. Following the announcement two weeks ago that "Australia And China will Enable Direct Currency Convertibility", which in turn was the culmination of two years of Yuan internationalization efforts as summarized by the following: "World's Second (China) And Third Largest (Japan) Economies To Bypass Dollar, Engage In Direct Currency Trade", "China, Russia Drop Dollar In Bilateral Trade", "China And Iran To Bypass Dollar, Plan Oil Barter System", "India and Japan sign new $15bn currency swap agreement", "Iran, Russia Replace Dollar With Rial, Ruble in Trade, Fars Says", "India Joins Asian Dollar Exclusion Zone, Will Transact With Iran In Rupees", and "The USD Trap Is Closing: Dollar Exclusion Zone Crosses The Pacific As Brazil Signs China Currency Swap", China has now launched yet another feeler to see what the apetite toward its currency is, this time in the heart of the Eurozone: Paris. According to China Daily, as reported by Reuters, "France intends to set up a currency swap line with China to make Paris a major offshore yuan trading hub in Europe, competing against London." As a reminder the BOE and the PBOC announced a currency swap line back in February, in effect linking up the CNY to the GBP. Now it is the EUR's turn.

A few hours ago, a major 6.1 magnitude quake struck in Iran once again, some 100 km away from Bushehr - location of Iran's only nuclear power plant. According to subsequent reports, at least 30 people have been killed and nearly 600 injured, although at least for now the official version is that the power plan was undamaged. From Al Jazeera: "Fereydoon Hasanvand, governor of Bushehr, said the nuclear plant was undamaged by Tuesday's earthquake. "No damage at all has been caused" to the plant, he told state television. The Russian company that built the nuclear-power station, 18km south of Bushehr, said the quake had been felt there but that operations at the plant were not affected. "The earthquake in no way affected the normal situation at the reactor." Of course, as TEPCO and Japan so vividly and glowingly in the dark demonstrated, when it comes to nuclear power plants, the last thing to be released, long after the alpha, beta and gamma rays, is the truth. We doubt this time would be any different.

A big picture look at the drivers of the global capital markets.

Whenever discussion over North Korea arises in Western circles, it always seems to be accompanied by a strange mixture of sensationalism and indifference. The mainstream media consistently presents the communist nation as an immediate threat to U.S. national security, conjuring an endless number of hypothetical scenarios as to how they could join forces with Al-Qaeda and attack with a terroristic strategy. In the midst of the latest tensions with the North Koreans, I have found that most people are barely tracking developments and that, when confronted by the idea of war, they shrug it off as if it is a laughable concept. “Surely” they claim, “The North is just posturing as they always have," creating a social and political atmosphere surrounding our relations with the Asian nation that places both sides of the Pacific in great danger. The skeptics argue that we will never get to this point, though, because North Korea has brandished and blustered many times before, all resulting in nothing. We see recent events being far different and more urgent than in the past. All that is needed to instigate an event on the Korean Peninsula are tightened sanctions.

It has been a while since one had to track news of assorted real and false flag attacks involving Iran, Israel, Syria, Turkey, Gaza and various other middle-Eastern countries. That time is again here following news that an Israel tank fired into Syrian territory, supposedly in retaliation for a Syrian mortar hit in the Israeli-occupied Golan heights region (unclear if said mortar was launched by the domestic Al Qaeda-supported rebels, although we are confident the Assad army will surely get the blame as the story is further massaged). The Israel military was certainly busy today, with the Syrian retaliation just one of its military offensives today, the other being the first airstrike launched against Gaza by Israel since the bloody conflict in November which nearly resulted in an all out war, even if this particular offensive was not reported by its defense forces.

A month ago we pointed out that as a result of Australia's unprecedented reliance on China as a target export market, accounting for nearly 30% of all Australian exports (with the flipside being just as true, as Australia now is the fifth-biggest source of Chinese imports), the two countries may as well be joined at the hip. Over the weekend, Australia appears to have come to the same conclusion, with the Australian reporting that the land down under is set to say goodbye to the world's "reserve currency" in its trade dealings with the world's biggest marginal economic power, China, and will enable the direct convertibility of the Australian dollar into Chinese yuan, without US Dollar intermediation, in the process "slashing costs for thousands of business" and also confirming speculation that China is fully intent on, little by little, chipping away at the dollar's reserve currency status until one day it no longer is.

Is it possible for burned Cyprus depositors to file a suit against the Troika or the US Navy? Why not?

Texas Rep. Giovanni Capriglione has a bill in play that would move the state’s gold from New York (where its under the “safekeeping” of the ultra shady Federal Reserve) to a depository within the state of Texas itself.  The reason this would be such a big deal if it happens, is because a lot of the gold bought and sold globally is not very likely not actually owned by those that “buy” it.  From my perspective, pretty much the only countries that actually buy gold and bring it within their borders are China, Russia and Iran.  Most other nations that claim they “bought” gold, most likely hold a certificate that states they have gold in London or New York.  So in other words, they have no gold.  It looks like Texas is wising up.

• Cyprus targets big depositors in bank plan  (FT)
• Merkel Vents Anger at Cyprus Over Bailout Plan as Deadline Looms (BBG)
• Russia rebuffs Cyprus, EU awaits bailout "Plan B" (Reuters)
• Russia Rejects Cyprus Bid for Financial Rescue as Deadline Looms (BBG)
• Cyprus unveils shake-up as the clock ticks (FT)
• Remember Italy? Italy’s stalemate unnerves investors (FT)
• Credit Suisse CEO pay jump to fuel banker bonus debate (Reuters)
• Kuroda Rebuts Reflation Naysayers as BOJ Action Looms (BBG)
• Fund Manager Says 'Whale' Trade Was a Bet (WSJ)
• House averts government shutdown, backs Ryan budget (Reuters)
• Hong Kong Homes Face 20% Price Drop as Banks Raise Rates (BBG)

That Russia has previously threatened, and followed through with, sending ships to the Mediterranean is nothing new. In the past, every such episode was related to the protection of what Putin considered vital geopolitical interests in the region: whether defending the Syrian port of Tartus, various crude and natural gas pipelines in the region threatened by NATO expansion in Turkey, or offsetting heightened US presence around Gaza and Israel (and of course Iran). Which is why with the legacy conflicts in the region dormant, and the only news of any relevance being the European intervention in Cyprus against Russian oligarch interests, it is surprising we learn today that the Russian Navy will dispatch a permanent fleet of five or six combat ships to the Mediterranean Sea, with frigates and cruisers making up the core of the fleet... How soon until we read that Russia is willing to invest even more unguaranteed loans into the Cypriot financial system.... in exchange for one little tiny naval and/or military base?

Following Part 1's discussion of America's Dangerous Drift, and Part 2's succincy summation of why America needs a Grand Strategy, today's Part 3 concludes with a discussion of the 'choice' American leaders have: "A decline in America’s leadership role and the emergence of a highly unstable world is a serious possibility. In reality, decline is not a foregone conclusion but a deliberate political choice that builds from a failure to define what matters most to the nation." When we step back from the language and imperatives of grand strategy, the case for the United States to rethink its grand strategy is fundamentally simple. It is designed to meet serious threats while creating and taking advantage of strategic opportunities. To continue on the present course of "drifting" from crisis to crisis effectively invites powers to believe that America is in decline. Worse, Americans, too, might believe wrongly that the nation’s decline is inevitable. If we are to assure America’s future security and prosperity, we need a new national grand strategy that harnesses America’s spirit, sense of optimism, and perseverance to help the nation meet the challenges and grasp the opportunities of this era. When we think about the alternatives, the United States simply has no choice.

• JPMorgan Report Piles Pressure on Dimon in Too-Big Debate (BBG)
• Employers Blast Fees From New Health Law (WSJ)
• Obama unveils US energy blueprint (FT)
• Obama to Push Advanced-Vehicle Research (WSJ) - here come Solar-powered cars?
• BRICs Abandoned by Locals as Fund Outflows Reach 1996 High (BBG)
• Obama won't trip over Netanyahu's Iran "red line" (Reuters)
• Samsung puts firepower behind Galaxy (FT)
• Boeing sees 787 airborne in weeks with fortified battery (Reuters)
• Greece Counts on Gas, Gambling to Revive Asset Sales Tied to Aid (BBG)
• Goldman’s O’Neill Says S&P 500 Beyond 1,600 Needs Growth (BBG)
• China’s new president in corruption battle (FT)
• Post-Chavez Venezuela as Chilly for Companies From P&G to Coke (BBG)

"Equity prices in the US and Europe have been hovering at multi-year highs. To the extent that this reflects powerful policy easing, equity markets may have lost some of its ability to reflect economic trends in exchange for an important role in the policy fight to support spending." This is a statement from a Bank of America report overnight in which the bailed out bank confirms what has been said here since the launch of QE1 - there is no "market", there is no economic growth discounting mechanism, there is merely a monetary policy vehicle. To those, therefore, who can "forecast" what this vehicle does based on the whims of a few good central planners, we congratulate them. Because, explicitly, there is no actual forecasting involved. The only question is how long does the "career trade", in which everyone must be herded into the same trades or else risk loss of a bonus or job, go on for before mean reversion finally strikes. One thing that is clear is that since news is market positive, irrelevant of whether it is good or bad, virtually everything that has happened overnight, or will happen today, does not matter, and all stock watchers have to look forward to is another low volume grind higher, as has been the case for the past two weeks.

Think of a rhino that puts its head down, and just charges through the bushes. Everything gets trampled in the process.

Today is the day all Robert Langdon fans have been feverishly waiting for: the 115 voting cardinals of the Catholic church begin today their secret conclave to choose the successor to Pope Benedict XVI. As Bloomberg puts it succinctly, "he who enters the conclave a pope exits as a cardinal" and it is notoriously tricky to try to handicap the papal vote. In processional next steps, the Cardinals will gather in the Sistine Chapel, hailing from as far as the Philippines, and may hold a single vote today with as many as four ballots on succeeding days. Politically, this conclave has been presented as a "struggle between cardinals looking to overhaul the Vatican bureaucracy known as the Curia, and those trying to maintain its influence, according to Vatican analysts. Electing a non-European, while a novelty, would not necessarily presage a change of course for the millennia-old institution shaken by the abdication of German-born Benedict." Realistically, it will be a free for all for the scandal-riven church, and it is very much an open question who the next pope will be. So while we await the puffs of white smoke, courtesy of Bloomberg here are brief biographies of some of the men who may be in the running, based on betting websites and consulting Vatican watchers.