Notes From Underground

All eyes have been focused on the MIDDLE EAST for its huge impact on OIL prices. There is a debate between those who believe that the OIL supply disruption is inflationary as energy prices create a rising price environment and those who believe that high energy prices are a tremendous drag on economic growth. NOTES FROM UNDERGROUND is in the camp that OIL supply disruptions are a drag on growth, especially in an environment of high unemployment and a severely stretched consumer. It is this fear that has roiled the stock market in the U.S. and put stress upon the global financial system. Emerging markets that are already feeling the impact of higher food costs will now have to deal with higher energy prices, which many governments already subsidize for its citizens. Will the situation in Bahrain be as economic disastrous as some analysts and pundits are claiming?

I think at this point, the answer is no! Bahrain‘s problems begin with the fact that a SUNNI minority holds monarchic power over a SHIITE majority that has continually desired a greater political voice. The support for the SUNNI rulers come directly from the SAUDI CROWN as Bahrain is connected to the Arabian Peninsula by a causeway. Lying across from Bahrain on the Persian Gulf is the headquarters of the SHIA, Iran. This is a difficult mix during tranquil times, let alone in the turbulent Middle East, of the increased desire for ARAB DEMOCRACY. Stir in the fact that the old G-7 powers have been the financial and political supporters of the most autocratic and repressive regimes for many decades and it is a witch’s brew. This toxic political environment has been there for many years and now it is about to boil.

The Iranians stand to gain a great deal from the present turmoil but I believe that they too were caught off guard by the suddenness of the Bahrain “democracy” movement. I think Iran will proceed cautiously for they are not prepared to deal with a Saudi-U.S. faceoff right now. The Iranians like to create mischief and unease throughout the region but they are not desirous of a drawn out battle with the SUNNI world and its Western supporters, so I think that things will calm down and order will be restored.

Amidst the Middle East turmoil, the U.S. DOLLAR didn’t get a safe haven bid as would usually happen. Even the uncertainty that tomorrow’s Irish elections hold for the EU could not provide support to the DOLLAR. The present Irish government is set to be pushed out of power and the only question seems to be if the main opposition party, FINE GAEL, can win an outright majority. An overwhelming majority will assure that the leadership of FINE GAEL will move to renegotiate the costly bailout that was pressed upon the citizens of Ireland by the EU/IMF bankers with the compliance of Brian Cowen, the PM and head of FIANNA FAIL party.

The move by a newly seated government to possibly force haircuts on bank senior bond holders will create uncertainty in the debt of all the PIIGS. The leadership of FINE GAEL has promised that the international bond holders of Irish debt would not be bailed out solely at the pain of Irish citizenry. This will help destabilize the EUROPEAN bond markets. This is well known and yet there is still no rally to the DOLLAR. It appears as if the demise of PAX AMERICANA is temporarily weighing on the prestige and image of the U.S.

It seems that the present political situation in the U.S. that is brewing across STATE CAPITOLS is causing investors to worry that the CONGRESS AND OBAMA will lose their zest for curbing government spending. Is Madison, Wisconsin going to be the Congressman Rostenkowski moment for the next generation of American politicians? I remember that all serious discussion about reining in social security and Medicare ended when a group of senior citizens attacked Rosty’s car with their canes and fists. That prevented a rise in seniors cost for medicare. Is that going to be the same effect for dealing with runaway deficits now? It really appears that global investors are becoming terrified that the president’s very own BOWLES-SIMPSON Committee is going to be swept aside for ELECTION 2012.

If I was a foreign investor, I would also be alarmed with the comments from U.S. Treasury Secretary, Tim Geithner.  A BLOOMBERG story noted that the president’s main economic voice was a great concern when asked about the recent spike in OIL prices. The Secretary said, “The economy is in a much stronger position to handle” higher oil prices. He also noted that central banks have a lot of experience in managing these things. These are scary statements from a Treasury Secretary at this time.

With unemployment at 9 percent and the U.S. consumer still on the ropes, is the U.S. really strong enough to take a large supply disruption? What experience does Bernanke and company have in dealing with an oil crisis, especially in the middle of a ZERO INTEREST RATE PROGRAM and massive QE? I would like to know exactly the expertise we are talking about here. Should the FED and all the other central banks lower interest rates and maybe promote a new giant stimulus package to counter the economic drag from energy prices to an over-indebted consumer? I am left scratching my head while others are selling DOLLARS.

Tags: Bowles-Simpson, Brian Cowen, Dan Rostenkowski, Dollar, Election 2012, Fed, Fianna Fail, Fine Gael, G-7, Iran, Irish elections, Libya, Madison, Middle East, oil, PIIGS, QE, Sunni, Timothy Geithner, WI

This entry was posted on February 24, 2011 at 8:10 pm and is filed under Commodities, Federal Reserve, Ireland, Oil. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.