Notes From Underground: Last Week Was The Year That Was

This weekend brought mixed news about the lessening of RISK in Japan, and possibly Bahrain, while increasing the sense of risk in Libya and other parts of the Middle East. It appears that the threat of nuclear catastrophe has been diminished as some power has been restored to the nuclear plants under stress and the needed cooling is proceeding. The Japanese equity market will be a good source to monitor investor sentiment as weekend news publications were filled with articles about the values abound in the Nikkei and other Japan-based indexes. The YEN will be a much more difficult barometer because of the impact of YEAR END and its ability to cause disruptive volatility in currency markets.

Friday’s G-7 intervention in the foreign exchange markets (in an effort to stem YEN appreciation) seemed to work as the YEN weakened against most of developed world’s currencies. The biggest move for the YEN was against the EURO but that appears to have been the result of the ECB being the largest participant besides the Bank of Japan. It makes perfect sense for it was the FRENCH who called the emergency G-7 meeting to stem the YEN‘s ascent. At this time we don’t know how much the CENTRAL BANKS spent but guesses reach the $25 BILLION level.

Why the French were so eager to push for intervention? Yes, I am aware that Sarkozy is presently the head of the G-7 as well as the G-20 and it is certainly in his purview, but let’s also remember the FRENCH have been calling for a restructuring of the world’s DOLLAR-based standard. France has gained some support from the Chinese and others in searching to limit the DOLLAR role in world finance and trade. I can’t believe that the French are looking to gain Japanese support for some effort to restructure the GLOBAL MONETARY SYSTEM. It seems as if EUR/YEN should be closely watched to see if this theory has any credibility and look to see if the resistance levels that have held on the cross give way as the Japanese year-end approaches.

The Bernanke FED did not seem to have played a large role in the G-7 intervention as any large DOLLAR buying would have countered the QE2 program presently in place. The FED could provide DOLLAR SWAP LINES to the BOJ rather than direct currency intervention, which would be an indirect effort at curtailing YEN appreciation. All of this activity and the increased appreciation of the EURO leaves me wondering if the ECB will be able to back off raising rates at the April meeting.

Also, early news from Germany has Chancellor Merkel’s CDU holding on to the status quo in today’s election in Saxony-Anhalt. The present grand coalition of the CDU-SPD looks to be repeated as the largest vote gainer will be the GREENS who will achieve more than 5 percent. The Japanese nuclear energy situation has provided the GREENS with an increased popularity due to their anti-nuclear stance. Overall, this should be seen as a victory for Merkel heading into the elections next week in Baden-Wurttemberg and may be an added positive for the EURO as Merkel’s ability to hold will be deemed further support for the bailouts necessary for the survival of the EU and the EURO.

The FRENCH have not only led the way on the YEN intervention. It was French diplomacy that assembled the coalition to support a “no fly” zone against the Libyan military. After getting the support of a UN resolution, the coalition wasted no time in attacking the military targets of Qadaffi loyalists. Foreign journalists have been limited in their movements so the news coming out of Libya is sparse and circumspect. Markets will be subject to a raft of rumors about the success of coalition bombings and its impact on the rebel forces, but this will become a very messy situation. This military support of the rebels seems to have been hastily done and as in the YEN INTERVENTION the U.S. appears to be a very reluctant  participant.

U.S. Defense and State Department policy makers seemed to be much more concerned over the Bahrain situation and its potential for spillover into Saudi Arabia, while the French and other Europeans are concerned about the instability in North Africa because of its close proximity to Southern Europe. The French diplomatic corps was caught off guard by Tunisia and Egypt. Let us hope that they are better prepared for the action they have begun in Libya.

Finally, we note that President Obama is on a trip to Latin America. His first stop is Brazil where he is meeting with President Dilma Rousseff. President Obama is acknowledging Brazil’s increased stature in the world and is bringing along the business people to secure enhanced trade prospects. Oil is a large topic as PETROBRAS has begun the production of very large oil finds and Obama has promised that the U.S. would be a large customer. Unfortunately, the U.S. president did not announce the removal of the 54 cents-a-gallon tariff on imported Brazilian ethanol.

Brazilian President Rousseff complained directly to Obama today about these tariffs, but again, U.S. domestic politics trumps global leadership on trade issues. The U.S. continues to lose credibility on free trade promotion when it allows political expediency to corrupt its international standing. After two days in Brazil it is on to Chile and maybe the President will find more common ground. The more hypocritical the U.S. is on its policies, the less significance its place in the G-20 and its ability to lead.

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7 Responses to “Notes From Underground: Last Week Was The Year That Was”

  1. Danny Says:

    One would think (at the margin) pressures to get rid of tariffs on Brazilian ethanol would only be increased by the Japanese earthquake, tsunami, and nuclear fallout. Now that the environmentalists (secretly armed with the political clout of the pocket books of ADM, et al) will have, for all practical purposes, lost their nuclear option for at least the next several years…where can they possibly turn to aid their agenda? Talk about a tough choice: support natural gas which is technically a hydro carbon or actually import Brazilian ethanol which I am told can put the U.S. ethanol industry on its back in one fell swoop (without even touching the rain forest).

    Cynically speaking: looks like this is bullish natural gas.


  2. yra Says:

    Danny—we will have to wait for Boone Pickens to come out front and center–but I think that is a good point .But don’t be bullish for the LNG for at this time and the far future that is a myth—natural gas is not fungible as is crude

  3. Arthur Says:

    Why is LNG better than Oil? I´m very long oil, Peter Thiel.

  4. yra Says:

    I don’t believe LNG is better then oil–not yet as you don’t have the facilities for export—the LNG industry in the U.S. was built for imports now the situation needs to reverse and then the bullish natural gas play will be on

  5. Arthur Says:

    I see… sounds far away. As you say, “The market can stay irrational longer than you can stay solvent.”

  6. Danny Says:

    From an energy security standpoint, I wonder if the Feds will make LNG exporting illegal. Or at the very least make it extremely restrictive. The proponents of natural gas do a good job of discussing the abundence of supply, but they seldom carry the discussion to its logical implications of the of what creating new sources of demand (i.e. LNG exports, MORE natural gas power plants, LNG cars/trucking) might imply with respect to price.

    We might have MORE than enough natural gas supply given today’s level of demand and demand sources…but if that is suddenly expanded and LNG exports become wide spread the equilibrium price will stand to be a hell of a lot higher than it is today – even if net net we still have plenty of natural gas in the United States.

    I read somewhere (most likely untrustworthy) that there are 140 LNG tankers on order currently. The EIA puports that a modern LNG tanker can carry 3 BCF. Thus in theory if these numbers were true, there will be 420 BCF of carrying capacity ready to take product from the U.S. to the rest of the rest of the world. That is a hell of a lot of gas even in the context of today’s supplies. I am not saying we will run short…but the equilibrium price is probably somewhat higher than $4/MMBTU…and the low price of natural gas is one of the primary points the proponents of natural gas make.

    In the meantime, surely coal has to be the quickest and surest beneficiary of the Japanese reduction in nuclear power. I noticed relevant freight rates tripled in price in a matter of a week.

  7. yra Says:

    Danny–I read something similar on th enumber of LNG tankers.The terminals are frought with danger and easy terrorist targets and unfortunately that eneters into the contemporary equation—and of course as soon as the price goes down the projects get mothballed.A lot of global natural gas supply is coming on line as the huge new find in Israel attests to —ther will be plenty of demand in the U.S. and I truly don’t believe that Nuclear is over—in fact the new plants that will be built will be much safer —the alternative of 200 dollar oil just does not work

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