Notes From Underground: When I have Something to Say Sir I Am Going to Say It Now! (Phil Ochs)

Yes, all the news about Prime Minister Berlusconi is pure puff and nonsense. The Italian economic situation will not change one iota when Silvio steps aside and, in fact, I would argue that the situation will become more volatile. Italy has seen so many governments come and go since the end of WORLD WAR II that it must be the role model for Japan. Mr. Berlusconi may be a scoundrel but the markets and the Italians know what they have and it seems that Berlusconi the known is better than what may come next. If the present government falls there is a possibility that a more leftist coalition will be formed and it is doubtful if it would be prone to pass an AUSTERITY plan.

For those investors and traders responding to the drivel that passes for TV analysis be cautious as the flawed comments will create misperceptions and the game will change. Yes, Italy is a problem but the situation is not nearly as bad as it is in Spain. The 10-YEAR BOND SPREAD BETWEEN SPAIN AND ITALY IS 114 basis points (Spain 10-year yield 5.57% versus Italy’s 6.71%). The problem for Italy is that it is the only PIIG with a listed BOND FUTURES CONTRACT, THUS MAKING THE ITALIAN 10-YEAR THE PISSING POST FOR ALL THE ANGST IN THE DEBT MARKETS OF EUROPE. Spain, with 22%-plus unemployment is a far greater problem regardless of what the media pundits blather about.

Also, Spain is debating further AUSTERITY MEASURES which will create larger deficits as the NEGATIVE FEEDBACK LOOP GRABS HOLD OF THE SPANISH ECONOMY. It is getting preposterous that the visual media is only concerned about the daily gyrations of the global equity markets. WELL, NOW I HAVE SAID IT.

***Notes From Underground has been on the European debt crisis for almost two years so it seems old and stale but there are times when changes are noticeable. The European YIELD CURVES have been good barometers of impending problems, especially as it has been 2-YEAR NOTES that reflect a sea change in sentiment. When the Greek 2/10 initially inverted, the DEBT CRISIS went geometric. The same with the IRISH and PORTUGUESE.

THE ITALIAN 2/10  has flattened fairly dramatically over the last month, from 180 basis points to a modest positive 50 basis points. If this curve inverts it will signal that the markets concerns are growing about Italy. As previously mentioned, the Spanish will also be on the radar screen. Today’s Spanish is still a positive 143.4 points and it actually widened 8 points today as the Italian narrowed almost 10 points. The action in Germany has settled down as its 2/10 curve is stable at 140. Germany and Spain at the same steepness. Oh where is the Spanish Bond futures contract??

***It was reported in tomorrow’s Financial Times that the U.S. State Department is trying to stall the building of the KEYSTONE XL oil pipeline that will bring oil from the tar sands in Canada all the way to Texas. Environmental activists have lobbied hard to prevent the pipeline being built for it fears the impact of oil leaks on the water reservoirs in the proposed pipeline route. Other environmentalists are opposed to the Canadian tar sands because of its large carbon footprint for it takes using natural gas to heat the sands to make it liquid and transportable.

Politics is in play as the Obama administration needs the image of GREEN going into the 2012 election. The problem is that if the U.S. desires to ween itself from Mideast energy sources, Canada becomes a very important source. The Canadians will not suffer for the Chinese are waiting to purchase Canadian crude and a pipeline to the Pacific Port in Vancouver is a credible alternative. The choice will have to soon be made about whether the $7 billion KEYSTONE PIPELINE WILL BE BUILT.

***Today the GOLD and OIL were interesting trades as they separated late in the day even as risk-on became the buzz on the Berlusconi resignation. The oil has been strong of late and two weeks ago I conjectured that the BACKWARDATION in CRUDE may be the result of some consuming nations nervous about the U.S. and IRAN, especially after the U.S. troops depart Iraq. It seems to me that the U.S. troops have been an umbrella of safety for the Iranian nuclear program. As long as the troops were vulnerable to Iranian rear guard actions, the U.S. was reticent about attacking the IRANIAN NUCLEAR INSTALLATIONS.

No troops and Iran’s protective shield is gone and this may well be putting the bid to oil as buyers rush to top off reserves. Again, just CONJECTURE but with all the talk about IRAN lately it seems to be gaining traction. Gold sold off late today failing to hold its rally even as the S&Ps closed on its high.

***The news item from the G-20 about Germany not willing to pledge its GOLD reserves to guarantee the EFSF leads me to believe that the use of GOLD to backstop DEBT is on the table. The U.S. has the largest GOLD RESERVES with Germany second and the IMF third. Yes, IMF rules presently prevent the use of its GOLD for collateral but with the G-20 seeking to become more relevant in the current CREDIT CRISIS it would not surprise me if the IMF HEAD Christine Lagarde didn’t find a way to utilize her legal background and circumvent the rules.

If the IMF leveraged it GOLD horde the market may see it as bearish as it may resolve the immediate crisis but ultimately the monetization of the world’s GOLD would lead to a bullish outcome; when and at what price we will let the market tell us? This view may be a fantasy but the German decision to deny Europe its GOLD holdings mean that discussions are taking place. Oh and Italy is also in the Top 10 of GOLD holdings.

When it comes to Europe and finance it is similar to the movie “BANG THE DRUM SLOWLY.” The veteran ball players entice the rookies into a card game called TEGWAR (THE EXCITING GAME WITHOUT ANY RULES). That seems to sum up the international financial system, especially Europe.

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14 Responses to “Notes From Underground: When I have Something to Say Sir I Am Going to Say It Now! (Phil Ochs)”

  1. whitewavetrader Says:

    Always insiteful!

  2. arthur Says:

    great! I can only add that Berlusconi is a consummate political survivor

  3. erich Says:

    Yra – oil may be an indicator about Iran, but a better one on these type of politics is USD/ILS and USD/TRY they really helped in keeping eye on prize with LIbya. I call them the LEI of Middle Eastern politics. Why? The Turks and Israelis are crazy gamblers and will look to make a quick buck. Olmert, former Prime Minister of Israel, has been alleged to dabble in oil futures with his brother during the Gaza operation.

    Also, Iran and Israel, though there are fundamental differences (understatement), are awakening on the economic front. It’s little known but Israel still pays Iran money on an energy project in the Negev because of a contract with the Shah. While the Iranians have a moderate Jewish population. A more recent news report has it that one of the wealthiest families in Israel, the Ofers, was doing shipping deals with the Iranians. So it appears that under the surface, people are conducting business.

    BUT the problem appears that the Western guarantee to Israel of having a nuclear free Middle East in exchange for Peace (with Land) for the Palestinians seems to be changing in front of our eyes.

    What is more likely is that Israel reasserts sovereignty over its borders (Jerusalem, West Bank, and Gaza). Or that an economic collapse in Iran creates a black hole and leadership change (I heard that they sell their energy at discount).

    Border conflicts appears more likely and WITH Turkey since the energy in the Mediterannean sea will motivate nation states to wage war (as they have always done) for an energy grab. Do you really think the Turks are trying to help Gaza? No! They want control over the massive amount of energy in the sea. Why are they also making noise in Cyprus as well?

    Now I felt motivated to write this because no one agrees with me and I haven’t seen this in writing and I’m being driven crazy with everyone thinking there is going to be some Battle Royale in the Middle East. That was so 1970s. The new generation and their parents are not going to tolerate war like they used too. I’m more afraid of what the hell my savings will be in 10 years if I don’t do anything and just park my money in a bank that is AAA rated by S&P and Moodys.

  4. Craig Shaw Says:

    Classic De Niro

    http://www.tcm.com/mediaroom/video/295230/Bang-The-Drum-Slowly-Movie-Clip-TEGWAR-.html

  5. yra Says:

    Eric—lots of conspiracy in the post .I can’t speak about Olmert and the energy plays.The Turks are important for after Sarkozy and Europe turned on the Turks to not allow them into the EU ,Erdogan is pursuing a policy of reestablishing the Ottoman Caliphate which puts him at odds with the Iranians—the mid-east is never easy.The Iran nuclear issue is as much if not more a Saudi issue and the Saudis are pushing the U.S. to destroy the Iranian nuclear capibility.Now you may say that is conspiratorial but if you don’t believe the Saudi influence in the State Department you need to go back and read—Mearshimer and others overstate the Israeli influence as does AIPAC which drinks its own kool-aid

  6. erich Says:

    Paul O Neil in his book said as much about the Saudi influence. Thanks for your time Yra during a busy trading day.

  7. yra Says:

    ah nothing going on —ha

  8. Jim’s Mailbox « Jim Sinclair's Mineset Says:

    […] More… […]

  9. Greg Says:

    The Italian 2/10s have sold off and nearly inverted today. If the Euro politics have been playing for time the entire crisis, has that time just about run out? Do you see policy proposals / decisions coming out of Europe at an accelerated pace?

  10. yra Says:

    Greg–Christine and the IMF treasury are riding to the Little Bighorn–the IMF can but some time for the crippled financial markets –but they better ride quickly as the most vulnerable points in the defense line are being revealed and as I always say—markets are like water-it seeks its lowest level

  11. servitor99 Says:

    ira – i like you, but it seemed to me you were a bit offensive to greeks and greek history the other day on cnbc …. we all have been up and down, its a long way my man … keep it cool…

  12. Jon Says:

    If governements keep insisting on austerity so that they can use tax payer money to bail out the corrupt and broken financial elites, we will be quoting a different Phil Ochs song — The Ringing of Revolution.
    “And away from the grounds the flames told the town that only the dead are forgiven, as they vanished inside the ringing of revolution.”

  13. yra Says:

    Servitor–absolutely not.I said that the Italian Bonds were the pissing post for all the debt woes of Europe nothing derogatory in any way about the Greeks.I feel for the greeks and I applauded Papandreous move to a referendum and criticized the CNBC anchoe Michelle for missing how well Papandreou was moving to get public support and head off any military moves to seize the government .I am sorry if I wasn’t clear about that–but I know that Papandreou is well aware of what his father had to struggle with.The rest of europe opposed Papa because they don’t want to have to call a referendum,which is why Sarkozy and Merkel ganged up on him.

  14. yra Says:

    Jon–I was just listening to it myself–for as Peter,paul and Mary sang—when will they ever learn,when will they ever learn.

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