Posts Tagged ‘Middle East’

Notes From Underground: The Tweets Controlling the Market Gyrations

July 1, 2018

Now that the first six months of the year have come and gone, the markets have a cacophony of events to look forward to as algos react to price, and fundamental macro analysts are trapped between WHAT OUGHT TO BE. The current concerns over tariffs, trade wars, strife between friends/allies, political uncertainty in Europe, Middle East conflagrations, the Russia/Saudi alliance on energy, Chinese growth concerns, RISING U.S. INTEREST RATES AND INCREASED QUANTITATIVE TIGHTENING (along with elevated TREASURY FUNDING NEEDS), decrease in capital inflows into emerging market economies leading to potential dollar funding concerns and U.S. Congressional elections. Yet, the markets remain are not pricing in the relevance of such concerns. Wise traders and investors do not fight markets but profit from the opportunities presented. To do otherwise is mere commentary. So to paraphrase John Maynard Keynes: When the facts change so do I, what do you do madam?

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Notes From Underground: Hell Has Frozen Over. Greenspan and Harris Agree

December 7, 2017

Over the last 30 years I have not had much regard for Alan Greenspan. He has been wrong on many of the issues on which he has opined, not least his speech on home bias and his pleadings for U.S. homeowners to refinance their mortgages and use home equity as a piggy bank. But like Holden, I digress. In his CNBC interview Wednesday he was adamant that fiscal stimulus was ill-advised, but tax reform was necessary. He said Congress should use the reform to close tax loopholes and run budget surpluses while we are at some modicum of full employment. I agree with this and as Greenspan maintained, the beginning of this tax reform OUGHT to be the reconsideration of Bowles/Simpson. Greenspan also stressed “… the folks in Washington do not understand that reducing the size of the system portfolio is a necessary condition for normalizing the price of credit.” I also agree with this viewpoint. And, in regards to BITCOIN, Sir Alan explained you can’t create VALUE out of nothing.

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Notes From Underground: Putting Qatar On Our Screens, A Potential Disruptive Force

June 5, 2017

Many times I have written that you don’t buy gold/silver on the outbreak of war but merely trade it. Over the last 35 years any GOLD rally on the outbreak of any world conflicts has been a mere short-term trade. Sometimes situations represent potential paradigm shifts which unfold over time. Yesterday’s announcement by Saudi Arabia, Egypt, United Arab Emirates, and Bahrain to sever ties with Qatar may be representative of a significant change in the fabric of Mid-East relations. I stress MAYBE because certain events will have to follow develop signal a seismic shift. THE QUESTION TO CONSIDER: WHY THE SUNNI COALITION CHOSE THIS TIME TO DENOUNCE QATAR?

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Notes From Underground: The Even-More Complex Map of Currencies and Politics

March 29, 2015

On Friday afternoon Chair Janet Yellen delivered a speech at a conference sponsored by the San Francisco Fed, titled “Normalizing Monetary  Policy: Prospects and Perspectives.” Many analysts will delve into the speech to find a possible nugget of “forward guidance” in the predisposition of Chair Yellen’s desire to raise rates. After a second read and reviewing several pages of analysis, I am left with the same outlook of President Harry Truman: Please bring me a one-armed economist. The speech is filled with a back and forth on the desire to raise rates to a level of “NORMALIZTION” but with the headwinds facing the U.S. and global economies caution is to be maintained. The headwinds prevailing in the U.S. and acting as a drag on economic growth are:

  1. Tighter underwriting standards;
  2. Continued household balance sheet reduction;
  3. Contractionary fiscal policy at local, state and federal levels;
  4. Lack of capex for lack of robust demand; and
  5. Recent appreciation of the dollar is likely to weigh on U.S. exports.

Chair Yellen opines that if the FOMC waits too long it could result in higher than targeted inflation levels. The Fed Chair cites the recent experiences of Japan and Sweden as a reason to be cautious “… in removing accommodation until the Committee is more confident that aggregate demand will continue to expand in line with its expectations.” Also, with “… an already large balance sheet. For example, the FOMC might be concerned about potential costs and risks associated with further asset purchases.” It seems it is better to err on the side of what Fed President Dudley has referred to as the economy running “hot,” which is inflation being sustained above the 2 percent level.

In a post-Yellen comment, Rick Santelli noted that during the brief Q&A session the Fed Chair said unequivocally, “Cash is not a very convenient store of value.” Santelli said this is the bogeyman of deflation and Gillian Tett picks up the argument in the weekend Financial Times with a piece, “How Deflation Gave Lower prices A Bad Name.” Readers of Notes from Underground have known that I refer to Ben Bernanke as a ’37er: An economist grounded in the belief that the early moves by the FED and the U.S. Treasury to prematurely tighten fiscal and monetary policy in 1937 led to a stifling of incipient growth and a renewed recession. “Cash is not a very convenient store of value” certainly signals that the Yellen Fed will keep rates as low as possible in order not to abort economic growth.

It has been my argument that the reason GOLD maintains its long-term strength is because of the fear of deflation and the policies employed by central banks to curb the possible threat of falling prices. In a continual effort to combat DEFLATION the world is awash in reserves, which presently support global equity markets. (It appears as if stocks are presently a better store of value than gold.) But as Tett wrote in her piece, falling prices are not always the BOGEYMAN of capitalism. Deflation is only a grave concern when an economy has accumulated for too much debt and then the fear of asset deflation brings about the asset liquidation of the 1930s and all the societal pain.

I believe the Bernanke Fed was correct in employing the first round of QE for it forestalled a massive round of asset liquidation in a very fragile financial environment. It is the continued use of QE that has created potential problems for the FED. Yes, I know as Senator Schumer proclaimed, “You are the only game in town.” I guess after reading the Yellen speech it appears that the Fed will remain data dependent but, more importantly, an aggressive easing of fiscal policy might be the real impetus for the Fed to raise rates. The ’49ers play in San Francisco while the ’37ers  dominate the Washington monetary scene.

***Global Politics — The news from the Middle East last week sent momentary scares into oil, precious metals and stock markets. The military response by the Saudis and a possible Sunni coalition of armed forces to recent events in Yemen was seen as a precursor of a new flash point in the already tense ME. By Friday, the oil markets sold off and the precious metals were in retreat as the conflict in Yemen was seen to be contained. IN MY OPINION THIS MOVE BY THE SAUDIS IS NOT TO BE MINIMIZED. WHY? If you look at a map of Yemen and its relationship to Saudi Arabia, and, of course Iraq, you will notice that both countries border the House of Saud. The Saudi family controls something greater than oil reserves. It controls the Islamic Holy Sites of Mecca and Medina.

The desire by Isis to rebuild the Caliphate necessitates the need to control the pivotal centers of the Muslim religion. While Isis is Sunni  the rebels in Yemen are a sect of SHIA and it is their Iranian support that causes the Saudis and other Arab states to militarily act to counter the perceived threat to the Saudi homeland. I have long believed that Mecca and Medina are the desired targets of any group or nation desiring to control the center of Islam. Those believing that Yemen is only about the control of Mandab Strait or Bab el Mandeb are fooling themselves. Yes, a choke point of oil transport is important. More than 3 million barrels of oil daily flow through the strait as crude moves to the Red Sea and out to the Mediterranean by way of the Suez canal. Yet there are also important elements in play in the struggle between Sunni and Shia.

In Friday’s FT, Richard Haass, President of the Council on Foreign Relations, wrote: “There are other reasons to predict limits to what the Saudis can be expected to do in Yemen. They lack much in the way of capable ground forces. Saudi arabia also has to worry about the home front. It is only a matter of time before it faces direct challenge from groups such as the Islamic State of Iraq and the Levant who will see ousting the government that controls the two holiest cities of Islam as essential to their ambitions.” If you believe the world is getting easier to decipher, think again. You need more than an MBA to know which way money will flow. The world is caught in the imbalances of 2+2=5.

***NOTE: I will be on with Mr. Santelli tomorrow morning at 9:40am Chicago time. I don’t know the topic but as my readers know, we’ll be prepared to go many places.

Notes From Underground: The clock to the end of the first quarter and the money from the BIG EASY has overwhelmed

March 29, 2011

Wow, what a long strange trip it has been. This quarter has certainly been visited by the four horsemen of the apocalypse. Every time the market thinks it has seen a cataclysmic event, something new arrives on the stage. Floods in Australia, earthquakes in New Zealand and Japan, high food prices and riots in the world over, and of course there is always war breaking out somewhere. In a prior time (THINK 1960s), we had a different hedge group writing: IT’S GOOD NEWS WEEK by  the HEDGEHOPPERS.

All these calamities and still the equity markets in the U.S. have rallied and the DOLLAR has failed to invoke its haven status. The only explanation I can discern from this action is that EASY MONEY from our friends at the FED has trumped all else. It seems that DOLLAR-based investors are searching for any type of investment that can yield more than inflation. Risky assets get bid up as money scours the investment map. Commodities, high-dividend yield stocks, high-yield corporate bonds are all desired.

Yet, as the Financial Times reported today,  the demand for MUNI BONDS isn’t there post Meredith Whitney as the yields are insufficient to overcome the fear of default. At least GREECE pays you a true risk yield to purchase its SOVEREIGN DEBT. The end of the quarter leaves me thinking that the FED and all the other QE-providing BANKS have so perverted the global interest markets that the decision to remove the monetary stimulus will create a great deal of volatility. The question is, when?

The coming quarter will begin to answer that question but the political stage will continue to surprise as 2012 brings forth many elections. In May, the Canadians will go to the polls and the Portuguese will follow. I am certain that other Parliamentary Governments will fall as the austerity budgets begin to take a toll on voters of many Western nations. As the quarter comes to an end, the EUR/YEN cross that has been the barometer of so much of the risk on/risk off paradigm, is breaking out to new highs since the second quarter of 2010. Is this a reflection of the G-7 intervention or merely the need for Japanese investors to seek higher yields outside of Japan?

The FT reported yesterday that several macro hedge funds suffered severe losses from the March 17 YEN rally that sent the DOLLAR/YEN rate to 76-plus. As the quarter ends, there are more questions than answers but I sincerely hope that the FED will begin to remove some of the haze that engulfs global financial markets. The politics will create volatility. Responsible central bank policies would do much to help remove some of the greater uncertainties. For many, this was certainly a “WINTER OF DISCONTENT.” Being a CUBS FAN, it is time for HOPE to SPRING ETERNAL.Hey Bernanke, PLAY BALL.

Notes From Underground: Irish Elections, Bahrain and the U.S. DOLLAR fails to RALLY

February 24, 2011

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?

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Notes From Underground: The revolution will not be televised*

February 14, 2011

As I was inundated with the news out of the Middle East it was simple to recall the song by Gil Scott-Heron. The talking heads were mesmerized by their apparent influence in helping to spark the “PLAZA FIRE.” This is a nice kumbaya moment to believe that the Twitter generation can overcome autocratic rulers by messaging. However, I think it creates a great deal of danger for those with their bodies in the squares. I am a believer in the need to remove the sclerotic autocrats from power but Egypt was not one of those moments. The military that has run the political machinery in Egypt is still intact and pulling all the strings. It is certainly a feel-good moment for those involved but until real change occurs it is nothing more than rearranging the chairs.

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Notes From Underground: Hello? Central Casting, we need experts in market and political hieroglyphics–STAT

January 30, 2011

All eyes have turned to Egypt as the political situation has caught the world’s financial markets off guard. The turmoil in Tunisia was merely a blip on the radar screen but the significance of Egypt is an entirely different matter. So much capital has been thrust at maintaining the status quo in Egypt that many financial analysts have been lulled into a pre-Minsky complacency: Stability breeds a false sense of comfort. The emerging markets have been the repository of the Bernanke QE2 program as low rates have led to the search for higher yields and let potential risk be damned or rather rationalized away by dusting off the models of Long Term Capital Management.

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