Turkey’s Act of War

The outrageous Turkish downing of the Russian bomber clarifies who is fighting whom.  It is abundantly clear that Turkey is fully allied with ISIS, and the US is backing al-Qaeda in Syria.  Russian success at taking out ISIS positions has humiliated the US’s own campaign, revealing western hypocrisy that they want to destroy ISIS.  In fact, the west’s agenda has always been about regime change in Syria, using ISIS as a tool to help facilitate that.  These facts are now obvious to all, including MSM.

This is an act of war by Turkey, and could be the trigger to dramatically broaden the ME conflict.  Where is the outrage?  Where is the international condemnation?  Such hypocrisy.

Is this what the next global war looks like?  Are we in it now?  It begins slowly, and then happens all at once.

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What Happened in Paris

I don’t know.  But here are some intriguing thoughts outside of the mainstream “it was ISIS” meme:

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Sleeping through a Revolution

An excellent presentation by Jonathan Taplan of the USC Annenberg Innovation Lab.

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Time to Panic?

If you can keep a calm head in these times, perhaps you just don’t understand the situation.

Yield rates on 10y bonds have been really wacky.  As have currency rates.  Big movements.  Lots of concern about liquidity in bond markets.

Did something finally give?  Did a derivatives bomb explode? Did it take out Deutsch Bank?

As an add-on, Golem XIV offers an interesting read — “Trapped in a Bubble”.  There is no price discovery in financial markets.  The market goes up and up, regardless of the underlying fundamentals of any company.  It is a ponzi kept alive without new entrants, with new money being pumped in by the Central Banks, ie back-stopped by the clueless 99.9% via endless QE and back door subsidies like ZIRP.

There’s no way out of here. When you come in, you’re in for good.” — David Gilmore

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Who has the Gold Makes the Rules

But, what if the gold does not exist?  Can they still make the rules?

Here is a fascinating analysis of US gold reserve audits by Koos Jansen.  It is well worth the read.  The net is US “audits” of its gold horde are an illusion, and likely a conspiracy.  Official USG audits are missing, assayers are unnamed and not independent.  And the gold held by the NY Fed Reserve has never been properly audited and is now officially exempt from being audited.  Coincidentally, the gold vaults at the NYFed are connected via an underground tunnel to 1 Chase Manhattan Plaza.  Read this post by BullionStar gold researcher Ronan Manly for more information on the construction of the FRBNY vault and the connection to the vault across the street that was owned by JP Morgan, but recently bought by Fosun (October 2013), a Chinese investment conglomerate.  How weird is that?

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Currency Contagion

Something big is clearly going on.

BoC lowering overnight lending rate by 25 basis points is a major move that will further weaken the Canadian dollar.  The BoC appears to be joining other countries (plus Euro) in depreciating its currency against the US$.

The yield on US treasuries is dropping, which forced the BoC to drop its key rate or face a rising currency as global investors chase yield. Lending credence to the idea that the BoC wants a weaker currency.

The other major currency event that ocurred is the SNB move last week.  Canada must have briefed the Fed and other central banks of its plans, and probably got the go-ahead. I think the SNB acted unilaterally.

Is this the prelude to a much more significant event related to the US$?  Perhaps the dropping yeild on US treasuries (and rising price) is blowing up interest rate derivatives, which have all been betting on rising rates.  Oil and energy derivatives have already gone nuclear.  The carnage from oil/energy, currencies and now interest rates has got to be huge.  Maybe the bubble has actually burst.

Find a safe haven.

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Swiss Franc

Wow.  Talk about shock and awe.  Destroyed anyone short the Franc.  I think the SNB wanted to decouple the Franc from the Euro before QE starts next week.

Absolute turmoil in the markets right now.  Oil, copper, US$ index pushing $0.93, 10yr UST  at 1.746%.  Gold is up to $1,265.

There are $billions in market losses for bad derivative bets.  Hidden for now, but will be revealed shortly.  I’ll bet some big banks are on the ropes.  Deutsch Bank, JPM, BofA, SocGen, Citicorp, Morgan Stanley, Barclays are prime candidates.  Goldman Sachs alumni are all in place at central banks, so they have the inside scoop and probably positioned accordingly.

The largest loss known to date from last week’s action by the Swiss National Bank (SNB) occurred at Everest Capital’s flagship hedge fund, Everest Capital Global. According to reports from Reuters, the WSJ and Bloomberg, the flagship fund will close after being essentially wiped out from a bet the Swiss Franc would fall in value.  The company was believed to have lost almost all of the flagship fund’s assets of approximately $830 million. How a “hedge” fund could wipe itself out on one strategy calls into question the very meaning of “hedge” fund.

2015 is off to a raging start.

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2015 – It ain’t going to be pretty

This is a collection of predictions for 2015 by various thinkers.  Not much to be hopeful about, unless you like chaos and calamity.

James Kunstler
The giant con.  Each dollar of debt generates less than a dollar of output.
long Nikkei/short gold/long silver hedgeand here.  More manipulation of the markets?

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Double Helix: the Dragon and the Bear

The double helix of the Dragon and the Bear or here.  From Vineyard of the Saker.  More to come on this topic.

$9 trillion US$ carry-trade blew up oil
– Institutionalized TBTF. Ellen Brown-5 Big Banks will Survive Next Financial Calamity-Everybody Else Bankrupt.
Dmitry Orlov summarizes the current geopolitical situation. Basically, Anglo-imperialists, i.e. the combination of Britain and the US, are being tossed out of Eurasia, ergo all the turmoil. Most of the major Eurasian players — China, Russia, India, Iran, much of Central Asia — are cementing their ties around the Shanghai Cooperation Organization (SCO), to which the US isn’t even admitted as an observer. It will be an interesting 2015.
While the U.S. remains embroiled in endless wars, the world is defecting to the East
Peculiarities of Russian national character.  More insight from Dmitry Orlov

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The declining price of oil is a catalyst for calamity

Its obvious that the price of oil, high or low, has serious implications for financial markets and sovereign budgets.  Cheap accessible energy has been the fundamental driver of economic development.  It is also the major cause of conflict, a key reason the west is demonizing Russia, and the US persistence in meddling in the middle east and North Africa.

From Zero Hedge, look at the charts for oil and the US$.  The petrodollar and oil move in lockstep, but inverted.  As oil goes down (the cause) the US$ goes up (the effect).  Bill Holter at Miles Franklin helps us see through this:

I want to mention the recent explosive move higher in the dollar. It has rallied nearly 15% in six months, and nearly 10% of this in just the last two month. This I believe is the result of the dollar carry trade unwinding. Many commodities including oil were “carried” by borrowing dollars. This was a synthetic short position in the dollar. As the commodities (oil) imploded in price, traders were forced by margin calls to exit positions. The borrowed (shorted) dollars were paid back (covered) and has caused the rally in the dollar.

The US$, the petrodollar, is the global reserve currency through its relationship with oil.  i.e. the US$ is the expression of the price of oil, and the currency used for most oil transactions.  US treasuries held as FX reserves in countries around the world are in large part for buying oil, or more broadly energy.

The declining price of oil is the catalyst for a chain of events that is impacting the global financial system.  Here is how I connect the dots:

– oil is going down because supply is outstripping demand.
– this drives up the price of the US$ since it takes less petrodollars to buy oil.
– this causes deflation in anything priced in US$, meaning asset prices drop
– US$ denominated debt will be more costly to pay back in the future, since US$s are more costly than they were borrowed at.  The rising dollar is bad for borrowers of outstanding debt (i.e. corporate and government)
– holding US treasuries (UST) means you are long on the dollar.  USTs increase in value as the dollar increases, which means the yield will go down, i.e. downward pressure on interest rates
– the US has been rolling over trillions of dollars of debt, which of course are denominated in US$.  Since the number of dollars they roll over does not change, they need to roll the debt over in more costly dollars.  The rising US$ is good for buyers of USTs since they will be paid back in the future with more expensive dollars.  On balance this lowers risk, which will push interest rates down.

So, if this flow of cause and effect is correct,

– as oil continues to drop, the US$ will rise
– all currencies will fall relative to the US$
– oil exporting countries will see currencies fall even more
– US trade balance will get creamed
– interest rates will be pushed down further
– deflation will dig in and asset prices will drop
– as collateralized asset prices drop, borrowers will need to either come up with more collateral, liquidate assets or default

The key danger points:

– declining assets prices and the need to cover collateral could spiral out of control.  Bonds/loans to shale and tar sands producers are blowing up, especially if revenue streams were collateralized
– energy derivatives that were long on oil are going nuclear
– two-thirds of the hundreds in trillions of dollars in derivatives are interest rate derivatives.  Half of those must be on the wrong side of the bet

With a dollar carry trade of $9 trillion invested in risk assets, the coming six months are not going to be pretty.

Max Keiser interviews former British energy regulator Chris Cook. Great insight into some of the dealings with global energy prices. Interview starts at 12 mins, but the entire show is about oil.  Basic thesis is that since 2008, QE money flowing into financial markets was looking for yield, and inflation hedging via commodities, which pumped oil and commodities up.  Saudis lent oil to hedge funds, who lent money to Saudis.  Oil balloon deflated when QE stopped.  US and Saudis had a dark deal, guaranteeing floor at $80/barrel and US gas at pump less than $3.50 as the ceiling.  If US gas went up, Saudis supplied more oil to the US.  Brent at one time was $20 more expensive outside of the US.  US shale oil, viable at >$100, is a swing supplier, essentially putting a cap on the global price of oil.  At $91, shale producers on average were paying $130 for oil and receiving $100.  At current $56, well, do the math.  At $25, carnage, with only a couple shale producers viable.  Wow.
Here is an excellent article on the Russian cancellation of South Stream pipeline.  Not oil, but natural gas.  Europe is not happy being captive to the Russian monopoly Gazprom for a third of its energy needs.  South Stream was a cynical attempt by Europe to gain control of the transmission of Russian energy.  EU “energy security” is really a euphemism for the extraction of energy in other countries by its own companies under its own control, aka western capitalism.  Russia did not want to be manipulated, walked away from the deal and is now looking towards China, Turkey and the east for economic partnership.  “… by redirecting gas away from Europe, Russia leaves behind a market for its gas which is economically stagnant and which (as the events of this year have shown) is irremediably hostile. No one should be surprised that Russia has given up on a relationship from which it gets from its erstwhile partner an endless stream of threats and abuse, combined with moralizing lectures, political meddling and now sanctions.”
This thread on TFMetals Report has lots of good discussion on Russian energy.
Its not just oil.  Energy is being routed and here.  The price of oil has plunged 50% since June, the price of propane is down 50% since its recent high in mid-September, and natural gasoline is down 32% since recent high in mid-November.
by ending QE the US primed the drop in oil prices. The rising US$ is deadly for emerging economies dependent on importing oil, which they purchase in US$. The chain of events is the rising dollar means emerging economies can no longer afford as much oil, which chokes off demand for oil which inflames the excess supply already in the market.  In addition, EM debt, which is typically denominated in US$, are watching their debt increase as the $US increases against their domestic currency.  This situation is unsustainable.
The real cause of low oil prices: interview with Arthur Berman.  The price of oil will recover. All producers need about $100/barrel. The big exporting nations need this price to balance their fiscal budgets. The deep-water, shale and heavy oil producers need $100 oil to make a small profit on their expensive projects. If oil price stays at $80 or lower, only conventional producers will be able to stay in business by ignoring the cost of social overhead to support their regimes. If this happens, global supply will fall and the price will increase above $80/barrel. Only a global economic collapse would permit low oil prices to persist for very long.
– … in this analysis, by SRSrocco, oil demand is up over previous year, but below projected growth, and price is highly elastic. Small changes in demand result in large changes in price.  Further, for oil importing countries, especially emerging markets, declines in the price of oil have been offset by the increasing petrodollar relative to domestic currencies, again noting the inverse correlation between oil and the $US index.

– I am not sure what to make of this analysis, but the author suggests Saudis are being compensated for the falling oil price through CitiBank.  If this is true, it would point  the smoking gun for the drop in oil prices at a deal between the US and Saudis.

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