Tuesday, February 14, 2012

Iran and the Jasmine Revolution

Here Comes the Next Peace Dividend

When communications between intelligence agencies suddenly spike, as has recently been the case, I sit up and take note. Hey, do you think I talk to all of those generals because I like their snappy uniforms, do you?
The word is that the despotic, authoritarian regime in Syria is on the verge of collapse, and is unlikely to survive more than a few more months. The body count is mounting, and the only question now is whether Bashar al-Assad will flee to an undisclosed African country or get dragged out of a storm drain to take a bullet in his head. It couldn’t happen to a nicer guy.
The geopolitical implications for the US are enormous. With Syria gone, Iran will be the last rogue state hostile to the US in the Middle East, and it is teetering. The next and final domino of the Arab spring falls squarely at the gates of Tehran.
Remember that the first real revolution in the region was the street uprising there in 2009. That revolt was successfully suppressed with an iron fist by fanatical and pitiless Revolutionary Guards. The true death toll will never be known, but is thought to be in the thousands. The antigovernment sentiments that provided the spark never went away and they continue to percolate just under the surface.
At the end of the day, the majority of the Persian population wants to join the tide of globalization. They want to buy IPods and blue jeans, communicate freely through their Facebook pages and Twitter accounts, and have the jobs to pay for it all. Since 1979, when the Shah was deposed, a succession of extremist, ultraconservative governments ruled by a religious minority, have failed to cater to these desires
When Syria collapses, the Iranian “street” will figure out that if they spill enough of their own blood that regime change is possible and the revolution there will reignite. The Obama administration is now pulling out all the stops to accelerate the process. Secretary of State Hillary Clinton has stiffened her rhetoric and worked tirelessly behind the scenes to bring about the collapse of the Iranian economy.
The oil embargo she organized is steadily tightening the noose, with heating oil and gasoline becoming hard to obtain. Yes, Russia and China are doing what they can to slow the process, but conducting international trade through the back door is expensive, and prices are rocketing. The unemployment rate is 25%. Iranian banks are about to get kicked out of the SWIFT international settlements system, which would be a death blow to their trade.
Let’s see how docile these people remain when the air conditioning quits running this summer because of power shortages. Iran is a rotten piece of fruit ready to fall of its own accord and go splat. Hillary is doing everything she can to shake the tree. No military action of any kind is required on America’s part.
The geopolitical payoff of such an event for the US would be almost incalculable. A successful revolution will almost certainly produce a secular, pro-Western regime whose first priority will be to rejoin the international community and use its oil wealth to rebuild an economy now in tatters.
Oil will lose its risk premium, now believed by the oil industry to be $30 a barrel. A looming supply could cause prices to drop to as low as $30 a barrel. This would amount to a gigantic tax $1.66 trillion tax cut for not just the US, but the entire global economy as well (87 million barrels a day X 365 days a year X $100 dollars a barrel X 50%). Almost all funding of terrorist organizations will immediately dry up. I might point out here that this has always been the oil industry’s worst nightmare.
At that point, the US will be without enemies, save for North Korea, and even the Hermit Kingdom could change with a new leader in place. A long Pax Americana will settle over the planet.
The implications for the financial markets will be enormous. The US will reap a peace dividend as large or larger than the one we enjoyed after the fall of the Soviet Union in 1992. As you may recall, that black swan caused the Dow Average to soar from 2,000 to 10,000 in less than eight years, also partly fueled by the technology boom. A collapse in oil imports will cause the US dollar to rocket. An immediate halving of our defense spending to $400 billion or less and burgeoning new tax revenues would cause the budget deficit to collapse. With the US government gone as a major new borrower, interest rates across the yield curve will fall further.
A peace dividend will also cause US GDP growth to reaccelerate from 2% to 4%. Risk assets of every description will soar to multiples of their current levels, including stocks, bonds, commodities, precious metals, and food. The Dow will soar to 20,000, the Euro collapses to parity, gold rockets to $2,300 and ounce, silver flies to $100 an ounce, copper leaps to $6 a pound, and corn recovers $8 a bushel. The 60 bull market in bonds ends.
Some 1.5 million of the armed forces will get dumped on the job market as our manpower requirements shrink to peacetime levels. But a strong economy should be able to soak these well trained and motivated people right up. We will enter a new Golden Age, not just at home, but for civilization as a whole.
Wait, you ask, what if Iran develops an atomic bomb and holds the US at bay? Don’t worry. There is no Iranian nuclear device. There is no Iranian nuclear program. The entire concept is an invention of American intelligence agencies as a means to put pressure on the regime. The head of the miniscule effort they have was assassinated by Israeli intelligence two weeks ago (a magnetic bomb, placed on a moving car, by a team on a motorcycle, nice!).
If Iran had anything substantial in the works, the Israeli planes would have taken off a long time ago. There is no plan to close the Straits of Hormuz, either. The training exercises we have seen are done for CNN’s benefit, and comprise no credible threat.
I am a firm believer in the wisdom of markets, and that the marketplace becomes aware of major history changing events well before we mere individual mortals do. The Dow began a 25 year bull market the day after American forces defeated the Japanese in the Battle of Midway in May of 1942, even though the true outcome of that confrontation was kept top secret for years.
If the collapse of Iran was going to lead to a global multi decade economic boom and the end of history, how would the stock markets behave now? They would rise virtually every day, led by the technology sector and banks, offering no pullbacks for latecomers to get in. That is exactly what they have been doing since mid-December. If you think I’m “Mad”, just check out Apple’s chart below, and the big relative underperformance of oil.

Thursday, February 9, 2012

Information asymmetry

Dinner With Joseph Stiglitz

The great thing about interviewing Joseph Stiglitz over dinner is that you don’t have to ask any questions. You just turn him on and he spits out one zinger after another. And he does this in a kibitzing, wizened, grandfatherly manner like one would expect from a character that just walked off the set of Fiddler on the Roof.
The unfortunate thing is that you also don’t get to eat. The Columbia University professor and former World Bank Chief Economist animatedly talked the entire time, and I was too busy feverishly taking notes to ingest a single crouton.
Stiglitz argued that for 30 years after the end of the Great Depression there was no financial crisis because a newly empowered SEC was on the beat, and everything worked. A deregulation trend that started under Reagan began stripping away those protections, with the eventual disastrous repeal of Glass-Steagle in 1999. The philosophical justification adopted by many economists, including Fed chairman Alan Greenspan, was that unfettered markets always lead to efficient outcomes.
This belief was based on simplistic models assuming that markets were always perfect, always open, and that everyone had perfect information. Stiglitz’s own work on ‘information asymmetry,’ which earned him a Nobel Prize in economics in 2001, pulled the rug out from under this theory, because it showed that one party to a transaction always has more information than the other, often the seller.

Tuesday, February 7, 2012

MF Global

Martin Armstong

The MF Global story may have fallen off the front pages but it is clear that the Judge Martin Glenn is not about to hold the feet of any of the bankers to the fire. Instead, the $1.2 billion in missing client funds is simply going to vanish in thin air like a magic trick. Moody’s has suggested that will be the case and those who were not even trading are taking the losses.

The House Financial Services Committee will continue grilling the ratings agencies, but this is just a show. There will be no indictments and no demands for the bankers to return the stolen money. New York simply does not obey the law. Even in the case of Princeton Economics, a managed a public fund for Deutsche Bank was seized by O’Melveny & Myers who made every investor in the fund prove it was their money in order to claim their own property. That was totally illegal. They are supposed to TRACE funds and demand their return if tainted. O’Melveny & Myers illegally seized everything and shifted the burden to clients to prove it was their money. It was the classic presumption of guilt. New York protects New York banks – period! It will neither honor the laws of the United States nor those that govern international property rights.

For this reason, you simply have to be insane to have funds in New York, or at any fund who keeps their cash in New York. MF Global has shown that all the regulations & laws mean NOTHING and the USA has been reduced to a third world country untrustworthy of one’s capital. Money that was taken from client accounts
AS A MATTER OF LAW must be returned by those to whom it was paid for MF Global’s losses.