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Global Markets

Iran's Currency Collapse Has All the Markings of a Full-Blown Crisis

Matters are beginning to come to a head in Iran.

So far, the impact of Western sanctions – an EU embargo of oil purchases, European and U.S. restrictions on Tehran's access to international banking, and a new move to intensify the trading restrictions even further – have had a devastating impact.

Iran's currency, the rial, has collapsed.

Riots have begun. Its government has rapidly lost its authority. And the Iranian economy is unraveling.

This has all the markings of a full-blown crisis.

It will have an uncertain impact on the region and the wider oil market. This could get very unpredictable and very nasty.

Let me explain…

Sanctions Paralyze Iran's Economy

Indications are emerging from several quarters that the current sanctions regime has dealt a major blow to the Iranian currency. The developments are prompting foreign initiatives to paralyze the regime in Tehran.

"The current perception is that the sanctions may have to be increased before Tehran will show clear signs of relenting," a source in the EU Energy Commissioner's office told me on October 6.

Still, it remains too early to determine how far EU members are prepared to go in strengthening anti-trade restrictions.

Nonetheless, several policy sources in Brussels, London, and Paris, confirmed last week that a rising consensus believes something additional is warranted.

A complete EU embargo of Iranian oil imports took effect on July 1. That action had widely been expected to put upward pressure on Brent prices in London. While some of that pressure has materialized, continuing demand concerns from the ongoing credit crisis and sluggish employment data have dampened the impact.

Still, a widening of the rift with Iran, coupled with the deteriorating situation on the Syrian-Turkish border, is certain to bring the problem to center stage.

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The Consensus in Europe is Simple, Oil Prices are Headed Higher

My latest trip to London may have centered on the briefings I gave on Iranian oil sanctions, but I also did a number of media appearances.

As I have mentioned before, questions from European interviewers are generally more knowledgeable and to the point than in the states. This may be because places like London are much closer to the events directly affecting oil prices.

However, there was a surprising element.

Nobody - be he/she a commentator, journalist, analyst, or expert – expected a fall in oil prices. The entire market environment in Europe is looking in the other direction.

In London, my predictions of $130 a barrel for Brent and $115 for WTI (West Texas Intermediate, the benchmark crude traded on the NYMEX) by the end of 2012 were considered on the low side.

My further suggestion of $150 for Brent and $130 for WTI by the end of 2013 have caused some disagreement in the states, but are par for the course averages for what people are saying over in Europe.

In fact, the overwhelming consensus in Europe is that oil will rise, absent exogenous economic or financial problems.

In other words, the price can go down, but such a move would be a result of another bout with credit crises, intra bank problems, or currency weakening.

In such situations, the lowering of oil prices has nothing to do with oil, or its supply/demand balance, or its trade. Rather, economic constriction results in concerns over short and medium-term demand and those translate into a lower price.

Left on its own, the consensus over here is simple. Oil goes up.

Concerns Grow in Europe Over Oil Prices

Now, unlike in the U.S., the conversation does not then immediately move to prices at the pump.

Gasoline is less of an issue for the simple reason that a combination of heavy taxation, lowered usage and a far better mass transit system has made driving more of a luxury than in the U.S.

Paying the equivalent of $7 a gallon tends to have that effect.

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The Challenge in the Persian Gulf with Iran Looms Large

My meetings and media interviews continue here in London. But this morning I want to fill you in on one of the more interesting briefings I have ever held.

Last night, Marina and I had the distinct pleasure of dining with Khaled Duwaisan, Kuwait's Ambassador to the Court of St. James and the longest-serving foreign emissary in London.

His Excellency is a very gracious man, well respected by his peers, and, after more than two decades in London, certainly somebody who has seen much come and go in his time.

Our discussions centered on the situation presented by Iran in the Persian Gulf and the current crisis there.

Also attending the dinner and long discussion were the ambassadors from every other Gulf Coordination Council nation in the region and the legal representative of the Iranians (who currently have no official diplomatic connection with the United Kingdom).

Now, as with such sessions, all of the conversations were held under Chatham House rules. That means, while general themes can be discussed, all participants agree not to connect named people with specific positions in commenting on the meeting afterwards.

This was one of the more memorable sessions I have ever had. It was striking how articulately and passionately the delegates addressed the subject.

The overwhelming response to my comments could be summarized in two ways: the rejection of a nuclear-armed Iran and a strong opinion that the region must settle its affairs on its own.

The first conclusion is certainly shared by the West, but the second may well be difficult to achieve in practice. The prospect of Iran with nuclear capability is hardly a matter Washington, or London, or Brussels will allow the region to decide on its own.

The gathering certainly understood that. These are, after all, seasoned diplomats well-schooled in the protocols and realities of international politics. But they are also experienced in the affairs of a region with the longest and most intricate negotiating traditions on the face of the earth.

They also have a perspective honed from several thousand years of history, tradition, and conflict. There was present a quality I rarely experience in my international meetings — patience.

However, one other matter quickly surfaced that was unanimously viewed as a major element in the ongoing conflict. The assembled representatives spoke about it candidly and directly.

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What to Do When Every Market Is Ponzi Scheme

LIBOR, Bernie Madoff, MF Global, Peregrine Financial, zero-percent interest rates, the Social Security and Medicare entitlement funds, many state and municipal pension funds, mark-to-model asset values, quote stuffing and high frequency trading (HFT), and debt-based money?

What do the following have in common?…

The answer is that every single thing in that list is an example of market rigging, fraud, or both.

How are we supposed to make decisions in today's rigged and often fraudulent market environment?

Where should you put your money if you don't know where the risks lie? How does one control risk when control fraud runs rampant?

Unfortunately, there are no perfect answers to these questions.

Instead, the task is to recognize what sort of world we happen to live in today and adjust one's actions to the realities as they happen to be.

The purpose of this report is not to stir up resentment or anger — although those are perfectly valid responses to the abuses we are forced to live with — but to simply acknowledge the landscape as it is so that we can make informed decisions.

In this report I connect the dots on the fraud, noting both what we already know about and what we'd better prudently suspect is happening but not yet revealed. (If you'd like to jump straight to our conclusions about this Ponzi scheme click here.)

Swimming Naked

As Warren Buffet said, "It's only when the tide goes out that you learn who's been swimming naked."

What he meant was that poorly-run companies can appear healthy during boom times but are later exposed as hollow shells when the economic tide retreats. Naturally it's a lot easier to make money when times are booming, but much more difficult when the economic pie is stagnant or shrinking. The dot-com companies of the late 1990s are the poster children for this phenomenon.

My corollary to Buffet's naked swimming quote is this: It's only when the pie stops expanding that you find out who's been running a Ponzi scheme.

The global pie is no longer expanding, and the relentless parade of disquieting economic and financial news can be laid right upon that fact.

Sure, there are the prosecutable examples, such as Bernie Madoff, but state and municipal pensions and the Social Security entitlement program also fit the definition. So does the practice of expanding public debt at a faster pace than GDP, which many nations, provinces, and states have done for many years running.

These are all Ponzi schemes in the sense that they require constant growth to remain 'healthy' (or hidden, more accurately) and are therefore mathematically certain to fail. Now that the economic pie is no longer growing like it used to and most likely will not for decades to come (if ever), all of these schemes are rapidly falling apart.

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How Higher U.S. Food Prices in 2013 Will Starve the Global Economy

The epic drought – the worst in 56 years – that has wreaked havoc on more than half the United States is setting up 2013 to deliver record-high U.S. food prices that will affect more than just our grocery budgets.

As the drought continues to kill crops throughout the Midwestern U.S., a region known as the "corn belt" because it produces 40% of the world's crop, the problem reaches farther than the dry U.S.

Now the United Nation's Food and Agricultural Organization (FAO) warns that if countries, including the United States, restrict exports on concerns of higher grain prices, the world could face a kind of food crisis like the one seen five years ago.

"There is potential for a situation to develop like we had back in 2007/08," Abdolreza Abbassian, FAO's senior economist and grain analysts told Reuters. "There is an expectation that this time around we will not pursue bad polices and intervene in the market by restrictions, and if that doesn't happen we will not see such a serious situation as 2007/08. But if those policies get repeated, anything is possible."

Abbassian added, "The very strong appreciation of the dollar, and the surge in prices, is basically a double blow which is going to be quite stressful for some of the more fragile countries."

Related: Higher food prices are just one part of a fascinating but frightening global trend that will restrain our most vital resources, as well as your finances – unless you're prepared.

Rising Food Prices Stall Economic Recovery

The FAO Food Price Index jumped 6% in July after three months of declines. Grain markets got a boost from speculation that Black Sea grain producers, particularly in Russia, might levy export restrictions after a drought there walloped crops.

A study conducted last year by the National Center for Atmospheric Research, based on some 70 years of weather data, found that from heat waves to cold snaps to droughts, weather could cause up to a 1.7% rise or fall each year in the U.S. economy's gross domestic product. In 2011, not counting extreme weather events like tornadoes or hurricanes, the amount was $507 billion.

Jeff Lazo, one of the study leaders, told USA Today that the findings are significant "especially when GDP is growing a percent or so a year, if that."

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How Global Growth Fears Are Playing Out in the Stock Market Today

After a strong start to the week the stock market today is down on fears of a worldwide economic slowdown. Investors are dealing with weak reports from China and more signs that the drought's effect on U.S. crops is not over.

China, the world's second largest economy, has been a leader of global growth, but is showing more and more signs that its economy is slowing.

China reported its exports grew just 1% from last July, well below forecasts and much lower than the 11.3% increase in June. Import growth stalled as well, up only 4.7% compared to a year earlier, well below the June growth of 6.3%.

At home, the U.S. Dept. of Agriculture released a report today projecting an enormous drop in corn production and an ensuing spike in prices.

In its monthly World Agricultural Supply and Demand report, the USDA projected the corn harvest would fall by 2.2 billion bushels, or 22.6 bushels per acre, resulting in a harvest of 123.4 bushels per acre.

Analysts had anticipated a decline of 20 bushels per acre and a harvest of 126 bushels per acre.
The 2012-2013 crop yield is now expected to be the worst since the 1995-1996 season and prices are soaring.

The USDA said it now expects farm prices for corn to reach a record high this season of $7.50 to $8.90 per bushel, sharply higher than its July forecast of $5.40 to $6.40 per bushel.

The food crisis is affecting consumers across the world as the United Nations released a report on Thursday indicating that world food prices rose 6% in July.

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Winning the Race for Resources

The world watched in awe as American swimmer Michael Phelps became the most decorated Olympian of all time.

I've read he's been training in the pool for an average of 6 hours a day, 6 days per week, which equates to about 30,000 hours since age 13 and about 10,000 calories burned during a training day. It's inspiring to see the incredible results of his tremendous sacrifice and commitment.

Investing in global markets requires the same sort of stamina, especially at times like this week, when the month's reading on the manufacturing industry was not encouraging. The J.P. Morgan Global Manufacturing PMI of 48.4 for July was the lowest since June 2009.

However, I believe there are encouraging pockets of strength to energize and inspire investors.

For example, we're coming up on the anniversary of the first stimulus move that kicked off the global easing cycle.

On August 31, 2011, Brazil unexpectedly cut rates by 50 basis points, and since then, ISI says 228 stimulative monetary and fiscal policy moves have been initiated across several countries, including the Philippines, China, France, and Colombia.

In June and July alone, there were nearly 70 moves-the most since the world began this massive easing.

Generally, by the time central banks make a fiscal or monetary easing move, economic deterioration has already occurred.

Even with these moves, it still takes several months for the stimulative measures to take effect and work their way through.

China Makes Its Move

But while the world wades in the shallow end of the pool waiting for the economy to warm up, Asia has taken a deep dive into the energy space as they've recently announced acquisitions of Canadian resources companies.

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What 700 Million People in the Dark Says About Investing in India

For years now I've preferred China over India.

When invariably asked to compare the two as investments, my answer has always been the same.

Somewhat tongue -in-cheek, I'd point out "that India has trouble keeping the lights on from one end of the country to the other."

Little did I know that those comments made in jest would actually become reality.

Earlier this week, a massive power blackout left more than 700 million people without power in India as not one, but three, regional electrical grids failed.

If that isn't a glaring sign that India isn't ready for prime-time I don't know what I can say to make you see the light – pun absolutely intended.

Don't get me wrong. There are clearly a few select Indian companies worth the risk.

But as a whole, the scope of this power failure suggests India has a long way to go before it achieves the global superpower status it seeks and a dominant position in your portfolio.

India Needs to Put its Own House in Order

Not that this will stop India from trying.

It's now the 8th largest military spender in the world, having tripled defense spending in the past 10 years. It's no secret India desperately wants to have a permanent seat on the United Nations Security Council.

And, it's making great strides in international diplomacy that it believes will pay off later in increased foreign recognition and direct investment.

But as this embarrassing power failure demonstrates, India would be better off getting its own house in order first before it steps onto the world stage.

Many investors take issue with these views. They cite the fact that India is the second-largest English-speaking nation in the world, that 58% of its economy is consumption-based, that it has huge numbers of tech-savvy and well-educated people.

I don't dispute any of that.

However, on the other side of the ledger is a laundry list of reasons for investors to be wary.

Read More…

Eurozone Debt Crisis Won't Be Fixed by "Bailout Lite"

The market red ink this morning (Monday) around the globe is the result of a usual suspect – Spain.

These days, if someone even sneezes in Madrid, Barcelona, or Córdoba (one of my favorite places, actually), investors go into intensive care all over the world.

This new Spanish influenza has been wiping out paper value from one end of Europe to the other. This morning came word that many of the regions in the country will need help. Attention is now directed from focused support for banks to wider calls for a sovereign bailout.

And that is where the whole matter can turn nasty. Word is that we should now expect some Italian cities to be requesting money in the near future. Seems California and Pennsylvania are not the only locations where cities can go bankrupt.

The accord reached at the end of June by the Council of Europe (the EU member heads of government) to bail out Spanish banks is already derisively referred to as "bailout lite." As the beer commercials attest, this is going to be "less filling."

Unfortunately, it is the heavier version that Europe now needs.

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Soaring Spanish Bond Yields Another Hit to Growing Eurozone Debt Crisis

Investors today (Monday) have been selling on news that Spain might need more bailouts as its 10-year yield reached a record high.

Spanish bond yields reached a record high of 7.56% and the latest unemployment rate sits at a miserable 24.6%.

Global stock markets plummeted Monday after Spain's borrowing costs soared on a third consecutive day amid concerns that an intensifying recession in the region would require Spain's government to request a full-fledged bailout.

The fresh worries come on the heels of a report Friday from the Valencia region, revealing that its economy would contract by 0.5% in 2013 instead of 0.2%, as had been forecast.

Spanish bond yields broke the critical 7%-mark last Thursday, a level many analysts worry could eventually alienate Spain from public markets and force it to seek a bailout similar to its ailing neighbor Greece.

"Those levels indicate that Spain may soon struggle to fund itself in the market and therefore unless some positive action is taken, the country will need a full bailout," Gary Jenkins, managing director of Swordfish Research told the Associated Press.

The deeper worry rattling markets worldwide is that with so many of its 17-member nations needing bailouts, European finance ministers will have a tough time finding funds to rescue an economy as large as Spain. Spain is the region's fourth-largest economy after Germany, France and Italy.

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