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Should We Be Worried About Iran?
If the Iranian government makes good on its recent threats to stop oil shipments through the Strait of Hormuz, oil prices would shoot up $20 to $30 a barrel within hours and the price of gasoline in the United States would rise by $1 a gallon.
Such a steep spike in crude oil prices would plunge the United States and Europe back into recession, said Money Morning Global Energy Strategist Dr. Kent Moors.
Iran just concluded a 10-day military exercise intended to prove to the West that it can choke off the flow of Persian Gulf oil whenever it wants.
The world's fourth-biggest oil producer is unhappy with fresh U.S. financial sanctions that will make it harder to sell its oil, which accounts for half of the government's revenue.
"Tehran is making a renewed political point here. The message is – we can close this anytime we want to," said Moors, who has studied Iran for more than a decade. "The oil markets are essentially ignoring the likelihood at the moment, but any increase in tensions will increase risk assessment and thereby pricing."
One reason the markets haven't reacted much to Iran's latest rhetoric is that although it has threatened to close the Strait of Hormuz many times over the past 20 years, it has never followed through on the threat.
But a fresh wave of Western sanctions could hurt Iran's economy enough to make Tehran much less cautious.
The latest sanctions, signed into law by U.S. President Barack Obama on Saturday, will make it far more difficult for refiners to buy crude oil from Iran. And looming on the horizon is further action by the European Union (EU), which next month will consider an embargo of Iranian oil.
"The present United Nations, U.S. and EU sanctions have already had a significant toll," said Moors. "They have effectively prevented Iranian access to main international banking networks. Iran now has to use inefficient exchange mechanisms."
Because international oil trade is conducted in U.S. dollars, Moors said, Iran must have a convenient way to convert U.S. dollars into its home currency or other currencies it needs, such as euros.
Pushed to the Brink
The impact of the sanctions combined with internal political instability has driven Iran to turn up the volume on its rhetoric.
"Tehran has limited options remaining," Moors said, noting Iran has historically used verbal attacks on the West to distract its population from the country's problems. "The Iranian economy is seriously weakening, the political division among the ayatollahs is increasing, and unrest is rising."
Analysts worry an Iranian government that feels cornered would be more prone to dangerous risk-taking in its dealings with the West. So while totally shutting down the Strait of Hormuz isn't likely, Iran could still escalate a confrontation beyond mere talk.
Too-Big-To-Save: Italy Totters on Debt Crisis Cliff
With its 10-year bond yields nearing 7%, Italy's debt is becoming a burden it will no longer be able to handle as it follows the same path as Portugal, Ireland and Greece.
However, Italy's economy – seven times larger than Greece's, nine times larger than Portugal's and 10 times larger than Ireland's – is too big for the Eurozone to rescue.
And because Italy's economy is so large – the third-largest in the Eurozone and the eighth-largest in the world – a default on its sovereign debt would be that much more calamitous.
Yesterday (Tuesday), yields on Italy's 10-year bonds hit 6.77%, a record for Italy in the era of the European Union (EU).
"Now we are really reaching very dangerous levels…We are above yield levels in the 10-year where Portugal and Greece andIrelandissued their last bonds," Alessandro Giansanti, a rate strategist at ING Groep N.V. (NYSE ADR: ING), told Reuters.
The spike in yields reflects rising investor concern that besieged Prime Minister Silvio Berlusconi doesn't have the political muscle to push through the tough budget measures Italy needs, such as pension cuts, to get its debt issues under control.
Those fears were further stoked yesterday when Berlusconi was unable to win a majority on a routine vote on a budget report, but eased when Berlusconi agreed to resign. Yields dipped slightly on Monday in response to rumors that Berlusconi might step down.
If Italy's bond yields don't fall significantly, it won't matter who's running the country. The high yields are making Italy's ability to cope with its debt increasingly infeasible.
At 120% of gross domestic product (GDP), Italy's debt load is second only to Greece's among Eurozone nations. Its total debt of $2.7 trillion is the eighth-highest in the world.
As bond yields go up, the cost of rolling over this massive amount of debt increases as well, and is nearing unsustainable levels.
Italy needs to auction $41.5 billion (30 billion euros) of debt less than a week from now, Nov. 14, and another $31.13 billion (22.5 billion euros) in December. Next year Italy will need to borrow $415 billion (300 billion euros).
One of These Banks is Europe's Lehman Bros. – And We're Going to Profit From Its Collapse
Back in July, I warned you that Europe probably had its own Lehman Bros. – an unstable financial institution on the brink of a collapse.
At the time, I didn't know exactly which institutions were most at risk.
Now I have a pretty good idea and want to share that with you.
One big firm, the Brussels-based Dexia SA, is already set to be dismantled.
And based on an analysis of 50 European banks with a combined $129 billion (92 billion euros) tied up in Greek sovereign debt, I've identified two other suspect institutions: BNP Paribas SA, and Societe Generale SA (PINK: SCGLY).
These banks have a high level of exposure to Greek sovereign debt and once they're forced to acknowledge the precariousness of their situation investors will stampede for the exits. That will have negative effects for both European and U.S. banks, as well as the overall markets. But there is a way to not only protect yourself, but turn a serious profit.
I will explain that to you shortly, but first, let me give you an idea of what it is we're dealing with.
Europe's Lehman Bros.
Basically, there are two ways to judge which banks are most at risk. You can look at how expensive the credit default swaps on these banks are compared to their peer group. And you can look at how quickly those credit default swaps have climbed.
Credit default swaps, in case you are not familiar with them, were originally created as "insurance" that protected the lender in case of a default. When they are purchased, the loan is turned into an "asset" and is then "swappable" for cash if the borrower defaults.
Generally speaking, the more expensive a credit default swap is and the faster its price has increased, the greater the risk there is associated with it.
As of Oct. 4 , the senior debt of the top 25 global banks with tradable CDS instruments was at 289 basis points. (A basis point is equal to 1/100 of a percentage point . They are commonly used to denote a rate change or, in this case, the difference or spread between two interest rates.)
However, the five-year senior credit default swaps for Societe Generale and BNP Paribas are considerably out of line with that figure – or at least they were as of Oct . 6. They've recovered since rumors of another rescue surfaced, but they're still dangerously high. Five-year senior credit default swaps were recently valued at about 386 points for Societe Generale and 287 basis points for BNP Paribas.
As for how fast the cost of insuring that debt has risen, the data is even more incriminating. Since 2009 Societe General's credit default swaps are up 294.17% and BNP Paribas credit default swaps have risen 199.60%.
This suggests two possibilities: 1) Traders are betting that the banks are substantially undercapitalized – meaning they may not have enough money to meet potential losses; or 2) They've got way too much exposure to Greek debt to withstand the country's failure.
What the Euro Will Look Like in Five Years
Believe it or not, there was a time when investors saw the euro as the savior currency of the world.
People talked about how the euro would replace the dollar as the world's reserve currency – and there was plenty of proof to support that opinion.
At the time, t he European Central Bank (ECB) had the right monetary solutions in place to fight inflation, while the U.S. Federal Reserve was struggling to keep inflation under control . That was another point for the euro, and a strike for the dollar.
So not surprisingly, central banks started replacing some of their U.S. dollar reserves with euros, and the euro became a second "reserve currency" for central banks.
The euro also soared past the dollar in just a few years. In fact, the euro shot up from 82 cents at its inception to $1.60 in less than 10 years.
Yes, it seemed that the planets were aligned for the euro to step up to the plate and become the world's reserve currency.
But that's because the euro had never experienced a real "rough patch," or serious monetary crisis.
Fast forward to 2008.
The Euro Gets its First Test
Once the credit crisis was in full bloom in mid-2008, loans dried up and unemployment went to 10% in the United States and Eurozone.
That's when the euro had its first real test.
In Today's Crazy Markets, Here's the One Global Region to Invest in Now
Money Morning global investing guru Martin Hutchinson has identified the one global region that he's focusing on as the world's next big profit play.
You'll be stunned to see what he's discovered.
But you'll also be wise to listen.
European Union Debt Crisis Stings France, Putting U.S. Banks at Risk
While investors in the United States have been preoccupied with the debt-ceiling crisis and volatile stock markets, the European Union debt crisis has worsened.
Now France is under suspicion, and if its debt troubles spiral out of control, then there's a good chance the country will take U.S. banks down with it.
Despite denials from the major ratings agencies, some believe France could be in danger of losing its AAA credit rating, just as the United States did recently.
In fact, it was Standard & Poor's unprecedented downgrade of the United States that put investors on notice that no nation was safe. France became a target because many of its large banks hold a lot of debt from troubled nations like Greece, and because France has a lot of debt of its own.
The cost of insuring French sovereign debt via credit default swaps edged up last week as rumors swirled and concerns accelerated.
French sovereign debt has grown alarmingly quickly, rising from just 64% of its gross domestic product (GDP) in 2007 to 85.3% of GDP this year, according to International Monetary Fund (IMF) estimates.
A weakening French economy – on Friday the French statistics office reported that second quarter GDP growth was zero – and inadequate government policies have added to investor jitters about the country's ability to repay its debt.
"We've been really cautious, and the sovereign crisis is now escalating," Philip Finch, global bank strategist for UBS AG (NYSE: UBS), told The New York Times. "It boils down to a crisis of confidence. We haven't seen policy makers come out with a plan that is viewed as comprehensive, coordinated and credible."
Investing in the Middle East: The Best Plays to Make
Periodic eruptions of violence and instability make investing in the Middle East fairly tricky. But that doesn't mean you ought to avoid the region entirely.
Indeed, investing in the Middle East can be extremely profitable, as the region currently is one of the world's bright spots for economic growth.
The International Monetary Fund's (IMF) said in its World Economic Outlook that the region's economy would expand by 5.1% clip in 2011. That's well above the 1.5% pace projected for Europe and Japan and the 2.3% rate forecast for the United States.
And contrary to the perception of many Westerners, that growth projection isn't based primarily on the price outlook for oil, which has trended higher for most of the past year. Rather, it's keyed to everything from construction and new-business development to banking, tourism and even Internet gaming.
So let's take an in-depth look at each sector, as well as some specific companies to invest in.
How to Profit From a Non-U.S. Investing Strategy
After reading columnist Martin Hutchinson's latest report on the Greek debt crisis last week, one Money Morning reader posed an excellent question: Given the crises already afflicting the markets in Europe and Japan – and the clearly darkening outlook for the U.S. economy – is it possible to craft a "non-U.S. investing strategy" of some type?
The answer, surprisingly enough, is "yes." You can put together an investment plan that largely avoids U.S.-related holdings – in essence, a non-U.S. investing strategy – and you can put it to work.
But before you can do that, you must fully understand the current challenges at hand.
Why a Greek Default Could be Worse Than the Lehman Collapse
The 2008 collapse of Lehman Bros Holdings Inc. (PINK: LEHMQ) ignited a financial meltdown that resulted in widespread bank failures and caused the Dow Jones Industrial Average to lose 18% of its value in just one week.
Yet a Greek default – which (even with a bailout) becomes increasingly likely with each passing day – would actually be much, much worse in many respects.
Sure, it's possible that European Union (EU) taxpayers will soon be dragooned into yet another rescue plan. But that would only delay the inevitable – a catastrophic collapse that will drudge up feelings of panic we haven't witnessed since the global financial crisis hit its apex nearly three years ago.
Dodgy Debt and a Dozing Economy
Greece's debt, at about $430 billion, is less than that of Lehman Brothers, which owed around $600 billion at the time of its bankruptcy. But Greece's finances are much less sound.
Whereas Lehman Brothers participated in the 2003-07 financial bubble with considerable enthusiasm, accumulating vast amounts of the dodgy subprime mortgage paper whose value collapsed in the 2007-08 downturn, Greece's misdeeds date back much further – to its 1981 entry into the EU.
As the poorest member of that group, Greece became eligible for a vast array of inventive subsidies, primarily related to agriculture. However, the frauds the country perpetrated to justify even larger subsidies were even more inventive. And this allowed Greece to bring its living standards close to the EU average, while still being subsidized as if it was a genuinely poor country.
Indeed, Greece produced nothing close to the level of economic output that would be needed to justify its spending and the lifestyle of its people.
The problem for Greece is thus stark: Its people need to suffer a decline in living standards of about 30% to 40%, so that the country's output is sufficient to repay its debts.
LNG Imports: We Predicted How Japan Would Ease its Energy Crisis
Just days after Money Morning columnist Peter Krauth predicted a global uptick in liquefied natural gas (LNG) demand because of the nuclear-powerplant disaster in Japan, experts predicted the Asian heavyweight would boost LNG imports by 50% to help ease the massive energy shortage the country now faces because of the tragedy.
Krauth is Money Morning's resident natural resources expert, and he also runs the "Global Resource Alert" advisory service. Late last month, in the special report "A Trillion Reasons to Bet Big on LNG," Krauth told Money Morning subscribers to take a close look at liquefied natural gas, predicting that Japan would seize upon LNG as a ready and plentiful partial solution to its increasingly serious energy-shortfall quagmire.
Japan relies on fuel imports for most of its energy needs. After the March 11 earthquake and subsequent powerplant accident ruined 20% of its nuclear power output, Japan has been forced to seek out other sources of electricity.