This week may very well go down as ‘connect the dots’ week. Submitted to Zerohedge.com by Simon Black of Sovereign Man Blog,
Things have been moving so quickly, so let’s step back briefly and review the big picture from the week’s events:
1) After weeks… months… even years of posturing and denial, Spain and Cyprus became the fourth and fifth countries to formally request aid from Europe’s bailout funds on Monday.
In doing so, these governments have officially confessed to their own insolvency and the insolvency of their respective banking systems.
Meanwhile, Slovenia’s prime minister said that his country may soon ask for a bailout. (Humorously, Slovenia’s Finance Minister denied any such plans.)
Spain’s 10-year bond yield jumped to over 7% again in response, and many Spanish banks were downgraded to junk status by Moodys.
2) Over in the US, the city of Stockton, California filed for bankruptcy this week… the largest so far, but certainly a mere drop in the proverbial bucket.
3) JP Morgan, considered to be among the few ‘good’ banks remaining in the US, conceded that the $2 billion loss they announced several weeks ago might actually be more like $9 billion.
4) The Federal Reserve reported yesterday that foreigners are reducing their holdings of US Treasuries.
5) Countries from Ukraine to Kazakstan to Turkey announced that they have purchased gold in recent months to bolster their growing reserves.
6) Chile has joined a growing list of countries that has agreed to bypass the US dollar and settle all of its trade with China in renminbi.
7) China has further announced plans to create a special zone in Shenzhen, one of its wealthiest cities, to allow full exchange and convertibility of the renminbi.
8) World banking regulators from the Bank of International Settlements to the FDIC are proposing that gold bullion be treated as a risk-free cash equivalent by commercial banks.
My additions:
Brent Futures Spiked to Settle Near $98 on EU Deal, Published: Friday, 29 Jun 2012 on Reuters
"Brent crude futures jumped more than 7 percent on Friday, the biggest one-day percentage gain since April 2, 2009, after European leaders acted to aid troubled euro zone banks and preserve the single currency."
And yet, on the same day we learn:
Iran Oil Embargo Goes Into Effect: Crude Up 8% on Zerohedge on 06/29/2012
Following a 3-sigma fall yesterday, WTI crude has rebounded exuberantly amid the European ecstacy and the Iran Oil Embargo. Up almost 9% from late yesterday's lows (a 6-sigma jump), it appears yet another squeeze is in play (perhaps from demand-pull on the back of Hillary's unyielding national policy - oh yeah apart from China and Singapore). While the WSJ notes: "There's no material price premium from the Iran issue", it seems the potential for an epic short-squeeze - as Iran's largest importer of Oil (cough China cough) is now exempt (and continuing to hoard) leaving refiners potentially tight on supply - as macro tail-risk is seemingly removed from the downside by the 'nothing' summit we just experienced.
Previously we learned
SocGen Lays It Out: "EU Iran Embargo: Brent $125-150. Straits Of Hormuz Shut: $150-200"
Previously we heard Pimco's thoughts on the matter of an Iranian escalation with "Pimco's 4 "Iran Invasion" Oil Price Scenarios: From $140 To "Doomsday"", now it is the turn of SocGen's Michael Wittner to take a more nuanced approach adapting to the times, with an analysis of what happens under two scenarios - 1) a full blown EU embargo (which contrary to what some may think is coming far sooner than generally expected), and the logical aftermath: 2) a complete closure of the Straits. The forecast is as follows: 1) "Scenario 1: EU enacts a full ban on 0.6 Mb/d of imports of Iranian crude. In this scenario, we would expect Brent crude prices to surge into the $125-150 range." 2) "Scenario 2: Iran shuts down the Straits of Hormuz, disrupting 15 Mb/d of crude flows. In this scenario, we would expect Brent prices to spike into the $150-200 range for a limited time period." The consequences of even just scenario 1 is rather dramatic: while the adverse impact on the US economy will be substantial, it would be the debt-funded wealth transfer out of Europe into Saudi Arabia that would be the most notable aftermath. And if there is one thing an already austere Europe will be crippled by, is the price of a gallon of gas entering the double digits. And then there are the considerations of who benefits from an Iranian supply deterioration: because Europe's loss is someone else's gain. And with 1.5 million of the 2.4 Mb/d in output already going to Asia (China, India, Japan and South Korea) it is pretty clear that China will be more than glad to take away all the production that Europe decides it does not need (which would amount to just 0.8 Mb/d anyway).
Just 9 days ago we learned that the Fed was going to print again:
Fed Expands Operation Twist By $267 Billion Through 2012 on Bloomberg - Jun 20, 2012
The Federal Reserve will expand its Operation Twist program to extend the maturities of assets on its balance sheet and said it stands ready to take further action to put unemployed Americans back to work.
Policy makers led by Chairman Ben S. Bernanke are taking steps to shore up the world’s largest economy as faltering growth leaves it vulnerable to fallout from the European debt crisis and looming fiscal tightening in the U.S. Photographer: Andrew Harrer/Bloomberg
Ben S. Bernanke, chairman of the Federal Reserve, at a Joint Economic Committee hearing in Washington. Photographer: Andrew Harrer/Bloomberg
The central bank will prolong the program through the end of the year, selling $267 billion of shorter-term securities and buying the same amount of longer-term debt in a bid to reduce borrowing costs and spur the economy.
So, in summary, what we can see from the last 2 week’s events is:
- Tightening Oil Supply increases prices and negatively affects already stretched economies
- European governments are insolvent
- European banks are insolvent
- US governments are heading in that direction
- Even the best US banks are not as strong as believed
- Foreigners are abandoning the US dollar and seeking alternatives
- Gold is money
These events are all connected, and the trend is becoming so clear that even the most casual observers are starting to wake up.
When you connect the dots, the next steps lead to what may soon be regarded as an obvious conclusion: the system, as it exists right now, is crumbling.
No amount of self-delusion can make this go away.
Rational thinking and measured action, on the other hand, can make the consequences go away… turning people from victims into spectators of the greatest bubble burst in modern times.
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