and Greece as Geopolitical Wildcards; Victor Assesses the Markets
by the Curmudgeon with Victor Sperandeo
Iran Continues as State Sponsor of Terrorism (Curmudgeon):
The U.S. State Department annual report on terrorism, released Friday, stated that Iran continued its “terrorist-related” activity last year and also provided broad military support to President Bashar al-Assad of Syria.
“Designated as a State Sponsor of Terrorism in 1984, Iran continued its terrorist-related activity in 2014, including support for Palestinian terrorist groups in Gaza, Lebanese Hezbollah, and various groups in Iraq and throughout the Middle East. This year, Iran increased its assistance to Iraqi Shia militias, one of which is a designated Foreign Terrorist Organization (FTO), in response to the Islamic State in Iraq and the Levant (ISIL) incursion into Iraq, and has continued to support other militia groups in the region. Iran also attempted to smuggle weapons to Palestinian terrorist groups in Gaza. While its main effort focused on supporting goals in the Middle East, particularly in Syria, Iran and its proxies also continued subtle efforts at growing influence elsewhere including in Africa, Asia, and, to a lesser extent, Latin America. Iran used the Islamic Revolutionary Guard Corps-Qods Force (IRGC-QF) to implement foreign policy goals, provide cover for intelligence operations, and create instability in the Middle East. The IRGC-QF is the regime’s primary mechanism for cultivating and supporting terrorists abroad.”
“In 2014, Iran continued to provide arms, financing, training and the facilitation of primarily Iraq Shia and Afghan fighters to support the Assad regime’s brutal crackdown. Iran remained unwilling to bring to justice senior Al Qaeda members it continued to detain and refused to publicly identify those senior members in its custody,” the report said. Although the report covers 2014, American officials said the Iranian policies described in it had continued during 2015.
Of course, this should come as no surprise to readers of this column as Victor and I have written about Iran's state sponsored terrorism for a very long time. Our most cogent expose was March 16, 2015 in a post titled: Iran Poses Huge Threat to World Stability and Markets
The U.S. State Department reports portrays Iranian foreign policy as very aggressive and often contrary to the interests of the United States. Even when the United States and Iran have a common foe, as they do in the Islamic State (ISIS or ISIL), the Iranian role in Iraq risks inflaming sectarian tensions. Some of the Shiite militias Iran has backed in Iraq, including Kataib Hezbollah, have committed human rights abuses against Sunni civilians, the report states.
“We continue to be very, very concerned about I.R.G.C. activity as well as proxies that act on behalf of Iran,” said Tina S. Kaidanow, the U.S. State Department’s senior counterterrorism official, referring to Iran’s Islamic Revolutionary Guards Corps. “We watch that extremely carefully.”
An annex to the State Department report indicates that the problem of terrorism has grown, though many of the figures reflect militant attacks in the wars in Iraq, Syria and Afghanistan. The number of terrorist attacks in 2014 was up 35% from 2013, while the number of fatalities from those assaults increased 81%. The number of exceptionally lethal attacks has also grown. In 2014, there were 20 attacks that killed over 100 people. In 2013, there were only two such attacks.
[The statistics appended to the State Department report, were prepared by the National Consortium for the Study of Terrorism and Responses to Terrorism, at the University of Maryland.]
Please refer to Victor's comments below on the June 30th deadline for the Iran nuclear agreement with the P5+1 (U.S., Britain, France, Russia, China and Germany). Just this Sunday, Iran's parliament approved a bill to deny foreign nation access to the country’s military scientists and sites. Iran and the P5+1 are negotiating to reach a final accord by June 30th that curbs Iran's nuclear program in return for the lifting of economic sanctions.
Greece Exit from Eurozone (Grexit) Looks Likely (Curmudgeon):
Talks on Thursday between Greece and its creditors concluded without an agreement. The country’s polarizing finance minister, Yanis Varoufakis, led the discussions at a meeting of European finance ministers in Luxembourg, sticking to the government’s official position that there can be no agreement without debt relief from Europe. In less than two weeks, Greece must repay 1.6 billion euros, or $1.8 billion, to the International Monetary Fund, one of its creditors.
In Germany, the fear is that providing new loans to Greece without extracting more spending cuts represents a fateful step toward a so-called transfer union, with wealthier nations providing handouts to Greece and other weaker countries. “If a small country can blackmail the other members into a transfer union without conditions and controls, the euro cannot survive,” said Adam Lerrick, a sovereign debt expert at the American Enterprise Institute, a research organization based in Washington.
Thomas Mayer, a former economist at Deutsche Bank who now runs a research institute in Frankfurt, compares the current situation to an elite country (the EU) with a long standing member (Greece-since 2001) who persistently flouts club standards. The club faces two choices. It could relax its principles at the risk of losing its select status. Or it could eject the troublesome member and risk causing a big stink in doing so.
Many in Europe these days are inclined toward the second option, Mr. Mayer says, which may well be for the best. While there would be pain for Greece, the effect on Europe’s broader economy may be limited.
“You just can’t keep forcing this down people’s throats,” Mr. Mayer said. “Plus, if Greece left, it would show that there is life outside of the European monetary union.”
The Greek central bank warned on Wednesday that the country’s economy would be devastated by an exit from the Eurozone. Bankers say that in the last week, Greeks have pulled more than €3 billion from their deposit accounts.1 Saturday's Financial Times (on-line subscription required) substantially raised that figure.
The FT noted that Greek savers withdrew more than €1.5bn in deposits on Friday, the largest withdrawal on one day since the leftwing government took office in January this year. About €5bn has left the system this week and bankers fear the withdrawals could speed up on Monday when banks reopen.
The ECB agreed to raise the amount of emergency liquidity assistance available to Greek banks by about €1.75bn to €85.9bn, according to two people familiar with the matter, to allow lenders to pay back depositors. The Bank of Greece had originally asked for a €3.5bn increase that officials believed would be enough to last until the next scheduled meeting of the ECB’s governing council on Wednesday. But growing fears at the ECB that it is pumping money into a banking system that risks becoming insolvent led to the decision to grant only enough support to last until the end of Monday.
Eurozone heads of government will meet on Monday in a last-ditch attempt to reach an agreement to unlock €7.2bn in aid funds, which Athens needs to pay back to the International Monetary Fund by the end of June or face default.
Within the European Stability Mechanism (ESM)2 Europe’s newly formed rescue vehicle, preparations are being made to bolster other weak countries (e.g. Portugal, Spain, possibly Italy) in the event of a contagion panic.
1. That's equivalent to a run on the banks, considering that Greece GDP was only $21.956 in 2013- the latest year available.
2. The ESM issues debt instruments in order to finance loans and other forms of financial assistance to euro area Member States.
While polls in Greece still show overwhelming support of the euro, a majority of Greeks are fed up with the harsh austerity measures that have been a condition for the €240 billion in loans that have been disbursed to the country. Many Greek politicians are united in their belief that Greece can no longer follow the harsh strictures that are the condition of euro membership.
“We can’t survive under a hard euro...There is no hope that we pay our debts, or return to growth — there is just no hope at all,” said Theodore Katsanevas, an economist and member of Greece's Parliament who has formed a political party that advocates a return to Greece’s former currency.
“Default and exit is the only option,” said Costas Lapavitsas, a London-trained economist who recently returned to Athens and won a seat in Parliament under the Syriza banner. “The other choice is to adopt the policies of our lenders, and that is the option of a slow death.”
Important International and Political Events to Watch (Victor Sperandeo):
There are several geopolitical and domestic political events coming up before the end of this month that bear watching:
1. The Iran nuclear deal (if you dare call it "a deal") rather than a giveaway, will have to be approved by the Senate by a simple majority. That's after the final international deadline of June 30th – just a little over one week away! Any deal seems implausible considering Saturday's NY Times article: “Iran Still Aids Terrorism and Bolsters Syria's President, State Dept. Finds." In my humble opinion, the U.S. is looking like the ultimate weakling or fool in dealing with a long term enemy (Iran), which hates America and calls for its destruction.
Yet it seems U.S. Secretary of State John Kerry is bowing to every request from Iran. In a recent PBS news hour program, Kerry said, “access to Iran’s nuclear-related military activities is very critical. It’s always been critical from day one. It remains critical.” Is that all he could say? Nothing else is critical or important?
2. Greece's “dead nation walking” saga that never ends may have some semi- conclusion soon. Greece will go into default if the ECB doesn't give them the money to repay their EU debtors. This is a story that depicts lawless bureaucracy at the height of its incompetence and confusion. It shows that the EU will end sooner or later. Please refer to the Curmudgeon's Grexit commentary above.
3. The Supreme Court will soon rule again on Obamacare (AKA Affordable Care Act or ACA). In "King vs Burwell" the Supreme Court has to rule on if the words in the law are correct as written. That only allows subsidies to an individual who could not "afford" the "Affordable (?)" Care Act's cost unless the State set up an exchange. You can follow the case here.
Sidebar: 2012 Supreme Court Ruling on ACA:
Perhaps the ACA law meant something else? In a June 28, 2012 Supreme Court ruling to uphold the ACA (by a 5 to 4 vote), Chief Justice John Roberts took it upon himself to CHANGE the original law to a covered law by redefining a “fee" to be a "tax." In other words, if you didn't buy health insurance you were subject to a “tax” (not a fee), which effectively made the ACA CONSTITUTIONAL, according to Roberts who wrote:
“The Affordable Care Act’s requirement that certain individuals pay a financial penalty for not obtaining health insurance may reasonably be characterized as a tax. Because the Constitution permits such a tax, it is not our role to forbid it, or to pass upon its wisdom or fairness.”
In my humble opinion, Robert’s committed an UNCONSTITUTIONAL act in reinterpreting the law from a fee to a tax. A Supreme Court Chief Justice has no power to write legislation -which he did in this case.
It's amazing that 535 members of Congress, the U.S. President, and 9 Supreme Court Justices (545 divided by 320,000,000 (~ U.S. population) =0.0000017 of the population) can rip up the U.S. Constitution and control the people by whim.
Victor's Potpourri Market Comments:
The "base" in gold is meaningful, and is bottom action after a bull market top which occurred in August 2011. It strongly suggests that it is not consolidation based on the time (2- years) of going virtually nowhere.
This pattern is very similar pattern to the Shanghai Composite index, which bottomed at 1849.65 in June 2013 which is now coming off its June 12th 2015 high of 5178.19, closing on June 19th at 4478.36. That's up 178% in two years at the high, while the China economy has declined during the same time period.
Here’s what this Saturday's NY Times had to say about this ultra-conundrum: “China’s stock rally has come as a sharp contrast to the nation’s slowing economy and is all the more precarious because it has been driven by unprecedented levels of margin financing, or investors’ taking on debt to trade in shares.”
Do you think that's a warning sign or the blasé market environment will continue indefinitely while economies continue to be weak? Nonstop monetary stimulus by China's central bank is no different than the U.S. or elsewhere, as newly created paper money has been flowing into financial assets.
In closing, it has been reported that the Comex has $2.8 billion in gold for delivery vs $80.5 billion in futures i.e. paper gold outstanding. If someone were to buy a major gold position in the futures market and take delivery it would cause a rocket like spike in gold. Of course, that's just a hypothetical example- not a prediction or forecast of what might actually happen.
Opinion: The Fed has truly pushed the envelope beyond anything in the past, including the “roaring 1920's.” It's going on 10 years since rates were last increased! The “Wizard's Wand” (AKA the Fed printing press) is being abused beyond anything imaginable! However, it does fit its "symbolic" meaning. The cost of the Fed's showing of power will not be cheap. It will be devastating in my view. We'll see during the next “financial crisis.”
Victor's End Note:
Let's end with these simple words of Albert Einstein: "Force always attracts men of low morality." I believe Einstein was referring to our greedy politicans and blasé central bankers who have no moral compass!
The ability to formulate and execute effective fiscal and monetary policy takes intelligence, listening, receptivity, analysis, speaking clearly, arguing successfully, and compromising/negotiating. The goal should be doing what's best for your constituents rather than for yourself (e.g. to get re-elected or continue to wield power). That's been absent in the U.S. for a very long time and has contributed to income inequality and the great disconnect between the real economy and financial markets.
Good luck and till next time.............
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Curmudgeon is a retired investment professional. He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996. He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.
Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies and government policies. Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.
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