June 23, 2014
- The man who would be prime minister?
- The only reason U.S. troops aren’t going back to Iraq… and how to invest accordingly
- Why one “surefire” indicator of a market top is anything but
- You too can hire a former NSA chief for $1 million a month
- A postcard from Greece… pulling apart the Fed’s balance sheet… the synergy between Obamacare and the TSA… and more!
“It’s Iraq,” a former CIA official tells BuzzFeed, “Anything could happen.” He was referring to who ends up being the next prime minister now that Nouri al-Maliki has fallen from U.S. favor.
Maybe not anything. There are certain ways the U.S. government tries to direct events overseas, summed up nicely in a flow chart spotted this morning by money manager and blogger Barry Ritholtz…
Within the constraints set by this flow chart, it apparently is possible that Iraq’s next leader might Ahmed Chalabi. Ahmed Freakin’ Chalabi.
He met last week with the U.S. ambassador to Iraq and the top State Department official in Iraq. For all we know, he’s meeting today with Secretary of State John Kerry, who’s over there.
If Chalabi’s name doesn’t ring a bell, let’s refresh the memory…
Chalabi ran the CIA-funded Iraqi exile group called the Iraqi National Congress. Without the INC’s exhortations, U.S. leaders might have never gone to war in Mesopotamia in 2003.
The bogus intel claiming Saddam Hussein had links to al-Qaida, and that he was developing weapons of mass destruction? That came from the INC — stovepiped to the White House, Congress and credulous reporters.
He’s also wanted for embezzlement in Jordan…
Yes, that Ahmed Chalabi. The Pentagon paid the INC $39 million over five years to gather “intelligence” that would boost the case for war.
When U.S. troops were unable to find any weapons of mass destruction in Iraq, Chalabi was unrepentant: “We are heroes in error,” he said 11 months into the war. “As far as we’re concerned, we’ve been entirely successful. That tyrant Saddam is gone and the Americans are in Baghdad. What was said before is not important.”
No, it wasn’t “important” to Chalabi… seeing how he wheedled his way into becoming Iraq’s oil minister.
On the other hand, was it “important” that he was doing his work on behalf of Iran?
“Senior U.S. officials… have evidence Iraqi politician Ahmad Chalabi has been passing highly classified U.S. intelligence to Iran,” CBS News reported in 2006.
U.S. forces in Iraq raided his home. He was never brought up on charges, but by that time many of Chalabi’s neoconservative allies in Washington had already begun to disown him.
Iran was the ultimate victor of the Iraq War; its archenemy Saddam was gone and its Shia Muslim compatriots rose to power in Baghdad.
Until now anyway…
“The post-occupation government has folded like a cheap suit — which is an insult to cheap suits everywhere,” quips our energy and military affairs expert Byron King.
For the moment, the fighting is far from Iraq’s three biggest oil fields — two in the Shia south and one in the Kurdish north. The berserkers from ISIS have no base of support in any of those places.
But make no mistake: “Iraq’s 3 million barrels per day of oil output is at risk.”
Exxon and other major players are pulling workers out. “And what’s wrong with this picture?” Byron asks rhetorically. It’s a NASA Landsat image of Iraq’s largest oil refinery at Baiji, a little northwest of Baghdad…
“If you say that refineries aren’t normally supposed to be on fire and billowing smoke,” says Byron, “then you’re on the right track.
“Normally — when it’s not exploding and burning — Baiji refines 300,000 barrels per day of product. Of course, it’s ‘over there’ in Iraq, and its output is almost entirely slated for internal Iraq consumption. So what does it matter to you?
“Well, if Baiji goes down, expect Iraq demand to tap international markets for gasoline, diesel, jet fuel, lubricants, etc. Thus does a burning refinery in Iraq reach out and touch global pricing levels. Everything is connected to everything else.”
In lieu of any “holy crap” news from Iraq this morning, crude prices are pulling back a bit. West Texas Intermediate is back below $107, at $106.57. Brent — the world benchmark — is at $114.08.
Only in February did Iraq’s oil production hit a 35-year high of 3.5 million barrels per day. But with ISIS at the gates of Baghdad, “that 3.5 million barrels of oil per day will almost surely go away, and we may not see that number again for another 35 years, if ever in our lifetime.”
As Byron reminded us in this space last week, Iraq’s daily oil production is equal to the increase in daily U.S. production made possible in recent years by the fracking revolution.
“If fracking (and horizontal drilling, to be sure) had never come into the mainstream, U.S. energy output would likely be terminal,” Byron concludes. “We’d be struggling and scraping through irreversible decline; and the situation in Iraq might look quite different — with U.S. troops back on the transport planes, if you know what I mean.”
[Ed. note: Chalk up another big winner for Byron, Matt Insley and the readers of Real Wealth Trader. On Friday, they sold the remaining half of a fracking play for 225% gains in less than three months. The first half? That was good for a clean double in only 36 days.
We’re looking for 100 more “wildcatters” eager to repeat the feat. Starting next Sunday, you’ll have the chance to equal or exceed that 100%-in-36-days performance. Want to learn how? Take the first step and click here.]
Stocks are mostly flat as the new week begins. The Dow and the S&P are down fractionally from their record closes on Friday.
Traders are chewing on a little merger-and-acquisition activity in the tech sector: Oracle is buying Micros for $4.6 billion. The economic numbers of the day are a mixed bag: Existing home sales rang in better than expected. Meanwhile, U.S. manufacturing is accelerating so far in June… but the costs factories are paying for raw materials are rising too.
“The big indexes continue to shove their ways higher this summer, following our technical outlook as close to perfectly as we could hope for,” says Jonas Elmerraji of our trading desk. “Here’s an updated look at where the S&P sits as of Friday’s close:
“As you can see,” says Jonas, “the big index is still bouncing its way higher in the trend channel that’s been in place for the last 19 months. In other words, it still makes sense to ‘buy the dips’ in stocks. But there’s no dip here. With the S&P sitting near the top of its channel, risk definitely outweighs reward in June.”
Note well: That is not a crash call, despite the farrago of headlines we see in mainstream financial media touting one indicator or another that’s supposed to be its “most extreme since 2007.”
Case in point: Data provider Dealogic reckons merger-and-acquisition deals will total $3.51 trillion this year. It’s the most since — you guessed it — 2007.
(Cue the duh-duh-duhhhh scary music…)
“Each of the last five great merger waves on record ended with a precipitous decline in equity prices,” Harvard professor Matthew Rhodes-Kropf tells MarketWatch.
“This bull market is not at the top,” emails our investment director Paul Mampilly after we sought out his take.
“At the top of every market, you can point to something else peaking simultaneously — whether it’s merger activity or margin debt or buybacks or IPO issuance or low junk bond-to-Treasury spreads… and I am sure that a few years after the gong sounds for this bull market, we’ll be told that XYZ was THE sign of the top.”
But not now, says Paul, pointing once again to the study revealing investors currently have their lowest allocation to stocks — only 37.7% — at any time in data going back to 1959. “Investors of all stripes, retail, institutional, low end, high end, are all braced in the crouch position waiting for the crash that they all believe to be inevitable.
“I can tell you from working on Wall Street in 1999, that was a top,” Paul goes on.
“You know how you could tell? Every person I knew would ask me about the stock market and then ask me about the stocks that they owned. Every bar and restaurant that had a TV was tuned to CNBC. I remember being at a baseball game where people cheered when they announced that the Dow Jones had gone up by 100 points.
“We can’t have a top till the demand for stocks is sated. And the fact that every day we have someone calling for a crash or the stock market top based on some coincidental indicator is a reflection of how far we are from 1999 psychology.
“Let people come up with all sorts of things that happened in the past that coincided with tops. But that doesn’t mean that the same thing is going to be true in the same way next time.”
“Mykonos is everything you think of when you think ‘Greek island,'” writes Chris Mayer in his latest dispatch from the Hellenic Republic.
“White houses like sugar cubes, seemingly piled on top of each other, and little churches with bright blue domes hanging off stunning cliffs. I enjoyed walking the narrow flagstone streets of the town of Hora, lined with shops and cafes. It is like something you’d see on a postcard.
The labyrinthian alleys of Mykonos.
“For most of its history,” says Chris, “Mykonos was home to fishermen and farmers trying to eke out a living on the barren rocky island. But Mykonos did have — and still has — one natural resource in great abundance: wind.”
Chris shares the full story from his latest adventure with a group of hardy subscribers in today’s Daily Reckoning.
Revolving door, NSA edition: The newest entry in the crowded field of cyber consultants is none other than the former NSA chief, Gen. Keith Alexander.
“As the four-star general in charge of U.S. digital defenses,” reports Bloomberg News, “Keith Alexander warned repeatedly that the financial industry was among the likely targets of a major attack. Now he’s selling the message directly to the banks.”
For $1 million a month, no less.
Last fall, we chronicled how Alexander resorted to some — uhhh — questionable logic in urging the financial industry to open itself up to the NSA, the better to defend against cyberattacks, of course.
Now he’s approaching the matter from the other direction — meeting with Wall Street’s largest lobby group, Sifma, to pitch himself as the premier expert in the cybersecurity field.
His asking price fell from $1 million a month to $600,000, confidential sources tell Bloomberg. No word yet on the outcome. But “the audience is receptive,” the newswire reminds us: “Under pressure from regulators, lawmakers and their customers, financial firms are pouring hundreds of millions of dollars into barriers against digital assaults.”
We have a bead on where those hundreds of millions are going, just as a friendly reminder. You can’t stop the crony culture, but you can channel some of its profits your way.
“How do you define leverage? Isn’t it debt versus assets?” a reader inquires after we cited Jim Rickards on Friday saying the Federal Reserve is leveraged 80-to-1.
“In the case of the Fed, the debt is the monetary base while the assets are mortgage securities, Treasuries, cash, etc.
“How levered am I if I take out a mortgage and keep the resulting cash in a savings account, for example?”
The 5: Hmmm… We haven’t pressed Mr. Rickards for the specifics, but we’re fairly sure he’s working off the Fed’s weekly H.4.1 statement. This is the Fed’s consolidated balance sheet. The latest, dated last Thursday, shows $4.37 trillion in “assets,” if that’s what you want to call them, compared with $56.3 billion in capital. That’s a leverage ratio of 77.6- to-1.
“When the government introduced the value-added tax (GST) in Canada, they dropped the federal income tax by the amount of income the GST was expected to produce,” a reader writes, carrying on our consumption-tax thread.
“The tax rate has not gone up since then. It’s still too high — max 30% — but it has stayed the same.”
“You do a great job, mostly,” a reader writes.
Since he’s one of our regulars, he left out the inevitable “but” and cut right to the bone he has to pick. Clever…
“You fail to see the synergy when government agencies work together,” he goes on. “For example, you lose your insurance and can’t afford the replacement policy. If you can’t afford a doctor, then go to the nearest airport. You get a free full body X-ray, free breast exam and, if you mention al-Qaida, a free colonoscopy.
“TSA and Obamacare — You Got It — or They Got You… Whatever.”
The 5: Hmmm…
Cheers,
Dave Gonigam
The 5 Min. Forecast
P.S. Circling back to the Fed’s balance sheet for just a moment: “Of course, nobody is going to shut down the Fed just because it is approaching technical insolvency,” fund manager John Hussman wrote in 2011, “but we ought to recognize that anytime interest rates rise, the interest being paid on Treasury debt is quietly being used to cover the Fed’s capital losses.”
So what could be the final trigger to topple the Fed over the edge? Check out this mind-blowing expose…