Cuban Missile Crisis Redux

  “I think we, the United States and NATO, may be edging toward actual war with Russia,” says Stephen F. Cohen, the distinguished Russia scholar from Princeton and NYU.
Mr. Cohen is giving voice to a fear we expressed on the first trading day of 2015 — that the war in Ukraine could easily spin out of control this year. In the 26 days since, a curious and frightening sequence of events has unfolded.
First, European leaders began making noises about allowing their sanctions against Russia to expire come March. Little wonder — those sanctions are tipping Europe into recession yet again.
“Mr. Putin does not want to annex eastern Ukraine, I am sure,” said the French President Francois Hollande. “What Mr. Putin wants is that Ukraine not become a member of NATO. The idea of Mr. Putin is to not have an army at Russia’s borders.”
  No sooner did these cracks appear in the “united front” of Western powers than the U.S.-installed Ukrainian regime launched an offensive — during the dead of winter — against rebels in the Russian-speaking east of the country. A fragile cease-fire going back to last September is now history.
Suddenly, European Union leaders are back, as the Brits say, “on side.” Indeed, they might put new sanctions into place when they meet next, on Feb. 12.
Meanwhile, an influential group of former U.S. officials is back from what they called a “fact-finding mission” to Ukraine. Next Monday, they’ll publish a report under the banner of the Brookings Institution recommending the United States and NATO openly arm the Ukrainian regime.
We got a preview of their report yesterday in a Financial Times Op-Ed by Ivo Daalder, the former U.S. ambassador to NATO. “Military aid,” he wrote, “needs to include lethal defensive capabilities, especially light anti-armor missiles.”
  “In effect,” says professor Cohen, “America will be at war with Russia” if Washington follows through on these recommendations.
“It will be a proxy war for a while,” Cohen said last night on John Batchelor’s syndicated radio show. “But I’ve always thought it could become a Cuban missile crisis. It could become real war, actual war.
“This is happening without any discussion in the United States. We’re not being informed, we’re not being given the chance to debate why we would want to do that, how it might turn out, whether it might go nuclear.”
  Even if the conflict doesn’t go nuclear, the escalating sanctions threaten to tank the dollar. Not immediately, but eventually.
Throughout 2014, we took note of a growing phenomenon our Jim Rickards calls an “anti-dollar alliance.” Not only Russia and China, but all the BRICS nations “are clear about their desire to break free of U.S. dollar dominance,” says Jim.
The more sanctions pile up on Russia, the more Russia seeks to accelerate the process. Thus did Prime Minister Dmitry Medvedev promise yesterday an “unrestricted” response if Russian banks are kicked out of the international payments network known as SWIFT.
Only one other nation of note has been excluded from SWIFT in recent years — Iran, in 2012.
  Yesterday brought word that “Iran is ditching the dollar,” as Business Insider put it.
“In trade exchanges with the foreign countries, Iran uses other currencies including Chinese yuan, euro, Turkish lira, Russian ruble and South Korean won,” said Gholami Kamyab, deputy governor of the Iranian Central Bank.
He added Iran is looking to do currency-swap deals of the sort China does with some two dozen other countries. That would allow Iran to exchange Iranian rials for the currency of its trading partners and vice versa.
  Iran and Russia are wasting no time getting their own such arrangement up and running.

“Both sides plan to create a joint bank, or joint account, so that payments may be made in rubles and rials and there is an agreement to create a working group [for this],” Iran’s ambassador to Russia tells the Russian news agency Sputnik.
Plans are also in the works to lower trade barriers between the two countries. Iranian meat and dairy products could be shipping to Russia as soon as March.
  Meanwhile, Russia is fortifying its economic defenses with gold. The International Monetary Fund says Russia grew its gold reserves by 20.73 metric tons in December.
That’s nine straight months of increases. The IMF report reinforces the Russian central bank’s own statements. At 1,208 metric tons, Russia’s gold stash is the world’s fifth largest, behind those of the U.S., Germany, Italy and France.
As Jim Rickards tweeted in reaction…

That picture never gets old, does it?
  Of course, Washington won’t take these measures lying down. Which is what makes the nomination of the next deputy director of the CIA, well, interesting.
David Cohen currently oversees U.S. sanctions policy at the Treasury Department. Reuters describes him as “specializing in terrorism and financial intelligence.”
Cohen’s appointment, says Jim Rickards, “will lead to even greater intensity in the U.S. financial wars with Russia, Iran, Syria, North Korea and other adversaries.”
[Ed. note: With events moving so quickly, you don’t want to miss Jim Rickards’ next live online briefing exclusively for Agora Financial readers. It’s coming up in less than two weeks — Monday, Feb. 9.
It’s during these sessions that readers like you are clued in to Jim’s thinking in greater depth than he can convey on Twitter. And you get more “inside intel” than TV viewers get when he’s on cable business channels. You can even submit your questions in advance.
Subscribers to Rickards’ Strategic Intelligence have free access, as always. If you’re not among their ranks, you can join them here.]
  Major U.S. stock indexes are picking themselves up after yesterday’s drubbing. At last check, the S&P 500 was up five points, to 2,034.
Apple did indeed wow Wall Street with earnings, as many traders hoped. It posted a net profit of $18 billion. That’s the biggest quarterly figure ever posted by a public company, eclipsing Exxon Mobil in 2012. Now traders await a Federal Reserve policy statement, due later today.
“Small caps are still in breakout mode,” says Greg Guenthner of our trading desk — with an update on a trend he spotted in mid-October. The Russell 2000 index held up much better during yesterday’s sell-off than the Dow Jones industrials. “Now small caps look poised to break ahead of the S&P and the Dow in the weeks ahead,” he says. “If the Russell keeps eating its vitamins, we could see a double-digit move in a matter of weeks.”
  “Stand by for petroleum drama,” says our Byron King. “Oil prices are headed back up by midyear.”
As Byron told us yesterday, there’s been no change in Saudi Arabia’s stance on oil production — even with a new king on the throne. That means oil prices stay suppressed in the short term; as we write this morning, a barrel of West Texas Intermediate has sunk below $45.
But six months on? “What Saudi giveth, Saudi can taketh away, so to speak,” says Byron. “In other words, don’t discount the possibility of Saudi policymakers quietly — or openly — tightening the valves to export channels, and firming up oil prices.
“Understand that the people who really run Saudi oil policy aren’t sitting on thrones. Kings don’t micromanage wellhead settings, pipeline flows and tanker loadings from the royal palace. Indeed, when you peek behind the curtain of Saudi oil policy, it’s clear that the bosses are a power bloc all their own.”
Too, there’s the ever-present turmoil on Saudi Arabia’s doorstep. Iran is an old enemy; ISIS is a new one. “As the next six months unfold,” says Byron, “more events will occur at Saudi’s periphery that are beyond Saudi political or military control.
“At the rate things are going, it’s going to be a long, hot summer in the oil trading pits.”
  And now, the destruction of a five-generation business for want of the letter “s.”

Until today, we’d missed the saga of Taylor & Sons Ltd. — a 124-year-old engineering firm based in the Welsh capital Cardiff.
On Feb. 20, 2009, Britain’s Department of Business, Innovation and Skills posted a notice that the firm had gone bust.
This was news to co-owner Philip Davison-Sebry. “I was on holiday in the Maldives,” he recalls to the London Telegraph, “when I got a message to urgently contact Corus, one of our major clients. They said they weren’t happy at all I was on holiday, asking how could I be on holiday at a time like this?
“They said we were in liquidation and that the credit agencies had told them. I rang the office to find out what was going on — it was like Armageddon. This was all on the day of my wife’s 50th birthday. We will never forget it.”
Turns out a bureaucrat was supposed to record the bankruptcy of a different firm — Taylor & Son Ltd. Only one son. Oops.
The government tried to correct the mistake, but it was too late: “We lost all our credibility as all our suppliers thought we were in liquidation,” says Davison-Sebry. “It was like a snowball effect.” Two months later, the firm had to close its doors and throw 250 people out of work.
This week, a judge ruled the government responsible for the firm’s collapse, awarding damages of $13.7 million.
The British taxpayer will bear that cost. The fate of the bureaucrat who fouled up? We don’t know; we presume the Public and Commercial Services Union fought long and hard on his or her behalf.
  “In Northern California, king of the nanny states, I too have received those irksome letters in the mail comparing my energy usage with my purported peers,” a reader follows up from Monday’s episode.
“Apparently, we are 57 out of 60. Not so good. I blame it on the wine refrigerator and my son’s penchant for long showers and leaving all the lights on. I find the letters rather Big Brother-ish.
“However, I took the liberty of sending your article to my brother-in-law who is an engineer for PG&E. Here are his comments: ‘PGE doesn’t make money on energy use. PGE earns money by spending what is approved in their rate case and earning the authorized rate of return on investment. PGE actually earns on energy-reduction programs, which are approved in the three-year rate case. Smart meters will help reduce your energy use by helping the utility manage voltage.'”
The 5: Yup, that sounds like “decoupling” in action…
  “Do you idiots know anything about basic math,” a cranky reader writes after yesterday’s episode, “or do you just think your readers are stupid?
“Buffett bought Disney in 1966 for $0.31 and sold a year later for $0.48. That was an annualized gain of around 55%.
“Between ’67 and ’95, DIS went from $0.48 to $66 — which is an annualized gain of just under 19%.
“From ’90-’95, Berkshire Hathaway Class A gained an average of over 25% a year, while DIS only gained about 18% a year — so if Buffett had held DIS during these years, it would have brought his overall performance DOWN.
“I guess that’s why he’s the billionaire and you’re not.”
The 5: An interesting point… but aren’t you comparing apples and oranges? Tell us how DIS performed versus BRK between 1967-95 and get back to us.
By the way, Buffett cited the story himself in Berkshire’s 1995 shareholder letter. So if you want to call anyone an idiot, go to Omaha and take it up with him.
Best regards,
Dave Gonigam
The 5 Min. Forecast
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Dave Gonigam

Dave Gonigam

Dave Gonigam has been managing editor of The 5 Min. Forecast since September 2010. Before joining the research and writing team at Agora Financial in 2007, he worked for 20 years as an Emmy award-winning television news producer.

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