Submitted by Reggie Middleton Earlier this week I published a controversial rant on the US education system - How Inferior American Education Caused The Credit/Real Estate/Sovereign Debt Bubbles and Why It's Preventing True Recovery. This was a lengthy piece, but apparently caught the interest of many as it went semi-viral. This is part of the conclusion, attempting to show how US indoctrinated "GroupThink" prevents many (if not most) from seeing what empirically should be obvious.
There are many analysts and pundits who outline their predictions for the new year. I don't believe in "predicting" personally, but it is very important to form an outlook for the future and back said outlook up with objective observation and prudent analysis. Several big bank analysts have outlined what they perceive to be the biggest threat to stability for 2012, and material amount of them chose the same threat...
Iran
Tehran will be the top threat in 2012, former CIA Director Michael Hayden predicted Wednesday as Iran dominates foreign policy debate even while national security officials appeared to dismiss the Islamic Republic's latest threat to close the Strait of Hormuz.
"It is the single greatest destabilizing element right now with regards to global security," Hayden told Fox News, adding that the outlook is not encouraging.
Don't get me wrong, I fully appreciate and agree with the assertion that Iran is a serious threat to global stability - and I'm not the only one...
Whle PIMCO didn't actually label Iran as the biggest threat, they did do a superb job of outlining the potential fallout from an Iranian oil event....
"Whenever the global economy is in a fragile state, as it is today, geopolitical concerns such as the possibility of a strike on Iran’s nuclear facilities become much more exaggerated. Although we cannot (and will not) predict whether an attack is imminent, or even likely, our experience and research tells us that any major disruption in the supply of oil from Iran could have either subtle or profound global repercussions – especially as excess capacity is virtually exhausted and we doubt that other OPEC nations would be able to compensate for a reduction in Iranian oil production."
The 4 scenarios presented by PIMCO here they are: "i)Scenario 1: Exports minimally effected. Concerns would drive initial price response; Oil could spike initially to $130 to $140 per barrel and then settle in a higher range, around $120 to $125; ii) Scenario 2: Iranian exports cut off for one month. In this case, we would expectprices could reach previous all-time highs of $145/bbl or even higher depending on issues with shipping; iii) Scenario 3: Iranian exports are lost for half a year. We think oil prices could probably rally and average $150 for the six months, with notable spikes above that level; iv)Scenario 4: Greater loss of production from around the region, either through subsequent Iranian response or due to lack of ability to move oil through Straits of Hormuz. This is the Armageddon scenario in which oil prices could soar, significantly constraining global growth. Forecasting prices in the prior scenarios is dangerous enough. So, we won’t even begin to forecast a cap or target price in this final Doomsday scenario."
Now, SocGen weighs in...
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."
Now, the last thing an already crippled Europe needs is a doubling of its primary transportation energy source. Alas, methinks Europe has bigger problems to with which to cause goose bumps on its booty - namely.... It's banking AND insurance system is still one step from absolute implosion! It's gotten so bad that the borrowers are actually lending to the lenders because the lenders have no effective credit in the markets!!!
Blue-chip names like Johnson & Johnson, Pfizer, and Peugeot are among firms bailing out Europe's ailing banks in a reversal of the established roles of clients and lenders.
Euro bills and U.S. dollars being exchanged.One source with knowledge of the so-called repo deals, or short-term secured lending, said the two U.S. pharmaceutical groups and French car maker were the latest to sign up for them. Europe's banks are struggling to secure the cash to fund their day-to-day business and have largely stopped lending to each other for fear Europe's sovereign debt [cnbc explains] crisis could land any of their peers in trouble.
Euro bills and U.S. dollars being exchanged.One source with knowledge of the so-called repo deals, or short-term secured lending, said the two U.S. pharmaceutical groups and French car maker were the latest to sign up for them. Europe's banks are struggling to secure the cash to fund their day-to-day business and have largely stopped lending to each other for fear Europe's sovereign debt [cnbc explains] crisis could land any of their peers in trouble.
As a result a group of well-known, cash-rich companies with solid cash flows has stepped in the repo market, which provides a form of lending so far almost exclusively in use between banks, and between banks and central banks. One market participant said in one key area of lending companies now accounted for 25 percent of these deals. Repos provide the new financiers with the strict guarantees they need before parting with their cash, answering worries that the crisis has weakened Europe's banks to the extent that they might not be able to pay the money back.
"Companies in the past were ... happy to deposit cash on an unsecured basis to a bank for an interest payment," said Frank Reiss, who oversees some of the repo business at Euroclear, the Brussels-based settlement house owned by a group of banks. "Now following the crisis, we have seen that companies are engaging in repos secured with collateral against the cash they are lending," said Reiss. Euroclear is the largest administrator of repo trades in Europe. At the moment the European Central Bank provides the main lifeline for banks and has pumped hundreds of billions of euros of cash into the market. But the banks are parking most of the money they borrow back at the ECB [cnbc explains] rather than trusting to lend to each other.
"Companies in the past were ... happy to deposit cash on an unsecured basis to a bank for an interest payment," said Frank Reiss, who oversees some of the repo business at Euroclear, the Brussels-based settlement house owned by a group of banks. "Now following the crisis, we have seen that companies are engaging in repos secured with collateral against the cash they are lending," said Reiss. Euroclear is the largest administrator of repo trades in Europe. At the moment the European Central Bank provides the main lifeline for banks and has pumped hundreds of billions of euros of cash into the market. But the banks are parking most of the money they borrow back at the ECB [cnbc explains] rather than trusting to lend to each other.
Yes, this appears to be the fact...Deposits at ECB Hit New High
Commercial banks' overnight deposits at the European Central Bank hit a new record high of 464 billion euros, data showed on Monday, and traders said they could hit half a trillion euros by next week. High deposits indicate banks prefer the safety of the central bank for their funds to higher rates they could get by lending to each other.
Banks are awash with cash after taking an unprecedented 489 billion euros in the ECB's [cnbc explains] first-ever three-year liquidity operation late last month, and are mulling what to do with the money in the longer term. The liquidity operation was designed to underpin banks' finances and hopefully repair some confidence in the sector, but the sovereign debt crisis means many institutions still lack enough trust to lend to each other and prefer to stash their money at the ECB.
"The market is more or less closed, all the over-liquidity is going back to ECB," the trader said. "Slowly people are getting some longer funding, but there is no easing in the short end."
Now, Germany has acted as stalwart stopgap in the sovereign debt carnage of the EU nations. It's perceived as the strongest, most stable and most disciplined economy. As such, there has been a massive flight to quality trade that has pushed German bunds to negative yields. That's right! As in the US, you literally have to pay Germany for the privilege of lending it your hard earned money.
- German Note Yields Fall to Record Low Following Merkel, Sarkozy Meeting
Germany Issues Bills With Negative Yields As Economists Agree the nation is in recession.
Right here and now, the more astute should see there's something wrong here, but we shall move on. Wait a minute! This net export nation (that means its livlihood is based on selling goods to others) whose major trading partners suffer from a myriad of maladies ranging from hard landing to near depression is in economic recession, yet there's enough demand to lend it money that lenders have to pay for the privilege???
- Latest Numbers from Germany Confirm Recession The New American-The announcement from the German Economy Ministry over the weekend confirmed that the long-awaited European recession has officially begun: German factory ...
- Germany in recession - The Daily Economist- Entering the new year, we can now add Germany to the growing list of countries in recession, as noted by more than a dozen economists who have come to this ...
- Economists: Germany in a recession now - The Local - As European leaders struggle to stave off a looming recession this year,Germany – the continent's biggest and healthiest economy – is probably already in one,...
- Survey shows Germany already in recession: report - MarketWatch- BERLIN -The German economy is already in recession, Die Welt newspaper reported Monday, citing its survey of 14 bank economists.