John Hussman’s Formula For Market Extremes

Market extremes generally share a common formula. One part reality is blended with one part misguided perception (typically extrapolating recent trends as if they are driven by some reliable and permanent mechanism), and often one part pure delusion (typically in the form of a colorful hallucination with elves, gnomes and dancing mushrooms all singing in harmony that reliable valuation measures no longer matter). This time is not different.

 

Via John Hussman’s Weekly Market Comment,

The technology bubble was grounded in legitimate realities including the emergence of the internet and a Great Moderation of stable GDP growth and contained inflation. But it also created a misperception that it was possible for an industry to achieve profits while having zero barriers to entry at the same time (the end of that misperception is why the dot-com bubble collapsed), a misperception that technology earnings would grow exponentially and were not cyclical (as we correctly argued in 2000 they would shortly prove to be), and the outright delusion that historically reliable valuation measures were no longer informative. Meanwhile, the same valuation measures we use today were projecting – in real time – negative 10-year nominal total returns for the S&P 500 over the coming decade, even under optimistic assumptions (see our August 2000 research letter).

The housing bubble was grounded in legitimate realities including a boom in residential housing construction and a legitimate economic recovery that followed the 2000-2002 bear market (which we responded to by shifting to a constructive stance in April 2003 despite valuations still being elevated on a historical basis). But the housing bubble also created a misperception that mortgage-backed securities were safe because housing prices had, at least to that point, never experienced a major collapse. The delusion was that housing was a sound investment at any price. The same delusion spread to the equity markets, helped by Fed-induced yield-seeking speculation by investors who were starved for safe return. Meanwhile, the same equity valuation measures we use today helped us to correctly warn investors of oncoming financial risks at the 2007 peak (see A Who’s Who of Awful Times to Invest).

The 2008 credit crisis, which we anticipated, was more challenging for us because the extent of employment losses and gravity of asset price collapse was greater than we had observed in the post-war data that underpinned our methods of assessing the market return/risk profile. Our valuation methods didn’t miss a beat, and correctly identified a shift to undervaluation after the late-2008 market plunge (see Why Warren Buffett is Right and Why Nobody Cares). But examining similar periods outside of post-war data, we found that measures of market action that were quite reliable in post-war data were heavily whipsawed in the Depression, and even the valuations we observed at the 2009 market lows were followed, in the Depression, by an additional loss of two-thirds of the market’s value. My resulting insistence on ensuring our methods were robust to that “two data sets” problem was necessary, but the timing could hardly have been worse, with an initial miss in the interim of that stress-testing, and an awkward transition to our present methods of classifying return/risk profiles.

The present market environment is grounded in the legitimate reality that the labor market has recovered its losses, but not to the extent that creates resource constraints or clear interest rate pressures. Though broad measures of economic activity have actually eased to year-over-year levels slightly below those that have historically distinguished expansions from recessions, the economy seems to be treading water, and don’t observe a particularly negative tone. Still, the recent period has created a misperception that monetary easing itself will support financial markets regardless of their valuation. The error here is that we know from history that it does not. Indeed, the 2000-2002 and 2007-2009 collapses both progressed in an environment of aggressive and sustained monetary easing. What’s actually true about monetary policy is that zero-interest rate policy has created a perception that investors have no alternative but to “reach for yield” in riskier assets. It’s entirely that reach for yield that investors must rely on continuing indefinitely, because there’s no mechanistic cause-effect relationship between the Fed balance sheet and stock prices, bank lending, or economic activity.

As usual, the delusion is that this Fed-induced reach for yield is enough to make equities a sound investment at any price. Ironically, the Fed itself is in the process of reversing course on this policy. Meanwhile, based on the same valuation methods that correctly projected negative 10-year returns at the 2000 peak, correctly gave us room to shift to a constructive position in early 2003, correctly helped us warn of severe market losses at the 2007 peak, and correctly identified the shift to market undervaluation in late-2008 (which those who don’t understand our stress-testing narrative may not recognize), we currently estimate prospective S&P 500 nominal total returns of just 2% annually over the coming decade, and negative returns on every horizon shorter than about 7 years.

In short, investors who are reaching for yield in stocks as an alternative to risk-free assets are most likely reaching for a negative total return in stocks between now and about 2021.




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Obama Considers Special “Boots On The Ground” Forces In Iraq As Explosions Rock Baghdad Airport

If you like your boots on the ground, you can keep them – as long as they are Special Forces boots. Following promises that there would be no American “combat” ‘boots on the ground’, AP reports that President Obama is considering sending a small number of special forces to help the government in Baghdad. According to the official rules of “boots-on-the-ground”-edness, CIA and Special Forces do not count so ‘officially’ no promises have been broken. It’s not clear how quickly the special forces could arrive in Iraq; or whether they would remain in Baghdad or be sent to the nation’s north. With rumors of explosions rocking Baghdad airport, we suspect the former.

 

As AP reports,

The White House is considering sending a small number of American special forces soldiers to Iraq in an urgent attempt to help the government in Baghdad slow the nation’s rampant Sunni insurgency, U.S. officials said Monday.

 

While President Barack Obama has explicitly ruled out putting U.S. troops into direct combat in Iraq, the plan under consideration suggests he would be willing to send Americans into a collapsing security situation for training and other purposes.

 

 

It’s not clear how quickly the special forces could arrive in Iraq. It’s also unknown whether they would remain in Baghdad or be sent to the nation’s north.

But The White House is being very careful to exaplin that this is not “real” boots on the ground…

White House spokeswoman Caitlin Hayden said no combat troops would be sent to Iraq, but that the U.S. is looking at other options.

 

The president was very clear that we will not be sending U.S. troops back into combat in Iraq,” Hayden said in a statement. “That remains the case and he has asked his national security team to prepare a range of other options that could help support Iraqi security forces.”

Just special ones…

The mission almost certainly would be small: one U.S. official said it could be up to 100 special forces soldiers. It also could be authorized only as an advising and training mission — meaning the soldiers would work closely with Iraqi forces that are fighting the insurgency but not officially be considered as combat troops.

 

The troops would fall under the authority of the U.S. ambassador and would not be authorized to engage in combat, another U.S. official said. Their mission is “non-operational training” of both regular and counter terrorism units, which the military has interpreted to mean training on military bases, not in the field, the official said.

 

 

Already, about 100 Marines and Army soldiers have been sent to Baghdad to help with embassy security, according to a U.S. official.

Obama made the end of the war in Iraq one of his signature campaign issues, and has touted the U.S. military withdrawal in December 2011 as one of his top foreign policy successes.

Mission Accomplished…




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Stunning Fact Of The Day: In 2014 GM Has Recalled More Cars Than It Sold In 2013 And 2012

Just as we were about to proudly announce that today was one of those rare days when the bailed out consortium of union votes for purchase also known as Government General Motors did not announce the now generic daily recall of its atrociously built flaming paperweights, here comes the late afternoon stunner and proves us wrong yet again:

  • GM TO RECALL 3.16M 2000-’14 MODEL YR CARS ON IGNITION ISSUE
  • GM SAYS HAS LAUNCHED 44 RECALLS THIS YEAR
  • GM SAYS TOTAL NORTH AMERICA RECALLED CARS NOW 20.0 MLN

More details from Bloomberg:

GM told NHTSA it would recall 3.16m older model vehicles because combination of too much weight on key chain and “jarring event” may cause ignition to inadvertently rotate to accessory position.  Also announced 5 other recalls decided last Wednesday.  Sees charge up to $700m in 2Q incl. $400m for May 15, May 20 recalls.

And the bottom line, and why this entire bailout farce is now beyond simply criminal and purely ridiculous: as of this moment, GM has recalled more than double the number of cars it sold in all of 2013, or, another way of putting it, more than the total number of cars it sold in 2013 AND 2012 combined.

The good news, all those dealer and non-dealer parking lots still have space to accommodate more GM “sales” that just sit there and wait.

The bad news: all the dealer and non-dealer parking lots are getting full.




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Russell Rebounds On Late-Day Buying Panic But Rest Of Market Reluctant

Treasuries oscillated in a 3-4bps range all day to end flatter with 30Y -1.5bps and 2Y +1.5bps as stocks flip-flopped around like Charlie Sheen in a Phat Phong whorehouse. Trannies resumed their post-Iraq drop (-0.4% today) but high-beta honeys sent Russell 2000 up 0.3% with the S&P and Dow unch. Stocks recoupled with bonds after 2 attempts to spark new all time higherer highs. Ahead of this week's FOMC, the USD weakened as EUR gained and oil, gold, and silver all slipped in a highly correlated manner. VIX rose 0.4 vols to 12.6 – notably decoupling from the S&P as Iraq/Fed uncertainty prompted some hedging. The now ubiquitous buying panic took hold at 330ET and Russell closed at highs of the day.

 

Take you pick – Great Day; Terrible Day; or Flat

 

AUDJPY was in charge the moment POMO ended…

 

VIX decoupled as it seems Iraq or Fed uncertainty prompted some hedging

 

Stocks kept ramping away from bond reality and falling back…

 

But Treasuries flattened with the long-end rallying modestly…

 

Commodities slipped all day – in a highly odd correlated manner…

 

Becuae nothing say buy fucking small cap stocks like growth being slashed, oil prices surging (and stymying growth), and a Fed day this week…

 

Charts: Bloomberg




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Fed Prepares For Bond-Fund Runs, Looking At Imposing Bond “Exit Fees” Gates

It was two short years ago that the Fed, in its relentless attempt to push everyone into the biggest equity bubble of all time, did something many thought was merely a backdoor ploy to forcibly reallocate capital out of the $2.7 trillion money market industry and into stocks when, as we wrote in July 2012, it contemplated imposing suspensions of fund redemptions to “allow for the orderly liquidation of funds assets.” Or in other words “gate” money markets.

Since then various iterations of this proposal have been attempted, either by the Fed or the SEC, however due to stern industry push back (and the relatively modest amount of money at stake) the attempt to force investors to rotate their funds out of money markets (because it is quite clear that if the Fed is hinting at gating issues with a given asset class, it is only a matter of time before the hint becomes a reality) has failed, and as a result the total amount of notional capital held at money market funds has been largely unchanged in recent years.

Here comes attempt number two.

Only this time it is no longer aimed at money market funds, but that other most hated, by the Fed, asset class: bond funds, whose relentless inflows, we shouldn’t have to remind readers are the main reason why the propaganda myth of a recovery, and the resulting con game, keep crashing and burning, as it is impossible to spin a 2.5% 10 Year yield as indicative of anything remotely resembling a recovery, and shows at best, a semi-deflationary world. Said inflows also are recurring evidence that whatever retail money remains unallocated, continues to go into the one asset class which is actively disparaged by the Fed at every opportunity.

In brief, if anything, the Fed would prefer that all retail investors pull their money out of bonds funds (and money markets of course), and invest them into 100x+ P/E biotech stocks. Because after all, today’s stock market is nothing but the biggest Fed-propped Ponzi scheme in existence.

And in order to achieve that, according to the FT, “Federal Reserve officials have discussed imposing exit fees on bond funds to avert a potential run by investors, underlining regulators’ concern about the vulnerability of the $10tn corporate bond market.

FT justifies this latest unprecedented pseudo-capital control by sayng that “officials are concerned that bond-fund investors, as with bank depositors, can withdraw their money on demand even though the assets held by their funds are long-term debt and can be hard to sell in a crisis. The Fed discussions have taken place at a senior level but have not yet developed into formal policy, according to people familiar with the matter.

“So much activity in open-end corporate bond and loan funds is a little bit bank like,” Jeremy Stein, a Fed governor from 2012-2014 told the Financial Times last month, just before he stepped down. “It may be the essence of shadow banking is … giving people a liquid claim on illiquid assets.”

The Fed’s justification for this latest bazooka approach in forced capital reallocation:

Exit fees would seek to discourage retail investors from withdrawing funds, thereby making their claims less liquid and making a fire sale of the assets more unlikely.

“Oddly” there is nothing in the Fed’s proposal about gating the most overvalued asset classes of all, equities, or say, biotechs and momo stocks, where the drawdowns, when they happen, are so fast and vicious, the bulk of hedge funds are still down for the year precisely because they were all led like obedient sheep into the Div/0 PE slaughter. Also, memory is a little fuzzy, but in the days after Lehman, it was equity hedge funds that promptly gated all their investors…. not bond hedge funds, which in fact were scrambling to deal with the influx of new funds.

Also, it goes without saying that “discouraging investors” from withdrawing funds is the last thing on the Fed’s mind, which knows very well that when it comes to investor behavior all that matters is how the Fed’s future intentions are discounted.

And with this unprecedented step, the Fed is sending a very clear message: it may be next year, or next month, or next week, but quite soon you, dear retail bond-fund investor, will be gated and will be unable to pull your money.

The only thing that was missing from the FT piece was a casual reference to Cyprus.

So what is the obvious desired outcome, at least by the Fed? Why a wholesale panic withdrawal from bond funds now, while the gates are still open, and since those trillions in bond funds have to be allocated somewhere, where will they go but… stock funds.

In other words, now that the Fed is pulling away from injecting tens of billions of liquidity into the market every month, it is hoping the investing population will pick up the torch. And since it has failed to incite the mass reallocation of funds from bonds to stocks, the Fed is willing to use every trick in the book to achieve its goal.

Sure enough, “introducing exit fees would require a rule change by the Securities and Exchange Commission, which some commissioners would be expected to resist, according to others familiar with the matter.” However, those commissioners would be promptly silenced when a joint effort between the NSA and the Fed were to threaten the release of embarrassing photographs or conversations to the general public. And watch how all dissent promptly disappears, and the Fed once again demonstrates it is increasingly more helpless in not only preserving the biggest asset bubble in US history, but at modeling and nudging human behavior.

Sadly for the Fed, America is now on to its endless bullshit experiments. Because absent an executive order from Obama demanding that Americans invest every spare Dollar in a Ponzi scheme, this too attempt to forcibly reallocate capital from Point A to Point B will fail.

Which, however means one thing: since the Fed is so desperate it has to float trial balloons of this nature in the financial press, the untapering can’t be far behind, and with it QEternity+1.

Finally, just like in Europe with its revolutionary NIRP experiment, it will also confirm that the real economy has never been worse than it is now.




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Financial Stability?

As a helpful hint for the Federal Reserve – who appear concerned about “financial instability” – we thought the following chart might suggest where to look for ‘irrational’ investors

 

 

Everything is instant momentum chasing – starting at the lowest time frame in the HFTs and leaking out to humans – which is producing this chaotic market which is anything but natural.

As a reminder, the Fed has signaled its concerns of complacency and investors chasing markets higher because they have been going higher… will the Fed inject some volatility back into world markets this week?




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What US Veterans Say About The Iraq Fiasco: “When I Left In 2009, I Said In 5 Years There’ll Be A Civil War”

With Iraq having succumbed to sectarian violence worse than anything observed in recent history, which accordint to many was merely exacerbated by US neocon ambitions to feed the ravenous military industrial complex, one can easily discard the opinion of all those on both sides of the argument – first those who said a US intervention was critical, as well as those who demanded a pull out. In fact, the only person who has preserved any credibility, and has not been “surprised” by the recent developments – is the man who said to never get involved in the first place – Ron Paul.

But what about those who were tasked with implementing US foreign policy, flawed as it may have been: America’s veteran troops.

The WSJ has compiled several opinions of precisely those men and women who served in Iraq during the invasion and occupation. At least for some of them what is happening now is hardly surprising. “When I left in April 2009, I said, ‘In five years there’ll be a civil war,’” said Keith Widaman, a former Marine staff sergeant who helped train Iraqi law enforcement during his deployment. “The Sunnis were stockpiling weapons and they weren’t using them against us. They were just holding on to them.”

More:

Mr. Widaman, who currently lives in Washington, was stationed near the Syrian border, in Al Qaim, and said that area was mostly calm. But even there he noticed that the central government didn’t have the support of the local populace. In Mosul the situation was even worse.

 

There was just so much resistance, they never got it under control,” he said.

Former Marine Staff Sgt. Keith Widaman in Washington on Friday. Lance Rosenfield/Prime for The Wall Street Journal

Others are just disappointed by the local army’s response:

Matthew Sinsigalli’s infantry battalion with the Army’s 101st Airborne Division was part of the invasion in March 2003. He then spent most of his yearlong tour in Mosul, where his unit’s duties included training Iraqi military and police. 

 

“For them to just drop and flee, that’s disheartening to see after all the effort put into it when we were over there,” he said. “To see that fall, a place where we lost friends, that’s really a blow,” said Mr. Sinsigalli, who left the Army in 2004.

Yet others believe that America’s mistake was simply refusing to make Iraq yet another colony of the US global empire:

Several of the veterans said the U.S. had a responsibility to stay involved. Chris Schuster, 34, a Navy veteran who served two tours in Iraq in 2003 to 2005, said he had mixed feelings watching reports this week about the developments in Iraq. “Once you’re involved, you have a responsibility,” he said. He is now a student at Clemson University in South Carolina.

At least one person realizes that the entire US approach of solving global conflict through the imposition of Pax Americana, and even more military involvement, especially where US interests are at stake, needs a major rethink:

William “BJ” Ganem, who lost part of his left leg and suffered traumatic brain injury in Iraq in 2004 after an improvised explosive device hit his vehicle while on patrol, said he hopes the U.S. thinks hard about its approach, and takes a “holistic” view.

 

“I’m not sure we’re understanding the problem happening in the Middle East,” said Mr. Ganem, who lives in Reedsburg, Wis. “We need to spend time, step back and think about what the best approach is, what the root of the problem is.”

However with so much corporate money at stake, the last thing the US mega-corps, for whom even the slightest delay in promoting re-escalation and not letting yet “another crisis go to waste” means lost revenue, can afford to do is wait.

Finally, while it is handy to poll the invaders, be it those sitting behind desks or wielding an M-16, all of whom hide behind the idealistic banner of “democratic liberation”, perhaps the real answer should come from the Iraqis themselves what they want: was it their vision of a better world one which involved US armed presence in their (and neighboring) country, and one which has pushed sectarian violence and brutality to unseen levels.

And not just Iraq but Libya, Egypt, Ukraine, to name just a few from the past few years alone.

Sadly we will never get the real answer.




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A Reminder Of How Stocks React To Oil Prices

Back in Feb 2013 we introduced the "Brent Vigilantes" and reminded traders how stock markets (and macro economies) react to shifts in the oil price with the two trading together to a 'tipping point' at which point strocks belief in growth breaks. We further confirmed that this is even more worrisome in the case of an oil price shock which strongly suggests that VIX at 12 is not pricing in the volatility that we have seen in the past when the oil complex starts to shake.

We detailed in Feb 2013 how oil's trigger points drives macro weakness,

Time and again in the last few years, even as central bank balance sheets have risen inexorably, we get corrections in equity markets that bring them back to a fundamental reality, however briefly. The catalyst for those 'corrections' is hard to pin-point but a step back and we see that the flood of new money also spills out to anything that can't be printed (gold, silver, oil) and it is the latter that has a natural drag on the global economy. So, while the 'wealth' transmission mechanism is now the only policy tool left for central banks, it is the price of Oil that caps that upside thanks to its impact at the margin of a fragile global economy.

 

 

 

Nowhere is this more clear than in Europe, where each time Brent crosses above $120 (helped by central bank largesse), macro-economic surprises start to deteriorate rapidly and markets fade. We are close to $120 (Brent) once again now… With government bonds in US and Europe 'managed' so well, the vigilantes have left the building – and moved to the Crude oil pits… 

 

The same is evident in the US – with $100 WTI apparently the trigger…

 

 

 

Then, as we wrote in Sept 2013 how that shock shudder stocks,

The jury is still out on whether the US will attack Syria, whether it will do it unilaterally or as part of a coalition (with France), and how far crude would spike in the case of an intervention. Previously, SocGen presented some apocalyptic (if brief) scenarios that saw oil soar all the way to $150. That may be a stretch, but once the Tomahawks start flying a jump in Brent is virtually assured. Here is what BofA says on the matter: "watch for any escalation of Syria/geopolitical tensions that send Brent oil prices in excess of $125/barrel, the level in 2008, 2011 and 2012 that helped trigger a correction in equities. Historically during oil price spikes, equities have underperformed bonds, which have underperformed cash."

 

So what would happen to stocks? The mainstream financial media, in order to preserve a sense of calm, took the blended average of equity returns following historical oil price spikes, and concluded that it would be a manageable -2% in the worst case. However, like in the Reinhart-Rogoff case, the average calculation is a function of very disparate value, ranging from -15.5% in the case of the Iraq-Kuwait war of 1990 in the worst case, to +12.9% in the case of the Iran-Iraq war of 1980.

 

In other words, assuming a simple blended average return based on historical results is the most flawed approach in a military conflict that is and will be as unique, as all previous petrodollar conflicts have been in the past.

And speaking of historical results, here is what the record books say:

 

So the next time some talking head proclaims that stocks and oil rise together and so $120/130/140 oil is no problem for the US/EU/Chinese economy, remind them of these charts!!!

Because, as is clear below, high oil prices bleed into high gas prices and tamp the US consumer-driven multiple expansion exuberance

Each time retail gas prices have topped $3.80, valuations (Fwd P/E) have also topped – not good news for a market driven solely by hope-driven multiple expansion…

 




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Treasury Bulls Beware: A Cautionary Tale From Punk’d British Bond Traders

Bad data, don’t worry, the central bank’s got your back; Good data, don’t worry, the central bank promised to stay easier for longer and longer (no matter how good things appear from the data). That’s the meme that has driven the short-end of the world’s largest bond markets to record lows. And then, just as the world’s bond traders think they have the central banks understood, the Bank of England drops a tape-bomb…

 

Just when you thought you knew your uber-dovish central bank, this happens:

BoE Governor Carney noted that borrowing costs may rise sooner than economists expected…

 

and Deputy Governor Bean added…

 

“An increase in interest rates will be a symbolic step, because it will be an indication that we are on the road back to normality,”

 

“I would welcome us getting on to the path of normalization, as a demonstration that the economy is healing,”

 

Which produced this… in 1Y Gilts…

 

Coming to a US Treasury market near you soon? We have argued before that the Fed needs volatility to maintain their omnipotence.




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Heads, You Lose

Submitted by James Kunstler of Kunstler.com,

Obama Pushes Iraqis to Mend Sectarian Rifts

 

— Headline, The New York Times

Have they tried diversity training? I doubt it. That’s not how things are done in the Shithole Formerly Known as Iraq (SFKI). They’re headhunters now. For the moment the ISIS hasn’t had the inclination to shrink any of their trophies. Their method for preserving the memory of all that is the smart phone video of decapitation posted on the Internet. So let’s skip the part where both sides talk about their feelings.

It all happened pretty quickly last week, but in case you haven’t noticed, Humpty Dumpty fell off the wall over there. The bonehead American news media affects to be too stunned to even ask the pertinent questions, starting with: is that all it took to undo eight years and — what? — maybe two trillion dollars in US-sponsored nation-building? Oh, plus 4,000 US dead and 50,000 wounded. So, my question would be: when do the political recriminations kick in? Pretty soon, I reckon, and when they do, expect them to be fiercely perverse. The theme of who lost Iraq? may cost more than who lost Vietnam?

How perverse is the loose talk of Iran joining forces with “the Great Satan” to support the Shiite-dominated government of Nouri al-Maliki. Prediction: not going to happen. Events are moving so quickly that the ultimate nightmare scenario is at hand: the ISIS penetrates the “Green Zone” surrounding the US embassy in Baghdad. They take hostages and commence systematic decapitations of American personnel. This is not something I would like to happen, mind you. Just saying. And the thought must have loosened a few sphincters down at the US Department of State, too.

You can be sure that Obama will be blamed both for pulling out in 2011 and then not going back to war, to protect our two trillion dollar previous investment. I have to imagine that distrust for civilian control of the US military by a corps of rising officers will reach never-before-seen depths. It may not be expressed right away, but the knock-on effects of political breakdown in the Middle East could go long and far in upsetting US politics. The defeat of Eric Cantor is just the beginning of what could be the unraveling of the federal system.

The Iraq fiasco already threatens to spike oil prices way beyond the $107 level of today. That will crush whatever remains of the US economy all over again. God knows what it might do to the financialized Rube Goldberg shadow economy of counterparty booby traps that overlays an abyss of unpayable debt. You can’t squash price discovery forever, and one morning you might wake up to discover that the price of all those shenanigans was your political heritage.

Oh, one more thing: not much attention is being paid to Saudi Arabia, but note that it has been the chief sponsor of Sunni insurgency everywhere but Saudi Arabia itself, and that the genie they let out of that flask will probably come back and tear that country to shreds, especially in so far as King Abdullah at age 90 is a virtual mummy, and that many other clans besides the Saud tribe have designs on the throne (and its mighty revenue stream from oil production). Add to that inter-tribal tension the possibility of an ISIS-style insurgency in Saudi Arabia itself, with righteous Islamic puritan warriors drawn from all over the region, and you have quite the recipe for a global clusterfuck. Surely a lot of things would get broken in the event. Given all the jealousy and ill-feeling and toward Saudi Arabia, it is a wonder that over the last 30 years no mischief-makers have, for instance, blown up the Ras Tenura oil terminal on the Persian Gulf. That would put the schnitz on global oil supply lines on a world war scale.

For the moment, it is hard to see how anything can be salvaged in Iraq. The ISIS may cause enough havoc there to shut down Iraqi oil production forever. They can start World War III. They can inspire insurgencies across the whole Islamic world and beyond. The caliphate they establish will then have to figure out how to support a population twenty times as great as the region truly can support with a medieval economy. Sooner or later, they’ll be selling shrunken heads in the souks.




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