Markets continued to vacillate, down from their recent high of March 22. In the near future we can expect continued news of middle east wars to rattle oil prices; Greece will certainly flirt with a default and likely miss their April 9 payment to the IMF, but I think everyone will pull back at the last moment; and you're going to hear talking heads going full bore all week about the Iran deal. Stocks are unlikely to recover this coming week in such an environment.
Margin debt in the stock market continues to be exceedingly high. But for the carry trade (borrowing money in Europe and Japan and investing it in US stocks and bonds) I would say this portends a crash. But there will be no crashes without a recession or a major shock. Everyone is tip- toeing around right now because of Greece and Iran and Yemen and Ukraine and Russia, but it's likely this will all pass without anything major happening.
What exactly is Iran? Obama clearly believes they're just another nation and if we treat them with respect they will fall in line with international norms: stop sponsoring terrorism and killing, leave their neighboring countries alone, quit trying to build nuclear bombs. Moderates think they will respond to economic pressure and start acting more responsibly. Of course the sanctions have been ongoing since 2006 and they're still at it - if anything their actions have become more intrusive in their neighboring countries. Former CIA Director James Woolsey said Monday, "They are doing it on a highly ideological basis. They never cease chanting 'Death to Israel' and 'Death to the United States. They are an imperial power and trying to become more of an imperial power." Woolsey called for a halt in the six-nation nuclear talks with Iran, saying no reasonable deal with Tehran can be achieved. "They'll cheat." Personally, I agree with Woolsey.
And the new deal? Obama tells us it will keep Iran perpetually a year away from a bomb. Will it? Olli Heinonen, formerly deputy director- general of the International Atomic Energy Agency and now a senior fellow at Harvard University's Belfer Center for Science and International Affairs calculates that with the 6500 centrifuges Iran will be allowed and a stock of 3.5% enriched uranium the time to a bomb is 12 weeks. Unfortunately for his calculations, Iran has been enriching uranium to 5%, so the 12 week estimate is clearly several weeks too high. How good is the IAEA at detecting centrifuge work? The Russian centrifuge program went for years without detection despite tremendous intelligence efforts. The Iraqi and Libyan programs were not immediately detected, and South Africa, which manufactured nuclear weapons, ended up destroying its program before the IAEA knew about it. So Obama and Kerry want to sign a deal that keeps Israel and Saudi Arabia two months away from radioactive death, then punish Israel for calling it a bad deal.
Thomas Moore, a nonproliferation expert for the Senate Foreign Relations Committee, said he sees two red flags with the agreement: First, the agreement actually lessens Iran's obligations under the Additional Protocols of the Nuclear Non-Proliferation Treaty. Iran signed onto the Additional Protocols in 2003 only to flagrantly violate them: Most notably, in 2009, international monitors revealed the existence of the concealed Fordow nuclear facility, which is located inside of a mountain. Second, it allows Iran to engage in nuclear activities — like stockpiling low-enriched uranium and operating a plutonium reactor — that have no civilian necessity. Moore notes that technology-wise, the reactor is a 1970s-level relic. "You don't need a water reactor for electricity and it's antiquated technology," he explained. "It only makes one thing: plutonium." And plutonium is only good for one thing, bombs.
In a recent interview with New York Times columnist Thomas Friedman Obama said, "The truth of the matter is: Iran’s defense budget is $30 billion. Our defense budget is closer to $600 billion. Iran understands that they cannot fight us. You asked about an Obama doctrine. The doctrine is: We will engage, but we preserve all our capabilities. If in fact we can resolve these issues diplomatically, we are more likely to be safe, more likely to be secure, in a better position to protect our allies, and who knows? Iran may change," Obama said. "If it doesn't, our deterrence capabilities, our military superiority stays in place. ... We’re not relinquishing our capacity to defend ourselves or our allies. In that situation, why wouldn't we test it?"
If the deal is signed and sanctions are substantially dropped here are a few very predictable results: 1) oil prices will drop as Iran floods the market trying to build up their desperately needed cash stocks; 2) terrorism and conflict in the middle east will increase as Iran has more cash; 3) Egypt, Jordan, Kuwait, Morocco, Sudan, Algeria, UAE and Saudi Arabia will form a NATO like military alliance to counter Iran; and 4) Saudi Arabia, the United Arab Emirates, Turkey and Egypt are all likely to have bombs of their own within a year or three. Obama's foreign policy legacy is going to be holocaust II.
An "unnamed" Greek senior official told UK's paper, the Telegraph, "We are a left-wing government. If we have to choose between a default to the IMF or a default to our own people, it is a no-brainer. We may have to go into a silent arrears process with the IMF. This will cause a furor in the markets and means that the clock will start to tick much faster. They want to put us through the ritual of humiliation and force us into sequestration. They are trying to put us in a position where we either have to default to our own people or sign up to a deal that is politically toxic for us. If that is their objective, they will have to do it without us. We will shut down the banks and nationalize them, and then issue IOUs if we have to, and we all know what this means." Yup, it means the Drachma will soon be back. "They want us to impose capital controls and cause a credit crunch, until the government becomes so unpopular that it falls. They want to make an example of us, and demonstrate that no government in the Eurozone has a right to have a mind of its own. They don't believe that we will walk away, or that the Greek people will back us, and they are wrong on both counts."
Greece owes €462 million to the IMF on April 9. A few days later, €1.4 billion in T-bills come due, and in a few more days, another €1 billion in T-bills. Then on May 1, Greece needs to pay the IMF €202 million. In total, Greece has to scrape together a little over €3 billion this month. But they won't be able to make even that first payment to the IMF unless they skip paying salaries and social security. If Greece fails to pay the IMF on April 9, it would have a one-month grace period. Then the IMF's executive board would declare Greece to be in default. That default on IMF debt would constitute an event of default for the European bailout fund, the EFSF, which under the provisions could cancel its loan facilities and declare the principal amounts due immediately. This would then cascade out from there into a massive default. Will it happen? Many Germans will argue that "first loss is least loss," the time to let them go is now. I doubt that argument will carry the day; I expect some new plan will be put together late this month to push this all out a few more months. But in the meantime the drama will heat up.
"The Germans are not going to fund the Greeks forever," said Warren Buffett. "The euro is not dead, and may never be dead, but it can't live with people going in dramatically different directions." Berkshire vice chairman Charlie Munger, speaking of Greece, said last week that "you can't vote yourself rich."
The California snow pack is at 5% of normal. Basically there isn't one. Most farmers are not receiving any water from the state or the feds, they're having to rely on wells to pull up groundwater. Those are starting to go dry. There are 39 million living in the People's Republic of California, including about 3m illegals, 2m GLBTs, and 22m liberals. Many of these are likely to be coming soon to a city near you - on present trends, this state simply will not support this many people. We're going to invade and wreck your schools, your cities, your politics. Best be prepared. It will take only half a million or so California liberals to completely redraw the political lines in most states. And your house prices will shoot up - when you've just sold a California house for $500,000 to $1m, buying a larger house with a much larger lot for $250,000 in flyover country seems like a give away. At the minimum you'd best pass some laws about businesses getting fined severely for hiring illegals. We're going to want to be bringing our illegal gardeners and nannies with us. When Google or Facebook or Apple comes knocking looking for tax breaks to open a huge campus in your state, my advice is to tell them to take a hike.
McDonald's same-store purchases in the US are declining. The problem? Kids. In 2003 39% of children of the US ate fast food on any given day. By 2010, that share had declined to just under 33%. Meanwhile, birth rates have declined 9% between 2007 and 2013. That's 9% fewer little kids watching McDonald's TV commercials. 9% fewer kids who will grow up addicted to meat on a bun. And 9% fewer kids guilting their parents into eating McDonald's fries. Families with a child age 12 or under represent 14.6% of McDonald's customers today, down from 18.6% in 2011.