Category Archives: Analysis

Analysis: Some Gulf rulers wary of U.S. shifts on Islamists, Iran

By Andrew Hammond and Rania El Gamal
DUBAI | Wed Sep 5, 2012 10:35am EDT

(Reuters) – The rise of the Muslim Brotherhood and its ideological affiliates in the Arab Spring uprisings has stoked fears among Gulf Arab governments that the United States may one day abandon its traditional allies as it warms up to Islamists.

While the ruling families in the Gulf are currently vital U.S. allies who buy large amounts of American military hardware and facilitate a significant U.S. military presence, some are apprehensive Washington may apply pressure on them to accommodate Islamists who could end up challenging their exclusive rule.

In a number of colorful online outbursts, Dubai’s outspoken police chief Dhahi Khalfan has warned of an “international plot” to overthrow Gulf systems of government with Western complicity. The Brotherhood, manipulated by the United States, is working to take over the Gulf by 2016, he said.

“Today the Americans are mobilizing the Muslim Brotherhood in the Arab nation, for the benefit of America, not the Arabs,” he wrote on his Twitter account on Sunday. “There is an American plan that has been drawn up for the region.”

Though Khalfan insists his tweets are his personal views, analysts and diplomats say they reflect largely unspoken concerns among the United Arab Emirates’ ruling elite about the regional popularity of the Islamists and the possibility that the West will sympathize with them as political underdogs.

They also reflect fears among the region’s Sunni Muslim rulers that, despite being Sunni itself, the Brotherhood is soft on their arch enemy Shi’ite Iran. Egypt’s Islamist President Mohammed Mursi tried to dissipate such fears at a Tehran conference last week by condemning Iran’s ally Syria and urging attendees to back rebels trying to overthrow President Bashar al-Assad.

Despite pockets of Western-style liberalism in cities like Dubai, most Gulf ruling elites seek to project an image of Islamic conservatism.

So the threat they see is not religious or social but political: the Brotherhood advocates playing by the rules of parliamentary politics as a path to government, threatening inherited rights to rule and state-backed clerical establishments.

An opposition movement that gains ground in Gulf states could perhaps find the U.S. administration newly disposed to speak out in its favor.

Such an opposition has already emerged in the UAE, where more than 50 Islamists linked to Brotherhood thinking have been arrested since late last year. So far Washington has kept mum.

“While the U.S. security umbrella protects the UAE against threats from Iran, Washington would be much more reluctant to support a widespread crackdown against a local opposition movement,” said analyst Ayham Kamel of the Eurasia Group.

“This is making the political leadership in the UAE much more nervous about domestic threats,” he said.

The Brotherhood also has potential to draw support from Gulf Arabs who may see their countries’ foreign policies as overly pro-Western and are concerned about the social influence of their large Asian and Western expatriate communities.

SEEKING U.S. REASSURANCE

Washington was initially hesitant to openly support the uprisings that toppled Tunisia’s Zine al-Abidine Ben Ali and Egypt’s Hosni Mubarak, partly because of concerns they could bring Islamists to power.

President Barack Obama’s administration has since overcome its reluctance, and has made extensive efforts to engage Egypt’s Brotherhood over the past year.

Analysts say Washington is simply pursuing realpolitik given the new power centers in the region.

“I don’t think the West is keen on having a bunch of Islamists coming to power in the Gulf anytime soon,” said Michael Stephens, researcher at the Royal United Services Institute based in Doha. “It’s more the case that Washington is working with who they can work with, because Islamists are in power and they have to be dealt with.”

U.S. officials said privately that they addressed the Gulf’s concerns last year after Mubarak fell and that subsequent conversations have not focused on the issue. They declined to go into specifics.

“Gulf governments realize both the United States and Iran will want to have relations with the new regimes,” said Ghanem Nuseibeh, senior analyst with Cornerstone Global. They just needed to be reassured that those regimes’ gain was not their loss, he said.

Diplomats said they were confident that building good ties with the Brotherhood was unlikely to strain the long-term strategic relationship between the U.S. and Gulf states.

“They (the Gulf states) need the Americans to protect them against Iran. Iran is the biggest worry for them in the whole region right now,” one Gulf-based Western diplomat said, asking not to be named due to the sensitivity of the issue.

YES, BUT …

Still, rumblings persist.

Saudi Arabia, which has long seen itself as insulated from political Islam because of its promotion of more conservative Salafi Islam, is feeling less secure these days, said Abdulaziz Alkhamis, a London-based Saudi analyst.

“After the Arab Spring they (the Islamists) are rising again. They start to use Islamist political rhetoric to gain publicity in the Gulf, especially Saudi Arabia,” he said.

Prominent clerics such as Awadh al-Garni and Salman al-Odah, viewed as sympathetic to the Brotherhood, have become more outspoken, cheering Islamist gains in social media.

Brotherhood-linked Islamists are well-established in Kuwait, where parliamentary politics is most advanced in the Gulf. And in Bahrain the government has drawn closer to the Minbar party, another group inspired by the Brotherhood, as it shores itself up against a protest movement dominated by Shi’ite Islamists.

The angst over what the United States plans for the region is at its most public and visceral in Bahrain, whose government Obama has urged to enter dialogue with leading Shi’ite opposition group Wefaq, citing the group by name.

Sunni clerics and commentators in official media regularly raise the fear that Washington, currently at odds with Tehran over its nuclear program, is plotting to create a Wefaq-led government in a regional reordering of power that would open a new page of cozy ties with Iran.

TV presenter Sawsan al-Shaer denounced a “Satanic alliance” between Tehran and Washington in an article in the al-Watan daily last month, claiming Wefaq was a “Trojan horse, used by the U.S. administration and Iranian regime to redraw the region.”

The wild card in the region is Qatar. It has actively promoted the Brotherhood and its affiliates, giving them coverage widely seen as positive on its satellite broadcaster Al Jazeera.

At an early stage in the uprisings Doha stuck its neck out much further than other Gulf states in its support for protests in Egypt and Tunisia, and then rebel movements in Libya and Syria, supporting those among them close the Brotherhood.

Earlier this year the Dubai police chief railed against Sheikh Yousef al-Qaradawi, a popular Brotherhood-linked Egyptian cleric based in Doha who criticized UAE policy towards Islamists on Al Jazeera. Khalfan threatened to arrest the cleric if he ever entered the country.

Alkhamis said opinion in Saudi Arabia was split over whether Qatar’s close links to the Islamists was a smart move to keep a close eye on a rising movement whose historical time has come, or a ruse to sow discord for its neighbor and sometime rival.

“The Qataris say that if we don’t have the Brotherhood (operating) openly then they will go underground and that it’s not against Saudi Arabia, but the Saudis are not happy with this,” Alkhamis said pointing to Qatar-backed Islamist seminars. “Some think the Qataris are not an honest friend, but have an agenda.”

(Additional reporting by Andrew Quinn in Washington and Raissa Kasolowsky in Abu Dhabi; Editing by Sami Aboudi and Sonya Hepinstall)

Reuters

Euro zone fragmenting faster than EU can act

By Paul Taylor
PARIS | Mon Jul 9, 2012 2:05am EDT

(Reuters) – Signs are growing that Europe‘s economic and monetary union may be fragmenting faster than policymakers can repair it.

Euro zone leaders agreed in principle on June 29 to establish a joint banking supervisor for the 17-nation single currency area, based on the European Central Bank, although most of the crucial details remain to be worked out.

The proposal was a tentative first step towards a European banking union that could eventually feature a joint deposit guarantee and a bank resolution fund, to prevent bank runs or collapses sending shock waves around the continent.

The leaders agreed that the euro zone’s permanent bailout fund, the 500 billion euro ($620 billion) European Stability Mechanism, would be able to inject capital directly into banks on strict conditions once the joint supervisor is established.

But the rush to put first elements of such a system in place by next year may come too late.

Deposit flight from Spanish banks has been gaining pace and it is not clear a euro zone agreement to lend Madrid up to 100 billion euros in rescue funds will reverse the flows if investors fear Spain may face a full sovereign bailout.

Many banks are reorganizing, or being forced to reorganize, along national lines, accentuating a deepening north-south divide within the currency bloc.

An invisible financial wall, potentially as dangerous as the Iron Curtain that once divided eastern and western Europe, is slowly going up inside the euro area.

The interest rate gap between north European creditor countries such as Germany and the Netherlands, whose borrowing costs are at an all-time low, and southern debtor countries like Spain and Italy, where bond yields have risen to near pre-euro levels, threatens to entrench a lasting divergence.

Since government credit ratings and bond yields effectively set a floor for the borrowing costs of banks and businesses in their jurisdiction, the best-managed Spanish or Italian banks or companies have to pay far more for loans, if they can get them, than their worst-managed German or Dutch peers.

POLITICAL BACKLASH

The longer that situation goes on, the less chance there is of a recovery in southern Europe and the bigger will grow the wealth gap between north and south.

With ever-higher unemployment and poverty levels in southern countries, a political backlash, already fierce in Greece and seething in Spain and Italy, seems inexorable.

European Central Bank President Mario Draghi acknowledged as he cut interest rates last week that the north-south disconnect was making it more difficult to run a single monetary policy.

Two huge injections of cheap three-year loans into the euro zone banking system this year, amounting to 1 trillion euros, bought only a few months’ respite.

“It is not clear that there are measures that can be effective in a highly fragmented area,” Draghi told journalists.

Conservative German economists led by Hans-Werner Sinn, head of the Ifo institute, are warning of dire consequences for Germany from ballooning claims via the ECB’s system for settling payments among national central banks, known as TARGET2.

If a southern country were to default or leave the euro, they contend, Germany would be left with an astronomical bill, far beyond its theoretical limit of 211 billion euros liability for euro zone bailout funds.

As long as European monetary union is permanent and irreversible, such cross-border claims and capital flows within the currency area should not matter any more than money moving between Texas and California does.

But even the faintest prospect of a Day of Reckoning changes that calculus radically.

In that case, money would flood into German assets considered “safe” and out of securities and deposits in countries seen as at risk of leaving the monetary union. Some pessimists reckon we are already witnessing the early signs of such a process.

OVERWHELMING?

Any event that makes a euro exit by Greece – the most heavily indebted member state, which is off track on its second bailout program and in the fifth year of a recession – look more likely seems bound to accelerate those flows, despite repeated statements by EU leaders that Greece is a unique case.

“If it does occur, a crisis will propagate itself through the TARGET payments system of the European System of Central Banks,” U.S. economist Peter Garber, now a global strategist with Deutsche Bank, wrote in a prophetic 1999 research paper.

Either member governments would always be willing to let their national central banks give unlimited credit to each other, in which case a collapse would be impossible, or they might be unwilling to provide boundless credit, “and this will set the parameters for the dynamics of collapse”, Garber warned.

“The problem is that at the time of a sovereign debt crisis, large portions of a national balance sheet may suddenly flee to the ECB’s books, possibly overwhelming the capacity of a bailout fund to absorb the entire hit,” he wrote in 2010, after the start of the Greek crisis, in a report for Deutsche Bank.

European officials tend to roll their eyes at such theories, insisting the euro is forever, so the issue does not arise.

In practice, national regulators in some EU countries are moving quietly to try to reduce their home banks’ exposure to such an eventuality. The ECB itself last week set a limit on the amount of state-backed bank bonds that banks could use as collateral in its lending operations.

In one high-profile case, Germany’s financial regulator Bafin ordered HypoVereinsbank (HVB), the German subsidiary of UniCredit (CRDI.MI), to curb transfers to its parent bank in Italy last year, people familiar with the case said.

Such restrictions are legal, since bank supervision is at national level, but they run counter to the principle of the free movement of capital in the European Union’s single market and to an integrated currency union.

Whether a single euro zone banking supervisor would be able to overrule those curbs is one of the many uncertainties left by the summit deal. In any case, common supervision without joint deposit insurance may be insufficient to reverse capital flight.

German Chancellor Angela Merkel, keen to shield her grumpy taxpayers, has so far rejected any sharing of liability for guaranteeing bank deposits or winding up failed banks.

Veteran EU watchers say political determination to make the single currency irreversible will drive euro zone leaders to give birth to a full banking union, and the decision to create a joint supervisor effectively got them pregnant.

But for now, Europe’s financial disintegration seems to be moving faster than the forces of financial integration.

(Editing by David Holmes)

DYLAN GRICE: The Next Crisis Will Be Born Out Of The US Treasury Market

SocGen investment strategist Dylan Grice does not think “safe-haven” assets are very safe.

In Grice’s latest note to clients, he compares the illusion of safety created by faulty regulation before the 2008 financial crisis to the new, impending wave of financial regulation on the table like Dodd-Frank in the U.S. and Basel requirements on a global scale.

Grice warns “madness is going on in the government bond markets” today, furnishing this long term chart of US Treasury yields going back to 1800:

From the note:

The regulations which told banks that AAA-rated bonds were “risk free” were designed to make markets safer. But they created an artificial demand for such bonds, which created an incentive for issuers to dress up bonds as “risk free” when they were anything but. The regulations effectively incentivized ratings agencies to rate them as “risk free” when they clearly weren’’t. And today, the same madness is going on in the government bond markets.

It’s very difficult to see how government bonds are anything other than “risk assets” (let’s face it, all assets are). Yet insurers are buying them because they’’ve been told to “take less risk” (whatever that means) by the regulators. So they are taking more risk, and they will one day suffer the consequences. Banks in the eurozone are bust because they own so much of their local sovereigns’’ debt. But they were told it was OK to do that by the regulators. So they let their guard down.

Indeed, having told banks that they were of sound balance sheet before the crises (Lehman Brothers Tier 1 risk-weighted capital ratio was 11% five days before bankruptcy), those same regulators today scratch their heads and wonder how banks became too big to fail. It’’s all embarrassing really.

Source

Is JPM “The Burning LOH”?

https://i2.wp.com/www.mcoscillator.com/data/charts/weekly/T-Bonds_1993-2012.gif

May 11, 2012

“The target is marked by the burning LOH.”

When I was an reconnaissance helicopter pilot in the Army many years ago, that was a popular saying that was passed down by the more experienced pilots, some of whom had flown during the Vietnam War.  It was meant to convey our own frailty, and the foolishness of being too eager about finding the enemy’s location.

LOH back then stood for Light Observation Helicopter, either a Hughes OH-6 Cayuse or a Bell OH-58.  It was pronounced as “loach”.  They were 4-seat commercial helicopters that were bought by the Army and adapted for use in scouting for enemy forces.  A pilot had little more than his eyes and his wits as weapons, and the .040″ aluminum skin and Plexiglas windows were not much protection from enemy fire.  The idea was to fly low, using the terrain for cover and concealment, and try to find the enemy so that fighter planes or attack helicopters could be called in to deliver ordinance on the enemy’s position.

But given the fact that enemy soldiers are usually not stupid, and don’t want to be spotted, often the first indication that a pilot had located the enemy’s position was that he was taking fire from the enemy.  A lot of them got shot down.  So then another helicopter crew would step in to radio the fast movers and guide them into the target.  The fighter pilots would acknowledge that call, and the existence of enemy fire in the area, and then ask:

“Roger, how is the target marked?”  The question was about the possible use of colored smoke, landmarks, or other features that can be seen while zooming in at 500 MPH.

And the answer would be, “The target is marked by the burning LOH.”

There is a corollary to this in the financial markets.  Quite often at the end of a big price move, we learn about a big institution blowing up because they did not think that the trade would go so far against them.  The 2006 case of Amaranth Advisors would be a classic example, with its bankruptcy in late 2006 marking the bottom for natural gas prices ahead of the big commodity bubble in 2008.  There were several portfolios that blew up at the top of that bubble.

In this week’s chart, I have labeled several notable news events that served as markers of important turns for T-Bond prices.  Back in 1994, Orange County, California went bankrupt because its treasurer, Robert Citron, had overextended his bets the wrong way in the bond market.  That bankruptcy marked the bottom for the big price decline.  Orange County was the burning LOH.

In late 1998, the money management firm Long Term Capital Management (LTCM) famously made huge bets on T-Bonds that were based on the limits of how far price moves had historically gone in the past.  And the market taught them a lesson about how trends can persist longer than one can stay solvent.  The Federal Reserve had to intervene, lining up several major banks to help take apart LTCM’s positions and keep it from cascading into a bigger problem.  LTCM’s collapse was the burning LOH for that up move.

More recently, the collapses of Bear Stearns, Lehman Brothers, and MF Global each coincided with peaks in bond prices.  Each was the burning LOH for its particular moment in history.

So now this week, we find out that J.P. Morgan Chase (NYSE:JPM) has suffered a $2 billion loss on financial derivative bets that went bad.  And this news comes as T-Bond prices are once again getting back up to the price levels seen at last year’s MF Global collapse.  The implication is that the news of JPM’s big loss is serving as the “burning LOH” of this current time frame, and the news arrives just as the stock market is about at the end of the corrective period suggested by both our eurodollar COT leading indication and the Presidential Cycle Pattern.  Subscribers to our twice monthly newsletter and our Daily Edition have been watching the current stock market correction unfold pretty much right on schedule relative to those models, and now we have a portfolio blowup to help mark the beginning of the end of that corrective process.

Tom McClellan
Editor, The McClellan Market Report

CHART: Why Savers Are Furious In America

Joe Weisenthal | Mar. 31, 2012, 7:38 AM

Combing through the personal income and spending data (which was released yesterday) reveals all kinds of interesting nuggets.

For example, we observed the big surge in rental income in America, thanks to a surge in both rent prices, and the number of people who are renting homes, rather than buying them.

And then also the data reveals that the savings rate is back to collapsing.

Anyway, here’s another fun one. Check out income earned from interest as a percentage of GDP.

image

As rates have declined, interest income as a total share of the economy is back to levels not seen since the early 70s.

It’s interesting to compare this chart with 10-year yields.

image

As you can see, interest income as a share of the total economy actually stayed pretty high throughout all of the 80s, even as rates dropped precipitously. And through rates are at all time lows, interest income isn’t quite there yet. But for savers and retirees, the trend is still not looking good.

And though people blast Bernanke for a policy of zero interest rates, that’s misguided. It’s the massive glut of savings (people wanting risk-free assets all around the world) and the still-poor growth prospects that conspire to make a scenario where you can’t earn any money on your cash.

Read more: BI

%d bloggers like this: