My Take:
The market looks AWFUL tonight. Stock futures are diving and gold and silver are surging as Libya sinks into a full blown civil war.
Qaddafi has officially reverted back into his old "lunatic" self as the walls begin to cave in around him. The situation in the Middle East is bordering on the brink of chaos.
IMO, There is more uncertainty over there today than ever before which says a lot when you look at the history of this region.
The questions are endless:
Who will rise to power in Egypt and Libya(after the regime falls)?
What happens to the Suez canal?
Which government will fail next?
Does oil go to $200 if Saudi Arabia is next?
I could go on and on. Wall St will spin all of this change as being one gigantic positive for the markets as the crazy dictators come crashing down like a ton of bricks. The market rallied on the rumored death of Qaddafi on Friday.
This is retarded thinking in my view. The reality here is millions of impoverished arabs are becoming desperate as inflation takes the cost to living unaffordable levels. These worries are now starting to drift over into the Western world:
The EU is getting increasingly concerned about rising prices. there are reports that they might bolt on the Fed and start raising rates in order to quell inflation:
"(Reuters) - The Federal Reserve and European Central Bank may go their separate ways if Middle East unrest provokes a sustained, inflationary oil price spike.
Crude prices creeping back into the triple digits have sparked concern about slower economic growth and will no doubt reignite two long-running monetary policy debates:
Should central banks have a single inflation-fighting mandate, as the ECB does, or dual goals of price stability and full employment, like the Fed?
Should policymakers focus on headline inflation rates or strip out volatile food and energy prices?"
Take Continued:
This is NOT good folks. If the EU starts taking rates higher then our currency is toast unless the Fed follows. Gas is closing in on $9 in the UK, and I am sure the prices are similar throughout the whole EU.
The PIIGS simply cannot afford this type of shock as their unemployment rates hover over 20% in some areas.
The walls are closing in on this whole charade people. The Fed is slowly getting "boxed in".
What will Ben do next?
Does he risk a huge surge in global inflation as he continues dropping money out of helicopters?
OR
Will he be forced to raise rates which then risks the whole economic recovery?
The Bottom Line
The right answer is to raise rates of course. There is no economic recovery to save. Government spending created an artificial one there for a bit, but we all knew all along that this was not sustainable.
The problem the Fed has if it raises rate then it will likely put this country into an economic depression. This is why I fully expect Ben to choose option A.
This means you should expect to see prices continuing to rise until the whole thing inevitably collapses. $140 oil should do it.
Remember, we are much less prepared for an oil spike this go around. Unemployment is nearly twice what it was when a similiar "shock" occurred back in 2008. This means the consumer will roll over much faster this go around as Americans continue to remain jobless.
This is all going bad much sooner than I originally thought. If oil continues surging like this then the central banks of the world are going to have some tough decisions to make when it comes to interest rates.
Sticking our head in the sand and running up the government credit card with mind numbing amounts of debt is not the answer. The market will eventually force the Fed to raise rates if Ben continues to deny that we are seeing inflation.
Keep an eye on Bernanke's testimony in front of Congress this week. What's interesting here is the ECB has their policy meeting regarding interest rates right in the middle of his testimony. We should learn a lot about what Ben is thinking as he is forced to take some tough questions. I am sure the phone lines of the central bankers will be lit up in the hours before Bernanke speaks.
That's all I have time for tonight. I didn't even get a chance to discuss Ireland's dramatic election results.. The ruling party got abused by the voters. In fact, the ruling party came in 4th place which is mind boggling when you really think about it.
The concern here of course is what will the new regime do in regards to the EU bailout of Ireland? Does the Irish now tell the ECB to take a hike and refuse to pay the money back? I would if I were them. Why would any government sacrifice it's people in order to pay back a bunch of greedy bankers? Afterall, that's what the bailout is all about.
Keep a close eye on this. Until next time.....
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