Why did the Fed choose to go the unlimited QE route last week, risking opening Pandora’s box with its implications of the dollar becoming a Fiat Currency ? After all the ECB seems to have provided the solution that would hold back the anticipated disaster in Europe, and the Fed must know that more QE will not bring down unemployment?
Unless Benanke and the Fed’s recent decision was driven by something bigger, and there is more to this than initially meets the eye. Ie that these new Fed measures have been put in place to provide price stability in the event of an oil shock, triggered by a strike on Iran.
A Pre-emptive Strike on Iran?
I have been mentioning the risk of Israel pre-emptively striking Iran for some time, and the only reason that I think that they have not done so already, is that Obama has made it clear over the past two years that they would intervene against Israel before they could strike, which was well within America’s combat capability. However I suspect that Israel has found ways to circumvent US military blocks, possibly potentially by using ballistic missiles. From Israel’s perspective and especially their hard line leader Benjamin Netanyahu’s, Israel has not felt more insecure and under pressure to act in defense of its nation for almost three decades. From their perspective the situation must look critical, with the Arab spring melting away the complex web of political security relationships with neighboring powers that has ensured the safety of the Israeli state for 30 years. A sharp increase in the rise of anti Western sentiment across the Middle East coupled with a perceived weakening of American influence in the region. But most worrying of all for Israel is the spectra of Iran charging towards a nuclear capability a Nation who has demonstrate a clear intention to destroy Israel, and shown a track record of sponsoring Hezbollah and Hammas who have by proxy been attacking Israel for years. Thus is should be no surprise that Netanyahu’s political rhetoric has become stronger and stronger in the past weeks, and should be classed as that of a leader potentially preparing his nation for a state of war, when threatened with annaliation.
His fear must be that Obama will get re-elected, and the situation will continue unresolved. Thus the only political lever he can play is to strike Iran pre-emptively in the run up to the US election on 6th November, and blackmail Obama into supporting his actions as Critically the 2% US Jewish Vote will be the swing vote to regain the presidency or lose it if Obama is not seen to support Israel. In the ideal window of action enough time will be needed before the election and so we are entering into the prime risk period, that favors an Israeli preemptive strike.
This implied threat by Netanyahu mysteriously seems to coincide with a massive US Navy exercise designed to show its capability to keep open the 26 mile wide straits of Hormuz against Iranian aggression. The Telegraph today reports that three carriers are involved.(all other sources only mention two carriers being on station, which in itself is still significant) If the telegraph is correct this is major signal that something is afoot as a concentration of three carriers over the past two decades has only taken place at times of hostility. If this is a concern then the presence of the HMS Invincible equipped with apache attack helicopters ideal for countering Iran navy swarm tactics, and the French carrier Charles De Gaulle in the Eastern Med only a few sailing days away from the Gulf suggests a massive concentration of western navel power.
Is this a coincidence? I doubt it, and especially as after the recent UK cabinet re-shuffle, one of the reasons suggested for the departure of Sir Nick Harvey the armed forces minister, from the ministry of Defense was that he would not favor action against Iran.
Lastly last Wednesday, it was revealed that MI6 chief Sir John Sawers had made a rare and secret visit to Israel to try and persuade the Netanyahu government not to launch a unilateral and pre-emptive strike on Iran's nuclear facilities in the coming weeks or months. It should be noted that the two countries have not been on good terms since the Foundation of the nation state.
My conclusion is that the Israeli strike on Iran is imminent ie in the next month
Assuming our analysis is correct, what will a pre-emptive strike look like? It is reasonable to assume that whatever limited actions the Israelis take, Iran will retaliate against all western interests where it is able to, forcing in the US and its allies to resolve the conflict, and who will then target the extensive military infrastructure of Iran, and especially all facilities and navel assets around the straits of Hormuz. One should realize that the US Navy and US air force with its B2s could systematically take apart such targets in a relatively short time of 7-14 days. Thus the ultimate outcome will not be in doubt as the power of the US Navy and Air force, is truly formidable.
However it will be a matter of time, financial costs and some potential ship casualties, within such a confined zone, as the risk of extensive anti ship mining by Iran will present more than a few challenges to the Western Navies, from whom this type of warfare has not been a major focus for many decades. Thus there will be uncertainty, especially for the markets and the perception of the fragile Western economies. The one wild card may be the Chinese reaction, and let’s hope they do not see this as their Suez Moment as America did, using it in 1956 to supplant Britain as an Empire once and for all, by selling it currency.
Those that are trending in the direction that will be accelerated by a strike
- The oil pattern looks bullish as does Gold.
Those that will reverse direction in the case of a strike.
- There will be a big reversal in stocks, the dollar and bonds even with Fed and ECB support.
- For these markets the problem will be that there will be that there will no warning, as the first we will know about a strike will be that it has started, and the markets will open with a gap. Thus one either has the position beforehand or it will be very hard to put on. The risks of been early however with the current QE rally, could be painful, so timming will be critical in the location of such a trade.