Price of Oil Hits Record High in Euros and British Pounds; Oil Shock Coming; Nancy Pelosi Blames Speculators; What About Iran? Israeli Intelligence Concludes "No Iranian Nuclear Weapons Program"

Bernanke is hell bent on producing price inflation. He has succeeded, just not where he wants most. What Bernanke desperately wants is for housing prices to rise because that more than anything will help the banks and all the foreclosed properties they are sitting on.

The Bernanke Fed has certainly assisted the stock market, as intended, but that is not doing the average Joe much good in the face of soaring oil prices, soaring food prices, falling home prices, and zero% interest on savings.

Oil Shock Coming

As a direct consequence of Fed policy, in conjunction with an inane US and European oil embargo on Iran, Europe (already in the midst of what is going to be a long and deep recession) will be hit with an oil shock on top of it.

Record Price of Oil in British Pounds

On Wednesday the Financial Times reported Record sterling oil price sparks fears

Oil prices have soared to a record high in sterling terms and are approaching euro highs, raising fears that European countries struggling with heavy debts will face further barriers to economic recovery.

�This is a regional oil shock,� said Amrita Sen, commodities analyst at Barclays Capital in London.

Brent rallied to �78.48 a barrel, passing the previous all-time high of �77.71 a barrel set in April last year at the peak of the Libyan civil war supply disruption. In euro terms, the oil benchmark reached a three-year high of �92.70 a barrel, a fraction below the peak of �93.50 a barrel set in July 2008.

Record Price of Oil in Euros

It took precisely one more day for the Financial Times to report Euro denominated oil hits record

Oil prices soared to a record high in euro terms, surpassing the peak touched in the 2008 price spike and posing a fresh problem for eurozone economies already struggling under the weight of the region�s debt crisis.

The euro-denominated price of Brent crude, the global benchmark North Sea crude, rose to a peak of �93.63 a barrel on Thursday, surpassing the previous high hit on July 3, 2008. The new euro record comes just a day after Brent hit a record in sterling terms.

Nancy Pelosi Blames Speculators

The Hill reports Dem leader Pelosi blames Wall Street for spike in gas prices

Oil speculators, not a lack of domestic drilling, are to blame for the nation's rising gas prices, the top House Democrat argued Wednesday.

House Minority Leader Nancy Pelosi said unscrupulous Wall Street investors have artificially inflated prices at the pump, which are climbing toward $4 per gallon.

The California Democrat called on Congress to take "strong action" to rein in the allegedly excessive speculation, and accused Republicans of protecting Wall Street profits at the expense of consumers.

"Wall Street profiteering, not oil shortages, is the cause of the price spike," Pelosi said in a statement. "Unfortunately, Republicans have chosen to protect the interests of Wall Street speculators and oil companies instead of the interests of working Americans by obstructing the agencies with the responsibility of enforcing consumer protection laws."

Irony of it All

No one gives a rat's ass if speculators drive up the price of houses or the stock market to absurd heights. Indeed, Congress goes out of its way to actively promote rising home prices.

The Greenspan and Bernanke Fed did the same. Now Bernanke openly takes credit for the rising stock market and encouraging speculation.

And where the hell is the blame for this absolutely inane embargo on Iran?

No Iranian Nuclear Weapons Program

As a matter of record, Israeli intelligence concluded in January of this year, there is No Iranian Nuclear Weapons Program!

As Gen. Martin Dempsey, Chairman of the Joint Chiefs of Staff, arrived in Israel Thursday, the left-leaning Haaretz newspaper dropped its own atomic bombshell.

Israeli intelligence agencies have worked up an intelligence assessment that Iran has not yet decided whether to begin a military program to construct a nuclear warhead. Put in other words, Mossad believes that there is no current Iranian nuclear weapons program. Haaretz writes:

�The intelligence assessment Israeli officials will present later this week to Dempsey indicates that Iran has not yet decided whether to make a nuclear bomb. The Israeli view is that while Iran continues to improve its nuclear capabilities, it has not yet decided whether to translate these capabilities into a nuclear weapon � or, more specifically, a nuclear warhead mounted atop a missile. Nor is it clear when Iran might make such a decision.�

This is the same conclusion to which the 16 US intelligence agencies have come in 2007 and 2010. It is also consistent with what the Iranian government itself says, which is that the Iranian nuclear enrichment program is a civilian one and that Iran is not trying to construct a nuclear weapon. Likewise, the International Atomic Energy Agency, which continues to inspect Iranian nuclear facilities, has repeatedly and consistently stated that no nuclear material has been diverted from the civilian program.

Haaretz says that Israeli Minister of Defense Ehud Barak gave an interview with the Army radio, in which he come to another surprising conclusion. Asked if Israel plans a military strike on the Iranian nuclear facilities in Natanz near Isfahan, Barak replied: �We haven�t made any decision to do this . . . This entire thing is very far off.�

ZeroHedge properly blasted Pelosi two days ago in his take Nancy Pelosi Issues Statement On Soaring Gas Prices

Speculators? Such as the Federal Reserve and other central banks who have pumped $2 trillion of "liquidity" into the capital markets in the past 3 months just so Italian BTPs don't implode to fair value and so Europeans can continue living in a socialist "paradise" even as the bankers steal their gold?

Or is it the same congressional speculators who until recently had every right to front run the public on advance knowledge that the SPR would be tapped due to Democrat insistence to sacrifice America's last energy backstop only to win the election?

Whatever the reason for the gas surge, with these idiots in charge, one thing is certain - the situation is about to get far, far worse.

Staggering Idiocy

The idiocy of this government and central bank created mess is staggering. The Fed is actively encouraging speculators and the Obama government is angling for another Mideast war over weapons of mass destruction that once again do not even exist.

Instead of placing the blame on the Fed and on the warmongers, Pelosi is enough of an outright idiot to demand Congress do something to rein in speculators.

Mike "Mish" Shedlock
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Troika Demands 38 New Changes in Greek Tax, Spending and Wage Policies in Next 6 Days

The hit parade of demands on Greece keeps right on marching. The Troika has 38 new demands in addition to 10 pages of prior demands that have not been met.

The ten-page list of prior demands need to be met by the end of the month. Fortunately this is leap year so Greece gets an extra day.

The Financial Times reports Athens told to change spending and taxes.

European creditor countries are demanding 38 specific changes in Greek tax, spending and wage policies by the end of this month and have laid out extra reforms that amount to micromanaging the country�s government for two years, according to documents obtained by the Financial Times.

The reforms, spelt out in three separate memoranda of a combined 90 pages, are the price that Greece has agreed to pay to obtain a �130bn second bail-out and avoid a sovereign default that the government feared would throw Greek society into turmoil.

They range from the sweeping � overhauling judicial procedures, centralising health insurance, completing an accurate land registry � to the mundane � buying a new computer system for tax collectors, changing the way drugs are prescribed and setting minimum crude oil stocks.

�The programme is much, much more ambitious than economic reform,� said Mujtaba Rahman, Europe analyst at the Eurasia Group risk consultancy. �This is state building, as typically understood in traditional low-income contexts.�

Most urgency is attached to a 10-page list of �prior actions� that must be completed by Wednesday in order for eurozone finance ministers to give a final sign-off to the new bail-out at an emergency meeting scheduled for Thursday.

Among the measures that must be completed in the next seven days are reducing state spending on pharmaceuticals by �1.1bn; completing 75 full-scale audits and 225 value added tax audits of large taxpayers; and liberalising professions such as beauty salons, tour guides and diet centres.

Demands Designed to Fail

The Troika demands 75 full-scale audits and 225 valued added tax audits in 6 days! Is that going to happen?

This setup is without a doubt designed to fail and that should have been obvious ever since Germany asked to put a commission in charge of the Greek budget on Feb 7. Please see  Greece to Cede Sovereignty to Eurozone "Budget Commissioner" for details.

These new demands are in addition to a requested a constitutional change that is impossible before 2013.

For details, please see Greece Needs New Constitutional Provision Imposed by the Troika; Slight Problem, Constitutionally It Can't Do it

It is possible some of the new demands need constitutional changes as well. I simply do not know.

Please also consider the Pact With the Devil Over Gold

As I have said repeatedly ...

Germany has put up roadblock after roadblock attempting to get Greece to scuttle the deal, only to have fools like Finance Minister Evangelos Venizelos agree to them.

It may be up to Germany to come up with still more ludicrous demands in hope that the Greek finance minister and Greek politicians finally get the message "it's not wise to make a pact with the Troika devil", especially one that requires Greece to relinquish its gold.

On Tuesday I said it's a 9 Day Race to Ecstasy; Only Way Greece Can Win Is To Lose

It's now 6 and counting.

Mike "Mish" Shedlock
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Pact With the Devil Over Gold

The one and only thing that might possibly spare Greece the agony of a completely worthless currency is Greece's small hoard of 111 tons of gold.

Pact With the Devil

Yet, in the fine print in the latest deal, Greece�s lenders will have the right to seize its gold reserves according to the New York Times article Growing Air of Concern in Greece Over New Bailout.

In the fine print of the 400-plus-page document � which Parliament members had a weekend to read and sign � Greece relinquished fundamental parts of its sovereignty to its foreign lenders, the European Commission, the European Central Bank and the International Monetary Fund.

�This is the first time ever that a European and probably an O.E.C.D. state abdicates its rights of immunity over all its assets to its lenders,� said Louka Katseli, an independent member of Parliament who previously represented the Socialist Party, using the abbreviation for the Organization for Economic Cooperation and Development. She was one of several independents who joined 43 lawmakers from the two largest parties in voting against the loan agreement.

Ms. Katseli, an economist who was labor minister in the government of George Papandreou until she left in a cabinet reshuffle last June, was also upset that Greece�s lenders will have the right to seize the gold reserves in the Bank of Greece under the terms of the new deal, and that future bonds issued will be governed by English law and in Luxembourg courts, conditions more favorable to creditors.

Causing a Nightmare Scenario

On Tuesday, Finance Minister Evangelos Venizelos defended the new debt agreement, calling it �the most significant deal in Greece�s postwar history� and asserting that it had �averted a nightmare scenario.�

Today this same puppet of the Troika installed government claims, as he has been for weeks, No Loan Deal Means Absolute Catastrophe

Greece Finance Minister Evangelos Venizelos said Thursday Greece would face an absolute catastrophe if it didn't approve the terms demanded by international creditors in exchange for a second bailout, which includes a EUR107 billion debt write-down plan.

Greece is already in a state of absolute catastrophe. The one thing 100% guaranteed to make matters worse for Greece is if Greece lost its hoard of gold to the thieves and plunderers at the IMF and Troika.

Rather than "averting a nightmare scenario" that pact is going to "cause" a nightmare hyperinflation scenario.

Value of 111 Tons of Gold

One tonne = 1000 kilograms = 32150.746 troy ounces.
At $1780 per troy ounce, the value of that gold is roughly $6.35 billion.

Given an estimated size of the Greek economy at $290 billion or so, that is not a huge hoard.

However, something is better than nothing as Zimbabwe proves. Something is enough to prevent a currency from going completely worthless, although obviously not enough to prevent a massive devaluation.

Still Time

There is still time for Greece to come to its senses and reject the deal. Also recall the conditions of the deal  require a constitutional change and that is impossible before 2013.

For details, please see Greece Needs New Constitutional Provision Imposed by the Troika; Slight Problem, Constitutionally It Can't Do it

Biggest Hope for Greece is Germany

In an enormous irony, Germany may be the biggest hope for Greece. Although France and other countries do want this pact to go through, Germany's words and actions prove that Germany does not.

Germany has put up roadblock after roadblock attempting to get Greece to scuttle the deal, only to have fools like Finance Minister Evangelos Venizelos agree to them.

It may be up to Germany to come up with still more ludicrous demands in hope that the Greek finance minister and Greek politicians finally get the message "it's not wise to make a pact with the Troika devil", especially one that requires Greece to relinquish its gold.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Don't Worry, It's Only a "Mild Recession"

The economic clowns in the EU have finally acknowledged something that was blatantly obvious at least six months ago (and a lot longer if one factored in the likely effects of multiple austerity programs in numerous countries).

However, the economists' new conclusion is about as silly as the "no recession" call that preceded it. The new forecast: there will be a recession in the eurozone but not the EU and it will be "mild".

Please consider Euro zone economy to shrink in 2012.

The euro zone's economy is heading into its second recession in just three years, while the wider European Union will stagnate, the EU's executive said on Thursday, warning that the currency area has yet to break its vicious cycle of debt.

"Recent developments in survey data suggest that the expected slowdown will be rather mild and temporary," EU Economic and Monetary Affairs Commissioner Olli Rehn told a news briefing following the release of the European Commission's interim report on the EU economy.

The wider, 27-nation European Union, which generates a fifth of global output, will not manage any growth this year, the Commission said.

"The EU is set to experience stagnating GDP this year, and the euro area will undergo a mild recession," it said.

"Negative feedback loops between weak sovereign debtors, fragile financial markets, and a slowing real economy do not yet appear to have been broken," the Commission said.

Germany and France, the euro zone's two largest economies, are likely to escape recession this year, growing 0.6 percent and 0.4 percent respectively, while Greece will enter its fifth year of economic contraction and Spain will shrink 1 percent, the Commission said.

Alternate Viewpoint

Let me reiterate things I have said many times: Germany and France will not escape recession, the German export machine will see a shocking slowdown (likely billed as "no one could have possibly seen this coming"), the overall EU will face a recession with the UK leading the way (the UK is highly in recession already), and these recessions will be neither mild nor fleeting.

By the way, a "negative feedback loop" is self-correcting by definition.

Negative feedback occurs when the output of a system acts to oppose changes to the input of the system, with the result that the changes are attenuated. If the overall feedback of the system is negative, then the system will tend to be stable

The writer meant a positive feedback loop (with negative consequences).

Mike "Mish" Shedlock
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Misunderstanding "China's Sweatshop As Great Wall Starts Building Cars In Bulgaria"

ZeroHedge posted an interesting article called Europe Is Now China's Sweatshop As Great Wall Starts Building Cars In Bulgaria. Unfortunately the article contains many often repeated trade fallacies as well as numerous other errors.


ZH: "With China Forecast To Reach Wage Parity With The US In Five Years, Is A New Manufacturing Golden Age Coming To The US?"

Mish: China's wages are rising fast. Sometimes in leaps of 20%. From where? How sustainable is it? Please consider this snip from the Reuters article HP, Dell watch rising China labor costs for Apple written February 22, 2012:

"Taiwan-based Foxconn said the pay of a junior level worker in Shenzhen, southern China, had risen to 1,800 yuan ($290) per month and could be further raised above 2,200 yuan if the worker passed a technical examination. It said that pay three years ago was 900 yuan a month."

Let's do the math. $290 a month is $3,480 a year. Assume 20% annual wage hikes, once a year for 5 years. Should that happen, at the end of that time, the salary would be 8,659.35. US minimum wage is $7.25 an hour (not sure what it will be five years from now), but that is about $14,500 assuming a 40 hour work-week and 2 weeks unpaid vacation.

It would take 33% raises every year for five years just to match US wages. Is that likely?

Bear in mind that shipping costs and productivity issues are also in play. This is not simply a wage issue.

ZH: As Spiegel reports, carmaker "Great Wall this week became the first Chinese automobile manufacturer to open an automobile assembly plant inside the European Union in the latest move suggesting the country's carmakers are seeking to establish a beachhead into the European market." Yes, that's right: it is now cheaper for China to make cars in the European Union: "It used to be that European carmakers opened plants to assemble their cars in China. Now the Chinese have turned the tables with the opening of their first factory in Bulgaria, an EU country with low labor costs and taxes.

Mish: Is it really cheaper to build cars in Bulgaria, or is something fundamentally different happening? I suggest the latter, possibly both, but the latter point is critical. China is sitting on huge piles of forex resereves. Those reserves must return at some point. China can either buy goods from Europe, or it can invest in Europe. What better place to invest than in a country with low taxes and low labor costs? The Bulgarian Lev currency is pegged to the euro at �1 = BGN 1.95583. Bulgaria is expected to join the Eurozone by 2015. Whether joining makes sense is debatable, but China sees an opportunity. China also has a need to put euro reserves to work. That need is a mathematical identity. By the way, this is likely a good deal for Bulgaria. It gets badly needed jobs.

ZH: Chinese carmakers are setting their sights on the European and American automobile markets." The ramifications of this landmark development are massive for virtually every aspect of the economy: for domestic labor migration, for inflation, for the trade balance, and certainly for US workers.

Mish: Agreed but for different reasons. This is a necessary part of global rebalancing.

ZH: Bulgaria, the EU's poorest country, is attractive as a labor market because it is an oasis of cheap wages and low taxes. Workers are considered well educated and the country is ideal as the site for a company like Great Wall to launch. Given that wages for factory workers have risen considerably in China in recent years, assembly sites abroad have become increasingly attractive for some manufacturers.

Mish: Exactly. So just how likely are those 33% annual raises for Chinese workers if the trend catches on? How likely are those 33% annual raises regardless?

ZH: So the real question is if Chinese wages can no longer compete with those in a poor EU member, just how high are they?

Mish: $290 a month for junior level workers and I will take a stab at not much higher for senior level workers.

ZH: And how long before China, for so many years a happy mercantilist importer of Bernanke's monetary inflation courtesy of its currency peg, is no longer competitive with ever growing parts of the EU, and then America? Does this mean that China's cheap labor force has pleateaued and the labor migration of peasants moving from the periphery to the cities no longer provides cheap labor? This was the topic of an extended analysis by SocGen from early January (posted here), of which the salient chart is presented below.



Mish: Is that alleged shortage of labor due to inflation and monetary stimulus in China or the US? How much Chinese labor goes into totally unaffordable projects driving up the price of labor? How much of the worker stagnation is simply do to falling export demand? I do not have the answers to those questions but there are multiple explanations for the alleged "shortage of labor". The single most likely explanation however, is unsustainable stimulus and growth, in China.

ZH: Aside from demographics, the macroeconomic implications on foreign trade and capital flows are monumental: most immediately for the US, it puts today's Wal Mart miss in a very different perspective, as it means that China is no longer the source of cheap commoditized produce, which in turn means that the entire discount retail vertical may have entered the secular sunsetting phase.

Mish: For a completely different viewpoint, and a deflationary one at that, please consider Hugh Hendry of Eclectica Discusses Hyperdeflation, Europe, China, and Japan.

ZH: Most importantly, it means that going forward China will have zero tolerance for Fed monetary expansion as any hot money will immediately set off an inflationary forest fire as China suddenly finds itself with absolutely no output gap slack (unlike America which allegedly has more than enough, even though it is really just a secular regression to the mean shift).

Mish: Most importantly, such events are a necessary part of global rebalancing. As a mathematical identity, China's hoard of euros must eventually return to Europe just as China's hoard of dollars must eventually return to the US. The sooner this happens the better. The US and Europe should both embrace Chinese investment. Unfortunately, that is highly unlikely.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Chris Christie to Warren Buffet "Write a Check and Shut Up"; Christie's Sound Advice to Everyone Else "Don't Send Them Money In the First Place"

New Jersey governor Chris Christie has me laughing today with a pair of interviews. Please consider Governor Christie's Advice: Don't Send It To Them In The First Place

Now, some in this chamber may want to return to the days of outrageous state spending growth. To gimmicky programs that take money out of the taxpayers right pocket, and have Trenton keep most of it. Then return far less of it in their left pocket, take a bow and call it tax relief.

Now, New Jersey has seen 30 years of this as Trenton's solution to fix property taxes. It never has fixed a problem and it never will fix the problem. And New Jerseyans will not fall for the same old Trenton politicians' trick again.

We know that the only way to ensure that Trenton politicians will not waste your money is to not send it to them in the first place.

Chris Christie to Warren Buffet

In a CNN interview on Tuesday, Christie has this message for Warren Buffett "write a check and shut up"

Famously outspoken New Jersey Governor Chris Christie says he's "tired" of making the discourse surrounding tax reform all about Warren Buffett - and that if the billionaire investor wants so badly to pay more taxes, "he should just write a check and shut up."

In a CNN interview on Tuesday, Christie sparred with Piers Morgan over the issue, arguing that, as governor, he's "not going to let the most vulnerable suffer." But the Republican governor added that he also is "not going to get into this class warfare business, where certain people are more important than others or deserve more attention than others."

"I'm so tired of talking about Warren Buffet. What are you going to bring up next, his secretary?" asked Christie on CNN.

"He should just write a check and shut up," Christie said, later on in the interview. "Really, and just contribute, OK? I mean, you know, the fact of the matter is that I'm tired of hearing about it. If he wants to give the government more money, he's got the ability to write a check, go ahead and write it."

Christie said that in New Jersey, he's proposed lowering tax rates for everyone, even the highest earners.

"What we're doing here in New Jersey is everyone will get a 10 percent tax cut. Everyone will get their taxes reduced," he said.

If you start sending government more money, I guarantee you politicians will find thousands of ways to waste it.

Christie will be on CBS' "Face the Nation" on Sunday, Feb. 26. It should be entertaining.

Mike "Mish" Shedlock
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Hugh Hendry of Eclectica Discusses Hyperdeflation, Europe, China, and Japan

With the masses screaming their lungs of about hyperinflation, something that is highly unlikely at best, Hugh Hendry of Eclectica Talks About Hyperdeflation, why China might have a hard landing, and various off-the-beaten tracks Japan plays.

Here is clip from a Barron's interview.

Barron's: Where do you find yourself outside the existing belief system today?
Hendry: In 2009, I made a YouTube video of the empty skyscrapers in Wuhan, China. Goldman Sachs and others articulate a very reasonable and compelling argument of being invested in China. With the evidence of my own eyes, I concluded that China had a very robust system of creating gross-domestic-product growth, but forsaking the creation of wealth.

When America was having its China moment in the 19th century, it occurred against the backdrop of a gold standard, a hard-money regime, with a public sector that was minuscule versus the overall size of the economy. As an entrepreneur, if your project failed to generate a sustainable level of cash flow, you failed.

If you talk about a hard landing in China, you talk about GDP growth of 5%, not minus 5% or minus 15%. The Chinese government prints money. It can build superfast railways and overbuild airports, because the rest of the economy can subsidize it. China's swollen public sector is directing asset allocation, rather than pursuing profit maximization. They see [their system] as a success. But it creates a bubble, which can prove quite damaging.

Barron's: You've already had a hard landing�in the Chinese stock market.
Hendry: I should add something else that is contentious�U.S. quantitative easing [that eventually sent more money flowing to China], promoted because America had two sharp recessions and pursued orthodox policies, and had very little to show in the creation of jobs.

The policy was very successful. China now has inflation. Minimum wages have grown 20% annually for the past three years. This has encouraged the Chinese to tighten monetary policy. When you have bubbles and you tighten, bad things happen. China's stock and property markets are weak, a side-effect of quantitative easing. We may now have the pricking of the Chinese bubble. A year or two down the line, it could have enormous repercussions for the global economy.

Barron's: How does one play it?
Hendry: The world is very fearful of hyperinflation. Pension schemes have a preponderance of real assets, from forestry to gold to TIPS [Treasury inflation-protected securities], because they are very fearful. The road to hyperinflation is via hyperdeflation. That is why it's proving so difficult for hedge funds to make money. How does the rational mind that anticipates hyperinflation own 10-year government Treasuries yielding less than 2%? It can't. That's why people are struggling. To lay the seeds of hyperinflation, you need really, really bad things to happen. I thought the U.S. housing market having a massive crash would be hyperdeflationary. But then my Chinese friends pumped $1 trillion of credit into their $5 trillion economy, and created a global recovery, which has just come to an end. I'm speculating that hyperdeflation happens before hyperinflation. What's the worst that could happen? But the sum of all my fears would be China having a real hard landing of minus 5% or minus 10% GDP growth. If we had that�and Europe�the Fed would be printing $20 trillion, and I would have gold at $5,000. You can have a modest amount of gold, but you can't have all your assets in real assets, in case we get that hyperdeflation event.

Barron's: So how do you make money?
Hendry: Would you believe that the AIG strategy of selling too much credit protection in risky assets like mortgage-backed securities is alive and booming today in Japan? It doesn't concern mortgages. It is credit-default swaps on individual Japanese corporations.

Barron's: Do you seriously believe Japanese corporations are going to fail?
Hendry: Clearly, they can and do go bust. I'm buying the CDS on investment-grade Japanese corporations because of the overpricing anomaly. Japan had a bust 20 years ago, and yet today the banking stocks, relative to [Japanese bourse] Topix, are making fresh lows.

If I'm a Japanese bank and I lend money to a new business, I get 1% on 10-year paper. Then the bank gets a call from me, and I'm willing to pay 50 basis points for five-year protection on this same company. So suddenly, the yield has gone from 1% to 1�%. Compare that to five-year Japanese government bonds, yielding 30 basis points. The bank thinks: This is a great trade! Japanese steel companies are investment-grade and won't go bankrupt. So, the bank gets this huge yen yield, and thinks it is not taking any risk. You'd better believe it will sell way too much of that good thing.

One of my partners told me about Japanese steel: Here is a country with no energy, no iron ore or coal, yet it's the largest exporter of steel in the world, exports half its output. To put that in context, China manufactures 700 million tons of steel and exports perhaps 30 million. Japan produces 110 million tons and exports 40 million. As long as Asia is strong, they are fine. But if Asia hiccups or reverses, plant-utilization rates go from very high to very, very low very quickly.

Then we discovered that Warren Buffett owned shares of South Korea's Posco [5490.S. Korea], and that Korea was the biggest importer of Japanese steel, but Posco and Hyundai [5380.S. Korea] are building huge, integrated steel plants. They have a surplus of steel capacity and�guess what?�they're exporting to Japan, because the yen is so strong.

Initially, I wanted to buy a three-year, out-of-the-money put on Nippon Steel. My broker said, "I've been in a 20-year bear market; my boss will kill me." Then I thought, being long credit protection is being long volatility. I redialed his credit counterpart. I said: "I'm thinking of purchasing up to a billion yen of five-year credit-default swaps in Nippon Steel." The first thing he said was, "Would you consider 10 billion?" So one part of the bank is banned from selling volatility, and the other part is having a party. I bought reams of the stuff.

Barron's: We've barely discussed Europe.
Hendry: We are partly playing it through Japan. If events kick off again in Europe, the correlation across all [global] asset classes will go to one. So the steel CDS is 130 basis points, while to insure against default by the French government, I'd be paying the same amount. Which is riskier? A very leveraged steel company that can't tax you? Or a government that can? Our bearish bets are largely outside Europe. As for Greece, the end game will be the Greeks rejecting austerity. The euro is nothing but a gold standard lacking flexibility, and all the onus is on private citizens to take the pain. Eventually, a Greek politician will say, 'Vote for me, and I'll get us out of this system.'

I certainly agree with that last comment above.

I as I have said and repeated Eventually, Will Come a Time When ....

Eventually, there will come a time when a populist office-seeker will stand before the voters, hold up a copy of the EU treaty and (correctly) declare all the "bail out" debt foisted on their country to be null and void. That person will be elected.

The Barron's interview is well worth a read in entirety.

Mike "Mish" Shedlock
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