Iran's Insane Gamble

Iran and the West, led by the United States, have signed an historic agreement designed to limit Iran's nuclear activities.  The goal is to prevent Iran from obtaining a nuclear weapon at some point in the future.  In return for agreeing to inspections and continued embargoes on military and missile technology, Iran will see sanctions lifted, and will return to the "comity of nations."

Iran is playing a very dangerous game.  If it is pursuing nuclear weapons - and it seems obvious that it is - it risks virtual annihilation at the hands of the Israelis.

Iranian leaders are Holocaust deniers.  Iran has hosted conferences devoted to questioning the Holocaust, and as late as 2013, Grand Ayatollah Ali Khamenei questioned the veracity of the Holocaust.  This matters in Israel, which was born out of the Holocaust and which is led by people who will do whatever it takes to protect the Jewish population, wherever Jewish people live.  They have "never again" as the cornerstone of their defence and foreign policy.

Israel has a history of attacking any facilities it thinks may be used to build nuclear weapons that could later be used to attack Israel.  In 2007, Israel destroyed a nuclear site in Syria. Before that, in 1981, it destroyed an Iraqi nuclear reactor.  This lesson of history seems crystal clear - if Israel thinks it will face a nuclear-armed opponent at some point in the future, it has no problem resorting to acts of war to eliminate the threat.

Iran's nuclear facilities are encased in concrete and are buried deep beneath the earth.  The Fordow facility in Northwest Iran is probably immune to attacks with conventional weapons, including munitions designed to breach just such facilities, called "bunker buster" bombs.  It is with noting that the only reason these facilities have been built like this is to secure them from Israeli and/or American attack.  Facilities with peaceful purposes do not need to be secured like this.

The game that the Iranians are playing is simple.  

Israel has between 80 and 250 nuclear weapons - it denies this, but everyone knows they exist.  If Israel thinks that Iran is about to get The Bomb, and that conventional weapons won't suffice to eliminate the threat, Israel has weapons within its arsenal that can certainly get the job done.  The Iranians are therefore betting that Israel would not cross the nuclear threshold even in the face of potential annihilation, and that they will be able to continue to develop their weapons in peace.  

They are wrong.  

If they continue on their present path, the Fordow facility will become the second place on Earth to be destroyed by nuclear attack, along with every other facility in Iran that could potentially threaten Israel.  The implications for all of us from the nuclear genie being let out of the bottle are dire indeed.  Would Pakistan and North Korea see a new green light for their own ambitions from such a turn of events?

They Have A Deal! Again!

French President, Francois Hollande - "We also had to show that Europe is capable of solving a crisis that has menaced the eurozone for several years," he said. And so, there you have it.  Problem solved!  The Plan is now clear - push countries to the brink of exit from the Eurozone, then come up with yet another bailout for an obviously bankrupt country at literally the "minus 13" day moment, as Greece has been technically in default on its debt to the IMF for almost two weeks.

The tentative deal will see €86bn go to Greece to cover its debts over the next three years. Of this, at least €25bn will go to recapitalize its banks.  It seems at this early point - the news is 13 minutes old - that not one penny will go to debt reduction, without which Greece will remain bankrupt and unable to finance let alone pay its debts on its own. Greece has about 48 hours to pass the required changes to its pension system, tax system and other reforms to secure the new cash.  Other European nations must also approve the third massive bailout to Greece in 5 years.  Who wins?

Europe wins, for now.  It gets three more years to realize it needs a different approach to deal with bankrupt countries in their midst. The IMF and Greece's other creditors also win, for now.  They get paid for a while more. With this, the bankers win.  They will get their bonuses this year. Who loses?

Greece loses.  The referendum of last week seems to have meant nothing.  Greeks resoundingly rejected austerity, and if anything, the vote was a rejection of how Europe operates.  They got austerity and the way that Europe operates, unchanged.  But their parliament still needs to approve this deal.  We shall see.

Europe loses.  It thinks that it has bought itself three years. In fact, this may turn into a delay of only two months as the Portuguese start voting in about ten weeks from now. One has to think that opponents of austerity in that country, and in Spain, will point to Greece as an example of how international bankers intend to bully and humiliate small countries in order to extract every single pound of flesh they can until they are paid, regardless of the situation.  They would be right in that. 

Worse, the great as yet untold story in Europe may not be the Euro, but the rekindling of national pride on a continent that is supposed to be all about "happy, happy, joy, joy" after a century of unprecedented bloodshed and slaughter driven by a nationalism gone insane.

Finally, we all lose.  The day of reckoning that is coming, where the planet finally goes through the pain of dealing with unsustainable sovereign debt in many nations throughout the world, but this day has been put off again, likely deepening the crisis we will inevitably face.  Ukraine and Puerto Rico may dominate the headlines next.  Then Portugal again...then Spain again...then Greece again...then....?

Down To The Wire! Again!

The Greeks may have their financing after all!  PM Alexis Tsipras has forwarded to Greece's creditors a list of proposed pension reforms and tax increases in an attempt to get up to €53.5bn in new loans to cover debts until 2018.  In fact, the new bailout could be as high as €74bn, because Greece wants to restructure (a.k.a. write off..) much of its debt, which it says is unsustainable.  The proposal appears to have been well-received by numerous Eurozone members, including Italy and France. The Germans are insisting that they will not agree to more debt reduction that causes losses to German interests.  Regardless, the talks are still on, and Greece may yet have a future in the Eurozone.

Greece has already received in excess of €200bn over the last five years to stave off bankruptcy.  As it stands, Greece is technically in default, and cannot finance its debt on its own.  If it gets a new bailout, the vast majority of cash could go to paying interest on its existing debt.  Bonus cheques for bankers throughout the Eurozone have probably already been drawn up.

So what do we know?  

We know that Greece is bankrupt.  Without someone coming forward to either fund or accept a massive write-down of Greece's debt, it will never finance let alone pay this debt on its own.  

We know that Europe is still not ready to face the consequences of bankrupt countries in its midst, preferring instead to send good money after bad in the hopes that all will somehow be well at some point down the road.  The previous two massive bailouts to Greece assumed significant economic growth that would drive new tax revenues and make everything alright.  It never happened.  Instead, Greece has experienced an economic collapse that rivals The Great Depression.

We know that this crisis will be repeated again, either in Greece, or in other countries like Portugal or Spain, likely quite soon. As noted, Europe has no plan for situations like this.

We know that Greek voters rejected the very type of austerity that their government just recommended to Greece's creditors.  Maybe the fact that the austerity proposal came from Greece and not from the creditors will satisfy the needs of Greek pride and sovereignty - no one knows. What does seem clear is that this proposal may imperil the present Greek administration, possibly adding a period of political chaos in Greece to this sad and complex situation.

Finally, we know that the Germans and other solvent European countries have seriously considered and likely planned for the Grexit over the last few weeks, if not months.  The hitherto unthinkable has now been thoroughly thought through.  The Greeks just voted "no" to austerity. The Germans and other solvent nations such as Finland may be about to vote "no" to Greece's continued membership in the Eurozone, by ramping up demands for austerity to levels that no Greek government can accept.  The Greeks aren't the only poker players in Europe.

Pete Rose, Hall of Famer? No.

Pete Rose is baseball.  He is the all-time leader in hits (4,256), games played (3,562), at bats (14,053), singles (3,215)  and outs (10,328).  He has three World Series rings. three batting titles, and 17 All-Star appearances at 5 different positions. But he is a gambler, and he has gambled on baseball, both as a manager, and as we discovered last month, as a player as well.  This fact led to a lifetime ban from baseball in August of 1989; a lifetime ban that he agreed to at the time albeit with no admission of guilt.  This also led to his permanent exclusion from being considered for induction to the Baseball Hall of Fame.

The bloom appears to be returning to Rose.  A choir of various fans, sports writers and others have begun to ask why he has been banned, when drug abusers like Barry Bonds and Roger Clemens are on the ballot for inclusion in the Baseball Hall of Fame, and may actually be inducted some day.

Here is what every player can see posted in their change room before every game they play in the Major Leagues, "Any player, umpire, or club or league official or employee who shall bet any sum whatsoever on any baseball game in connection with which the bettor has a duty to perform shall be declared permanently ineligible."  It is possible that no person in the history of the game had more opportunity to read this Rule than Rose.  Not only did he breach this rule, but he lied constantly about his actual gambling activities, to the extent that it was only last month that it became clear that he bet on baseball, not just as a manager, but also as a player.  He maintained this lie for over a quarter century.  Rose also maintains that he never bet against his own team, or that he ever threw a game.  After more than 25 years of lies, why would anyone give this man the benefit of the doubt?

The rule against gambling against baseball games while a player, or while otherwise involved in a game came out of the "Blacksox Scandal" of 1919 when 8 players for the Chicago White Sox threw the World Series in exchange for money from gamblers.  Rule 21 is supposed to be about the purity of the game.  In fact, it is there to make sure that regular gamblers can know, to the extent reasonably possible, that when they bet on baseball the game isn't fixed.  While it is supposed to stop gambling by those involved in the game, it actually facilitates gambling by everyone else.

Rose can't be reinstated or go into the Baseball Hall of Fame not only because he has never come clean about his gambling activities - and he is probably still lying - but also because allowing him in would open the door to a slight relaxation of the application of Rule 21, and this would threaten gamblers everywhere.  To maintain the purity of the the world's second oldest profession, he must remain in the wilderness.

Desperate Measures and The Madness of Crowds

The Shanghai Composite Index - the Chinese Stock Market - has plunged about 30% in three weeks. About half of the companies listed on the index asked for halt trading orders on July 8 to try to stop the bleeding.

The Government has ordered Government-owned enterprises to stop selling shares.  It has also is ordered CEOs and other officials in major Chinese companies who have sold in the last six months to buy their shares back, and they will be forbidden from selling again at least for the foreseeable future.  If the shares in their companies fall another 30% in the next 10 days, they will be required to buy more shares.  The People's Bank of China has indicated that it will provide support to the China Finance Securities Corporation which provides margin debt - the debt that investors use to invest beyond their means.  In essence, the Chinese Central Bank will flood the Chinese Margin Bank with new cash to entice investors to take even greater risks in the market.  Chinese insurance companies will also be encouraged to buy into the market as they will be allowed to hold 40% of their assets in equities, up from 30% previously.  Finally, a group of 21 state-owned brokerage firms have mobilized about $20 Billion to plunge into Chinese blue chip (a.k.a. major state-owned) companies to play their part supporting the market.

If this all sounds utterly bizarre to you, it should.  No market operates like this, and no government has ever ordered individuals to buy stocks to buttress a market.  Is there a gulag waiting for these people if they refuse to invest?  Central banks are also not supposed to buy equities.  Funnelling new cash to a margin bank is essentially the same thing, making a mockery of the People's Bank of China's claim to be a legitimate player in the small club that includes the world's central banks that actually matter (i.e. the US Fed, and the ECB).

The Shanghai Composite Index was up about 150% in one year prior to this "correction".  About 80% of investors are individuals, many of who were investing for the first time.  These people have moved with lightening speed from "Greed and Complacency" to "Fear and Extreme Discontent", which is the hallmark of The Madness of Crowds phenomena that occurs when asset bubbles burst.  Pay attention - this may be exactly what it will look like when bubbles in the equities markets in the West start to burst as well; small investors stampeding for the exit, while governments and central banks desperately try to stop the rush in its tracks.

Contagion, Anyone?

The Greeks have voted "no".  Portuguese, Spanish and Italian bond yields are rising very quickly, meaning investors are dumping these bonds out of fear that the populations in these countries will also reject austerity, and refuse to pay their debts.  The European Central Bank will no doubt start to print money to buy these bonds to drive prices up and yields down, maintaining the illusion of calm and normalcy.

Portugal's next legislative elections are from September 20 to October 11, 2015.  Spain's next parliamentary election is on December 20, 2015.  In both countries, anti-austerity political parties (the Socialists in Portugal who implemented austerity in 2010, but who have had a change of heart, and Podemos in Spain) were leading public opinion polls earlier this year.  The economic contagion that could be unleashed on the world's economies following years of mismanagement by the world's central banks could be triggered by the democratic rejection of the banker's "solutions" starting first in Greece, but later in Portugal then in Spain. From the perspective of the future of the equities markets, the stage may have been set for what could be a very significant "Year of Change" rivalling 1929, 1987, and 2008.

What Was Stalin Thinking? What Will Putin Do Next?

A prosecutor in Russia has confirmed that the 1954 transfer of Crimea from Russia to Ukraine was illegal, at least in his rather biased opinion.  The result is that Russia may now claim that the recent annexation of Crimea by Russia is entirely legitimate.  "Annexation"?  Why no, it was a return to justice!!  No doubt all those Western sanctions will soon fall away in the face of this recent legal clarification.  One is left wondering if Ukraine owes Russia an apology as a result of this powerful revelation.

But it gets better!  This same prosecutor has apparently decided to investigate whether the 1991 recognition of the independence of the Baltic States of Latvia, Lithuania, and Estonia by the old Soviet Union was also illegal.  The obvious implication is that should this recognition also be found to be illegal, then Russia has a legitimate legal claim of some sort to these three countries. Of course, these three countries were previously claimed as part of the old Soviet Union from 1940 to 1991. They were only "claimed", as the occupation of these three countries by the Soviet Union in 1940 was never recognized by the United States, the UK, Canada, NATO and other countries and international organizations.

One fundamental problem with the occupation of these independent states by the Soviets in 1940 and the later Soviet claim to sovereignty, was that this occupation and claimed sovereignty was facilitated by the 1939  Molotov-Ribbentrop Pact through which Nazi Germany and the Soviet Union agreed in secret to divide Poland and the Baltic region into spheres of influence.  The Soviets got part of Poland and the three independent Baltic States as its reward for making a deal with the Nazis.

What may this mean for a future Russian claim?  If this Russian prosecutor concludes that the previous recognition of Baltic independence was also illegal, and Russia then proceeds to claim that it still has some form of sovereignty over these now independent countries, then the Russians will actually be relying, in part, on a previous agreement with Adolf Hitler to back their rekindled claims.

What does history tell us about making and then relying on deals with Hitler?  If the later Soviet experience in the Great Patriotic War is any indication, relying in any way on deals with Hitler was a bad idea.  One would hope that Putin will be wise enough not to repeat Stalin's error.