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Luongo: Breaking The Empire Means Breaking With The Saudis

Luongo: Breaking The Empire Means Breaking With The Saudis

Authored by Tom Luongo via Gold, Goats, ‘n Guns blog,

To say that Saudi Arabia…

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This article was originally published by Zero Hedge
Luongo: Breaking The Empire Means Breaking With The Saudis

Authored by Tom Luongo via Gold, Goats, 'n Guns blog,

To say that Saudi Arabia has been the lynchpin to U.S. foreign policy objectives in the Middle East and central Asia is to engage in massive understatement.

For more than fifty years the Saudis have helped prop up U.S. foreign policy by exporting their oil to the world and taking only dollars in return.

Their currency, the Riyal, has been pegged to the U.S. dollar since then Secretary of State under President Nixon, Henry Kissinger, brokered that deal that built the so-called petrodollar system.

Now, in the intervening decades the petrodollar has been a buzzword thrown around by many, including myself, to explain the architecture of the U.S.’s imperial ambitions. In many ways, it has served a crucial part of that, at times. But, it was most needed during the early years of the dollar reserve standard, helping to legitimize this new currency regime and provide a market for U.S. debt around the world to replace gold.

After that it was just one aspect of a much bigger game built on the ever-expanding Ponzi scheme of fake funny money. In reality, the eurodollar shadow banking system is just a lot bigger than the petrodollar.

That said, I don’t discount it completely, as I understand this is real money changing hands for real goods, rather than the vast quantities of dollars out there supporting an increasingly creaky financialized system. Real trade matters and what currency that trade occurs in, also matters.

The U.S. closely defended the petrodollar famously going to war with any country that dared to offer oil on international markets in any currency other than the dollar, c.f. Iraq under Saddam Hussein. But, times change and so do the structure of capital markets.

So, when evaluating the health of the petrodollar system and its importance today it’s important to realize that the oil market is far more fragmented in payment terms than its been since the early 1970’s.

As a system, the petrodollar was always going to die a death of a thousand cuts. To my reckoning the first inklings of this began in late 2012 after President Obama finally used the financial nuclear weapon, expulsion from the SWIFT payment system, on Iran for pretty much no reason.

Earlier this year I wrote a piece describing why in negotiations you never go nuclear and how Obama made the biggest strategic blunder, possibly in U.S. history, by first threatening the Swiss over bank secrecy and then Iran.

The fact that the Obama administration politicized SWIFT when it did ended an era of international finance. The world financial system ended any illusions it had over who was in charge and who dictated what terms.

The problem with that is once you go there, there’s no going back, which was {Jim} Sinclair’s point over a decade ago.

Threatening Switzerland with SWIFT expulsion wasn’t a sign of strength, however, it was a sign of weakness. Only weak people bully their friends into submission. It showed that the U.S. had no leverage over than the Swiss other than SWIFT, a clear sign of desperation.

And that’s what the U.S. did when it pushed the big red ‘history eraser’ button.

The Swiss knuckled under. Its vaunted banking privacy is now a part of history.

Iran, however, in 2012, facing a similar threat from Obama, didn’t knuckle under and forced Obama to make good on his threat. Once you uncork the nuclear weapon you can’t threaten with lesser weapons, they have no sway. This is a lesson Donald Trump would learn the hard way since 2018.

Iran bucked the petrodollar to sell its oil by making a goods-for-oil swap arrangement with India. Iran was laughed at by U.S. foreign policy wonks at the time. Then we found out that Turkey was laundering oil sales for Iran through its banks using gold.

Its currency, the Rial, since then has been under constant attack by the U.S., most viciously under President Trump who sought to do what Obama couldn’t do, drive Iran’s oil exports to zero. The goal was regime change.

I chronicled this in detail, over these past four years, saying explicitly that the strategy was stupid and short-sighted. It didn’t work. It couldn’t work.

Iran’s resistance to Trump’s bullying only further entrenched the existing power structures there and hardened the Iranian people to become more disagreeable, more disdainful of America and, likely, Americans.

All it did was force Iran to develop alternate plans and find new markets. Those alternatives meant courting better relations with China, Russia and Turkey, which the U.S. tried hard to sabotage. As long as Iran was as good as its word, supplying oil and acting as a reliable partner in diplomacy, eventually deals would come to them.

Last year’s $400 billion, 20-year investment from China is the culmination of that resistance and ingenuity. That’s the whirlwind wrought by Trump’s pro-Israel, anti-Iran and confused Syria/Afghanistan policies.

In the intervening years, the U.S. sanctioned Russia who sells their oil, a lot of it, in a number of different currencies, some of which are still dollars. China began a yuan-denominated oil futures contract a few years ago, which is ultimately convertible to gold in Shanghai.

The U.S. still trades with China and Russia and yet no one who called for the death of the petrodollar then was right. These things are a process, not a step-function. The point being that the petrodollar isn’t dependent on it being a monopsony in oil trading. The system has been leaking for nearly a decade now.

Iran is an example of why Davos will fail to pull off anything more than the most limited form of their Great Reset. So is Russia. Necessity is the mother of innovation. Putin makes this point all the time. And he, like the Mullahs in Iran, were laughed at by the U.S. foreign policy wonks on K Street.

But, this article isn’t about Iran or Russia or China. It’s about Saudi Arabia.

Now that Afghanistan is all but settled in the geopolitical sense now the question is all about the fallout from it. For years we’ve seen the coalition that intended to atomize Syria splinter, bit by bit. First it was Qatar, who defied Saudi Crown Prince Mohammed bin Salman (MbS), who was isolated just like Iran. Qatar survived.

Then it was Turkey, constantly flipping and flopping around under President Erdogan trying to fill the power voids left as Russia’s military successes in Syria and diplomatic successes around the region frustrated U.S., NATO and Israeli plans there.

Slowly, bit by bit, Russia and China moved into those spaces while Erdogan tried and failed…. over and over and over again.

So, with the U.S.’s presence in Afghanistan now, officially, part of history, big changes are coming to the entire region fast and furious.

And the biggest one was the vague but significant defense coordination deal between Russia and Saudi Arabia. Because now, after having wormed its way into control over the marginal barrel of oil produced globally Russia controls OPEC+. It’s a nominal power-sharing agreement with the Saudis, but ultimately, with Trump out of the picture, the Saudis realized they have very few, if any, friends left in the world.

I went on this history lesson to remind you that this moment didn’t just happen. It was built over a decade of U.S. foreign policy mistakes. Mistakes that tried to extend the benefits and the narrative of the petrodollar for far longer than it should have.

The system should have died years ago. But it’s limped along indulging MbS’s bloodlust in Yemen, Syria and Lebanon. Rather than subsidizing U.S. foreign policy goals, it subsidized the Saudi Royal family’s continued delusion that it was a global power broker.

That continued until Trump was overthrown and Biden was installed. Since then MbS and the rest of the House of Saud understood what their future looked like and in whose hands it was.

Russia’s.

We’ve seen negotiations behind the scenes between Riyadh and Tehran, between Riyadh and Damascus. Syria is coming back into the Arab League. Iran and the Saudis are winding down the disastrous conflict in Yemen.

The time to sue for peace was at hand and to find a way forward that ensured relative stability. So, how does the petrodollar fit into this?

For now it doesn’t. Those thinking that the petrodollar is dead because of this deal are getting way ahead of themselves. With oil prices in the $70’s (Brent crude) there is no immediate threat to the future of the Saudi government. They can handle a mild budget deficit at these prices for a long time. There is no pressure on the Riyal peg at these prices.

What they cannot handle is oil in the $30’s or $40’s for any length of time. That is what blows out the budget deficit.

So, for now, as long as the U.S. doesn’t further antagonize MbS there is no reason why what’s left of the petrodollar can’t remain in place.

to that end, that bane of Davos’ existence, Southfront.org whose distribution is heavily censored by Big Tech, is speculating that the U.S. could sanction Saudi Arabia for this agreement with Russia.

The United States is urging its allies to avoid major defense deals with Russia, a State Department spokesman said, commenting on the signing of a military cooperation agreement between Russia and Saudi Arabia.

“We continue to urge all our partners and allies to avoid major new deals with the Russian defense sector, which we have made clear with … the Countering America’s Adversaries Through Sanctions Act (CAATSA),” the spokesman told Russian state outlet RIA.

While this is speculation, it is on target however, because this statement from the State Dept. came before the Saudis sat down and signed an agreement with the Russians during the height of the U.S.’s shameful and shambolic retreat from Kabul.

As insults go in geopolitics, this was a pretty big one.

So, that will be the next shoe to drop here. If I’m right and the goal of those behind the Biden Administration (itself with a use-by date similar to that of the petrodollar) is to dismantle the U.S. as much as possible, then we will see Lindsey Graham and others wring their blood-soaked hands in grief lamenting the necessity of sanctioning our long-term friends in Saudi Arabia.

It will be as nauseating as it is predictable.

And that will be a willful act of destruction of a still-significant portion of foreign demand for the U.S. dollar. This, of course, plays directly into the hands of Davos who are actively undermining confidence in the U.S. politically, economically, culturally and socially. Because the minute the U.S. does this MbS’s only rational move is to break the Riyal’s peg to the dollar and allow it to float freely.

At $70 per barrel the effect on the Riyal will be minimal.

That said, it would allow for a sharp drop in oil prices internationally as the Saudis, who have needed a strong oil price to fund its domestic welfare state, will no longer need as many dollars for its oil to do that. So, expect Davos to try to help this along. Well, they already tried when the UAE tried to torpedo OPEC+’s solidarity a few weeks back.

If oil were to drop sharply, say into the $40’s, it would create massive inflation in Saudi Arabia due to a sharp drop in the now-exposed-to-market-forces Riyal. And the Saudis would then have to go through the same painful adjustment that Russia went through in 2015-17, when it finally ended its strong ruble policy.

This is why Biden is told to beg publicly for lower oil prices. It has nothing to do with helping American consumers and has everything to do with baiting out the Arab countries to de-peg their currencies from the petrodollar and hope to crash oil prices in the confusion.

So, cue the Mu variant of COVID-9/11.

The Saudis, however, for their part have learned the lessons well what happens when you get into a price war with Russia. You lose. So, instead of fighting Russia for market share, they’ve decided to coordinate production for the big win-win for everyone while the U.S. continues to grapple with the reality that its empire is not only crumbling, but being actively dismantled from within.

And given where we’re headed, I’d say that the ones laughing now aren’t at the State Department.

*  *  *

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Tyler Durden Fri, 09/03/2021 - 23:00

Economics

Top Shipper Warns Commodity Freight Rates About “To Go Parabolic”

Top Shipper Warns Commodity Freight Rates About "To Go Parabolic"

Similar to container rates, dry bulk shipping rates are poised to move…

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Top Shipper Warns Commodity Freight Rates About "To Go Parabolic"

Similar to container rates, dry bulk shipping rates are poised to move higher on limited vessel capacity and robust demand, according to Genco Shipping President and CEO John Wobensmith, who spoke with Bloomberg

"I think rates can go higher from here," Wobensmith said. "You do get to a point, and you've seen this in containers, where you hit a certain utilization rate, and you start to go parabolic on rates. I think we're getting close to that period."

He said, "fundamentally, you've got demand outstripping supply growth," adding that freight agreements are above $20,000 for 1Q, a level not seen seasonally in a decade. 

More than 5 billion tons of commodities, such as coal, steel, and grain, are shipped worldwide in bulk carriers in a given year. A move higher in the Baltic Dry Index (BDI) indicates increasing commodity demand on top shipping lanes. 

Lending credit to Wobensmith's argument is BDI on a seasonal basis that shows demand is currently outpacing vessel supply and pressuring rates higher. 

He doesn't expect bulk carrier rates to experience a significant reversal until early next year as demand troughs seasonally. "You need very little demand growth to just continue to build off what we've seen this year," he said. "It's more about higher highs and higher lows than anything else."

China's credit impulse needs to turn higher for the commodity boom and bulk carrier rates to stay elevated. 

Besides China, passage of a US infrastructure bill could be the fiscal injection that could also spark higher commodity prices, thus continue driving bulk carrier rates higher. 

All of this is feeding into inflation that the Federal Reserve convinces everyone it's only "transitory." 

 

 

Tyler Durden Thu, 09/16/2021 - 16:50
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Economics

Ethereum 2.0 Has What It Takes to Knock Bitcoin off Its Perch

Ethereum (CCC:ETH-USD), the world’s second-largest cryptocurrency, is more than just an internet token. It is the top smart contract and decentralized…

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Ethereum (CCC:ETH-USD), the world’s second-largest cryptocurrency, is more than just an internet token. It is the top smart contract and decentralized application network, with more use cases than other digital assets.

Source: shutterstock

As it moves to a proof-of-stake model, the network’s capacity will increase substantially and significantly reduce its energy requirements. Therefore, ETH-USD represents the cream of the crop as far as crypto investing is concerned.

The ETH token has shot up more than 380% in value since the beginning of the year. At the same time, industry stalwart Bitcoin (CCC:BTC-USD) is only up about 60% in the same period.

The Ethereum platform is undergoing major changes to increase its scalability, transaction throughput and efficiency while reducing its gas fees. The platform has already shown significantly more real-world utility than its peers, and future upgrades will create more divergence between them.

The London and Shanghai Hard Fork

The whole crypto sector has been buzzing since the release of Ethereum’s London hard fork. This is a major step towards Ethereum 2.0 and introduced some critical changes to the network.

Most notably, it updated the fee structure to an algorithmically determined model. It involves a base fee, which is usually 25% to 75% transaction value, and a priority fee that incentivizes miners to put a particular user’s transaction first.

In contrast to the first-price auction model the platform ran on previously, the new model was said to significantly boost efficiency. However, the base fee is burned after each transaction is complete, making ETH a deflationary asset. The currency’s supply is likely to reduce overtime, pushing its price higher.

The Shanghai hard fork is the next and perhaps final upgrade that will wrap up the Ethereum 2.0 update. It will go live anytime between the end of this year and early to mid-2022. The update is likely to merge Ethereum’s mainnet and Beacon Chain to implement proof-of-stake protocol.

Ethereum Has an Abundance of Use Cases

Bitcoin, the undisputed leader in the crypto space, is more of a safe haven asset for investors against fiat currencies. However, Ethereum is an ecosystem that is powering the digital economy.

Aside from the typical staking involved with most cryptos, it is the foundation for decentralized finance (DeFi) protocols. These are based on smart contracts, which execute when a predetermined criterion is met. Crypto investors have at least 7.7 million ETH tokens in DeFi protocols at this time.

Moreover, Ethereum is a dominant force in the nonfungible tokens, or NFT, space. NFTs are unique tokens that can represent avatars, art, music and other related items.

The NFT market has been booming this year, and Ethereum has been powering those transactions. Virtually every NFT exchange uses ETH to conduct these transactions on their respective platforms.

Ethereum is also a base layer for stable coins such as Tether (CCC:USDT-USD), pegged to the US dollar. More than 50% of transactions in Tether are based on Ethereum.

2.0 Can Help Ethereum Outpace Bitcoin

Ethereum has been on quite a roll in the past year. Since the pandemic began, major institutional investors have loaded up on the crypto, which propelled its price up more than 2,700% since January 2020.

With Ethereum 2.0 around the corner, its value is expected to rise even further. The platform will become more robust than ever before, offering even more utility for its user base. Hence, ETH-USD is perhaps the hottest crypto to invest in these days.

On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Muslim Farooque is a keen investor and an optimist at heart. A life-long gamer and tech enthusiast, he has a particular affinity for analyzing technology stocks. Muslim holds a bachelor’s of science degree in applied accounting from Oxford Brookes University. 

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Economics

It May Take Time for General Electric to Surge Again

General Electric (NYSE:GE) stock is up about 90% in the past year, but it has been treading water around a split-adjusted $100 per share since the spring….

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General Electric (NYSE:GE) stock is up about 90% in the past year, but it has been treading water around a split-adjusted $100 per share since the spring. After fully pricing in expected earnings growth in 2022, investors have been hesitant to bid up the industrial giant’s shares much higher.

Source: Sundry Photography / Shutterstock.com

Last month, I said investors should wait for lower prices before buying due to the risk of earnings falling short of expectations. But after giving the situation another look, two other catalysts could help prevent GE stock from falling below $100 per share.

The first is GE’s pending sale of its aircraft leasing unit, a move that could help unlock shareholder value. Second, a possible ramp-up in spending by the federal government could give GE stock an indirect boost as well.

Now, don’t take this to mean I think shares will pop in the coming months. Instead, it’s a situation where strengths and weaknesses cancel each other out. There’s enough to keep GE stock steady around $100 to $105 per share. Just not enough to send it higher in the near term.

GE Stock Already Trades on Next Year’s Results

The key issue with General Electric today is that upcoming earnings growth is already accounted for in its valuation. The consensus estimate projects the company will generate around $4.33 per share in earnings in 2022.

At today’s prices, that gives GE stock a forward price-to-earnings (P/E) ratio of around 24.5. That’s in line with the valuation of a similar name, Honeywell (NASDAQ:HON), which trades at 23.9 forward earnings. But other diversified industrial companies trade at even lower valuations, such as 3M (NYSE:MMM), which has a forward P/E ratio of 16.9.

It goes without saying that General Electric needs its earnings to meet or beat these estimates. If the company disappoints, GE stock could take a big hit.

In the past, I have questioned whether General Electric’s earnings will come in above $4 per share next year, mostly due to the risk of inflationary pressures. Inflation that ends up being more than just “transitory” could affect performance across all its business units.

A repeat of last year’s Covid-19 lockdowns, due to the Delta variant, is a big risk as well. This would be a major setback for the recovery of the company’s flagship aviation unit.

That said, there are a few positives to counter these negatives. They may not be enough to send shares higher soon, but they could help prevent GE stock from falling below $100 per share.

Plenty in Play to Keep GE Stock Steady

As I mentioned above, there are two positive catalysts on the horizon for General Electric.

The first catalyst is the pending sale of its aircraft leasing unit. As Barron’s reported on Aug. 27, Barclays analyst Julian Mitchell sees this as something that could result in “valuation upside.”  According to Mitchell, once GE sells this unit, investors may be more willing to value the company at a higher multiple in line with its peers in the aviation, healthcare and renewable energy sectors.

Admittedly, it’s questionable whether this happens. Given Wall Street’s preference for pure plays, a diversified company like General Electric will likely have a hard time getting to a price on par with its sum-of-the-parts valuation.

Fortunately, the second catalyst seems more likely to play out.

As fellow InvestorPlace contributor Larry Ramer wrote on Sept. 3, both the infrastructure bill and the proposed federal budget could provide an indirect boost to GE’s power and renewable energy segments. Additionally, the desire of the Biden administration and Congressional Democrats to expand government healthcare spending may benefit the company’s healthcare unit.

Strength in these areas could counter any further headwinds with the company’s aviation unit. This, in turn, may ensure that General Electric’s turnaround carries on, its earnings soar above $4 per share next year, and the company’s current valuation stays intact.

The Bottom Line on GE Stock

Despite my prior pessimism, there may be enough in play to ensure GE stock stays at its current price levels. But with regards to its next move higher, that may take time.

Shares are fully priced based on 2022 projections. Earnings will need to come in at or above the high end of analyst estimates, currently at $4.88 a share, in order for the stock to see another immediate boost.

In the long run, GE stock could continue to rise. But in the short term, expect shares to hold steady at or around today’s prices.

On the date of publication, Thomas Niel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.

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