POTENTIAL SPARKS TO IGNITE
THE FLAMES OF A FINANCIAL FIRE"1. If the U.S. 2/10 curve begins to flatten–currently holding around 117 area–the bigger test will be in the 80 BASIS POINT area to signify the initiation of the flames of deflation;
2. There’s a new break in the currency wars.
3. The dramatic fall in the price of OIL is significant but actually aids Europe, which has little production and benefits from a fall in the price of its energy imports. The larger problem, of course, is for the U.S. financial system, which has lent heavily to U.S. energy producers and is exposed via the bond markets. There is a complacency among some investors that the loan exposure of banks is minimal compared to the sub-prime crisis but as we know a single spark can ignite a large fire. The more important question: What are the Saudis up to? The last time the House of Saud drove the price of OIL dramatically lower it was 1986 and Vice President George H.W. Bush went to Saudi Arabia and convinced the Saudis to cut production because it was a disaster for U.S. producers in Texas. This time the Saudis seem to be sending a message but it’s not clear what and to whom. Given its anger at the Obama White House over its dealings with IRAN, the Saudi message my cut deeper then all previous political machinations.
4. The most dangerous spark of all is something I have warned about in this blog and on television with Rick Santelli and that is the rise of anti-euro fringe parties in Europe. More importantly, these parties are also opposed to the insular nature of the governing elites. Chancellor Merkel is under great pressure, even as she has been touted as the greatest Chancellor since Konrad Adenauer. It is amazing how quickly the winds change. Frau Merkel cancelled her trip to Davos because to leave Germany to cavort with the epitome of crony capitalists would not play well with the Burhgers of Bavaria.
The recent scandal of the rapes in Cologne over New Year’s Eve has lit the fires of the AFD and its anti-refugee platform. But the real spark to German political pressure on Merkel is the RAPE of German savers by the ECB-imposed negative interest rates that are condoned by the German Chancellor (yet vehemently opposed by Bundesbank President Jens Weidmann). It is this potential conflagration that can cause the greatest problem for the EU and global financial markets. The ECB’s swollen balance sheet has caused the sovereign debt of Spain, Portugal, Italy, France, Greece and others to be absurdly priced risk. The world is a tinder box."
LINK HERE to the commentary