Friday, July 21, 2006

Life in a Parallel Universe

EUR/USD 1.2680 / 83 Hi 1.2691 Low 1.2624
USD/JPY 116.10 / 14 Hi 117.15 Low 115.82
EUR/JPY 147.20 / 24 Hi 147.88 Low 146.85

In the parallel universe where all our politicians live, the United States which has openly been arming and financing Israel for decades, has no real control over the actions of its ally. The most that the Bush Administration can do at present is call for restraint. So far that restraint has resulted in the displacement of more than one quarter of the Lebanese civilian population, destruction of much of Lebanon's infrastructure and the killing of more than 300 Lebanese civilians. There will be more. On its other border, Israel is still holding the Palestinian Government M.P.s (that it kidnapped) hostage. No problem.

Meanwhile Iran who, according to Washington intelligence sources (yes them again) has been funding Hezbollah, can control Hezbollah at whim and have so far failed to do so. The result being that the two Israeli soldiers who Hezbollah kidnapped are still captive and around 30 Israelis have been killed, as Hezbollah continues to shell Israel from Lebanon. This shelling, in response to the Israel attack on Lebanese infrastructure has had, so far, nothing like the devastating impact that Israel has had in Lebanon.

No matter. Iran should control Hezbollah. It has not done so. Obviously Iran needs to be taught a lesson.

But wait there is more. Israel has issued orders that all civilians should leave Southern Lebanon. Troops and tanks are being amassed at the border with Lebanon and an all-out assault and invasion is just days away. Washington is standing by to welcome this new liberation army and proclaim the democratic government of Lebanon safe and sound.

What we have here is big time escalation.

Israeli will occupy Lebanon. And Syria and Iran have had too much air time from the likes of George Bush and Tony Blair not to be the next targets. Syria might be small bananas but Iran is a big target with large oil reserves. It also has a large civilian population and, given the disastrous invasion of Iraq, there is no way the U.S. administration can contemplate an invasion without a "pre-emptive" extensive and destructive bombing campaign.

Basically the Middle East is going to hell in a hand basket and nothing and nobody can stop it. That is, everything is going to plan. We just aren't privy to that plan. All we can do is watch what the mainstream media is telling us, listen to the spin and connect the dots. The dots are bad.

Ben Bernanke meanwhile is living in an annex of that parallel universe. It's a nice place with no dangers. In there Oil will remain steady. Futures tell us so. Inflation will be contained and even fall. Growth in the States will moderate, but continue. And offshore investors will continue to supply the U.S. with all the funds it could possibly need.

Financial markets, however, have stopped listening. Bernanke said PAUSE and the FX market said SELL. The USD is getting hit and more selling is likely. USD global reserve currency? I don't think so. Not while the nutters are in charge.

The prospect of an all out war in the Middle East sometime soon is also not doing a lot for the Stock Market. Although Bernanke doesn't see any risks out there, the rest of the world is not so sure. Slower economic growth in the States is going to hit profits at the same time when GEOPOLITICS is written in capital letters in every sane mind on the planet. It's an ugly combination. The outlook for stocks remains poor.

OIL 75.00
GOLD 635.00

OIL unsurprisingly remains bid. GOLD is seeing volatility but more ugly fighting in the Middle East, with the sure fire possibility of more to come, means that GOLD too will remain bid.

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