Tags: Iraq | China | risk | Markit

Geopolitical Risks Still Abound Even Though Markets Are Ignoring Them

Tuesday, 24 June 2014 01:29 PM Current | Bio | Archive

It's really interesting to see how various markets in many places still seem to negate the risk monster that is developing in and around Iraq. In fact, the Islamic State in Iraq and Syria insurgence continues taking over more and more of the country and has reportedly even captured the country's largest refinery, the 310,000-barrel-a-day plant in Baiji.

Already some think gasoline prices in the United States could be at their highest level in six years over the July 4 holiday. One could ask if we are at one of these proverbial moments of a calm before the storm?

However, it's difficult to get a clear and truthful picture of what's really going on in Iraq and where the country is probably headed.

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One thing is for sure: This time won't be different from all these times when we got all these foggy-like declarations we have been obliged to listen to during way too many years and that, unfortunately, go back to well before the first Gulf War I.

In my opinion, the whole thing could get very nasty and especially now that U.S. forces finally got immunity guarantees from Iraq, as was requested for sending 300 U.S. military advisors to assist the Iraqi military.

Let's hope President Obama's decision for sending military advisors to Iraq will not turn out to become another one-way engagement that once it comes to its end could turn into a similar adventure as the disastrous one that started in 1961 when President Kennedy decided to send military advisors to Vietnam. That ended in 1975 when the million-man South Vietnamese Army, which the United States under it's "Vietnamization" program had trained for years and equipped with billions of dollars in U.S. weapons, and in the end, abandoned their arms and fled (yes, amazingly similar that what the Iraqi army just did in recent days) during the spring 1975 North Vietnamese Army offensive, which after only a few weeks, captured the capital of Vietnam, Saigon.

I see and feel a lot of similarities with what happened in Vietnam with what's going on now and where Iraq could be headed and with it the whole area. I hope I'm wrong, but if I'm right that doesn't bode well for anyone anywhere.

Whether we want it or not, geopolitical risk is back in a big way and I'm afraid we are only at the beginning of an extended period of "troublesome events" that will have their impact on, among many other things, oil prices. If we see a sustained and sudden price rise of more or less $30 per barrel, many economies in the world could get rapidly into serious problems.

By the way, please take notice that Saudi Arabia is building a security fence along its entire 515-mile border with Iraq.

Don't get me wrong. I'm not saying the world is at risk of facing a scarcity of oil supply. On the contrary, there is plenty of oil, but that doesn't mean the oil price couldn't spike. At the end of the day, it's the traders not the producers that set most of the oil prices.

On Monday, Canadian Finance Minister Joe Oliver warned that investors could be mispricing risk because of their desperate search for better investment returns. "We've said again and again . . . international financial markets are still fragile. Part of that is macroeconomic and monetary issues, but there is a geopolitical issue," he told Reuters

I have no doubt that long-term investors have little chance to err keeping an eye on the various geopolitical risks like the ones concerning Iraq, Ukraine, Syria, the South China Sea.

Of course, everybody has to decide for themselves if they will remain complacent, as the vast majority still continues to do, and discard the fact that at some time, some catalyst will cause a disruption/sell-off in the markets. When that would occur is anybody's guess, but I think it's better to be prepared and not to be in a position of being startled by a complete surprise.

Also on Monday, The Conference Board's Leading Economic Index (LEI) for China rose 0.7 percent in May to 290.2, after rising 1 percent in April and March.

"While the Leading Economic Index for China increased in May, its rate of increase has slowed considerably in recent months. The LEI . . . suggests continued weaknesses in China's real economy in the coming months," said Jing Sima, an economist at The Conference Board. "April's sharp improvement in the real estate sector was short-lived and consumers remain in a pessimistic mood."

If you ask me, I still see no reason whatsoever to believe that China is out of the woods yet.

Finally, we got also the four different Markit Flash Eurozone Purchasing Managers Indexes (PMIs) that all came in lower than expected. First, the Flash Eurozone PMI Composite Output Index came in at a six-month low, at 52.8 versus 53.5 in May. Second, the Flash Eurozone Services PMI Activity Index came in at a three-month low, at 52.8 compared with 53.2 in May. Third, the Flash Eurozone Manufacturing PMI came in at a seven-month low, at 51.9 versus 52.2 in May, and finally, the Flash Eurozone Manufacturing PMI Output Index came in at a nine-month low, at 52.8 from 54.3 in May.

All this points to a euro area recovery that, for the moment at least, is losing momentum. We'll have to wait and see if this trend is confirmed or not.

In contrast, the Markit Flash U.S. Manufacturing PMI showed its strongest improvement in overall business conditions since May 2010, coming in at 57.5 versus 56.4 in May. It really starts to look like U.S. growth during the second quarter could come in around 3 percent after the 1 percent contraction we saw during the first quarter, as job growth appears on its way to grow again with more or less 200,000 units in June.

I don't think it's an overstatement to say we could see rates in the United States starting to rise earlier than the forward guidance that Federal Reserve Chairman Janet Yellen seemed to indicate during her latest press conference, which in the end would be good news, although many in many places won't be happy about it when it happens.

I can't see any better places than the United States, Canada, the United Kingdom, Switzerland and a very few others to play it safe and keep, as much as possible, my investments as highly liquid as possible, as I still expect a correction to occur. Once it's underway, I'll try to detect its probable downward path, which, don't be surprised, could be violent.

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I can't see any better places than the United States, Canada, the United Kingdom, Switzerland and a very few others to play it safe and keep, as much as possible, my investments as highly liquid as possible, as I still expect a correction to occur.
Iraq, China, risk, Markit
Tuesday, 24 June 2014 01:29 PM
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