We put pen to paper today in a fast changing political climate. Since last writing two key developments have made material changes to our views of the world. Firstly the United States made a major U-turn in Syria. Having stated clearly that the use of chemical weapons was a “red line” according to the President the instantaneous elevation of tensions following the August 21st attacks created a sequence of quite unexpected events. Our call, from the vantage point as oil watchers dating back to the Iran Iraq war, was that, once again, bombs would drop. Indeed we are sure this was very nearly the case until it became clear that not one of the traditional “Gulf Ally” states had any popular backing for such action. This left both the UK and the US governments in highly embarrassing situations with both incumbents being deserted in fine style by their political opponents as well as many of their own breed. This marked the first time a British PM had been refused support for military action in over 300 years. Obama was saved from a similarly excruciating fate by, of all nations, Russia.
Vladimir Putin must be respected for the gambit he called, stepping in with scathing criticism and quickly gaining control of the situation and brokering a, let’s face it, much more sensible deal. Putin was handed a stunning diplomatic coup on a plate. We feel the sequence of events here marks a meaningful change in American hegemony which will not be reversed barring significant and identifiable terrorist activity leveled directly on the USA.
The consequence for the oil price and other assets which might indirectly have inflated prices is that much of the risk premium has or will evaporate. Our expectations for higher crude prices did not materialize due to the political about turn and our future expectations will be severely tempered as a result of this episode. America’s own “Energy Revolution” is consistently making new milestones and advancing faster than anyone predicted. This puts pressure on price levels too.
Meantime we are facing another, seemingly seasonal, debt ceiling issue which is beginning to grip markets. At the time of writing the reaction has not been major. The US Federal Government has been shut for eight days, S&P 500 values have fallen 75 handles from the “no taper” announcement of September 17th, 1 month T-bill yields have rallied from 3 to 24 basis points, bank CDS is rising and US CDS is picking up a bid. We estimate a 5% chance of default rising by a few percent each day and then exponentially as we approach the 17th of October. No one really believes the outcome can possible be US default—which is what is making us so nervous. This would be a cataclysm for global markets.
How tidy would the story be, looking back to today from fifty years in the future, to pinpoint the timing of the very peak of America’s political, military and financial leadership of the World to within this short eight week period?
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