I thought this was pretty interesting. InTrade the 'prediction markets' site has a contract for the probability of Bush bombing Iran by September or December. I had a chance to discuss and analyze this contract with Afshin Rattansi on Press TV, Iran's hottest television station, last night.
Afshin Rattansi: Live from Paris, Max Keiser, journalist and broadcaster, joins me now. Is the high price of oil again to do with the weak dollar and what did you think about the Fed's decision to keep rates the same, where they were?
Max Keiser: Well, it's a brilliant synopsis, Afshin, of the situation. The dollar is weak, oil is strong. Bernanke was maybe holding out hope the possibility of him becoming more hawkish on rates. Maybe even raising rates a quarter of a point to throw the US dollar bulls a bone. No cut was forthcoming. A lot of talk. The markets saw this as an excuse to sell the dollar. The dollar is weak, very weak and, of course those commodities priced in dollars like oil, gold and food commodities, responded accordingly. So the US is in an interesting situation, Afshin, because they can't raise rates without making the housing crisis worse. They can't lower rates without making the dollar more precarious so they've backed themselves into a corner. And if they are going to go into a global currency fight against countries like China, well, the US has about 75, 76 billion in foreign reserves. They're going to be up against China with 1.7 trillion in US dollars and foreign reserves, so it's not much of a fight there. It could be an interesting fight though.
Afshin Rattansi: Do you think China would ever call that though? I mean, during the 1990's, of course, we all wondered about Japan calling in that bet as it were.
Max Keiser: Sure. Well, Sumitomo Bank, Bank of Japan are direct extensions of the Federal Reserve System and the cartel on Wall Street, whether it's JP Morgan or Goldman Sachs. China is a little bit different situation. I think they've got the ability now to wean themselves off the US dollar. They've got the local currency, the yuan which is appreciating against the dollar which means that all these Chinese people have more purchasing power. And they're willing now to spend some money after saving, you know they provided America with savings for years. Now they're going to spend some money. So this means that they are willing to allow the dollar to weaken because it means that their currency, the yuan goes up, so they're actually in a winning situation.
Afshin Rattansi: Just on the matter of gold, it hit a one month high. It's traditionally seen as that investment of choice during wars. Is it the same indicator or is oil a better bet?
Max Keiser: I brought you some gold Afshin, I'm going to send this to you. One troy ounce of gold to put in your pocket and carry around with you as this crisis unfolds.
Afshin Rattansi: It's probably illegal.
Max Keiser: But gold is poised to break out on the upside again. It is the commodity of choice for those that are looking for a safe harbor. It has been selling off over the past few months because the Central Banks and the commercial banks and the investment banks have large short positions in gold trying to keep the price down, but they don't have inexhaustable finances to carry something like that out. So gold is really breaking out on the upside and we're looking for gold to get through the $1000 barrier again, on its way to two and possibly three thousand dollars an ounce.
Afshin Rattansi: We've got a graph coming up on the screen from Intrade dot com about international politics betting, as it were, on the markets. I know you pioneered this type of betting. The international media says its not the weak dollar its international politics. You probably can't see the graph in your studio there, but it shows a decline . . . well, we're watching a graph about betting on a war with Iran, airstrikes against Iran. You had a look at the graph just before coming to the studio, how would you interpret the graph?
Max Keiser: Well, the global tensions right now, based on that graph, which is the probability of a US bombing of Iran by September, I believe there's a 16 percent chance with the chance rising to 30 percent by December, according to that chart. And this is a prediction market, or a perception market, which aggregates interest from traders all over the world, who are making bets as to the probability of such an event occurring. My take on the recent weakness is that you see, for example, Bush is making nice nice with North Korea. He's, I guess, lifting some sanctions, or talking about lifting some sanctions. So there's a perception, now that the neo-cons have had to take a step back. John Bolton was on TV today saying, "oh Bush is making a horrible mistake by cutting the North Koreans any slack whatsoever." So traders who are betting on a possible bombing of Iran are selling out of their positions. They're pulling their money out of that position. But you see that in the December's future contract on bombing Iran, it's a 30% probability, so I wouldn't say that by the time Bush is out of office, the probability is going to stay at 16%. Obviously, there are still some traders out there who are betting on bomb Iran by the end of the year, which corresponds with the Bush administration.
Afshin Rattansi: Finally, back to what you were saying about how the Fed seemed to have them in an unwinnable situation. Does that mean that oil futures will just continue to rise and that the Fed has no options on the table to be able to stop it because that too will mean political problems for political parties in Europe and the United States?
Max Keiser: Absolutely. The chart of oil, if you look at it more technically speaking, going back a few years oil has been on an upswing, but it's stayed within a very defined channel. If you can imagine that on its upswing. The price today broke out of that channel on the upside, which, if it stays above the 141/142 level, you could see panic buying into the 150/160 level. Which would create unbelievable dislocations in the global markets and this would result in some, I think, urgency on the part of various world governments to take some action.
They are now trying to blame speculators for this problem, but the speculator in this equation is Ben Bernanke.
He speculated with the future of the dollar. He lost.
And now the results are in the price of oil.
Afshin Rattansi: But, surely, a war with Iran would increase oil prices and make things worse for all those banks, so perhaps it's not in the interest of Wall Street?
Max Keiser: Goldman Sachs now has the biggest oil position in America and probably one of the biggest oil positions in the world. They're long oil. So the banks have aggressively been buying oil on their balance sheets. I think they might see this as a way to bail themselves out of this mortgage crisis. By hedging themselves by buying oil. They have, remember the shadow banking system, Afshin, which is not talked about widely, but it's the back channel, special investment vehicles and conduits that exist between banks - it's roughly a ten trillion dollar market which is unregulated and unreported.
All this paper in the shadow banking system, ten trillion dollars, is at risk of going bad. Which would mean that every major bank in the US is technically insolvent. So if they could get oil to a higher price and they are long oil, maybe this is how they are going to bail themselves out? You know policy is driven purely in self interest. The Federal Reserve Bank and the commercial banks and the Wall Street banks are not acting in the interests of the population at large, they're acting purely in their own self-interest, which is a shame because they're actions dictate the reality for 300 million Americans. But they don't see it that way, they see it only as a way to preserve their own self-interest.
Afshin Rattansi: Max Keiser, financial analyst. Thank you for giving that financial perspective on international affairs.