A Debt Defying Drop
Oil prices fall and gold prices surge as the US debt talks appear to be going nowhere. The Democrats and the Republicans have gone their separate ways and hot money is running to Asia, Switzerland and the safe haven place of their choice. The odds of QE3D may be rising, the dollar is falling and stocks and oil could take a debt defying drop.
As the so called debt deadline comes close the Republicans and the Democrats are falling further apart. Yet the markets action is showing some restraint as it believes that a deal should be cut and at the end of the day the Treasuries are still a safe place to be. Oil is under pressure as it is concerned that the uncertainty can reduce demand. At the same time the dollar seems not to be as weak as one might think.
The market obviously believes that this political “high noon” will end with Democrats and Republicans walking hand in hand into the sunset. Yet despite a short-term drop in oil, a debt default will be bullish! The Fed will be forced into a QE3 and the dollar would get trashed. Hot money would cause a surge in demand as the Chinese and emerging economies would seek to spend all of that money that is being thrown at it. Of course it is also likely that a US default may cause the International Energy Agency to reconsider its stance on an oil release. With central banks already flooding the market with liquidity they may want to try to flood it with oil as well.
The Financial Times reports that the Iranians and the Chinese are getting even chummier and have created a trading system where the Chinese get oil and the Iranians get goods. No word on whether the goods will be knockoffs or officially licensed. The FT says that some Iranian officials are growing increasingly angry about the inability of the country’s largest oil customers to pay cash, a problem that has contributed to a shortage of hard currency and has hindered the central bank from defending the Iranian Rial, which has been sharply devalued over the past month. So instead of cash I guess the Iranians will accept Ironic Phones.
The FT says that those problems with payments caused Iran to threaten India which owes Iran $5bn for oil but has not been able to move the money out of an escrow account to Tehran. “Unlike India, which exports almost nothing to Iran, China is dominant in Iranian business and could use a barter system to balance trade between the two countries.”