It is interesting to see the boundless determination of the US authorities to put an otherwise harmless 76 year- old auteur behind bars:

Hell hath no fury like LA County prosecutors and the US Attorney’s office, which collaborated on nabbing the arch criminal. All that is required is sex … or, rather the word, ‘sex’.

When will Jerry Lee Lewis ever face the bar of justice?

Polanski could be guilty of making creepy movies, but the original witness … “withdrew [her claim] many years ago.” What’s the point?

I wonder if the same forces will ever be arrayed against the thieves looting the Treasury?

With the Federal Reserve swapping as many worth- less assets it can get its hands on and the Treasury keeping the largest ‘systemic’ players from taking a dive; with a tsunami of Fed credit in all the financial marketplaces and the troubles in the real economy walled off from finance, what will bring an end to the current bubbles in stocks, bonds, and in government finance in general?

What will cause the next great crash, in other words?

• A run on stocks (because most equity purchases have been by banks seeking to improve their balance sheets. In order to capture the improvement, the bank(s) have to sell and if enough do so, the market will … uh … crash)!

• A decline in the dollar leading to a rise in interest rates (to attract ‘investors’ to dollar- denominated securities).

• A bursting of the investment bubble in China, leading to … what, exactly?

• A resumption of the real estate- foreclosure crisis (leading to more bank write- offs).

• A trade war breaking out worldwide.

• A rise in oil prices (culminating in another spike like last summer’s).

• A real war breaking out in Iran

Point, by point; keep in mind the world’s governments are working hard to keep any miniature crisis from morphing into something serious. The only tool they are using is more and more credit … but it works to some degree in keeping unstable, systemically important organs from failing cataclysmically … like Lehman Brothers failed last fall.

First, the stock markets are supported by central bank liquidity and there is no sign that this liquidity tide is turning. If a bank wants to cash out of stocks there are certainly others to take its place. Most banks need income and making loans in the current environment is not profitable. At the same time, banks must either lend or fail or attempt some substitute for lending. In this case, the alternative is to trade. There is no reason – all else being equal – for this trade alternative to fail in the foreseeable future.

Second, the decline in the dollar is overdone on all levels. What the term itself circumscribes is the trading action of currency speculators, the actual trade that is taking place requiring currency exchange – in the oil markets – has been stable of the past several months. Outside the oil markets, world trade has fallen sharply along with the currency exchange that goods trade requires. What is left is the carry trade. While a declining currency makes carry trades more profitable on one hand, a declining currency makes equally less profitable in the ‘trade’ area of the same market. Think about it.

Meanwhile, the Fed and other central banks have shown no sign of slowing down their support for the debt markets. That this is self- defeating in the long run – credit yields are finance’s proxy for the resource costs of the real economy and must reflect the payment in hard goods extracted from same. As long as the market pretends there are more participants than the Fed … yields will remain low.

EDIT: Andy Xie demonstrates his acumen with this scenario:

This suggests a trading issue in currency markets or foreign exchange, something to keep an eye on.

Third, what happens next in China is hard to determine. The Chinese are leveraged just like the rest of the world. By itself, this state of affairs is not fatal, just like it isn’t in the US or UK. As long as the risks entrained in the leverage can be contained – by central banks or off- balance sheet in private institutions – the same central banks can monetize some of it. The weight of the debt on institutions will not increase (because they can monetize it, after all), and the Peoples Bank Of China shows deliberate determination to keep all loans/lenders afloat. Where China differs from other countries is the population overhang, which drives policy. Part of this is expressed in the PBOC’s backstop, it also drives investment. Investment increases employment … until it doesn’t, any more. Investment plus a command economy leads me to support the idea that the Chinese can ‘command’ inflation a lot better than their deleveraging counterparts across the Pacific. Whether Chinese stimulus results in out- and- out monetary inflation is a guessing game. I vote for inflation, but certain wrinkles – the Chinese government encouragement of (deflationary) individual purchases of gold raises questions. Right now, the Chinese seem to have the lid on things, not to have a crisis any time soon.

Fourth, a ‘Return to Subprime‘ … or, ‘Son of Subprime‘ … or ‘Subprime II’ … directed by that jailbird Polanski, no doubt … with this leading to more bank failures, particularly of regional/local banks that have invested heavily in commercial real estate lending, including construction loans to developers. A wild- card is the precarious states of both the FDIC and HUD’s Federal Home Administration, which has become the ‘Niewe Countrywide’, giving away money under deadbeat terms and selling the resulting mortgage- backed securities to Ginnie Mae.

Since the country has been down this path before, the authorities are prepared. The plan is … don’t laugh … print more and more money and prepare more bailouts. Since FDIC and FHA are ‘key men’ there is no way under the sun that either would allowed to fail. This doesn’t mean there won’t be administrative contretemps as FDIC’s Bair and Tim Geithner circle each other warily, daggers in hand. Otherwise, the ‘extend and pretend’ strategy devised during the ‘Lost Decade’ in Japan should do nicely to keep financial order. At declining house prices, there is an endless supply of speculators looking to buy at the bottom; the longer the time period over which prices decline, the greater the number of speculators.

Fifth; the imbroglio over tires has taken the overtones of an out- and- out trade war between the US and China. Overheated imaginations race back to the early- 1930’s and the Smoot– Hawley Tariffs which clamped down on international trade and amplified the Depression … only there was little trade to clamp down on. Like today, citizens in the US and abroad had little disposable income and simply didn’t buy imported goods. There is a significant difference; the trade that matters is between the US and its energy suppliers. In the petroleum ambit, as of now, there is no oil trade war in the offing.

At the same time (sixth), a significant rise in energy prices doesn’t seem to be in the tarot cards, either – with one exception. One reason is the dollar is oversold and the other is world demand is still below maximum production capacity. As long as there is spare capacity, the price won’t spike. The $64,000 question is, how much spare capacity is there? The answer is enough to keep prices where they are, currently.

The exception is the ratcheting upwards of war rhetoric in Washington, Iran and Israel. There is no consensus about how the Iranian nuclear provocation will be resolved. Obama’s naive assumption that his nice appearance and pleasant demeanor could resolve relationship issues with Ahmadinejad has foundered on Iranian intransigence and the centralization of (insecure) authority in that country to what amounts to a ‘state within a state’, comprised of Iranian intelligence services and the Revolutionary Guards. Any leverage is dearly gained; the world requires every drop of Iranian oil. The US/UN sanctions banter has been of such long- standing duration and porosity, that there is little left to threaten Iran with short of military action.

At the same time, the sharp- dressing US president has been effectively painted into a corner by his commander in Afghanistan. The outcome of this will be some sort of ‘surge’ (bailout) in that country; Obama is at a point in his administration where he has to prove to the stallions in the Pentagon and Centcom that he really isn’t bromide peddling, argyle sweater- wearing, ex- law school lecturing weenie, after all. Behind the curtain, the Saudis are open to the idea of a destabilizing attack on its Shiite (read, ‘infidel’) rival and petro– competitor; and why not? Attacking Iran would result in immediate disruption of the petroleum market! Even if the Iranians failed to close the Strait of Hormuz, their military capability would add a ‘risk premium’ that would counterbalance the likely flight into US dollars that would also take place at the same time.

A problem that arises from the war scenario is the likelihood that any conflict would probably last a long time; there would be increased fighting in areas where Americans are already engaged. Iran would send jihadi proxies into Iraq and Afghanistan as well as point them at US vulnerabilities around the globe. More missions and resources would be directed against Iran directly, either by Israel as- a- proxy or by the US in order to keep sea lanes open. If US shipping is attacked, a much wider war is possible. The longer a conflict lasts in troubled Gulf waters, the certainty for another lunge upward in oil prices takes hold.

While the central banks and the finance ‘system’ can restrain deflation crisis a bit longer – maybe a lot longer – the weakness of the president and the collection of incendiary Middle East hotheads acting in concert seem to be aiming to blow up the oil market. When? Sooner, rather than later.