The late Washington-state Senator Henry M. Jackson told me – in about 1970 or 71 “Keep your eye on the Straight of Hormuz.”

When it closes, the world will get involved in a Middle East war that could quickly escalate to global and nuclear.

Fast forward to overnight:

“Two oil tankers struck in suspected attacks in Gulf of Oman – shipping firms.”  And on the al Jazeera website, we learn that “One ship ablaze, all crew members rescued after presumed attacks on vessels near the Iranian coastline.”

Some analysis by military affairs contributor warhammer:

“And ye shall hear of wars and rumours of wars: see that ye be not troubled: for all these things must come to pass . . . “ ~ Matthew 24:6 KJV”

Military.com coverage here adds details.

Iran apparently has figured out one viable way to push the price of crude higher.   Whether by torpedo or mine, the gauntlet has been thrown by the Islamic Republic.

Consider this – if Iran behaves this way using conventional weapons against Western shipping interest in and around the Straits of Hormuz  to make a diplomatic statement, what can we expect if/when Supreme Leader Ayatollah Ali Khamenei oversees a shelf of nuclear warheads?  Not just the Persian Gulf, but the entire Middle East and large swaths of North Africa, Central SW Asia and Southern Europe could he held hostage.

I fully expect Israeli PM Bibi Netanyahu to team with U.S. President Trump, possibly with some others thrown in the mix, to send a clear message to Iran’s leaders.  Then we sit back and wait for Russia and China to support the Mullahs bad behavior until Iran puts the finishing touches on a line of ‘canned sunshine.‘

And yes, Israel is rumored to have several hundred nukes in its secret arsenal.  But it has never used them or threatened to use them.  Its enemies strongly suspect that the nation has them and, if they have them, they will employ them only to insure the survival of the Jewish state.  Were Iran to engage in a treaty with Israel, publicly declaring they will ‘never’ use nukes first should they ever develop them, that might be a suitable first step.  But Iran’s current bad behavior is a troubling sign regarding such hopes.

I’d wager the Doomsday Clock is moving a tad closer toward midnight.

“I can tell you one thing, Iran is closer to developing nuclear weapons today than it was a week ago, or a month ago, or a year ago.  It is just moving on with its efforts.”  ~ Benjamin Netanyahu”

Word of the attack sent the price of oil and the futures market up more than four percent.

The Iranian news agency is linking this to a foreign head-of-state visit:

“Reported attacks on Japan-related tankers occurred while PM @AbeShinzo was meeting with Ayatollah @khamenei_ir for extensive and friendly talks,” Mohammad Javad Zarif tweeted on Thursday.

He added: “Suspicious doesn’t begin to describe what likely transpired this morning.”

No doubt Iranian based forces are suspect.  And, depending on what satellite recon from the area shows, we might see a Western response as a result.

Small-time traders, who follow the news closely, will have a marvelous chance today to watch market information asymmetry at work:  While the price of certain levered ETF products jumped in the extended-hours market to the upside, the futures were showing the Dow with increasing gains and a prediction +84 open with an hour and 20 minutes to the open.

Tangentially Related?

A very good interview by Sputnik News offers this from Pakistan’s prime minister Inran Khan:

Sputnik: Has there been any progress on the Iran-Pakistan pipeline project? Are you planning to completely suspend the project due to the US sanctions?

Imran Khan: You see, at the moment there has not been much progress, and that is because of the sanctions put on Iran by the United States.

The reason we pay attention to the Pakistan – Iran oil pipeline is that in our 72-year war cycle, Pakistan “goes hot” in a couple of months – due for a major war with India.  (Won’t happen until after the sports showdown this weekend, but keep a weather eye on that, too, as a possible source of a “cause”…)

Ex-Im Prices Tumble

Is Deflation returning due to trade dust-ups?  Just out are import/export prices.  News release on that begins like this:

“Prices for U.S. imports declined 0.3 percent in May, the U.S. Bureau of Labor Statistics reported today,
following an increase of 0.1 percent the previous month. Lower fuel and nonfuel prices contributed to the
May decline in import prices. U.S. export prices fell 0.2 percent in May, after advancing 0.1 percent in
April, 0.8 percent in March, and 0.6 percent in February.

Imports

U.S. Import prices fell 0.3 percent in May, the first monthly decline since a 1.4-percent drop in December.
Import prices advanced 1.8 percent from December to April before the downturn in May. The price index
for overall imports decreased 1.5 percent over the past 12 months, matching the drop in January. These were
the largest over-the-year declines since the index fell 2.2 percent in August 2016.

Exports

Prices for U.S. exports declined 0.2 percent in May, the first monthly drop since the index fell 0.6 percent in
January. Lower prices for both agricultural and nonagricultural exports contributed to the May decline.
Export prices decreased 0.7 percent over the past 12 months, the largest over-the-year decline since the
index fell 1.1 percent in October 2016

It will be one hell of an interesting day for markets!

Meet the “Heel and Toe” Economy  (Invisible Depression)

Maybe you haven’t been through a real race driving school like Skip Barber or Bob Bondurant,so it’s totally understandable that you may have missed the experience of downshifting (heel & toe) into turns 7, 8, and 8a (“the corkscrew“), but heel and toe downshifting is pretty neat stuff – especially when initiated from the triple digits of speed…

“Heel-and-toe shifting is an advanced driving technique used mostly in performance driving with a manual gearbox, although some drivers use it on the road in everyday conditions in the interest of effectiveness. It involves operating the throttle and brake pedals simultaneously with the right foot, while facilitating normal activation of the clutch with the left foot. It is used when braking and downshifting simultaneously (prior to entering a turn), and allows the driver to “blip” the throttle to raise the engine speed and smoothly engage the lower gear.”

The rest of the Wikipedia article is here, or you can just pop for a copy of ”

About here, you may pointedly ask “What the hell could this have to do with the economy???
We were just getting to that; hold Ure horses.
The concept of heel and toe is at the heart of a theory my consigliere and I worked almost 20 years back.  In a nutshell, it goes something like this:
In a “normal Depression” the economy “breaks” one of two ways:  It can end with a massive deflationary depression when “real” money dries up.  OR, it can end with the Weimar/Zimbabwe-style hyper-inflation.
So the theory looks at these two “typical outcomes” and asks the question:  Is there some other combination of events that could “cover-up a Great Depression while still maintaining the illusion of normalcy?
Certainly, and of course.
There are exactly three ways this could be done.
  1. One way would be to all the economy to deflate and then bring along lots of inflation.
  2. A second path would be inflate like crazy and then bring on deflation.
  3. And the third path is what the Fed seems to be trying on this near-brush with financial implosion:  Heel and toeing through the worst of it.

In fairness,   my consigliere’s version may have been more elegant, but visually, it offers limited demographic appeal.  Paraphrasing, it went something like this.  (My memory from 2002 is not as crisp as I’d like…)

“Suppose you had a train and the tracks end right at the edge of a steep canyon.  The Grand Canyon will due.  You run the train as fast as you can off the edge of the canyon and then have some workers (perhaps on speed or meth) who are building the bridge under the train as fast as they can to get it to the other side…”

When looked at from the macro economist’s perspective, one can almost make out the Fed creating an inflationary bubble to provide “artificial growth” to the US economy that peaked in 2007-2008.  As we rolled into 2009, we experienced massive deflation as the housing bubble unwound.

Now, thanks to the work of Dr. Ben Bernanke (of late at the Brookings Institution) calling in some ideas from the sidelines, as in the Bernanke, Kiley, and Roberts paper “Monetary Policy Strategies for a Low-Rate Environment” which you can read over here.

As I explained a few days back, most people seem to be seriously misunderstanding the Fed.

The task of the Fed, here at the end of the Juglar cycle distance from the last 11-year bubble popping, is to “heel and toe” through the “corkscrew” if we can use the Turn 7, 8, and 8a analogy from Laguna Seca.

We’re how the course is laid out in detail:

Donald Trump is trying to get the Fed to lower rates.  There’s a (we think misguided) sense that would be good for the economy.  Such is Donald Trumps position.

On the other hand, the democrats would love nothing more than a mild recession and end of the Trump-Bump so that two things can happen:  Agenda 1 is to sour the economy enough so a democrat can waltz into the Oval in 2021. Agenda 2 is to take back the US Senate.  With some Béarnaise being building their margin in the House.  The radical wing of the “demoncrats” is actually pretty crafty so far out.  The move the middle and “pander-tuning” will be honed before the CONvention.  But, I digress.

We’re just trying to help you contextualize two stories in the snooze today:

“Federal Spending Tops $3 Trillion Through May for First Time; Deficit Hits $738 Billion.”  And stories like “May deficit surges to $208 billion, 42% higher than last year.”

A Few Short Takes

Stupid is in the House as House will hold two cabinet members in contempt over 2020 census citizenship question.  What we can’t figure is how when it’s the job of Census to count Americans, how these lefty POS’s can do that without asking “Are you a citizen?”  Boggles the mind!!!

The object of Census is tally the US population, not the 15-million people who’ve slid in under the radar, so to speak.  Go save us from the House!  From  the Oval Trump slams contempt vote against Cabinet officials, says Dems have gone ‘Loco’.

Fitting the House is looking at “deepfake” though in House holds hearing on “deepfakes” and artificial intelligence – live stream.

Political Correctness becomes International Stupid as Mexico accuses Carolina Herrera fashion house of cultural appropriation.  WTF is “cultural appropriation?”  You mean like building aircraft in Mexico?  Or how many other auto and manufacturered things?  Is Mexico sure they wanna go there?

New Gold Rush? Public companies target private firms for cannabis M&A.  Click to smoke out the details…