The energy markets found a footing late last week as hopes of a negotiated deal over the looming Fiscal Cliff. At issue too was a band-aid approach to Greece, which seemed to mollify the markets for a few days. But make no mistake about it, this will be back to haunt us again.
Nevertheless, the ideologue paralysis that grips Washington has given traders pause. But the markets are acting as if there will be a done deal despite recriminations from both sides.
From our vantage point it does not appear that the sides have drawn closer. In fact it sounds as if the President is dictating terms rather than being “open” to a solution. We are sure each side could make the same claim. However, if this economy is pressed into another factor of complexification of the economy, the resulting solution set will be far to the outside of the tail risk. That is putting the genie back into the bottle will be very difficult or impossible. Chaotic equations do not like it very much when parameters are “adjusted.” The results are far beyond what many would think is normal. Over the course of billions of iterations the results may be exponentially different than common economic modeling would suggest.
Egypt’s situation is now at the tipping point. The populace goes to the polls to vote on the new constitutional referendum. Both sides of the issue plan Sunday demonstrations. The Egyptian President, Morisi, made a grab to overcome judicial oversight, by eliminating their power. This moved many who had fought to remove Mubarak from office to feel that their government has been stolen from them. The Muslim Brotherhood, which backed Morisi, is demonstrating in favor of the power grab. They want to turn Egypt into a strict Islamist state. These things tend not to end well. We think it odd that the Obama administration praised Morisi just prior to the power grab as a peace maker that he deemed it time to grab power.
Also on the Middle East front, the IAEA has again accused Iran of thumbing their nose at nuclear inspectors. They have increased their production of 20% fissile material. The refined element is needed at that purity to be able to start a chain reaction.
The markets will be swayed and emotionally torn between headlines and sound bites. It will be a dangerous trading situation with abrupt changes in market direction quite possible.