Qatar’s economy will be devastated for years by US aggression in the Gulf.

 

Even if the war the US wages against Iran were to end immediately, the damage sustained by Qatar during this conflict will not be so easily fixed, laments the NYT:

♦️ Disruption of maritime traffic through the Strait of Hormuz has effectively shut down Qatar’s liquefied natural gas (LNG) trade, which contributed about 60% of the country’s revenue

♦️ Attacks against Qatari LNG production, such as the facility in Ras Laffan, have degraded the country’s productive capacity by 17%, and obtaining replacement parts for repairs could take up to five years

♦️ As Qatar lacks overland LNG export routes, the Hormuz blockade leads to gas production shutdown as storage tanks get filled to capacity. It could take Qatar up to four months after the Strait reopens to fully resume exporting operations

♦️ The threat of drone and missile attacks has ruined Qatar’s reputation as a tourist hub, as the World Travel & Tourism Council estimated that the Middle East as a whole was losing about $600 million a day in tourism revenues amid this crisis

♦️ The risk of further attacks also erodes Qatar’s attractiveness to international firms, increasing the likelihood of foreign capital leaving the country. Alleviating these concerns would take months or probably years

♦️ Qatar imports about 90% of its food, and the Hormuz crisis forced the country to seek alternative and more expensive delivery routes. Prices of imported goods have already increased by 10%, with a more severe spike being avoided only because of government subsidies

 - And this is only one example among others. Kuwait, Bahrain and eventually the Emirates will not fare much better. However you look at it, the US will come and go but Iran is here to stay as the giant country filling their northern horizon.   

 - You can build all the pipelines you want to Fujairah, you are indeed out of the Persian Gulf but still facing Iran in the Gulf of Oman. Even Saudi Arabia must cross the Bab el Mandeb or aptly named Strait of Tears to export oil and gas to Asia. In the end, the damage to the Gulf Countries will end up being a magnitude larger than to other countries. Money can only alleviate the pain for a while. Then reality will set in: The Gulf Countries have no choice but to be realistic and compromise with the new Persian Empire. The imbalance is just too much.  

The Fed Will Invent New Inflation Numbers Out Of Thin Air

  The best description of going bankrupt is the one famously illustrated by Ernest Hemingway: "How did you go bankrupt? Two ways: gradually, then suddenly."

  Old nobility in Europe had its own definition: First you burn the furniture to keep warm. Then the floor's planks and finally the roof of the castle.  

  For a country, it is both more gradual and protracted but no less relentless. It always end up the same way: The inability to pay excessive debt. But before that fateful day arrives, which it always does, the bag of tricks as illustrated below is full of predictable surprises and, well, yes, tricks.  

 Interest rates repression, more nicely called control is a double edged sword that governments use as a last resort because of the risks attached. Japan has used and abused the privilege over the last 30 years, transforming a rich country into a newly poor one thanks to the relentless devaluation of the Yen. 

  But the tool of choice is of course inflation since most people have been taught to believe that inflation is part of life in a modern society. It is not. In reality, technological progress should generate a 1 to 2% deflationary environment as was the case in the 19th Century. But 2% of "free" technological progress plus 2% of "target" inflation are of course not enough to pay for endless promises. Which is exactly when fudging the numbers become official policy allowing for another 2% of diversely called "hedonist" adjustment or substitution effect. To finally end up with inflation numbers out of thin air which is more or less where we are now. 

  This period unfortunately cannot last very long as the cumulative effect on consumption and the economy quickly becomes overwhelming when the growth of debt far outstrip the capacity of the underlying economy to repay it. Then, through another more circonvoluted route we end up at the same spot of bankruptcy.     

by QTR's Fringe Finance

The Federal Reserve is rapidly approaching the point where every available option becomes politically toxic, economically destructive, or both.

Inflation remains stuck around 3.8% CPI, well above the Fed’s stated 2% target, and that number alone should theoretically eliminate any serious discussion of aggressive easing. Treasury yields are rising as bond investors demand compensation for persistent inflation, uncontrolled fiscal deficits, and the growing realization that Washington’s debt load is becoming increasingly unstable.

The American consumer, meanwhile, is clearly running on fumes. Credit card balances continue hitting records, delinquency rates are rising, savings buffers have been depleted, and wage growth is failing to keep pace with the real cost of living for millions of households. Yet despite all of this stress beneath the surface, equity markets continue trading as if rate cuts are inevitable, growth will remain strong, and the Fed will once again rescue investors the moment volatility appears.

It is a fantasy built on the assumption that policymakers can indefinitely suspend economic consequences.

As I’ve been writing about, the Fed’s dilemma is now impossible to ignore. Raising rates further would intensify pressure on households, corporations, regional banks, commercial real estate, and most importantly the federal government itself, which now faces massive refinancing needs at dramatically higher borrowing costs. Holding rates steady risks allowing weakness to spread until something in credit markets eventually breaks.

Cutting rates, however, presents its own disaster scenario because inflation remains far too elevated to justify meaningful monetary easing. The Fed spent years insisting inflation was transitory before being forced into the most aggressive tightening cycle in decades. Repeating that mistake while inflation remains nearly double target would destroy what little credibility remains. And yet that may not stop them if markets begin unraveling. Remember this Bloomberg Businessweek cover?

As we’re seeing last week, real danger starts in the bond market. Stocks may dominate headlines, but Treasury markets are where systemic pressure becomes impossible to hide. Washington’s fiscal position becomes increasingly unsustainable if yields continue climbing because deficits at current levels only function in a world where debt can be financed cheaply.

If bond investors continue pushing yields higher, policymakers will eventually be forced to intervene directly. As Michael Green noted during this recent interview, that intervention will almost certainly come in the form of yield curve control, where the Fed steps into the Treasury market and effectively caps long-term rates through direct bond purchases. In plain English: money printing returns under a more sophisticated label.

Once that happens, equities likely become the next casualty before ultimately becoming the next rescue target. If yields spike hard enough before intervention arrives, equity valuations face a brutal repricing. Those investors currently paying extreme multiples for growth stocks and not just participating in the massive ongoing gamma squeeze in markets are doing so partially because they assume lower rates are right around the corner. If that assumption fails, stocks can fall hard and fast. And once markets experience enough pain, political pressure on the Fed will become overwhelming. Policymakers will once again be told they must stabilize markets, protect pensions, preserve confidence, and prevent contagion.

That is where things move from reckless, to dangerous, to out of ideas.

If inflation remains stuck around 3.8% but the Fed still wants political cover to print money, suppress yields, and rescue markets, it needs a justification. The easiest way to create that justification is by changing how inflation is measured. A Reuters report recently highlighted comments from Fed Chair Kevin Warsh suggesting that one of his first initiatives could be a major “data project” aimed at better measuring what he called “underlying inflation.”

Rather than relying on traditional inflation readings, Warsh expressed interest in trimmed-mean inflation metrics that remove what policymakers classify as extreme price movements in order to create a supposedly cleaner picture of inflation trends.

That sounds harmless until you understand what it really means. If inflation is running at a very real 3.8% and consumers are already being crushed by rising rent, food, insurance, healthcare, and utility costs, artificially lowering official inflation metrics to justify renewed money printing would be like pouring gasoline onto a house that is already on fire. It would take an inflation problem that is already eroding the middle and lower classes and deliberately intensify it in order to protect asset prices and government financing needs.Wealthy asset holders may celebrate easier policy and rising stock prices, but ordinary households would be left paying the real cost through even higher living expenses. Their wages would lag further behind. Their savings would lose more purchasing power. Their path to home ownership would become even narrower. Their ability to absorb everyday price shocks would deteriorate further.

This is what makes the entire idea dangerous. Americans do not live in a world of “trimmed mean inflation.” They live in the real economy. They buy groceries at actual prices. They pay actual rent. They pay insurance premiums that have surged. They deal with medical bills, childcare expenses, utility costs, and tuition payments that continue rising faster than official narratives suggest. Reuters itself noted that similar inflation metrics helped policymakers underestimate the inflation surge in 2021 by filtering out warning signs until inflation became impossible to ignore. Now the same intellectual framework is reappearing at precisely the moment policymakers may need an excuse to restart intervention.

Kurt Altrichter on X noted the potential change: “The Fed has used Core PCE, which excludes food and energy, as its benchmark since 2000. Warsh favors Trimmed Mean PCE, which removes the most extreme price movements each month instead of excluding whole categories.”

He writes: “The practical difference: Trimmed Mean PCE currently reads 2.36%, well below the 3.20% reading on Core PCE. Depending on which measure the Fed follows, the case for rate cuts looks very different. This is not a minor procedural change. The metric the Fed uses to gauge inflation directly determines when it judges the economy to be at target.”

And the purpose of the change: “If Warsh moves the committee toward Trimmed Mean PCE, he is mathematically moving the Fed closer to a declared victory on inflation, which creates runway for rate cuts even as headline readings stay elevated.”

Altrichter concludes: “You’d think with 400+ Ph.D. economists and 500+ researchers on the payroll, the Fed would run the most sophisticated macro forecasting operation on the planet, leaving Bloomberg and every major hedge fund in the dust. Not even close. When the data doesn’t cooperate, just change the data. Same thing I saw in the Army when time or weather worked against higher leadership, and we would quietly move the goalposts rather than admit the standard couldn’t be met. Can you tell why I didn’t stick around for the full 20 years?”

And he’s right. This may be the real endgame. If bonds break, implement yield curve control. If stocks break, flood markets with liquidity. If inflation remains too high to justify either action, simply redefine inflation until the numbers say what policymakers need them to say. First it was hedonic adjustments. Then substitution effects. Then core inflation. Now “underlying inflation.” Every step moves further away from what ordinary people actually experience and closer to whatever statistic allows policymakers to keep the debt machine operating.

Maybe Wall Street celebrates another round of artificial stability. Maybe politicians claim inflation has been defeated because a revised formula says so. But if policymakers print aggressively into what is still a real inflationary environment, they are not solving the problem, they are accelerating it. They would be sacrificing the purchasing power of the middle and lower classes to preserve financial asset prices and government solvency.

And then they will likely stand at podiums explaining that inflation is under control while families wonder why groceries, rent, and insurance somehow keep rising faster than the official numbers suggest. At that point, the only thing more inflated than prices may be the credibility of the people reporting them.

AI Is A Massive Problem. Here's Why (Video - 42mn)

  How dangerous is AI? Nobody knows is the most accurate answer to date. 

  I believe it is a risk worth taking since anyway we have no choice. Whatever we decide, AI, potentially, gives such an advantage to the people who develop it first that it is unavoidable that sooner than later, it will be developed. 

   But to have an educated opinion, first, you need to understand how we got where we are, which the video below presents superbly. There, at the end, they move on to their concern: AI is potentially dangerous.  

  I don't know. Nobody does. So here's the elements to form an opinion. 

AI Is A Massive Problem. Here's Why

  And here's a deeper, more complex discussion about the risks:

“This Isn’t Just AI. It’s ALIEN Intelligence”

 

The Middle East's Next War After Iran (Video - 36mn)

    "Do not interrupt your enemy when he is making a mistake!" is the very first axiom of Chinese strategy and sure enough Xi Jinping was masterful in the art this week. No major breakthroughs were made, but conversely the exercise of this visit was fraught with dangers and pitfalls which were avoided on both sides allowing a general sight of relief.    

   Trump as usual came to China for a, mostly, business trip and was welcome as such, allowing China the luxury to not engage in sensitive discussions, keeping mum on strategic issues which Trump interpreted as acceptation of his leadership role. How mistaken! 

   The fact that Trump has no patience for the intricacies of strategic thinking doesn't mean that the US "Deep State" doesn't have a strategy. Only that it is being implemented without much discussion with either partners or competitors. Contrary to what many people may be thinking, the war with Iran is not about Israel. The balkanization of most Middle East countries may be beneficial for Israel but it can only be a secondary goal, most certainly not comparable to the main objective which is to rebuild the post-war petro-dollar American hegemony on a new, stronger base of total control of all fossil resources (oil and gas) around the Globe. That is the clear and obvious strategy of the US which is being implemented whatever the current administration may be, by blowing the Nordstream pipeline (controlling the supply of gas to Europe), taking over Venezuelan oil, or closing down the Hormuz Strait. (Which in itself is only a plan B compared to the initial goal of controlling directly Iranian oil.)  

   But then, what about China? All this is of course crystal clear to the Chinese so why not confront directly the Americans and their blatant imperial run? Xi Jimping actually gave us a very strong hint when he casually commented that the US was a declining power and conversely implied that China was a rising one. Obviously, energy must be at the very core of any power, rising or declining, so why this quiet and almost nonchalant answer to the gauntlet thrown by Trump? Could it be because the Chinese now believe they are on their way to building a post-oil economy and consequently find it unnecessary to directly confront Trump on this subject?

   This to my opinion is a very shaky ground to base a strategy since it implies that not only China will be first to develop new technologies (very likely) but that these new technologies will actually be competitive with oil and gas. Definitively not a done deal at this stage. So what could be the source of this Chinese self confidence? 

   It must be a complex mix based on the combination of different factors which together must give a significant edge to China. First, even if oil and gas remain the most dense and economic energy sources available over the coming years, the Chinese have proved that with a judicious energy mix (Nuclear, wind, solar, hydro, gas and oil) they can effectively insulate an economy which from now on will become less energy dependent to generate output. Second, although the US as a major oil and gas producer is immune to an energy crisis, it is not immune to an economic crisis since the country cannot disconnect its economy from the world economy since this would immediately crash the petro-dollar. And finally, would such a global crisis take place, the damage would be greater for the US and its partners than for China which therefore would find itself in an even better strategic position to finally negotiate the reorganization of the post Bretton Woods financial ordering of the world.          

   This I believe is the context which allowed Trump to return home with a short term tactical victory (a status quo) while China was slowly moving its 'Go" pieces on the world checker board, ensuring a future positive outcome. 

   So what can we conclude from this analysis? In the short term, nothing has changed. The pressure will keep rising and the pain with or without war will grow, faster with a war, more slowly without. India which was especially dependent of Middle Eastern oil is already showing signs of acute stress. The rest of Asia will follow soon and Europe finally in June. By July, the signs of the coming recession will be obvious. Good luck for November, Mr Trump!

   But then, what about the Middle East? As discussed in the video below, the stakes for the Middle East could not be higher. An unlikely return to the previous balance could help the monarchies survive another day. Conversely, both the rise of Iran or anarchy in the Gulf could spell doom for them with the old prediction of Saudi Arabia King Faisal: "From camels to gold back to camels in a hundred years!" becoming a reality. The dices are rolling. The Chinese didn't throw them but are trying hard to be on the winning side wherever they land. Trump meanwhile is jumping from one tactical move to the next, making money for himself on the way, which is more or less what he has done his whole life! He is also running against the clock which is less and less his friend at this stage.    

The Middle East's Next War After Iran