Friday, June 13, 2008

A Game of Chicken: Cutting It Close

No doubt that Bush and Ahmadinejad are "cutting it close". They are playing a game of chicken and the stakes are much higher than the "pinks" to a couple of '57 Chevy's.

Bush has submitted a massive 123 Agreement between Russia and the USA to congress. So far, there has been a lot of grumbling but no action. The congress must vote to cancel the agreement, a simple majority will do, or it becomes law within 90 days of submission. There is a worldwide scramble in progress to get other 123 Agreements to the Congress at least 90 days prior to the November elections. Technically there is a little more time but what nation wants to depend on a lame duck congress for anything? The consensus opinion is that there will be little chance of passage once more tree huggers elected. Tree huggers do not mind wrecking the economy even if it means we all go back to 15 hour work days while living on the farm.

Ahmadinejad is apparently willing to push right to the last moment. It has been reported that he desires to reach a nuclear accord by September. Again, the proposed nuclear power treaty will need to be ratified by congress.

Bush has said he expects to reach agreement with Iraq on a security agreement by July. The Iraq agreement is being structured as a "non-treaty". Lawyers, bankers and consumers do this kind of structuring all the time. For the past several years, investment bears have talked about the amount of home equity being withdrawn. Many if not the majority of these transactions were nothing more than car loans structured as home loans. Current US law allows income tax deductions for home loan interest but not for car loan interest. In the case of Iraq, the agreement will not include the pledge of the USA to defend Iraq against foreign invasion. A technicality that would make the agreement a treaty to be ratified by congress.

Iran and the UN negotiators have by all accounts have reached a general agreement as to how to handle nuclear fuel refinement. The current hang up to the negotiations is the security agreement between Iraq and the USA. This agreement must he in hand before the rest of the matter can be settled. It is doubtful that negotiations can go much further without direct talks which means Iran needs to temporarily suspend uranium enrichment or some compromise must be reached that gives the IAEA more direct supervision while the talks proceed. Hopefully Javier Solana will meet with success this week end. Market seems to be discounting a chance of success gold down, oil down, stocks up dollar up!