Bloomberg reports:

Treasury Secretary Timothy Geithner committed to cutting the budget deficit as concern about deteriorating U.S. creditworthiness deepened, and ascribed a sell-off in Treasuries to prospects for an economic recovery.

“It’s very important that this Congress and this president put in place policies that will bring those deficits down to a sustainable level over the medium term,” Geithner said in an interview with Bloomberg Television yesterday. He added that the target is reducing the gap to about 3 percent of gross domestic product, from a projected 12.9 percent this year.

These are wonderful promises, but we see little substance to back up Geithner’s “targets”.   More concerning was the sell-off in bonds yesterday indicating that foreign central banks may be anticipating a ratings cut in the U.S.A itself and are selling on the rumor.  While concerns over inflation through quantitive-easing have risen over the past weeks, the far greater concern is the threat of a serious bond-market meltdown should Bernanke’s dreams of low interest rates crash against the rocks of inflationary fears  — forcing rates ever higher.

What then of our “green shoots”?   With America’s deficit exploding almost 30% to over $2 trillion in a matter of months, America’s circle of creditors are sure to be casting nervous sideways glances at one another.  Growing international concern that the US may not be a reliable debtor were hightened yesterday, as Britain’s AAA rating was called into question by Standard & Poors, who lowered the nation’s outlook to “negative”.  (It does not take a particularly keen observer to note that the USA may be next in line.)

Also concerning is the “rot within”, as municipal defaults around the USA threaten to place an impossible burden on the shoulders of the Federal government.  One must concede that the concept of “too big to fail” has not yet been truly considered until one grapples with the issue of defaulting state and local governments.    There exists no framework, or precedence for these massive stormclouds forming on the US horizon.  Policy makers everywhere are deeply troubled with the prospective issue of whether the federal government should run to the rescue of state and local budgetary fiascos:  Fiascos brought about by irresponsibility, fraud and the very same ingredients that made up the subprime scandal itself.   To take on these burdens at the federal level would seriously call into question the financial health of the USA itself, and yet allowing local governments collapse under their own financial burdens will have deep and extraordinarily painful repurcussions.

Bloomberg reports:

Also yesterday, Geithner said the U.S.’s $700 billion financial rescue package can’t be used to aid cities and states facing budget crises.

The law “does not appear to us to provide a viable way of responding to that challenge,” Geithner told a House Appropriations subcommittee in Washington. Among the hurdles: money from the Troubled Asset Relief Program was designed for financial companies, he said.

Geithner said he will work with Congress to help states such as California that have been battered by the credit crunch and are struggling to arrange backing for municipal bonds and short-term debt.

The municipal bond markets are “starting to find some new balance and equilibrium,” he said.

No, Mr. Geithner, they are not.  But while Treasury is correct in not extending TARP support at this time — Geithner’s promise to “work with Congress” hardly sounds like restraint.  The US is sailing swiftly into a scenario which will demand significantly higher interest rates.  While we are fuly cognisant of the pain and hardship that accompany a laissez-faire response to corporate and municipal financial failures — such pain is deeply preferable to the broad systemic collapse that will follow if the federal government tries to backstop our entire bathtub of bursting bubbles.

Brazil’s central bank announced today that transactions between China and the South American nation will increasingly use their own currencies rather than use the US dollar.   Rumors of a Chinese/Brazilian move to break away from USD hegemony first surfaced at the G20 meeting in London last month.  This week, with Brazil’s president Luiz Inaςiao Lula Da Silva involved in high level economic talks in Beijing,  it seems the rumors are swiftly turning into actual policy initiatives.

SKY reports:

The move is significant for two reasons: not only is it a direct challenge to the dollar as the world’s transaction currency of choice but it is coming from two countries with some of the world’s largest foreign-exchange reserves—most of which are held in (yes, you’ve guessed it) dollars.

…

It’s not the first time we’ve heard such posturing. A year ago China – the world’s largest consumer of U.S. government debt – warned it could move those assets into better performing currencies like the euro and as recently as March, the country’s central bank governor pondered replacing those dollar holdings with a standard reserve such as the one used by the IMF. Such words have in the past seemed idle threats but with the prospects of countries like Brazil, Russia, India and China (the so called ‘BRICS’) outpacing shrinking markets in West, a currency agreement between such emerging market titans could challenge the monetary status quo.

We’re still extremely curious as to the specifics of this somewhat “apples and oranges” agreement between the two currencies.  Brazil’s currency floats like any other major currency on world FX markets, while the Chinese renminbi is carefully managed by Beijing at just under 7 per dollar.   It is also interesting that the arrangement is not exclusive and still allows either nation to use USD as a matter of choice — a flexibility which doesn’t exactly ring of confidence in either one of the competing currencies.

The Financial Times reports:

An official at Brazil’s central bank stressed that talks were at an early stage. He also said that what was under discussion was not a currency swap of the kind China recently agreed with Argentina and which the US had agreed with several countries, including Brazil.

“Currency swaps are not necessarily trade related,” the official said. “The funds can be drawn down for any use. What we are talking about now is Brazil paying for Chinese goods with reals and China paying for Brazilian goods with renminbi.”

An aide to Mr Lula da Silva on his visit to Beijing said the political will to enact a similar deal with China was clearly present. “Something that would have been unthinkable 10 years ago is a real possibility today,” he said. “Strong currencies like the real and the renminbi are perfectly capable of being used as trade currencies, as is the case between Brazil and Argentina.”

While many economists scoff at the relative strength of both the Renminbi and the Real — and point out that a real shift away from USD hegemony would take decades to occur, we must point out the following 3 facts which are inescapably true:

1. The United States has a massive debt which is growing larger.
2. The trade deficit in the United States continues unabated.
3. The Federal Reserve has shown that it is willing to “print” dollars as a response to liquidity issues within the US banking system.

We continue to watch with concern as the Federal Reserve continues to throw money at the weakest parts of the US economy, tarnishing the dollar and preserving those parts of our economy which should be allowed to fail.  If Ben Bernanke believes that such actions won’t ultimately destroy the privileged role of the US dollar — he is seriously mistaken.

The Pension Benefit Guaranty Corp., a government agency that provides insurance for corporate pension funds, recently reported to Congress that its deficit has tripled in the last 6 months to $33.5 billion as it takes on payment responsibilities for underfunded pension plans of companies going bankrupt in the current economic crisis.

Acting director, Vince Snowbarger, commented:  “Long term there is going to have to be some resolution of that deficit. I think at some point in time it’s going to require congressional attention.”

“How soon depends on what happens in the next several years,” he added.

Well, according to the PBGC’s own estimates, pension underfunding in the auto sector alone is $77 billion, so it looks to us like that ‘congressional attention’ may be required sooner rather than later.

AP Reports:

A flurry of pension plans that have either been terminated or probably will end up being taken over by the PBGC is the largest reason for the agency’s rising deficit. Declining interest rates was listed as the second-largest reason for the shortfall. Investment losses from the stock market were only the third contributing factor.

“Despite ongoing deficits, the PBGC has sufficient funds to meet its benefit obligations for many years because benefits are paid monthly — spread over the lifetimes of participants and beneficiaries, not as lump sums,” Snowbarger said.

Preliminary results show that India’s moderate Congress Party has swept national elections, re-electing Prime Minister Manmohan Singh with a parliamentary majority which promises to see much needed political reforms instituted in the world’s largest democracy.  State television says Congress’s alliance has won or is ahead in 263 seats, compared with the BJP’s (154), the Third Front (60) and others (66).

NPR Reports:

Defying almost all predictions of a tight national election, a hung parliament and weeks of political horse-trading, hundreds of millions of Indian voters have given the incumbent prime minister, Manmohan Singh, and his centrist United Progressive Alliance an unexpected and surprisingly decisive victory.

The winning margin was so large that Singh’s Congress party and his closest allies, with 260 seats and two races undecided, came close to a 272-seat majority in the 543-seat parliament. The assumption that India, with its many divisive communities and ideologies, was doomed to weak coalition governments for the foreseeable future was swept away in ballot boxes across the country.

This result has the potential to do away with the tense coalition politics of his last term in which the communists fiercely opposed any reforms put the brakes on moves to free up the economy.

India’s Sensex index gained 17% on the news, forcing the Bombay Stock Exchange to shut down for the day.

Bloomberg reports:

“This is an absolute game changer,” said William Nobrega, the co-author of ‘Riding The Indian Tiger,’ who advises U.S. companies on investing in the world’s largest democracy. “It can truly move India in a much faster pace to where it deserves to be in the global economy.”

Political stability will make India a more attractive investment destination as Singh, 76, seeks the funds to stimulate Asia’s third-largest economy.

“There were so many major initiatives that were sidelined,” Nobrega said. “It will have a phenomenal boost on the Indian economy this year and next.”

Singh is the first Indian Prime Minister to be re-elected to office after serving a full five-year term since first PM Jawaharlal Nehru.

AFP Reports:

As finance minister in the early 1990s, Singh initiated the sea change that began the opening of India’s inward-looking economy to the world, earning him the sobriquet of the country’s economic “liberator.”

A former governor of the International Monetary Fund, Singh became the first Sikh prime minister of [India]… when he was nominated for the job by Sonia Ghandi when the Congress Party returned to power in 2004.

After a heart bypass operation in January, Singh took only a minor role in the elections, leaving the campaigning to Rahul Gandhi, the heir of the Nehru-Gandhi clan, and his mother Sonia Gandhi, who is president of the Congress party.

Now Singh — a married man with three daughters — is expected by many observers to step aside midway through his new five-year mandate for Rahul.

In a televised speech by Thomas Woods,  author of the New York Times bestseller “Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse“, had some gems of concise insight that we thought we’d echo here:

“The recession is just the economy trying to re-adjust after all the mal-investment and misdirected resources caused by the Fed in the first place.”

“When you’re the “Soviet commisar” in charge of money and interest rates, when you’re Alan Greenspan, you can create money out of thin air and now the banks have a ton to lend and can keep the illusion going.  But it’s an illusion all the same.”

“This is not just a matter of “We need a little more regulation”.  That is the most irresponsible, intellectual laziness imaginable.  …  If the institutional structure gives rise to this [boom bust cycle], ecourages excessive risks by making credit artificially cheap — you can have all the regulation you want …

…  It is the institutions that are giving rise to this.  It is the money itself.”

And our favorite summary of where things are today:

“What we have here is a slow-motion train wreck as we watch Washington and the Fed trying to put everything back together.  … Who is being held up to us as the people we should listen to?  First let’s talk about Ben Bernanke…  Why be awed by a man whose investigators examined the mortgage market a couple years ago and found that it was healthy as ever?  Why should we listen to a guy who said the housing bust will be over by December 2008?   Why should we have listened to Hank Paulson, who told us in 2007, the world economy was in the ‘best shape’ he had ever seen it?   These are the people we are supposed to care about?  Seriously, you should want to do the exact opposite of what these people recommend.”

“Instead of listening to [Bernanke, Paulson, et al], who have been wrong for years, who have given us the wrong advice, who have contributed to the largest asset bubble in the history of mankind… Instead of listening to them, let’s listen to the people who saw it coming.  … Why don’t we listen to them?  Their phones are not exactly ringing off the hook from the Obama administration.  The Obama administration seems to be of the opinon that the bigger blockhead you were, the more surpised you were by the crisis, the less sensible advice you have — well, the more we want to hear you.   But if you saw this coming?  Forget about it.”

The complete speech (via C-Span) is available here, and is well worth listening to:

http://www.booktv.org/watch.aspx?ProgramId=PC-10285

In what could amount to extraordinarily serious and dangerously destabilizing global event, the government of India announced today that Pakistani extremists may already be in  control of nuclear weapons sites in Pakistan.  This is particularly concerning given that Pakistan already has the world’s worst record for proliferation of nuclear technologies to date.  (In 2004 the founder of Pakistan’s nuclear program,  A.Q. Kahn confessed to being involved with a clandestine international network which was engaged in proliferation of nuclear technologies to Iran, North Korea and Libya — and is believed to have supplied Iran and North Korea with gas centrifuges and uranium hexaflouride.)

The Times of India reports:

India’s Prime Minister Manmohan Singh has told President Obama that nuclear sites in Pakistan’s restive frontier province are “already partly” in the hands of Islamic extremists, an Israeli journal has said, amid considerable anxiety among US pundits here over Washington’s confidence in the security of the troubled nation’s nuclear arsenal.

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There was no official word from either Washington or New Delhi about the exchanges, with India in the throes of an election and US winding down for the weekend. But US experts have been greatly perturbed in recent days about what they say is Washington’s misplaced confidence in, and lackadaisical approach towards, Pakistan’s nuclear assets. The disquiet comes amid reports that Pakistan is ramping up its nuclear arsenal even as the rest of the world is scaling it down.

“It is quite disturbing that the administration is allowing Pakistan to quantitatively and qualitatively step up production of fissile material without as much as a public reproach,” Robert Windrem, a visiting scholar with the Center for Law and Security in New York University and an expert on South Asia nuclear issues told ToI in an interview on Thursday. “Iraq and Iran did not get a similar concessions… and Pakistan has a much worse record of proliferation and security breaches than any other country in the world.”

Windrem, a former producer with NBC whose book “Critical Mass” was among the first to red flag Islamabad’s proliferation record going back to the 1980s, referred to recent reports and satellite images showing Pakistan building two large new plutonium production reactors in Khushab, which experts say could lead to improvements in the quantity and quality of the country’s nuclear arsenal. The reactors had nothing to do with power-production’ they are weapons-specific, and are being built with resources who diversion is enabled by the billions of dollars the US is giving to Pakistan as aid, he said.

Windrem also pointed out that Khushab’s former director, Sultan Bashiruddin Mahmood met with Osama bin Laden and his deputy, Ayman al-Zawahiri, and offered a nuclear weapons tutorial around an Afghanistan campfire, as attested by the former CIA Director George Tenet in his memoir “At the Center of the Storm.” Yet successive US administrations had adopted an attitude of benign neglect towards Pakistan’s nuclear program and its expansion at a time the country was in growing ferment and under siege within from Islamic extremists.

US officials, going up to the President himself, have repeatedly said in public that they have confidence the Pakistani nuclear arsenal will not fall into the hands of Islamic extremists, and they have Islamabad’s assurances to this effect. But scholars like Windrem fear Pakistan’s nuclear program may already be infected with the virus of radicalism from within, as demonstrated by the Sultan Bashiruddin incident.

This comes on the heels of last Wednesday’s announcement by Pakistani president Zardari’s announcement that Pakistan’s nuclear facilities are secure:

As the AP reported last Wednesday:

Pakistan’s president is rejecting concerns that his country’s nuclear arsenal was in jeopardy.

The concerns are prompted by a surge in Taliban activity, and growing instability.

In London today, Asif Ali Zardari said Pakistan’s secret nuclear sites are secure. But he wouldn’t specify what safeguards are in place.

He says “anyone who is responsible in any government” will say that they are not concerned about the situation in Pakistan.

With due respect, Mr. Zardari — it would be the height of irresponsibility to not be overtly concerned at this juncture.  By many accounts, the government of Pakistan is currently perched at the tipping point, and by some estimates could fall to opposition within a matter of days.  .

President Obama has downplayed the situation, calling the threat of proliferation “overblown”.

The Atlanta Journal Constitution reports:

The Pakistani government and President Barack Obama say concern over the security of the nuclear weapons is overblown, and the country’s still-powerful army gives top priority to guarding them.

“I’m confident that we can make sure that (they are) secure,” Obama told reporters last week, adding the army “recognizes the hazards of those weapons falling into the wrong hands.”

But we must address the semantics of “proliferation”.  At this time, the potential of an outright theft of an intact nuclear weapon is likely to be an extremely low-level threat (although India’s announcement today certainly raises the threat level), and actually launching a missile would be impossible without acquiring centralized control.  Furthermore, it is believed that Pakistan’s nuclear arsenal is stored in an incomplete, disassembled state for security reasons, with warheads and missiles stored separately (although one must assume, within some geographic proximity).

Complicating the matter of monitoring the situation, is that Pakistan’s nuclear arsenal is stored on Soviet-style mobile launchers and rail-freight lines — making sattelite tracking of Pakistan’s weapons difficult for foreign intelligence agencies.

But “proliferation” of dangerous radioactive materials is indeed a real threat at this time .

Reuters reports:

Two scenarios are particularly worrying, analysts say.

If the Taliban encroached close to an area where warheads are stored, the military may feel it needs to try to move them — and the convoy could be vulnerable to capture.

“The Pakistani military say their procedures for moving nuclear weapons are very well thought out, but that is always a weak point, moving your nuclear assets,” Kuusisto said.

The second, and likelier, scenario would be that despite the vetting procedures in place, Taliban or al Qaeda sympathisers managed to get employed in a nuclear facility and were able to steal enriched uranium or other radioactive material.

Vetting of personnel can never be foolproof.

“What chills me is that the military says personnel assigned to sensitive nuclear facilities are all vetted by the Pakistan intelligence service,” said Steve Vickers, president and chief executive of FTI-International Risk and a former head of criminal intelligence for the Hong Kong police.

Now, in light of the government of India’s statement that “nuclear sites” may already be compromised, we must ask specifically which scenario they are describing?  Neither one of course, bodes well for global stability or for keeping the lid on the nuclear genie.

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The first quarter of 2009 saw the worst performance in the history of the 16-nation Eurozone since its establishment in 1999.   The 27 nation E.U. also marked the worst performance in its history as GDP shrank by 2.5%.  This annualized loss of 10% to Eurozone GDP is far worse than the worst case expectations of many economists.

Germany, the heavyweight of Eurozone economies, hit the mat even harder with a 3.8% plunge in the first three months of 2009.    (An annualized loss of 15.2%)

Even more alarming were the 1Q’08/1Q’09 performances of  Estonia (-15.6%), Latvia (-18.6%) and Lithuania (-10.9%).   What is notable about the Eurozone figures overall is that the Eurozone is getting far more bruised by the global financial crisis than either the US or the UK.

The credit collapse of both the US and the UK has led to an export collapse in the Eurozone manufacturing economies.  Even though Europe’s exporters managed to avoid the levels of credit bubble insanity experienced by their neighbors to the West, Europe’s export economies are the ones being hit the hardest by the crisis.

As it stands now, these frightening plunges in GDP have not yet resulted in widespread job-losses across the Eurozone, but in our estimation this quiet cannot last.  We foresee job-losses ramping up quickly towards the end of this year as Europe’s manufacturers see continued quarters of tepid demand for exports. There is no easy fix for the Eurozone’s economic problems, and macroeconomic problems are likely to be felt on a far more personal level across the Eurozone soon.

On Wednesday, Treasury Secretary Timothy Geithner wrote a brief letter outlining proposed regulation of the enormous $600 trillion derivatives market.  In it, he calls “for federal regulators to be given comprehensive authority, for the first time, to police all derivative markets and derivative dealers; for the establishment of clearing, margin, and capital requirements to reduce risk; and for authority to impose position limits on over-the-counter derivatives to prevent market manipulation and excessive speculation. The letter also proposed important derivative reporting and recordkeeping requirements that could be satisfied in part by clearinghouse or regulated trade repository records.”

While most market observers agree that regulation of this market is essential for reducing systemic risk to our economy, many disagree as to the forms these reforms should take and fear that the Geithner proposal will leave dangerous loopholes that will leave us exposed to further danger.

The New York Times reports:

Mr. Geithner suggested that derivatives should be split between standardized instruments, which would be traded on regulated exchanges, and privately negotiated contracts, customized deals (often called “swaps”) that are made between two financial organizations and would not be publicly traded or regulated. Rather, such transactions would be reported privately to a “trade repository,” which apparently would make only limited aggregate data available to the public.

The problem with this, according to critics, is the danger that “today’s exception could become tomorrow’s rule.”  Derivatives have proved an extremely useful tool to investment banks and counterparties seeking shelter in the opacity of lax or non-existing oversight and disclosure requirements.  Should new regulations leave a gaping loophole that would allow these banks to continue pushing risks off their balance sheets or into offshore jurisdictions, the fear is that the banks will exploit it.

This criticism certainly has merit, and we hope that it will find a receptive audience with legislators and the Treasury Department alike.   Still, we are encouraged with this first step down the road to greater accountability and transparency for banks in the operation of this enormous market.  Here is a chance for Timothy Geithner to put his stamp on the future of US financial regulation.  Properly executed, these reforms have the potential of going a long way towards re-establishing trust in our badly shaken banking system.

Abdullah Toukan and Anthony Cordesman of the Center for Strategic and International Studies have produced an extensive and detailed strategic  analysis of Israel’s offensive options regarding a military strike on Iran’s nuclear facilities.   The 114 page study examines in exhaustive detail, all available data on Israel’s offensive capabilities, Iran’s arial defense capacities, Iran’s nuclear technology and the respective long range missile arsenals of both nations.

The report’s conclusion: “A military strike by Israel against Iranian nuclear facilities is possible … [but] would be complex and high-risk and would lack any assurances that the overall mission would have a high success rate”.

Complicating any military operation are the following factors:

1. Intelligence regarding underground or secret enrichment facilities is incomplete. As such, the strategic effectiveness of a 100% destruction of  known facilities cannot be precisely determined — since unknown facilities could potentially survive an Israeli strike.
2. Israeli intelligence regarding a completion date for an Iranian weapon is imprecise. Estimates vary between 2009 and 2012.   US intelligence estimates put a completion date closer to 2013.    The date is important because Israeli estimates favor a strike sooner than later.  The window of opportunity may already be closing.  It is widely agreed that no strike can or will occur after Iran has obtained a nuclear weapon.

While issue #2 above raises the question of “when”, it is issue #1 that presents the greater challenge:  Is any strike likely to be effective?

A Partial Strike?

To this question Toukan and Cordesman introduce the scenario of a partial strike:  What if only the three primary sites for nuclear research and refinement were destroyed?  Would there be any effective strategic result from a partial destruction of Iran’s nuclear facilities?   The study examines a likely scenario involving the destruction of the installations at Arak (plutonium production), Isfahan (uranium enrichment) and Natanz (heavy water production).  The study estimates that the destruction of these primary facilities would set Iran’s program back by only a few years.

Offensive Requirements

The study estimates that a strike on Iran’s nuclear infrastructure would require at least 90 aircraft in total, including:

1. All 25 F-15E’s
2. Approximately 65 F16I/C’s
3. 5 KC-130H’s for re-fueling
4. 4 B-707’s for re-fueling

Flight Routes

A detailed analysis of potential flight paths concludes that the likely flight path would follow the Syrian/Turkish border, traversing Iraq near it’s northeastern territory into Iran.  Additional flight routes over Jordan, Saudi Arabia and Iraq were also analyzed — and although shorter, include more complex political issues.

We believe these political issues to be overstated in the report due to a shared Iraqi, Jordanian and Saudi fear over a nuclear Iran.

Defense Assessment

First, there are fortification issues at Natanz (The facility is buried 8 meters underground and is fortified with a 2.5 meter thick concrete wall.  The centrifuge facility is buried 25 meters underground and has a protective concrete wall which is at least several meters thick).  Israel possesses over 600 US made “bunker busters” which could be used to penetrate the fortifications — bit the efficacy of bunker busters is mitigated by the necessity for extreme pilot accuracy in deployment.

Secondly, there are there are Iran’s considerable arial defense systems.  These include:

1. Batteries of Hawk SA-5 and SA-2 surface-to-air missiles.
2. Rapier, Crotale and Stinger anti-aircraft missiles.
3. 1700 anti-aircraft guns directly protecting the strategic targets.
4. Iran’s 158 combat aircraft
5. The S-300V anti-aircraft defense system supplied by Russia to Iran last year.

The latter is a considerable concern as the S-300V is a highly sophisticated, modern anti-aircraft defense system which could potentially eliminate 20% to 30% of Israeli’s strike aircraft.

Collateral Damage

The report also notes that a strike on Bushehr would result in mass deaths due to radioactive contamination over 100’s of square miles.   Cancer deaths in later years would likely reach the hundreds of thousands.  Additionally, the environmental impact of radionuclides would extend north (due to wind dispersal) to Bahrain, Qatar and the UAE.

Military Response

Iran’s direct military response would likely include a counterattack with Shahab-3 ballistic missiles — which are capable of reaching 100% of Israeli territory.  (There is also a threat of a chemical warheads being used.)

Proxy attacks would also occur through Hamas and more directly Hezbollah — whose missile capacity has been more than restored since the cessation of hostilities during the last conflict.

In addition to the certainty of a direct military response, the report estimates that Iran’s nuclear ambitions would likely emerge undetered — if not accelerated.

Political Impact

The CSIS report summarizes the political fallout from a surprise Israeli attack on Iran’s nuclear facilities succinctly:

It is possible that Israel will carry out a strike against Iranian Nuclear Facilities, if the U.S. does not, with the objective of either destroying the program or delaying it for some years. The success of the Strike Mission will be measured by how much of the Enrichment program has it destroyed, or the number of years it has delayed. Iranian acquisition of enough Uranium or Plutonium from the Arak reactor to build a nuclear bomb.

The U.S. would certainly be perceived as being a part of the conspiracy and having assisted and given Israel the green light, whether it did or had no part in it whatsoever. This would undermine the U.S. objectives in increasing stability in the region and bringing about a peaceful solution to the Arab-Israeli conflict. It will also harm for a very long period of time relations between the U.S. and it‘s close regional allies. [emphasis ours]

Arab States have become extremely frustrated with the U.S. and the West double standard when addressing the Proliferation of Weapons of Mass Destruction in the Middle East. Arab countries will not condone any attack on Iran under the pretext that Iran poses an existential threat to Israel, whilst Israel has some 200 to 300 nuclear weapons, and the delivery means using the Jericho missiles. In addition to Israel still occupying the West Bank and the Syrian Golan Heights.

It is doubtful that an Israeli strike on Iranian Nuclear Facilities would bring Syria into a direct conflict with Israel. Syria knows very well that alone it‘s military forces are no match to Israel. However, proxy actors such as Hizbullah would engage Israel in ant-symmetric attacks, with Syrian and Iranian assistance.

Threat Assessment

Somewhat disturbing in our minds is the report’s assessment of overall risk to Israel in world with a nuclear-capable Iran.  The report weights heavily the deterrent of mutually-assured-destruction should a nuclear capable Iran conduct a nuclear first-strike on Israel, and concludes that even if Iran had nuclear weapons it would likely never use them.

While we agree with Toukan and Cordesman that the threat of a direct nuclear exchange between a nuclear armed Iran and Israel would be mitigated due to the threat of mutually-assured-destruction, one must consider firstly, that Iran’s preferred method of military confrontation with Israel  has been indirect and by proxy of well-known extra-national military groups; and secondly, that proliferation of nuclear weapons in the Middle East is in and of itself deeply threatening to Israeli security and would represent a new and extraordinarily dangerous phase for Israel.

US Foreign Policy Today

Last Thursday, US State Department spokesperson Ian Kelly reiterated the desire for a “multilateral track” for dealing with Iran’s nuclear ambitions:

“We believe that the multilateral track is the way to go…  Our goal is to make them abandon their nuclear program in a verifiable way, and we will continue with this track. We decided that we want to let Iran get back to the table, to engage them, because the previous approach of isolating Iran didn’t work. But we don’t have a clear timetable.”

Ha’aretz reports today:

U.S. President Barack Obama has sent a message to Prime Minister Benjamin Netanyahu demanding that Israel not surprise the U.S. with an Israeli military operation against Iran. The message was conveyed by a senior American official who met in Israel with Netanyahu, ministers and other senior officials. Earlier, Netanyahu’s envoy visited Washington and met with National Security Adviser James Jones and with Secretary of State Hillary Clinton, and discussed the dialogue Obama has initiated with Tehran.

The message from the American envoy to the prime minister reveals U.S. concern that Israel could lose patience and act against Iran. It is important to the Americans that they not be caught off guard and find themselves facing facts on the ground at the last minute.

We find this response from the White House to be somewhat lacking in any real policy initiative.  It is also hard to interpret concepts like “last minute” and “caught off guard” when the issue of a rapidly approaching nuclear Iran has been on the radar of policy makers for years now, and all efforts to use diplomacy, incentive, inspections, sanctions and threats have failed to deter Iran’s progress.

It’s a rare thing when insiders speak their minds publicly against the powers-that-be.   Today in a global investment conference held in Qatar,  an insider accused the entire US bank bailout of being a “sham”, and said it publicly at a global conference of his peers.   Meet Mark Patterson, chairman of MattlinPatterson advisers, a firm which utilized the TARP program’s ‘matching funds’ to buy Flagstar Bancorp in Michigan.   Patterson certainly didn’t pull any punches in blasting US Treasury Secretary, Tim Geithner’s bailout as being a deeply flawed plan which will not only ultimately fail, but is enriching Wall Street insiders in the process.

The Telegraph UK reports:

Mr Patterson said the US Treasury is out of its depth and seems to be trying to put off drastic action by pretending that the banking system is still viable.

“It’s a sham. The banks are insolvent. The US government is trying to sedate the public because they are down to the last $100bn (£66bn) of the $700bn TARP funds. They think they’re doing this for the greater good of society,” he said, speaking at the Qatar Global Investment Forum.

Mr Patterson said it would be better for the US to bite the bullet as Britain has done, accepting that crippled lenders must be nationalised. “At least the British are not hiding the bail-out,” he said.

Well said indeed, Mr. Patterson.  We’d love to hear Mr. Geithner respond, but he’s off skipping through fields of green shoots, and worse yet, seems blissfully unaware that the US taxpayer is bearing most of the cost while seeing precious little of the upside.  Perhaps when the last $100 billion of TARP funds has been magically transferred into private coffers, Mr. Geithner will make the hard choices we’re hoping for.

More from the Telegraph UK:

“This is not a normal recession and there will be no V-shaped recovery. The crisis has destroyed leveraged companies. We’re going to see a catastrophic increase in the number of LBO’s (leveraged buyouts) going into default because they’re knee-deep in debt and no solution exists since they can’t refinance,” he said.

“Alfa hedge funds have been making their money by gambling with excessive leverage, so the knife that cuts off leverage is going to cut off their heads as well,” he said.

Like many bears, Mr Patterson expects the great crunch to end in deliberate inflation, deemed a lesser evil than outright depression.

“The US government has thrown 29pc of GDP at this crisis compared to 8pc in the early 1930s. The Fed’s balance sheet has risen from $900bn to $2.7 trillion to bail out the system. America has to do it because the only way out is to debase the currency, but that is going to lead to some very high inflation three years down the road,” he said.

We couldn’t agree more with Mr. Patterson, and he has our sympathies for exercising good judgment, but bad luck in choosing to short this rally from the start.    As our colleague Tyler Durden at Zero Hedge once said, “Anyone with any common sense is losing money in this market”.   Our only hope is that more insiders speak up like Mark Patterson did before the situation gets any worse than it already is.