Libya War Rages On

Fundamentals: The stock market wants the Federal Reserve to implement QE3, printing money out of thin air to buy government bonds. Bernake knows QE3 is a horrible idea but he doesn't want to spook the markets with honesty, so he essentially said,"Probably no QE3, but maybe, we'll see in September." In a childish mood, the market took maybe as yes and rallied.

Also on Friday, Euro-zone ministers are trying to rescue the Greek bail out package, which is falling apart as Finland demands hard liquid collateral for its share of the rescue fund. Finland has talked Greece into siphoning off part of the bail out loan package and putting it into a separate account that insures Finland (and only Finland) suffers no down side. Of course all the other European creditor nations want the same deal, which will derail the bail out, force Greece to default, and destroy the world economy. Germany is trying to get Greece to give state owned real estate to the various creditor nations as collateral. If Germany succeeds, then the new bail out package is much better than the original because it would be more free market, much tougher, and it would result in harsh foreign owners taking over Greek state owned assets if payments are not met: tough love. If Germany fails, we're all screwed.

Long War: The conventional stage of the Libyan War rages on. Gaddafi still controls a sizable chunk of the country. NATO war planes and drones are operating at the same tempo as before. In one sense, the longer the conventional phase lasts, the better. It is a good thing if Gaddafi's forces are ground to dust in a conventional onslaught. It is a good thing if the bad guys fight to the last man in set piece battles and are utterly defeated. If this happens, then the guerrilla phase of the war will be much smaller.

Perhaps sensing that a horrible enemy is emerging in Libya with the new (battle hardened and pro-American) rebel government, AQIM (Al-Qaeda North Africa) is moving into Nigeria. Islamic attacks in Nigeria are exploding. This is crippling oil production and doing as much harm to the world economy as shutting down Libyan oil production. Obviously this widens the North African aspect of the Long War and guarantees that fighting will continue for decades even if the rebels win 100% in Libya.

ASS Wins War

Long War: Media reports gave the impression that the Libya War had ended yesterday, with the rebels victorious. The war still rages as of today, but the rebels are winning. As I write, the rebels are attacking Gaddafi's main command and control complex in Tripoli, Bab al-Azizya. Reports indicate they are successfully tearing apart this complex.

Right before the big rebel push into Tripoli, the CIA announced it was introducing extra Predator drones into the theater. At the time this seemed to serve only one purpose: provide a fig leaf for the imminent exposure of a much bigger CIA footprint in Libya than anyone guessed possible. And indeed, there are an increasing number of media reports of western Special Forces soldiers embedded within the rebel army.

Also, it is becoming apparent that the infrastructure damage from the NATO air campaign is almost zero. Oil refineries, pipelines, bridges, etc... have not even been scratched. But when NATO ran a similar air campaign in Kosovo, the infrastructure damage was huge. The damage in the Balkans was so great much of it has not been repaired even now. CIA drones are capable of clobbering the bad guys without damaging infrastructure to a much greater degree than traditional aerial bombardment from manned jets.

If I am correct in surmising that the CIA's drone campaign in Libya was much bigger than media reports would have us believe, then we have evidence that General Petraeus is in charge of the CIA ahead of schedule (he is supposed to take over in September). During the Iraq War Petraeus displayed a special genius for neutering the Media; this is a unique talent that he alone possesses, no other military commander can muzzle the press the way he can. It is hard to imagine a better skill set for a CIA Director.

Throughout rebel held Libya there is graffiti saying: "Thank you Britain. Thank you France." Apparently there is no graffiti saying: "Thank you America." And certainly there is no talk anywhere of the CIA's role in the Libya War. This is all to the good because America is running a global empire that dares not speak its name and America is fighting a century-long global war while voters have a desperate thirst for a century-long peace.

After Libya is mopped up, our attention must turn to Syria. And this is what we must look for: Turkey getting involved in the Syrian Civil War. We need to see graffiti inside rebel held Syria saying: "Thank you Turkey."

As always, our only concern is investing. We must never forget that there is a 100% correlation between the Anglo-Saxon Superpower (ASS) winning wars and a bull market. Today is a case in point, we are having a huge up day, but the most recent economic data is very weak.

The CIA

Libya: The Free Libya Army has assaulted and taken Tripoli. This should spell the end of the conventional phase of the Libya War. Over the weekend a sophisticated pincer movement engulfed Tripoli as a massive number of sleeper cells were activated within the capital city by imams giving a coded message through the traditional call to prayer. The sleeper cells were installed months ago. The entire operation was highly coordinated and speaks toward a much bigger CIA and French intelligence presence in Libya than anyone guessed possible. Big problems are still possible in Libya, primarily a guerrilla campaign against oil infrastructure. Western intelligence will have its hands full dealing with the aftermath of the war.

Syria: The Syrian rebels will now be emboldened by the success in Libya. Assad will have to use air power to stop them; something he has not yet done to any significant degree. NATO will have to start an air war against Assad and travel the same path that it took in Libya. If not, Iran will vastly increase its power in the region since Assad is an Iranian puppet. And Iran will then have Iraq surrounded. Iran is already engaging in a low level war against Iraq. American and European voters will go insane at the prospect of Libya style air war in Syria. It might be possible to avoid all this if Congress can somehow be forcibly removed from CIA oversight; i.e. targeted assassinations could wipe out Assad's government and Syrian rebels could be built up covertly.

Afghanistan: European leaders within NATO and western diplomats are calling for the resignation of Kandahar police chief, General Raziq, the CIA's point man in southern Afghanistan. Essentially the complaint against Raziq is that he is too hard on the Taliban. When NATO gives Raziq captured insurgent prisoners to interrogate they come back from the interrogation cells bearing the marks of obvious torture. NATO no longer gives Raziq any prisoners.

Afghan experts agree that Raziq is the only man in southern Afghanistan that the Taliban fears. The bad guys are happy they no longer will have to face Raziq if they are captured by NATO troops. But if they are captured by Razik's forces, it will now go even harder on the bad guys.

All of this highlights the crying need to get NATO, the State Department, the US Congress, and everybody else out of the CIA's face and turn it loose. By fits and starts this is indeed happening. The pace that it occurs will dictate whether the global recovery can remain intact.

All Eyes On Libya

Charts: The S&P 500 has executed a death cross. Please go to the blog below this one to reference the significance of this chart formation.

Fundamentals: Advanced economies equal 60-70% of world GDP. As a group they are currently growing at about 0.7%. Economists call this "stall speed," which means that a global recession is likely. The only hope is for emerging market economies to start growing more strongly. They are held back by roaring inflation, which forces tight monetary conditions. The inflation is caused by the high price of oil, which is primarily caused by the Libya War. Despite all the bad economic news, oil went up today. It has to come down or we are royally screwed. This can only happen if the rebels win in Libya.

Long War: The CIA is publicly saying that it is introducing 2 more Predator drones into Libya. It would only say this if its footprint in Libya has grown so large that the mainstream media is on the verge of exposing this growing footprint.

CIA fingerprints are becoming more and more obvious in Libya. We are seeing supposedly untrained rebel fighters effectively calling in NATO air strikes. The rebels are acquiring NATO satellite data of Gaddafi's troop movements even though NATO is not giving them this information.

Gaddafi's capital city of Tripoli is surrounded by the rebel army. All supplies into Tripoli are cut off. The rebels would probably like to let Tripoli starve. But the world economy needs a bloody siege and relatively quick victory.

Gaddafi is in command of small numbers of elite troops who will fight to the death in an urban combat situation. It is very hard to take a city quickly under these conditions.

The US would throw more weight behind the offensive against Tripoli if Russia and China would look the other way. Team Obama has just cancelled the sale of 55 or so advanced F-16 fighters to Taiwan. This could be Team Obama being total wooses or it could be a bargain that allows China to ignore a very heavy CIA footprint in the Libya War.

The coming offensive in the Libya War is the most important event for the world economy anywhere on Earth. Forget the big Fed meeting in Jackson Hole. It means nothing. All eyes on Libya.

Don't Count Chickens Before They Hatch

Charts: The stock market is in a rally attempt. This attempt needs to succeed or we could be in big trouble. Earlier in the year the S&P 500 battled with its 200-day moving average. The loss of this battle knocked stocks down a good 10%. The line in the sand right now is with the formation of a death cross, where the 50-day moving average plunges through the 200-day moving average; when this happens the two lines form a cross. A death cross produces a full blown bear market about 50% of the time. The current rally attempt began just as the 50-day line had curved down and intersected the 200-day line. So we were saved by the bell. If this rally attempt fails and we get a fully formed death cross, then a savage bear market is likely.

If a death cross does not materialize and the market puts in a bottom, then we need to see apathy. We need to see sideways trading. Roaring up in thin volume, as it has done for 2 1/2 years, is not good.

Long War: The Libyan rebels have Tripoli 100% surrounded and are in the process of cutting off all the oil pipelines that feed the capital city. They are planning on choking Tripoli and fomenting rebellion from within. And indeed there have been small armed uprisings inside the city and this is why Gaddafi's top lieutenants are fleeing the ship. Now that he is cornered and on the brink of defeat, Gaddafi must decide whether to use chemical weapons or not. He practice fired a Scud missile yesterday, obviously a prelude to delivering chemical warheads into the rebel held city of Misrata.

Scuds are clumsy. Helicopters are the best way to deliver chemical weapons but then Gaddafi would have to fight through the NATO air force that is constantly overhead. So if he goes down that path, very few chemical weapons will get through. More to the point, the moral authority of NATO will grow immensely if it stops a chemical attack.

And if NATO wins the Libya War, it will be immensely strengthened. It will then start doing better in Afghanistan. No point in counting your chickens before they hatch. If NATO loses a war for the first time ever, the results will be apocalyptic.

Cut Butter, Not Guns

Charts: Earlier this week the all world index at one point registered a 20% decline from its April highs, nipping into bear market territory. Despite that, the market is not technically driven, rather fundamentals and geopolitics are the driving forces.

Fundamentals: China is trying to ride to the rescue again as the world economy teeters on the brink of a horrific double-dip recession. The Great Dragon is letting its currency rise sharply against the dollar, which will give a boost to American exports and lower the price of oil within China. With lower oil prices, Chinese consumers will spend more and overall imports into China will increase which will help Europe and the rest of the world.

China can only raise its currency by buying less American debt. This means there has to be less US debt hitting the credit markets or interest rates will rise in America, which will force a global double-dip recession. So the Congressional super panel charged with reining in US spending is going to have to really do some cutting and then Obama is going to have to back these cuts. If not, China cannot ride to the rescue.

Also, if the super panel doesn't make real cuts to domestic spending it will trigger automatic "doomsday" spending cuts to the CIA and Pentagon, which will be catastrophic to the Long War and Cold War II.

Cold War II: This week China launched its first ever aircraft carrier for a trial run. At the same time, North Korea shelled the same South Korean island that it has attacked in the past. The North Korean shells splashed into the ocean, but came close to doing real damage. South Korea responded with a heavy artillery barrage, with its shells also falling into the ocean. South Korea had the last word, as its shells landed closer and closer to North Korean gun placements, the North tucked tail and silenced its cannons. These two incidents illustrate how huge cuts to the US Navy aren't really possible. Insiders say China plans on building a fleet of four aircraft carrier battle groups by 2030.

Long War: After SEAL Team 6 lost over two dozen men to a Taliban RPG, NATO and the CIA hunted down and killed the Taliban unit responsible. The next day 5 more US soldiers were killed in Afghanistan. President Obama made a speech saying the US is not leaving Afghanistan after this bloody week of combat. None of the doves in Congress made a peep. Obama did a good job with his speech. But the above incident tells us that huge cuts to the Army, USMC, and CIA are not possible.

If you can't make big cuts in the Army, USMC, Navy or CIA, then you aren't making big cuts to Defense. So the Congressional super panel is going to have to cut butter, not guns, or we're all screwed.

Through The Lens of The Long War II

Long War: Through QE2, the Empire (America) tried to tax its provinces by debasing its currency; exactly as its predecessor (ancient Rome) did so many times. The only way a tax like this can stick is if the Empire keeps winning its wars. Is the tax hike sticking? Is America forcing its debt down the world's throat? The S&P downgrade of America's debt was followed by the biggest one day combat loss ever in Afghanistan. Not only did 31 Navy SEALs die as a Taliban RPG took out a transport helicopter, there were 4 other combat deaths that day from separate firefights. Even though financial writers will make no connection between the combat losses in Afghanistan and the debt downgrade, the markets are making a connection, which is amplifying the ongoing stock market correction. Several country stock markets have already been pushed deep into bear territory.

But also over the weekend the CIA backed African Union Army and pro-American Islamic militias seized control of 90% of Mogadishu, the capital of Somalia, dealing Al-Qaeda backed Al-Shabab a nearly mortal blow.

And the Libya rebels have seized a key town which opens up the invasion route to Tripoli, even as they battle Gaddafi/Al-Qaeda sleeper cells that have been activated within the rebel heartland. Overall, a good situation in Libya but clearly not enough CIA presence if bad guy sleeper cells exist inside good guy territory.

So CIA-only Long War hotspots are doing okay.

The recent economic weakness is very good for Al-Qaeda, just as the Great Depression was very good for European Fascism. With oil prices falling, Mideastern economies will only get worse and the ranks of the bad guys will swell. With a nearly infinite pool of jihadist fighters to draw upon, the Long War is morphing into a structure that can not be dealt with by conventional Western military forces.

But the demands on the CIA are many times greater than its capacity and the US Congress is still interfering in Company business, exhibiting an isolationist streak that can only be described as toxic. One example: the rebels in Syria need to be supported by the CIA and they need to win. If Assad wins, then Iran's power is vastly multiplied. Iran is already attacking Iraq by supporting Shiite insurgents. If Iraq were surrounded by both a hostile Iran and Syria, the attacks would soon come from two directions and a conventional invasion would not be far off and the price of oil would reach $300 a barrel.

There are only two ways this dire situation can be rectified: Either Congress increases the CIA's budget by ten times or it absolutely untethers the CIA from all control, a complete free hand in all Company affairs. A sign of this latter possibility would be if DEA agents were pulled out of Afghanistan and somehow media attention is curtailed from the CIA's take over of the world's heroin trade as it tears this cash cow away from the Taliban.

Jobs

Fundamentals: The economy will go into a double-dip recession if jobs growth doesn't pick up. We have three jobs reports to consider. Yesterday the ADP jobs report came in a little bit better than expected. The ADP survey is skewed toward construction and contractors and as a consequence it is the least reliable of the three.

The government's payroll survey said 117,000 jobs were created. This is a horrible number, but better than expected. In the Great Moderation Era (GME) investors are trained to react positively to any data that beats a forecast, even if that data sucks, the forecast beat is everything. Investors are also trained to accept the payroll survey as more accurate than the household survey because supposedly the Federal Reserve only looks at the payroll survey. The GME is characterized by an almost religious belief in the power of the Fed. As far as accuracy, the payroll survey only looks at bigger companies, not self-employed people or very small businesses.

The household survey said 38,000 jobs were lost last month. The month before it said 445,000 jobs were lost. This survey looks at a wide selections of households, where people work for large companies, small ones, and are self-employed; in other words all facets of the labor market are included. It, however, has a smaller sampling size than the payroll survey, thus the Fed's supposed focus on payroll. Over time the smaller sampling size is less important because the household survey is casting its net over an increasingly bigger selections of households, therefore trends established by the household survey over several months should be more accurate than the other surveys.

Other data indicate the household survey is more accurate. So far this year the US economy is growing at a .8% annualized GDP rate. PMI surveys are plunging at a rate equivalent to what happened during the Great Recession, and so forth.

Another troubling economic indicator to watch is the yield on the ten year Italian and Spanish government bond. They both closed yesterday at about 6.2%. A few months ago they were around 4%. If they reach 7%, then Italy and Spain will probably need to be bailed out since the three PIGs needed to be bailed out when their debt yield reached 7%. It seems that the only way to stop the two large Mediterranean countries from reaching 7% would be if the ECB were to start aggressively buying their debt. There are rumors today that this might be happening.

If Spain and Italy require bailing out in the same way that the PIGs did it will be very bad for the global economy because France and Belgium will then need to be bailed out as well. In other words, Germany will have to essentially bail out most of the Euro-Zone, which is impossible.

Through The Lens of The Long War

Long War: The Stock Market is experiencing a historic correction. There hasn't been a downturn this bad in decades. It has many causes, primarily the sovereign debt crisis, which has spread to Italy and Spain, countries that are so big if they need to be bailed out the Euro-zone will be bankrupt. But you can read about all this in the Wall Street Journal. Today let's look at the stock market melt down through the lens of the Long War.

The bill that just raised America's debt ceiling only pretends to cut domestic spending while it actually slashes the budgets of the Pentagon and the CIA. It is unexpected and shocking that the CIA should be singled out for draconian cuts. It would be far better to eliminate aircraft carrier battle groups and actually increase the CIA's budget. That is not in the cards.

Consider recent Long War events... Gaddafi announced he is forming an alliance with Islamic radicals in rebel controlled Libya. Through his son, he is saying that after defeating the rebels, Libya will become a Jihadist nation, like Iran. His alliance has already born fruit, it seems to be responsible for the assassination of the rebels top general. Al-Qaeda will be only too happy to cozy up to Gaddafi, who still has access to billions of dollars in hard currency and gold.

There is a small CIA presence in Libya. But for it to handle a problem of this size there should be a huge presence. Unfortunately there is yet another resolution waiting in the wings of Congress to curtail America's involvement in the Libya War. While bad guys across the globe may tremble at the might of the CIA, the Agency itself trembles in fear of the US Congress. Right now Washington DC is saying it is okay to lose a war. This stance, if fully implemented, has a 100% correlation with a bear market.

And finally, in recent days, the Islamic rebellions in China and Thailand have flared up dramatically. Obviously the US Army is not going to land in Thailand or China. The Long War is morphing into a conflict that only the CIA can deal with.

There are currently three Long War type wars in oil producing regions (Libya, Sudan, and Yemen), this is jacking up the price of oil and crushing global growth. The debt crisis has only one solution: more growth. Every actor in the crisis has cut government spending as much as it will be cut. The Euro-Zone countries have austerity budgets in place. America has made cuts to the war fighters and that is all that will be cut. Growth will only come with lower oil prices.

Al-Zawahiri Is A Genius

Charts: At Midday on August 2, the S&P 500 has crashed through its 200-day moving average in heavy volume. This is not good.

Fundamentals: Nobody is fooled by Congress's phony budget deal. China, European bond investors, average voters on the street, everyone is seeing through the smoke and mirrors. The black hole of America's roaring debt machine is sucking up the world's capital, diverting it away from productive uses and into Uncle Sam's gaping maw.

Long War: The only real cuts in the recently voted budget deal is to the Pentagon and CIA. The only way America can tax the world with its debt is if we clobber the bad guys. This is hard to do with budgets getting slashed.

Meanwhile, out on the Long War battlefields, it is getting hairy. China's Al-Qadea linked Islamic insurgency is exploding across the mineral rich west. If it gets much worse, China will not be able to access vital mineral resources and the world's only big growth machine will falter.

Stepping away and looking at the big picture: Al-Qaeda's new leader, Al-Zawahiri, has a policy of attacking everywhere except in the American heartland. He understands the Tea Party and knows they will give up the rest of the world if America itself is not threatened.

But America is dependent on overseas oil and markets. The only GDP growth we are seeing is coming from exports. If not for exports we would be in a second recession. America cannot give up its global empire and sail blissfully along by itself.

1948, Start Of A Rocky Period

Fundamentals: The "baseline" for the US government budget is the trajectory spending will take if Congress does nothing. In other words, the baseline means all existing laws, like ObamaCare, go into affect. The baseline calls for spending to increase by 7% a year for the next 10 years, which amounts to about $45 trillion in total spending.

The baseline is wrong. Consider Obamacare. The pilot programs running in a few states to test ObamaCare are running 90% over projections. The original projections for Medicare in the 1960s also understated the eventual cost by 90%, so there is a historical precedent for these projections to be inaccurate.

But even if the baseline were accurate, the deal being cobbled together in Washington over the weekend only cuts $1 trillion in spending from the baseline over the next 10 years and another $1 trillion worth of cuts is promised through smoke and mirrors. So spending will grow by 6.5% each year rather 7%.

So we need an election with fiscal hawks winning both chambers of Congress to enact real cuts. If the deal over the weekend convinces voters that the problem has been solved and the coming election does not revolve around spending cuts, then it will be very bad.

Long War: Gaddafi apparently has activated tribal elements within the Free Libya Army that are loyal to him, a fifth column. These elements have assassinated the top general of the FLA and have started a small battle around Benghazi, this is FLA territory. As a consequence, the FLA is back on its heels.

The above development is not the end of the world and the FLA is still overall winning the Libya War. However, it is a reminder that the Long War is at the same stage the Cold War was at in about 1948. We are not at a 1982 moment where victory is clearly in sight and the news is so good it powers a bull market over any obstacles.