This Week... on Wall Street.

Ladies and Gentlemen,

Good morning. There's a lot to cover, so let's get to it.

As predicted, the Turks and the Kurdistan Worker's Party (PKK) are getting ready to do battle in Northern Iraq.

What's really interesting is that it seems that Syria, a Sunni Muslim nation, seems to support Turkey's increasingly aggressive stance. Syria, of course, has much to gain from general chaos in Iraq in general, and a breakup over ethnic-religious lines in particular, something that Sunni Al-Qaeda has failed to bring about.

And of course, the Americans can't do too much to interfere without mortally offending Turkish pride (and if you've ever met any Turks like I have, you know how proud they are about their country) , seriously pissing off the Kurds, who have been the most steadfast supporters of the American adventure to date, or some other unexpected consequence of meddling in very old vendettas.

So what does all this have to do with the market?

In one word: OIL.

According to Market Oracle:

Turkish Saber Rattling lifts Crude Oil

Earlier this week, Turkish PM Recep Erdogan asked his parliament to approve plans for an invasion into northern Iraq to attack Kurdish militants, defying a US demand for restraint. Turkey built up its military forces on Iraq's border, a move meant to pressure Baghdad to rein in the rebels of the Kurdistan Workers' Party, who are launching raids into southeast Turkey from hideouts in Iraq. Turkey must also deal with its own rebellious Kurdish minority, which makes up 20% of its population.


But Ankara also has its eyes on a bigger prize, the oil fields of Kirkuk that contain 40% of Iraq's proven oil reserves. Ankara still holds its claim to Kirkuk, which was taken from Turkey as a result of the 1923 Lausanne Treaty. Turkish nationalists still regard it as historically part of Turkey. Ankara also asserts guardianship over the Turkmen ethnic minority in northern Iraq.

Ankara fears that Baghdad will allow the Kurds to make Kirkuk part of their autonomous zone. For Ankara, this would be excessive Kurdish autonomy, its red line in Iraq, and it might resort to military intervention to prevent the emergence of an oil-rich Kurdish political entity on its southern border.

Erdogan said his country will not be deterred by the diplomatic consequences if it decides to stage a cross-border offensive against Kurdish rebels. “If such an option is chosen, whatever its price, it will be paid. There could be pros and cons of such a decision, but what is important is our country's interests.” With regards to whether or not a Turkish invasion of Iraq could destroy the relationship with the US Erdogan said, “Let it snap from wherever it gets thin...”

Please read the rest of the article, as it is excellent.

One will immediately note that all of the major Powers have an interest in Oil, the Middle East, and the success (or failure) of the rehabilitation of the latest addition to the American Empire.

It goes without saying that record high oil prices, just in time for the Winter season, can play havoc with economies around the world. Super expensive oil will force businesses to raise prices eventually, which could be one of the many possible shocks that will bring about massive inflation, which will cause our dollar to weaken even further than it already has.

Speaking of the U.S. Dollar, I believe this is the indicator that you need to watch.

According to Daily FX:

US Dollar Tumbles Ahead of G7 Summit, Fed Rates Outlook Exacerbates Sell-off
Thursday, 18 October 2007 17:16:42 GMT

Written by David Rodriguez, Currency Analyst

The US dollar plummeted to fresh record lows on a trade-weighted basis, leaving the Euro at all-time highs and the Canadian dollar just short of 33-year peaks. Traders sold the dollar on speculation that the upcoming G7 meeting would provide little guidance on the future of greenback trends. Official commentary on dollar weakness has been mixed through recent days, dashing hopes for verbal intervention to stem the greenback’s declines.

The euro scaled fresh record heights of $1.4309 through morning currency trading, and the British Pound remained similarly bid at three-month highs of $2.0512. The forex carry trade strategy was substantially lower, as the low-yielding Japanese Yen and Swiss Franc were the largest gainers through the afternoon—adding 1.0 percent and 0.9 percent, respectively.

Economic data was partly to blame for the dollar’s decline, as disappointments in Jobless Claims and Leading Indicator reports boosted expectations for Federal Reserve Interest rate cuts through year-end. Federal Funds Rate futures now price in an approximate 70 percent chance that the central bank will cut interest rates by 25 basis points in its October, 31 meeting—a clear shift from the 40 percent chance just a week ago. Worsened expectations for US dollar yield differentials have kept the currency on offer, and a further deterioration could only sink the greenback further. Such downward pressures only exacerbated the sell-off ahead of the upcoming Group of Seven Financial Ministers summit in Washington DC.

Fresh record lows.

Now, it must be noted that in the short term, a very weak dollar is good for our exporters, because American goods become cheaper. However, on the other side, foreign countries, many of whom absolutely depend upon their exports to the United States for their daily bread, are not going to sit idly by and let the dollar sink into oblivion.

As we read at Market Oracle:

Jack Crooks writes: The finance ministers of six leading nations — Germany, France, Italy, Britain, Canada, and Japan — will meet with Treasury Secretary Henry Paulson in Washington today. And you can bet there's one topic they'll definitely want to discuss — the falling dollar.

How could they not? The dollar is as distressed as ever … the Canadian loonie is trading at multi-decade highs … and the euro has hit levels never before seen.

Remember, these currency moves aren't abstract … they greatly affect the world economy and individual trading partners. A cheaper dollar makes U.S. exports far more competitive in the global marketplace. Conversely, nations with stronger currencies lose a bit of their edge.

Foreign businesses have been crying out for help! One example: BusinessEurope, an organization representing overseas firms, has asked the G7 to intervene and stem a further rise in the euro (or additional downside in the buck).

Now, a lot of people lobby the G7 to do a lot of things so it's not like they aren't used to meeting under pressure. However, the issue has become so important and so high-profile that Paulson and the other finance ministers will at least have to discuss the topic.

The question for currency investors is whether or not anything meaningful will come out of the discussions. My answer: Probably a lot of banter and not much else.

After all, markets dictate currency moves, not finance ministers! That's why I think you need to pay far more attention to what's actually happening in the world right now.

Look, the dollar's fate rests far more on the uncertainty in the U.S. economy than it does on any meeting in Washington. Nevertheless, G7 ministers will be careful not to completely ignore the dollar's weakness because that would send the market a flashing green light to sell the buck even more.

However, you shouldn't expect much more than talk to come out of the G7 meeting.

Regardless of how the market translates the G7 message, no mention of dollar weakness would implicitly mean these ministers have no problem with an ongoing, orderly dollar decline — a big mistake.

Warning flags are flying. This idea of allowing the dollar to decline can quickly lead to a crisis. Desperate times call for desperate measures, so they say. And unfortunately, for the buck, the U.S. economy can't accommodate desperate measures right now...

No, we cannot.

Because you see, the American Housing market, which quite possibly became the new asset backing for an America that went Bankrupt back in the 1930's, continues to tank. To make matters worse... the subprime crisis is spreading across the globe.

From Seeking Alpha:

In 2005, Ben S. Bernanke, then an adviser to President Bush and now the Fed chairman, said “strong fundamentals” were the main force behind the rise in prices. “We’ve never had a decline in housing prices on a nationwide basis,” he added.

Such statements utterly astonish me when they come from professionals, let alone the eventual head of a central bank. Simply because asset prices have not fallen in the past, it is not axiomatic asset prices will not fall in the future.

Well, Helicopter Ben's rate cuts won't save either the housing market or the CDO market, just as Easy Al's rate cuts didn't save the Tech Bubble.

[Richard] Bove notes that the financial system has essentially regressed from one in which borrowers were expected to pay back their debt, to one in which principal was forgotten so long as the interest payments were made, to one in which even interest payments are being refinanced. Now Bernanke has institutionalized this practice by bailing out errant commercial paper holders.

With the growth in total U.S. financial debt outpacing GDP growth, 8.7% to 1.5%, Bove concludes, our economy is not capable of generating the income necessary to meet the debt-repayment requirements. The potential for disaster is mind-blowing, and any steps taken to paper this over are only prolonging the unavoidable wipeout

Thus, surely the Fed will continue to cut rates into next year. Residential construction spending is falling.

Easy Al, now speaking clearly, knows the stakes:

The fate of the world economy hinges on what happens to house prices in America and that may not be a good thing, former Federal Reserve chairman Alan Greenspan said on Monday.

Speaking at the Reuters headquarters in London, the former Fed chair delivered a gloomy prognosis on the state of the global economy – U.S. house prices are likely to fall further and they could drag the rest of the world with them...

Please remember, that if the Fed cuts interest rates, the value of the dollar will be further devalued. That's bad because if the dollar continues to fall, foreign business partners will continue to suffer. But more importantly, if the dollar continues to fall, then the foreigners that we absolutely rely upon to finance our ever increasing debt obligations will simply choose to invest in assets that produce a higher rate of return.

This is the iron law of finance. Investors, especially the non-American kind, really don't give a fuck about us. America is not special. Ain't no love when it comes to money Baby.

If we as a nation can't pony up the bucks to pay our Money Men and other international investors, then they will, at some point, dump our bonds and seek greener pastures.

Seeking Alpha:

The spin investment thesis goes like this:

Why are you worried about the fiscal and trade deficits? China will continue to buy our bonds. They have to, because it is in China's best interest to do so. If the U.S. economy goes into a recession, so will China's. They need economic growth to alleviate social and economic pressures as they transition from a Communist to a capitalist society. So they have no choice. They have to keep buying our bonds.

Really?

Chinese investors decreased their holdings of U.S. government debt $8.8 billion in August, while Japanese investments declined $24.8 billion, the Treasury said.

But it wasn't just the Chinese who were selling:

International investors sold a record amount of U.S. securities in August as soaring credit costs sparked an exodus from the stock market.

Total holdings of equities, notes and bonds fell a net $69.3 billion after an increase of $19.2 billion in July, the Treasury Department said today in Washington. None of the dozen economists surveyed by Bloomberg News predicted the decline, the first since Russia defaulted in 1998.

None of the economists predicted the decline? I'm shocked!

The Treasury's reporting on long-term securities captures international purchases of U.S. government notes and bonds, stocks, corporate debt and securities issued by U.S. agencies such as Fannie Mae and Freddie Mac, which buy mortgages.

Including short-term securities such as Treasury bills, foreigners sold a net $163 billion, compared with a gain in the previous month. ...

International holdings of U.S. stocks fell a net $40.6 billion, compared with net purchases of $21.2 billion in July, the first drop since December. ...

But wait. Every time I saw Jack Bouroudjian on Bubblevision the past two months, he was telling us to buy stocks because foreigners were buying. Yet, the Treasury says foreigners have been dumping US equities.

Perhaps the lack of volume the past few months is a buyers' strike by foreign investors.

More:

International demand for Treasuries decreased by $2.6 billion, compared with a $9.4 billion drop the previous month. The yield on the benchmark 10-year note in August averaged 4.73 percent, compared with 5.04 percent in July.

Holdings of agency debt increased a net $9.6 billion after an $8.7 billion net gain the month before. ...

U.S. investors bought a net $34.5 billion of overseas assets in August, after buying $5.5 billion in July.

Foreigners sold a net $1.2 billion of corporate bonds, compared with a $4.5 billion increase in July.

Now dear reader, you know that I have written much about what could happen if foreign investors begin selling their bond and dollar holdings in earnest. I also explained the ill effects of other countries moving to diversify their assets out of dollars and into other currencies, such as the Euro.

Well, it would appear that countries are beginning to scale down their dollar holdings [1][2][3][4].

This be bad.

Finally, we saw that the U.S. Dow Jones plunged 360 points
in honor of "Black Monday."

However, it is my opinion that the Stock Market, at this point, has decoupled from the real economic issues that threaten to destroy the U.S. economy. Investors continue to crave ever expanding bull markets, easy credit, and euphoric corporate earnings reports. In other words, its time to stop looking at the Market as the bellweather of American financial well-being.

Make no mistake though... there are plenty of opportunities to make money, and there are plenty of individual stocks that are solid companies that will produce higher and higher gains for its shareholders, economic instability be damned.

However, I will not be recommending any individual stocks, as there are a ton of sites on my finance sidebar that do it a whole lot better than me. However, I would suggest that you may consider, after you speak with your financial adviser of course, looking into commodities ETFS (Exchange Traded Funds), gold and silver coinage, international funds and stocks, and quite possibly, currency ETFS, to take advantage of all the currency movements that may be taking place in the very near future.

There are many ways to get paid in this situation. You could sit things out in cash and gold coins, and buy up attractive properties and securities after the great future crash occurs.

Or, you could use put options and shorts to make money as the Market falls all the way down, if such a thing should happen.

Once again, please speak with your financial adviser before you make any serious moves, as these opportunities also bring great risk.

It should be noted that, unless and until the United States, and her people wake up and understand the seriousness of the situation at hand, and make serious moves to correct that which is broken, then our country will take its place alongside the late and great failed empires of history.

Kumogakure out.