How to define "Event Risk".

Ok.. I'm motivated to write another post today because my head is reeling over what transpired overnight with Israel's boarding of that Turkish vessel filled with "humanitarian aid" for Palestinians living in Gaza.

First off.. I'm going to try and maintain my objectivity with regard to Israel's actions. I'm not Jewish, nor am I a die-hard Zionist. The only reason I support Israel is because it's the only truly democratic state (flawed as it may be) in the region. Hamas, although it was elected, can hardly be considered "democratic", nor do they permit any effective opposition. Furthermore, they have publicly stated that it's not just the elimination of Israel that they seek, but also the restoration of the Islamic Caliphate, as well as conquest of Europe and the "Two Americas"..

Don't believe me? Watch for yourself (courtesy of MEMRI):

From the Horse's mouth.. Dirka, Dirka, Jihad

It's clear that Hamas is in a perpetual state of war with Israel until they have succeeded in destroying the Jewish state. They will not make peace because it would be against their political charter and undermine their very "raison d'etre".

But politics aside, the issue at hand is how Israel should respond to attempts by so-called "humanitarian" groups attempting to assist Hamas and remove the blockade/seige.

I think Israel didn't think this through very well. Obviously fast-roping commandos onto the decks of this ship didn't turn out the way they thought it would. Now they have created an ENORMOUS problem for themselves because the 9 deaths that resulted have made their former ally, Turkey, extremely angry, possibly to the point of open hostilities.

Israel should have relied upon non-lethal means to disable the ship. The use of heavy netting, laid in front of, or bracketed by several Israeli patrol boats, would likely have fouled the ship's propellers and forced it to be towed.

And now that these groups are threatening to send another ship to break the blockade (the RV Rachel Corrie, registered in Ireland), they DEFINITELY need to get a grip on a non-lethal deterrence or interdiction technique that separates protesters from IDF personnel. The Israelis have already stated they will stop and detain this, and any other ship, that attempts to break the blockade.

However, in the process Israel has now essentially alienated any allies that it possessed, so we should not understate the level of tension right now. Egypt, which had been also blockading Gaza, has suddenly opened up those gates. It's even possible that Egyptian forces may be mobilized to establish a presence in Gaza. If this occurs, hopefully it will lead to the overthrow of Hamas (which Egypt truly despises as it is an offshoot of their own Muslim Brotherhood).

But how are the markets going to take this is the question? Who in their right mind is going to believe that a potential war between Turkey and Israel would be a reason to buy stocks, either in Europe, or the US?

North Korea

North Korea is a situation that is also factoring into global "event risk". NK is a nuclear power and therefore, presents a scenario where they could choose to create significant turmoil in the region with only the risk of economic sanctions (which already exist). There is no way the UNSC is going to vote for any military response in answer to the sinking of the S. Korean ship.

One should also remember that NK has several hundred artillery batteries within range of Seoul, S. Korea. Any outbreak of hostilities would lay the SK capital to ruins and result in a horrendous refugee problem, as well as economic tumult for the 15th largest economy in the world. It would become a war of attrition fought across the 38th parallel and via naval engagements and bombing raids.. All because no one in their right mind would be willing to risk a nuclear attack that would be the obvious response to any threat to the NK regime.

Kim Jong Il is getting old and he wants his son to assume power upon his death. But the military, it is rumoured, doesn't think Kim is being aggressive enough and it's possible they are following their own course of action with regard to war with SK. Generals derive their power from their "toys" and if they don't get to eventually use them, they can assert the current regime is not assertive enough in advancing NK's interests.

So, regardless of whether Kim actually ordered that attack on the SK ship or not, he owns the situation now and has to save face and stand firm and defiant. He will not bow to Chinese pressure, IMO. And China has no desire to see hundreds of thousands of NK refugees flooding across their border with NK.

It's also possible that Bejing has an interest in permitting a bit of turmoil to erupt in order to advance their own global political position. I don't see them exerting too much pressure on Pyongyang without obtaining some valuable concessions in return.

Thus, why would anyone want to buy stocks when such a scenario lies before them?

Europe

Then there's the problems with the EU.. I'll be short with this since it's been covered all over the internet. The Euro came within a hair's breath of breaking long-term support this morning and sparking a decline that some postulate would result in parity between the USD and Euro. (1:1). It's possible that this may happen tomorrow..

Understand this. Europe NEEDS AND MUST HAVE a lower Euro if they are to grow their way out of this debt mess in which they find themselves. They need to EXPORT BABY, EXPORT!! to generate revenues. So they are pursuing a "beggar thy neighbor" policy that has been followed by both Japan and China for years now. And all of this will be at the cost of US exports and markets. We'll buy more and sell less, thereby reigniting the long-standing problem of our trade deficits.

So don't expect Europe to get it's act together anytime soon. They want a cheaper Euro, but they have to be careful how they go about achieving it without appearing to be waging the mercantilist economic war they require.

Also remember that China owns over $600 Billion Euros worth of reserves. If the Euro falls to parity with the USD, China takes nearly a 20% haircut on that cash stockpile. That's not going to sit well with them.

Flash Crash.. Is this fixed, or just a preview? Or can the computers get switched off again and send the DOW down another 1,000 points in the blink of an eye??

I'll be honest.. I'm playing TZA, which is a Ultra-short ETF that's inverse to the Russell 2000. I figure that even if the Dow and S&P manage to stabilize in the short-term, it's going to come at the expense of the small caps. They are going to become a source of funds for propping up the large cap indices as a last gasp effort to stave off what appears to be the inevitable collapse from that 10 year H&S formation we're forming.

So that's what our markets are facing right now.. Why do you want to buy when your potential loss is upwards of 40-70% before all is said and done?

And lastly, I'll leave this to ponder.. What if you were any number of leaders of a tyrannical rogue state. And what if you had considerable assets (all of which you've exploited from your oppressed masses) squirreled away in foreign bank accounts? And what if you happened to be savvy enough to see that 10 year H&S formation and wondered, "What can I do to initiate, and therefore profit from, that collapse? Kim Jong Il has billions of dollars worth of assets in foreign accounts, all managed by his son.

Seems to me that's one hell of a motivation to create as much tension as possible short of outright war and risk to the regime.

That's all for now.. more later...

Scrutinizer