Friday, March 4, 2011
I first wrote about this a few weeks ago and since it’s a good barometer of real-time growth concerns it is useful to update periodically. The copper/oil divergence is a clear sign that markets are now worried about the negative impact of oil prices on global growth. Morgan Stanley elaborates with an excellent chart of brent and copper and explains (below) why spiking oil prices can cause declines in economic growth (via Hedge Analyst):
“Investors are now worrying that rising oil prices are less a symptom of macro strength and more a threat to growth. This shift saw the close correlation between the price of oil and the price of copper – another real-time growth barometer – break down (Exhibit 1).”
“It also matters how fast oil prices rise. Oil price increases – like any price increase – transfer spending
power from consumers to producers. This can have a distributive effect, but shouldn’t affect total income. If prices are rising slowly, stronger demand from producers can offset the adverse impact on consumer demand. If prices rise sharply, however, the adverse income shock – which is immediate – may not be offset by a commensurate increase in producers’ spending. That is why sharp increases in oil prices can do more damage to growth than an equivalent increase over an extended period.”
Our economy is not only not in "recovery", it's on the precipice of crisis.
“If you look at the government’s latest statistics - the poverty survey of 2009, which is the most recent release, with average and median household income adjusted for inflation (and they use a really gimmick low inflation rate with that one) - it shows that not only has household income been falling the last year or two, but it’s below its near-term peak before the 2001 recession. Household income has not recovered above that, and if you use the CPI-U (the usual inflation rate to deflate that by instead of the gimmick one) it shows that household income today is below where it was in 1973. Again, the average household has not been able to keep up here. If income growth is not keeping ahead of inflation, very simply you can’t have consumption growing faster than inflation on a sustainable basis.”
Government statistics guru and believes the most important economic indicators used by our political leaders in their decison-making - the Consumer Price Index, the unemployment rate, the Gross Domestic Product - are deeply flawed in how they're calculated. Whether these flaws result from letting theory trump reality or by machinating politicians, the result is the same: we are fooling ourselves at our peril. We have been understating the risks we face - which is why we are working harder for less today than the previous generation, and why our economy is not only not in "recovery" - but on the precipice of crisis.
In this podcast, John and Chris outline how:
- John came to understand how changes in the way the key economic indicators are calculated has resulted in an outcome in which they no longer reflect reality. No one believes, values or knows how to accurately apply them anymore.
- There is rampant precedent for political manipulation of how these indicators are calculated. Past administrations forced changes in the forumlae for many reasons - a common one being optics.
- Using erroneous indicators is dangerous - not just for the governement, but for everyone. When inflation is running higher than most expect (as it is today), investors are cheated out their returns, wage earners wonder why their paychecks buy less goods, and fixed income earners suffer greatly. Unfortunately, there are myraid incentives for politicians and corporations to embrace artificially-low calculations - as they justify reducing obligations owed.
- The key approaches to calcualting inflation are especially convoluted, especially the practice of applying hedonics. If we instead calculate inflation according the formula used in 1980, we would see a number closer to 8%+ vs today's 1.5% rate.
- Similarly with unemployment, John calcualtes the true rate in the country today is 22% (vs the reported 9%).
- In sum, he sees the US suffering from structural issues that are extremely hard to address - but impossible if we continue to let fantasy data be our guide. Our circumstances are not sustainable and, in his eyes, have us on an inexorable path to higher inflation - and likely hyperinflation.
Dominant Social Theme: So much to muddle through. The EU will survive.
Free-Market Analysis: The Telegraph's Ambrose Evans-Pritchard has published one of his usual insightful analyses on the upcoming difficulties the Irish will face in renegotiating debt payments to prop up failing Irish banks (see article excerpt above). Irish bank bonds are held by German and French banks, among others, and there has been overwhelming pressure placed on Ireland ‘s government to borrow money, raise taxes and cut expenses so as to ensure the ailing banks do not founder entirely.
The stresses placed on the Irish economy and Irish taxpayers in particular are tremendous. Iceland chose not to support its insolvent banks and as a result the Icelandic economy has show some improvement; the Irish economy still lags badly and there is no expectation that it will much improve; in fact it is likely to end in a kind of national bankruptcy or popular rebellion.
For this reason, the Irish turned to the country's main opposition party, Fine Gael, in recent elections to provide a clear alternative to what has already been agreed upon with the EU. Nonetheless, as Evans-Pritchard shows, there are grave obstacles in the way of renegotiating an agreement with the EU that provided bank bailout money to stabilize Irish finances last year.
Much of the problem with renegotiating the current, likely unsupportable, agreement lies with Germany itself. Most recently it has been suggested that the EU could issue "eurobonds" that would considerably ease the financial crunch that countries like Ireland face. But Angela's Merkel's three-party German coalition is opposed to the eurobond idea, Evans-Pritchard reports, because ultimately all EU countries would end up guaranteeing such bonds. The coalition intends to put any agreement reached by the EU to a vote in the Bundestag. More than this, "A group of 189 German professors has [warned] of ‘fatal consequences for the whole process of European integration' if the EU crosses the Rubicon to a de facto debt union."
"I cannot remember any occasion when lawmakers have set guidance like this before: Merkel has very little leeway," Pritchard-Evans quotes Hans Redeker, currency chief at BNP Paribas as saying. "There is going to be disappointment at the summit and that will make life even harder for the EMU periphery." Meanwhile, an oil spike will considerably reduce EU growth and make the Irish economy (among others) even less responsive. Such "peripheral countries" are most at risk from exogenous financial difficulties.
Merkel's administration has an alternative plan to offer Eurocrats. In return for expanding the bailout pool, those recipients of aid will agree to an intrusive EU (German) regulatory and inspection reign. This has already met stiff resistance from the Irish and others. Resentments from World War II are still evident, especially in such countries as Greece, and the perception is that Germany is trying to use its financial clout to gain in peacetime the European empire it could not claim long ago by war.
The European Commission, Evans-Pritchard points out, has drafted a compromise plan, but in Germany, already, it is seen as more of the same. Outgoing Bundesbank chief Axel Weber – a vehement critic of any agreement that would further enmesh Germany financially into third-party bailouts – has attacked the plan, claiming it would eventually resolve itself into a move toward a eurobond program. Germany's views on this matter are increasingly shared in Holland and Finland – other so-called "Northern" states that are considerably more solvent than Southern ones.
Ireland currently pays nearly 6 percent for EU loans, versus the EU funding cost of 2.6 percent and there is no guarantee that the carrying costs won't rise as the EU gradually continues its recovery from the 2008 crisis. Evans Pritchard believes the new Irish regime has one considerable weapon in its arsenal, which is to "threaten 'haircuts' on senior bank creditors if the EU refuses to compromise, a move that might set off EMU-wide contagion and inflict big losses on German Landesbanken." To play it, he concludes, would encourage the wrath of the eurozone. To allow the situation to remain as it is will reignite the wrath of the voters that the just handed a resounding defeat to the previous regime that negotiated the current bailout terms. The alternatives could not be starker.
Evans-Pritchard's analysis ceases with the observation of the various alternatives. But we want to suggest a fourth option here – one that no respectable mainstream publication would likely speculate on. Our idea is that at this point the euro is actually being set up for failure. The current dilemma may be no accident and is in fact perfectly predictable. We have argued in the past that the eurozone is an integral part of the Anglo-American power elite's plans for closer global governance. But the EU itself has harmonized much of Europe's regulatory disparities and in a sense, even without full political power, has turned the Eurozone into a homogenous whole.
It may be that the euro itself is expendable at this point. The idea would be, of course, that as the euro continues to falter, an alternative currency must be waiting in the wings. The Anglosphere has such a currency available in the IMF's SDRs, which can be resolved into an even more fungible currency called the "bancor" as economist John Maynard Keynes suggested 50 years ago.
While this may sound somewhat unrealistic, to say the least, we would argue (as Devil's advocate) that it is sociopolitical and economic chaos that drives sizable economic changes. Is such chaos looming on the horizon? It seems to us that the power elite has already begun to inflict it on the world, creating regime change throughout the Middle East and Africa. We've covered Western culpability in this regard in numerous articles. We would argue that any elite capable of setting off controlled revolutions in a dozen countries is certainly willing to introduce similar chaos in the West.
What signs to do we see? We think that Western central banking policies may have deliberately introduced raging price inflation in developed and developing countries. We believe the sudden advent of food scarcity (to be followed by water scarcity) may be no accident either. All these factors are controllable via money power and we it would seem to us, arguably anyway, that this controlled – and expanding – chaos is meant to be.
In America, Barack Obama has added trillions to the national debt and made George Bush's profligacy look almost modest by comparison. Again, we believe that this may be a deliberate destabilization of the nation's fiscal and monetary situation. Homeland Security's authoritarian depredations are acting as deliberate incitements as well. With 40 million on food stamps, 20 percent unemployment (at least), mounting price inflation, failing wars, 10-percent foreclosures and a polarized political environment, we would tend to believe that America is on the verge of the kinds of civil disturbances that Europe is likely to face as the weather warms.
It is not the civil unrest itself that will make the difference but the inflationary decline of the dollar reserve system. The combination of monetary destabilization, social unrest and military tension (the West versus the growing "threat" of a (controlled) faux-militant Islam) could create the necessity for a grand G-20 compromise that could usher in a new monetary environment administered by the IMF under the auspices of the UN. At that point, all that would be needed to create a UN-driven "new world order" is a taxing authority, something the UN has been suggesting with increased enthusiasm for the past several years.
Conclusion: Certainly all the above sounds radically speculative but we have been astonished at the boldness – desperation? – of the power elite's depredations in the past few years. Destabilizing a quarter of the world is apparently not beyond it and we would not put it past this shadowy cabal to purposefully begin to destabilize the euro as they have evidently destabilized the dollar. China has all but broken away from the dollar-reserve system in the past months and Russia shall not be far behind in our opinion. We do not yet foresee the exact mechanisms that might resolve themselves into a new monetary system but in this article we have done our best to pursue the issue logically. Far-fetched? Sure. But no more than many other events occurring in the world today.
When using charts for options trading and any kind of trading, it is a good idea to look at various time frames to be sure you have a solid understanding for the longer term trends in play. It’s easy to get caught up in trading the short time frames like the one, 10, and 60 minute charts, especially when there are large intraday movements. But be careful to always look at the bigger picture.
Below are weekly and daily charts which I think offer a big picture view of things. In both 2009 and 2010 we saw a 5% — 8% correction down to the key moving averages. I feel that we are in store for a similar pullback this year. After that we will most likely continue higher.
US Dollar Index – Weekly Chart
The dollar is trading down at a key support level. If we get a close below this trend line then we should see the dollar sell off sharply which in turn will trigger another leg higher in commodities across the board.
Gold – Daily Chart
Both gold and silver have made new highs but after such a run I expect we see a quick pullback before they go higher. Gold and silver are two investments that everyone should hold as a core position for the long run. But, if we do get a nice quick pullback into the key moving averages then I think it’s a great spot to get involved with more money.
Mid-Week Trend Report:
In short, I am bullish on stocks and commodities and bearish on the dollar and bonds. Going forward — if the dollar breaks down it will most likely help boost oil prices which in turn puts downward pressure on stocks. Depending on how things unfold in the Middle East and a falling dollar, we may not see higher stock prices. Some are forecasting $150 — $220 per barrel and I know if it gets back up there it will definitely slow the economy and stock prices down.
“Making the chicken run” is what Rhodesians used to say about neighbors who packed up and got out during the ‘60s and ‘70s, before the place became Zimbabwe. It was considered “unpatriotic” to leave Rhodesia. But it was genuinely idiotic not to.
I’ve written many times about the importance of internationalizing your assets, your mode of living, and your way of thinking. I suspect most readers have treated those articles as they might a travelogue to some distant and exotic land: interesting fodder for cocktail party chatter, but basically academic and of little immediate personal relevance.
I’m directing these comments towards the U.S., mainly because that’s where the problem is most acute, but they’re applicable to most countries.
Rolling into 2011, the U.S. is in real trouble. Not as bad as Rhodesia 40 years ago, and definitely a different kind of trouble, but plenty serious. For many years, it’s been obvious that the country was eventually going to hit the wall, and now the inevitable is rapidly becoming imminent.
What do I mean by that? There’s plenty of reason to be concerned about things financial and economic. But I personally believe we haven't been bearish enough on the eventual social and political fallout from the Greater Depression. Nothing is certain, but the odds are high that the U.S. is going into a time of troubles at least as bad as any experienced in any advanced country in the last century.
I hate saying things like that, if only because it sounds outrageous and inflammatory and can create a credibility gap. It invites arguments with people, and although I enjoy discussion, I dislike arguing.
It strikes most people as outrageous because the long-running post-WW2 boom has been punctuated only by brief recessions. After 65 years, why should it ever end? The thought of a nasty end certainly runs counter to the experience of almost everyone now alive – including myself – and our personal experience is what we tend to trust most. But it seems to me we're very close to a tipping point. Ice stays ice even while it’s being warmed – until the temperature goes over 32 F, where it changes very quickly into something very different. (more)
The world financial system is a total fraud. It is one gargantuan Ponzi scheme, no better than the one Bernie Madoff used to swindle his friends and neighbors, and thousands of times worse if you add up the total number of victims it has ripped off over countless generations.
The principal difference between the two schemes is that Madoff was acting outside the law while the international banking cartel has persuaded generation after generation of monarchs, presidents and prime ministers to provide legislative protection for their larceny.
The banks Ponzi scheme is alarmingly simple. They lend the same money to several people or institutions at the same time and collect interest on it from each. What the banks really lend, however, is their credit, and what they take back in compensation for that privilege is a debt that must be repaid with interest.
The number of times they lend the same money is called leverage. The practice is as old as the hills but for our purposes we can start with the goldsmiths of Lombard Street in London, England, who accepted deposits for which they issued certificates redeemable on demand. They paid their depositors a nominal interest rate on the understanding that they could lend the money to their customers at higher interest rates. They soon found that they could lend more than they had in their vaults because only a few depositors came in to redeem their gold or silver at any one time. It was a scam. It was illegal. Nevertheless they got away with it for a long while and the scam was legitimized when the Bank of England was chartered to help King William finance his war. Rich people subscribed £1,200,000 in gold and silver, as capital, to found the bank, which then was lent to the government at 8 percent. To show his appreciation the King allowed the bank to print £1,200,000 in banknotes and lend them at high interest rates. In effect, the bank was allowed to lend the same money twice – once to the government and once to the people. (more)
By BARRY EICHENGREEN
The single most astonishing fact about foreign exchange is not the high volume of transactions, as incredible as that growth has been. Nor is it the volatility of currency rates, as wild as the markets are these days.
Instead, it's the extent to which the market remains dollar-centric.
Consider this: When a South Korean wine wholesaler wants to import Chilean cabernet, the Korean importer buys U.S. dollars, not pesos, with which to pay the Chilean exporter. Indeed, the dollar is virtually the exclusive vehicle for foreign-exchange transactions between Chile and Korea, despite the fact that less than 20% of the merchandise trade of both countries is with the U.S.
Chile and Korea are hardly an anomaly: Fully 85% of foreign-exchange transactions world-wide are trades of other currencies for dollars. What's more, what is true of foreign-exchange transactions is true of other international business. The Organization of Petroleum Exporting Countries sets the price of oil in dollars. The dollar is the currency of denomination of half of all international debt securities. More than 60% of the foreign reserves of central banks and governments are in dollars.
The greenback, in other words, is not just America's currency. It's the world's.
But as astonishing as that is, what may be even more astonishing is this: The dollar's reign is coming to an end.
I believe that over the next 10 years, we're going to see a profound shift toward a world in which several currencies compete for dominance.
The impact of such a shift will be equally profound, with implications for, among other things, the stability of exchange rates, the stability of financial markets, the ease with which the U.S. will be able to finance budget and current-account deficits, and whether the Fed can follow a policy of benign neglect toward the dollar. (more)
Uranium stocks have tripled since that time and are now taking their first major breather. During this time we have seen major investors come into the market specifically from China. This interest in uranium was highlighted back in June of 2010 when China National Nuclear signed a contract with Cameco (CCJ) to supply 23 million pounds of uranium. This showed how aggressive China has become and took a large amount of the supply off the table. Cameco is on the record looking for additional acquisitions. Already it has inked a deal with Uranium Resources (URRE) to explore a property in south Texas. Paladin (PDN.TO), an emerging producer, bought the controversial Michelin Property from Fronteer Gold (FRG) for about $250 million in November. Russia’s state-owned ARMZ purchased Mantra Resources for almost $10 a pound of uranium in the ground. Mantra controls the Nyota deposit and will be able to produce 5 million pounds of uranium a year. This is proof that the nuclear industry is heading into consolidation. This year expect to hear more news, especially as prices pull back to support, like what is occurring now.
Market corrections are valuable. Uranium stocks are all pulling back to support and reversing higher. Over the past few months I have highlighted the role nuclear is playing in emerging markets, especially China, Russia, India and South Korea. Even the Middle East, which has vast resources of oil, is looking to expand its nuclear capability. I believe investors will look back at this correction as a great buying opportunity. Acquiring companies may use the next few weeks to make deals as share prices take a breather. Similarly, Fronteer Gold was acquired by Newmont (NEM) specifically during the gold (GLD) consolidation in January. Large companies use profit taking and sell-offs to make offers.
All over the world nuclear is being recognized as an integral part of clean energy generation in a developing and expanding world. President Barack Obama has announced more than $8 billion in federal loan guarantees for the first nuclear power plant in the United States in close to 30 years. Obama says investing in nuclear is critical for the United States as it will reduce US dependence on foreign oil, and help the US economy by creating high-wage jobs. The Middle Eastern turmoil is a wake-up call to our elected leaders in Washington who have not been proactive with developing efficient and clean energy sources. One pound of uranium is equal to 20,000 pounds of coal. Despite the “Deepwater Horizon” and “Upper Big Branch,” there has not been a push for safer and cleaner nuclear energy.
Unfortunately, the US has been asleep at the switch like Homer Simpson and the earliest a new reactor will be built is late 2011. Southern Company has a pending application for a reactor in Georgia, which it says will create 3,000 jobs and generate power for 1.4 million people. However, I believe leaders around the world are realizing nuclear is the only viable choice for clean energy. Obama, who has a large constituency of environmentalist, has given the green light on nuclear. It doesn’t take a high IQ to realize the demand from emerging economies for nuclear power. There are supply concerns as Russia is not renewing its agreement to supply the US with converted uranium from nuclear weapons. The US must move fast and domestic uranium miners are just beginning their secular bull market trends. I believe we will begin seeing a major consolidation in this sector as many of the larger producers — such as Cameco, Uranium One (UUU.TO) and Paladin — as well as sovereign countries continue to acquire reserves. Look for deals to occur on pullbacks.
Crude fell as much as 1.8 percent, the biggest intraday decline since Feb. 24, as an Arab League official said the group has consulted with Venezuela on the plan, which involves sending mediators to the North African country. Libya’s Muammar Qaddafi and Venezuelan President Hugo Chavez have discussed resolving the crisis, the Associated Press reported. Oil prices may be starting to hurt global economic growth, said Adam Sieminski, chief energy economist at Deutsche Bank AG.
“The market perception is if there’s an end to the crisis, there won’t be any potential supply shock,” Pearlyn Wong, a Singapore-based investment analyst at Bank Julius Baer Group Ltd., said in a telephone interview in Singapore today. “This will reduce the pressure on oil prices because without supply shock, there would be enough inventory to meet current demand.”
Crude for April delivery slid as much as $1.86 to $100.37 a barrel in electronic trading on the New York Mercantile Exchange and was at $101.09 at 4:05 p.m. in Singapore. The contract earlier rose as much as 71 cents after settling yesterday at $102.23, the highest since Sept. 26, 2008.
Brent crude for April settlement fell as much $3.26, or 2.8 percent, to $113.09 a barrel on the London-based ICE Futures Europe exchange. That was the biggest intraday decline since Nov. 12. The contract earlier advanced as much as 0.5 percent.
There are no deadlines to agree on the Arab League’s proposal, Hesham Youssef, chief of staff for the group’s secretary general, Amre Moussa, said in a phone interview today. Venezuela is also discussing the plan with other countries, he said.
Oil surged yesterday on concern the turmoil curbing exports from Libya will spread to the Middle East, disrupting more supplies. Violence has cut Libyan oil production by as much as 1 million barrels a day, according to the International Energy Agency.
Qaddafi’s warplanes bombed rebels yesterday as his ground forces fought unsuccessfully for a major Libyan oil port and opposition leaders appealed for foreign nations to launch air strikes against regime mercenaries. Libya pumped about 1.6 million barrels a day in January, according to Bloomberg estimates.
“These high prices are beginning to weigh on the minds of central bankers who are worried about what it might be doing to inflation,” Washington-based Sieminski said in an interview with Phillip Yin on Bloomberg Television. “As oil gets up to $120 a barrel it begins to impinge on global economic activity.”
Demonstrations have toppled leaders in Tunisia and Egypt, while there have been protests in countries including Iraq, Iran, Yemen, Oman and Saudi Arabia, the Organization of Petroleum Exporting Countries’ biggest oil producer. Websites have called for a nationwide Saudi “Day of Rage” on March 11 and March 20, according to Human Rights Watch.
Oil also declined on signs the market is “overbought,” prompting investors to sell contracts. The front-month contract’s 14-day relative strength index yesterday rose to 74.67, the highest since June 2009, and is above 71 today, according to data compiled by Bloomberg. A reading of 70 typically indicates a price is set to retreat, while 30 suggests it may recover.