Tuesday, January 18, 2011

Niall Ferguson On Whether The Financial Crisis Will Lead To America's Decline And A Glimpse Of The "Post-Pax Americana" Dark Ages

Two weeks after we presented Niall Ferguson's video lecture - "Empires On The Verge Of Chaos" to tremendous reader response and almost 30,000 views, we follow up with another must watch video presentation, this time highlighting the intellectual rigor of Ferguson, David Gergen and Mort Zuckerman. The topic once again is the Financial Crisis, and specifically how, why and whether it will lead to America's decline. Of particular note is Ferguson's spot on characterization of the primary deficiency in the so-called brains of economists, namely that they see patterns, equilibria and stable systems where there are absolutely none: i.e., in the complex (as in Lorenzian) world of economics: "Complex systems look like they are in equilibrium, but they are not: they are constantly adapting, highly decentralized, interdependent systems and this process of adaptation can continue for quite a long time. And you think to yourself when you look at it, that's in a wonderful equilibrium. That's how we think about the economy. That is how economists teach economics. They talk about it in terms of equilibrium. The bad news is that in fact we inhabit a complex system that has virtually nothing to do with the neoclassical model that you are taught in Econ 101. And that's why the economists failed to predict the financial crisis... For me American power if you generalize beyond the realm of finance through the geopolitical system is a perfect example of a highly complex system which looks like it is in equilibrium but like all the great empires of the past is quite close to the edge of chaos. And our nightmare scenario should be that something happens to us like happened to the Soviet Union... It suddenly just falls apart. And I think the trigger, the catalyst if you want to switch to chaos theory the butterfly in the tropical rainforest that flaps its wings and posits the distant thunderstorm is going to be the credibility of fiscal policy. That just seems to me like the obvious place where things can turn nasty, and they turn nasty with amazing speed." (more)

3 Stocks Insiders Are Buying Like Crazy

Insider Monkey has been regularly publishing articles about the stocks insiders buy like crazy since the beginning of December. The stocks we highlighted in those 6 articles have performed spectacularly compared to the S&P 500. Insiders know more about their companies than do most investors. This is especially true in smaller companies which are only followed by a few analysts, if any at all. Academic studies conducted during the past 40 years confirm this. Stocks bought by several insiders outperformed the S&P 500 index funds by about 7 percentage points per year in those studies. Last week, we brought 5 companies insiders are buying to your attention. Here are their performance numbers since we highlighted them:

1. Winmark Corp (WINA): This is the only stock that underperformed last week. Winmark returned only 0.5%.

2. Trailer Bridge Inc (TRBR): Trailer Bridge was last week’s best performer; it returned 19% vs. 1.7% for the S&P 500 index.

3. Cogent Communications Group Inc (CCOI): There have been recent insider purchases at Cogent Communications around $14 per share. On January 7th the stock closed at $13.74- less than what the insiders paid for it. After we highlighted this stock, it returned 10.4%. (more)

Chart of the Day: % Change 1970-2010

Inflation Is Here

For months now, the Federal Reserve has been worried about inflation being too low. So low, that the Fed claims it is unhealthy to the U.S. economy. When it announced its second wave of money printing (QE2) in early November 2010, the Fed said, “Longer-term inflation expectations have remained stable, but measures of underlying inflation have trended lower in recent quarters. . . . To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to expand its holdings of securities.” (Click here to read the Complete Fed News release from November 2010.) That means the Fed started printing $75 billion a month, out of thin air, to finance more than half of the U.S. budget. QE2 is scheduled to end in June, but many predict it will be immediately followed by some sort of QE3.

The mainstream media is spinning the latest consumer price numbers as good news, but inflation 2011 is here. The Associated Press called inflation “tepid.” The story went onto say, “The Labor Department said Friday that consumer prices rose 0.5 percent last month, the largest increase since June 2009. Roughly 80 percent of the increase was due to higher gas prices. . . . Without food and energy costs, consumer prices only increased by 0.1 percent for the second straight month. This “core” inflation rate has gained 0.8 percent in the past year, evidence that prices are not rising too quickly.” (Click here to read the entire AP story.) It would be nice to live in a world where you don’t need food or energy, but that simply is not the case. (more)

2011 Financial Meltdown Fast Approaching

Despite the best efforts by the American mainstream financial media, the eager PR division of the United States Dollar Ponzi Scheme, to paint the rosiest of rosy pictures for blindly optimistic readers, the stubborn image of a debt-swollen jobless behemoth economy slowly toppling persists. No matter how much U.S. departmental data is primped, polished, and primed, no amount of lipstick is going to transform this fat pig into a princess.

This week's top harbinger headline points to the fact that the United States is once again bumping its fat head on the ceiling of its spectacularly stratospheric debt ceiling of $14.3 TRILLION dollars. That means an act of congress is once again necessary to lift that limit. The alternative is either a) a revaluation of the U.S. Dollar to reflect the depreciation inherent in Quantitative Sleazing as part of a debt restructuring, or b) default.

Default? Could it be?

Never, according to bright-eyed Harvard educated economists and Forexperts.

"The likelihood of a restructuring of US sovereign debt is zero," says MF global currency and fixed income analyst Jessica Hoversen. "As for a downgrade, while it's theoretically possible, it is still extraordinarily unlikely."

Well that's one opinion. (more)

How Problematic Is Oil`s Rise?

As oil prices approach $100 a barrel, a level the market hasn't seen in over two years, there is growing concern that it could hamper the global economic recovery.

Analysts said the UK and Europe's weakest economies were most at risk from a surge in crude oil to near $100 a barrel.

The higher costs of everything from gasoline to heating oil, jet fuel and the myriad of products that have an oil component is a tax on growth at a time when prospects for recovery in these countries are so fragile.

While few analysts see oil returning to its high of $147 hit in 2008 because of oil producers' excess capacity, crude prices do represent a threat to the global economy and particularly to Europe at levels even well below that.

"Whenever the size of the energy sector in the global economy reached 9 percent, we went into a major crisis," said Sabine Schels, a commodity analyst at Merrill Lynch.

"It was in the 1980s and it was the same in 2008. Right now we are at about 7.8 percent and if you go above $100 per barrel to $120 per barrel, you get to that 9 percent level."

Rising oil prices may increase pressure on the Bank of England to raise interest rates to offset already high inflation, some economists said.

The weakness of the euro due to the euro zone's debt crisis will also make the higher oil price more difficult to swallow in weak economies such as Greece, Ireland, Portugal and Spain. (more)

A strange time for listed gold stocks

Batten the hatches: continue shorting gold stocks, and buy . . .

JOHANNESBURG - By now, anyone or anything not predicting that the gold bullion price will continue rising has been hunted off the face of the planet. Never mind a decade of bull markets for the yellow metal (and a near fivefold rise in prices), GFMS this week reckoned the metal could broach $1 600/oz by year-end.

An all time record of $1 431/oz was seen less than two months ago. The strange thing, for which there is no ready explanation, is that investors (and speculators, as always) are broadly selling off listed gold stocks. The metal is currently trading just 4% below its record level, but listed gold stocks have been clobbered for more than a month.

The US-quoted SPDR Gold Shares ETF, the world's biggest gold exchange traded fund (ETF) (market value: $56bn), tracks the bullion price, as ever, and is just 4% off its highs.

For miners of the metal, stocks prices look painfully out of synch. Toronto-based Barrick, the world's biggest gold digger by value and output, has surrendered 15% of its NYSE-quoted market value, now at $47.4bn, since early December, when dollar gold bullion most recently peaked. (more)

Technically Precious with Merv

Gold has hit its lowest closing level (but not yet its intra-day level) in almost two months. The intermediate term momentum indicator is at its lowest level since early August. The price action seems to be developing a weaker and weaker strength, not usually a good sign.



I mentioned the intermediate term momentum weakness in the introduction. Even the long term momentum is showing greater weakness than the price action. The indicator is well below recent levels while the price is still holding its own, but weakening. The long term weekly price/momentum chart shows the two year old up trending channel in the price action and the support line in the momentum. The momentum support appears ready to be breached but the price action is still some distance from its channel support line. The weakening momentum may be more of a sign of intermediate term reversal than a long term reversal. There is still a long way to go for the momentum to get into its negative zone (below 50%). The one thing that this action DOES suggest is that one should hold off on new purchases until things get a little stronger or if one just must buy then one should understand that one is doing so at a time of much greater risk of reversals. Since the indicators are not yet bearish one would not be on the sell or short sell side as far as long term commitments are concerned. Most likely what lies ahead may be a very good new buying opportunity but not yet. The daily and weekly action should tell us when it’s ready to start new purchases again. (more)

Food Strike: Junior Fertilizer Companies on the Rise ( MFM, EPO, FOS )

Doomsayers and economists alike are warning the public of the sharp rise in world food prices that are expected in the near future. Already we can use the record levels hit in December in sugar, grain and oilseed prices as our indicator of things to come. With these trends, many investors are seeking the answer in their portfolio to help soften the blow made by the increased cost of dinner time.

Early in November of 2010, the Canadian Government made a landmark decision regarding the purchase of Potash Corp. [POT - TSX] by BHP Billiton, opting to reject the transaction on the basis of it providing “no net benefit to Canada.” Since the announcement was made, much speculation erupted over what were the true reasons behind the feds' intervention. Potash Corp. currently reigns as the world's largest fertilizer producer, and thus wasn't particularly an entity the government wanted to see handed over to the BHP group from down under. The implied future control over our own food supply is apparently more important to the feds than the foreign entities entering into Alberta's oil sands.

But in the aftermath of the ordeal, potash as an investment focus has gained a lot of steam. The price for the big players such as Potash Corp. or even its provincial rival Mosaic are a little too high for those who follow the higher-yield, higher-risk TSX Venture Exchange. Here are some of the stocks we're following closely as impacts from the global food market weave their investment magic.

Marifil Mines Ltd. [MFM – TSX.V]
Current Price: $0.21
52wk Range: $0.06 - $0.25
Market Cap: $10.88M
Instead of dabbling in the rolling prairie fields of Saskatchewan, Marifil snapped up 47,150 hectares of potash lands in Argentina. The K3 Project as it is called has good potential for salt horizons at depths ranging from 500m to 2,000m, while further analysis in the works from local abandoned oil wells. The site is nearly 50kms NW of Brazilian giant Vale's massive Rio Potasio potash mine, which has a resource of 2 billion tons of potassium chloride. On top of the potash upside of K3, Marifil also has further prospective amounts of uranium, sulfur, lead, zinc and asphaltites on the property. All in all, the company holds over 20 properties that also focus in precious metals, copper, nickel and an oil and gas target called Mina El Carmen. (more)

Precious Metals Default Scenarios

For obvious reasons, there has been a great deal of discussion about actual, formal “defaults” in the gold and silver markets. Among those “obvious reasons” is that informal defaults are apparently already taking place in both markets.

Beginning in the London gold market over a year ago, and now rumored to be occurring in New York’s “Comex” silver futures market, buyers who have legally contracted to take “physical delivery” of the metals they have purchased are said to be accepting large, paper bribes to accept a “cash settlement” instead.

There are many reasons for investors to take such “rumors” seriously. Empirically, we see the premiums being charged for physical bullion (even from large, established dealers) rising to levels never before seen (around the world). This strongly suggests a very tight market for bullion. This is confirmed through the anecdotal reports of both industrial users and large institutional investors (such as Sprott Asset Management) that they are having a great deal of difficulty locating any large quantities of bullion available for sale.

In theoretical terms, we are merely seeing the culmination of arrogant bankers attempting to defy the elementary laws of supply and demand for over a quarter of a century. Even those with no training in economics know the basic rule (since it is merely an expression of common sense): when prices rise, demand falls; when prices fall, demand rises. (more)


Investors in mainland China are clearly expressing concerns over inflation and slowing growth that the USA and much of the rest of the world is comfortable ignoring for now. The Shanghai Composite fell -3% on Monday to close almost -16% off its November highs. Investors are increasingly concerned over the government’s ability to contain inflation and steer the economy towards a soft landing.

The Shanghai composite has served as a reliable leading indicator of both commodities and equity prices over the course of the last 5+ years. US equity futures are trading down marginally on the news, however, exchanges are closed for trading on Monday.

Hedge funds bet China is a bubble close to bursting

The world is looking to China as a springboard out of recession - but some hedge funds are betting the country's credit and growth levels cannot be sustained.

For his first-ever speech as Britain’s new Minister of Trade & Industry last week, Lord Green faced a formidable audience of 400 Chinese and British business delegates.

The former chairman of HSBC declared that China’s economic growth figures over the past five years represented an “extraordinary historic event”.

Green didn’t need to go over Britain’s experience during the same period for most to agree that plugging into China’s blistering growth - predicted by the IMF to be 10.5pc this year - was of “vital importance” to the UK.

But even as he spoke a hedge fund manager in Mayfair was poring over spreadsheets of sovereign and corporate credit default swaps, interest rate and foreign exchange options with one aim: to “get short on China”.

The manager, who wanted to remain anonymous, said: “The Chinese delegation has said all week that there will be double-digit growth for years to come and the Brits have lapped it up. But the data doesn’t add up. We think we’ve experienced credit bubbles over the past few years, but China is the biggest. And yet the global economy is looking to China as not just a crutch but a springboard out of the recession. It’s crazy.” (more)