Thursday, February 10, 2011

USD Hits an All-Time Low

While central bankers are “experts” on economic theory, we would all be well served if they had a little education on real world physics—that is, those immutable laws governing the universe that aren't subject to the whims of economic mis-interpretation. One of the most well-known of these comes from Sir Isaac Newton’s three laws of motion, which is that for every action there is an equal and opposite reaction.

It is imperative for central bankers to learn their actions are not made in a vacuum but have wide array of consequences for inflation, economic activity, and currency fluctuations. While US Fed Chairman Ben Bernanke may state that inflation is well contained, it appears he may finally get his wish of higher inflation which he stated in the December 2010 FOMC meeting was below desired levels.

What’s the easiest way to boost the inflation rate? Simple, just depreciate the home currency. This was exactly what FDR did in the Great Depression to break the back of deflation, and Fed Chairman Benanke, a student of the Great Depression, is following right along in conjunction with President Obama in carrying out FDR’s game plan as highlighted by David Rosenberg below.

And how might this play into Bernanke’s opinion that inflation rates are too low? Easy, devalue the USD and up go commodity prices. As seen below, there is a negative correlation between the CRB Raw Industrials Index (black line) and the USD (green, inverted). Of note, the secular bear market in commodities using the CRB Raw Industrials Index as a proxy stopped dead in its tracks when the USD peaked in late 2001. Also of note, the CRB index peaked in 2008 when the USD bottomed. Conversely, the CRB index bottomed in late 2008 when the USD peaked. The CRB index has broken out to new highs as commodity traders are likely pricing a lower USD ahead. (more)

Did WikiLeaks Confirm "Peak Oil"? Saudi Said To Have Overstated Crude Oil Reserves By 300 Billion Barrels (40%)

In what can be the "Holy Grail" moment for the peak oil movement, Wikileaks has just released 4 cables that may confirm that as broadly speculated by the peak oil "fringe", the theories about an imminent crude crunch may be in fact true. As the Guardian reports on 4 just declassified cables, "The US fears that Saudi Arabia, the world's largest crude oil exporter, may not have enough reserves to prevent oil prices escalating, confidential cables from its embassy in Riyadh show. The cables, released by WikiLeaks, urge Washington to take seriously a warning from a senior Saudi government oil executive that the kingdom's crude oil reserves may have been overstated by as much as 300bn barrels – nearly 40%." Could the OPEC cartel's capacity for virtually unlimited supply expansion to keep up with demand have been nothing but a bluff? That is the case according to Sadad al-Husseini, a geologist and former head of exploration at the Saudi oil monopoly Aramco, who met with the US consul general in Riyadh in November 2007 and "told the US diplomat that Aramco's 12.5m barrel-a-day capacity needed to keep a lid on prices could not be reached." And yes, that conspiracy concept of peak oil is specifically referenced: "According to the cables, which date between 2007-09, Husseini said Saudi Arabia might reach an output of 12m barrels a day in 10 years but before then – possibly as early as 2012 – global oil production would have hit its highest point. This crunch point is known as "peak oil"." And it gets worse: "Husseini said that at that point Aramco would not be able to stop the rise of global oil prices because the Saudi energy industry had overstated its recoverable reserves to spur foreign investment. He argued that Aramco had badly underestimated the time needed to bring new oil on tap." Look for Saudi Arabia to go into full damage control mode, alleging that these cables reference nothing but lies. In the meantime, look for China to continue quietly stockpiling the one asset which as was just pointed out is the key one to hold, for both bulls and bears, according to Marc Faber.

More from the Guardian:

One cable said: "According to al-Husseini, the crux of the issue is twofold. First, it is possible that Saudi reserves are not as bountiful as sometimes described, and the timeline for their production not as unrestrained as Aramco and energy optimists would like to portray."

It went on: "In a presentation, Abdallah al-Saif, current Aramco senior vice-president for exploration, reported that Aramco has 716bn barrels of total reserves, of which 51% are recoverable, and that in 20 years Aramco will have 900bn barrels of reserves. (more)

Time Lapse Interactive Video Of Global Debt: 1870 - 2010

Ever wanted to run a Sid Meyer Civilization end of game recap scenario on the world and see which country, region or continent had built up the most debt the fastest? Or, far simpler, just to watch a time lapse video of total debt/GDP by country or by region? The IMF now allows you to do both. The international monetary organization has released a Data Mapper tool which not only shows a snapshot map chart of instantaneous sovereign leverage at any given moment, but also shows just how global debt levels have changed through the ages. Of particular note is total debt/GDP at advanced countries in the post-WW1, Great Depression and WW2 period. And while back then the result was either hyperinflation (Weimar) or various stages of removal of the gold standard (until all currencies became freely floating under Nixon), we now no longer have the option of a relative devaluation, and the only chance left for a world levered to its gills is either absolute revaluation of a brick of gold, accelerating, rampant inflation or outright default. Have fun playing with the drilldown function.

China to Add Staggering 5,042 Tons of Gold for 10% Reserves

On the heels of the Robin Griffiths interview where Griffiths is looking for the Chinese to increase their gold reserves five-fold from 2% to 10%, King World News interviewed Dan Norcini to get his thoughts. “Eric, if you base Chinese reserves on $2.5 trillion, for China to move from 2% to 10% they will have to increase their gold holdings a staggering 5,042 tons at current prices.”

Norcini continues:

“I’ve been seeing reports and I don’t think that it is any secret that the Chinese officials have been telegraphing their intention to dramatically increase their gold reserves. The reason behind this is that China wants to ultimately position the Yuan for the longer-term as being part of a basket of currencies that would comprise a new official global reserve currency.

A dramatic increase in gold holdings is necessary for China to achieve this goal. By way of comparison, right now both the US and Germany have roughly 70% of their reserves in gold, while China is at a paltry 2%. We don’t want to leave out China’s neighbor Japan which also only holds 2.5% of their total reserves in gold.

Going back to the 5,000 tons, we are talking about two years of global production. Where is the supply going to come from? China is in competition with individuals, funds and other sovereign wealth funds for a portion of the global gold production.

That is why I believe there will be continued buying support on any subsequent retracements in the gold price, because China will be using these opportunities to acquire the metal. I always think back to when India jumped in and bought 200 tons of gold at $1,040. I said at that time that it was doubtful that we would ever see gold below $1,000 again.

That move by India signaled to me that the Asians were serious about increasing the amount of gold that they were going to be holding as part of their official reserves.

What this means to the King World News readers is that if you are looking to acquire gold you need to take advantage of the dips in price because they have been relatively short-lived, now that all of the Asian central banks are on the prowl to acquire more of the yellow metal.”

Interestingly Norcini notes that the Japanese need to increase their gold reserves as well. With so many entities lined up to buy and no major sellers, we should see continued upward pressure on the price of gold for years to come.

Eric King

Foreclosure Inventories are 7.8 Times above Normal and Rising

A report by Lender Processing Services today confirms Fitch Ratings’ analysis yesterday that the volume of defaulted loans moving to REO status has fallen to a trickle as a consequence of the Robo-gate scandal, contributing to a backlog of foreclosures that threatens to reverse the overall decrease in foreclosure inventory caused by the steady decline in new delinquencies last year.

Even though most moratoria have been lifted, Fitch reported that the flow of defaulted loans into REOs will continue to be slow due to outside scrutiny and servicers’ concerns over legal liability. As a result, Fitch extended its estimate of the time it will take to clear the current inventory of distressed properties to four years. See Robo-gate Will Haunt REO Inventory for Four Years.

LPS said the total number of delinquent loans is nearly twice as high as historical averages - and foreclosure inventory is currently 7.8 times higher than historical averages and is rising. Just over 2.1 million loans are 90 days or more delinquent but not yet in foreclosure, with nearly 6.9 million loans in some stage of delinquency or foreclosure.

The report also found that over one-third of borrowers with loans that are 90 days or more delinquent have not made a payment in over a year. Self-cures for loans one-to-two months delinquent declined slightly in December, and late-stage cures, usually related to modification activity, continue to decline. In December, 259,518 loans were referred to foreclosure, which represents a 0.6 percent month-over-month decline.

Other key results from LPS’ latest Mortgage Monitor report include:

Total U.S. loan delinquency rate: 8.83 percent

Total U.S. foreclosure inventory rate: 4.15 percent

Total U.S. non-current* loan rate: 12.98 percent

States with most non-current* loans: Florida, Nevada, Mississippi, Georgia, New Jersey

States with fewest non-current* loans: North Dakota, South Dakota, Alaska, Wyoming, Montana

Hong Kong housing bubble! Mainland buyers blamed

Residential property prices in Hong Kong are bubbling up again, following substantial falls in the second half of 2008. Hong Kong is riding another euphoric wave of property purchases.

Hong Kong’s housing market was seriously affected by the global financial crisis, but after falling 17% (18% in real terms) from June to December 2008, Hong Kong’s residential price index rebounded and rose by 20% (21% in real terms) from last year’s bottom to August 2009, according to the Ratings and Valuation Department (RVD)

A massive influx of buyers from mainland China has been a partial cause. The Chinese stimulus package of November 2008 boosted liquidity, and cash-rich Chinese, facing restrictions on bringing out capital from China, bought properties in Hong Kong.

Hong Kong Island, Kowloon and the New Territories all saw strong price increases in the first two quarters of 2009. The overall residential price index in Hong Kong rose 8.3% (8.4% in real terms) in Q2 2009.


Q-O-Q Nominal
Q-O-Q real

(Less than 40 sq. m.)
Hong Kong


New Territories







(40 to 69.9 sq. m.)
Hong Kong


New Territories







(70 to 99.9 sq. m.)
Hong Kong


New Territories







(100 to 159.9 sq. m.)
Hong Kong


New Territories







(more than 160 sq. m.)
Hong Kong


New Territories







Heavy intervention by the HK government helped. There were two stimulus packages, in October 2008, and May 2009, which maintained buyer confidence and encouraged continued spending. The government likewise implemented measures to strengthen the financial sector and ensure liquidity. (more)

The Wall Street Journal Asia - 10.02.2011

read it here

The Violent Declines the Follow Overbought Rallies

I am as skeptical as the next guy about technical analysis, maybe more so, so I was kind of intrigued when Robert McHugh of Main Line Investors wrote an essay titled “Time Analysis of the Coming Market Top.”

He writes, “We have identified when an extended overbought rally has likely reached its expiration date.” And what is this time frame? “Two and a half months,” he says.

This “two and half months” time frame is particularly intriguing to me, as this is the approximate time it took for my wife to realize that marrying me was the worst mistake of her Whole Freaking Life (WFL).

Without showing the usual sympathy that my wife gets from her friends and family, the parallels are eerily obvious when he goes on that “once this condition reaches the 2.5 month age, the rally not only ends, but a sharp, sometimes violent decline begins.”

Violent declines! That’s it! Of course, there are those who say that since she did not actually hit me with anything that she threw at me, it cannot be termed “violent,” although nobody is contending that it wasn’t a “decline” in our relationship. (more)

5 Reasons to Buy Real Estate or a New Home Now

The term “housing bull” hasn’t been heard much since the Great Recession was burned into the American consumer’s psyche. In fact, bearishness in the housing space has become the new normal, with many potential buyers just deciding that they will wait on that new home until conditions in the market begin to improve — if they ever do. Similarly, many investors won’t touch housing stocks with a 10-foot poll — from the obvious laggards like PulteGroup (NYSE: PHM), which is off -30% in the last year, to builders bouncing back like Toll Brothers (NYSE: TOL) which is up double-digits so far this year.

Well, those conditions are indeed beginning to improve, and that means right now could be the best opportunity to get in on a home at a very attractive price. Let’s take a look at five reasons why pulling the trigger on a new home purchase now could be the right financial move.

Home prices are starting to climb

According to a report from the National Association of Realtors (NAR), sales of existing U.S. homes jumped 12.3% in December. The upbeat month for home sales data comes at the tail end of what was a weak 2010. Annual home sales saw a 4.8% drop in the metric from 2009 levels, but the final month rise in sales could be the beginning of more upside in the sector. The NAR report also shows that although there is still a lot of inventory in the property market, those inventories have been gradually going down. Inventories in December of 3.56 million homes represented 8.1 months of supply, compared with 9.5 months in November. (more)

McAlvany Weekly Commentary

INFLATION: No Surprise to Anyone Except Americans

A Look At This Week’s Show:
-Manufacturers are stocking up early to save on future higher priced supplies
-Unemployment rising, not falling as reported
-China seems to be booming but their household consumption is shrinking

An Oil Options Trade with High Precision This USO spread can be rolled for a continued payoff

Commodities markets recently have been manic with gyrations of the price of materials, metals, and energy. Given these wild fluctuations, let’s consider options trading in the United States Oil Fund (NYSE: USO) that indicates a solid probability of success.

I look at some trades this way: The development of precision high altitude bombing during World War II resulted in a dramatic reduction in casualties while inflicting devastating consequences on enemy forces. I view the sort of option strategy described below as the equivalent of high altitude precision bombing.

As is shown on the daily price chart below, there is substantial support in the region of $35.60 — $36 provided by a recent swing low and the 200-day moving average.

US Oil Fund

US Oil Fund 200-Day Moving Average

In selecting the structure of option trades, I usually like to consider the volatility environment in which we currently operate. This is important because of the tendency of implied volatility (IV) to revert to its mean. The knowledgeable trader factors this into his trades in order to put the wind at his back. Trades can be selected and constructed to benefit (positive vega trades) or suffer (negative vega trades) from increases in implied volatility. As you can see in the chart below, IV is currently in the lower quartile of its historic value for this specific underlying: (more)