From www.prudentbear.com
Volatility, heightened "Monetary Disorder", and, seemingly, acute systemic risk have returned. For the week, the Dow dropped 3.4% (down 8.0% y-t-d), and the S&P500 was hit for 2.8% (down 7.3%). The Economically-sensitive issues were under pressure. The Transports declined 3.4% (up 14.9%) and the Morgan Stanley Cyclicals dropped 4.1% (down 6.0%). The Utilities fell 2.0% (down 5.8%), and the Morgan Stanley Consumer index declined 2.4% (down 6.8%). The broader market held together better. The small cap Russell 2000 declined 1.1% (down 3.4%), and the S&P400 Mid-Caps dipped 0.9% (up 1.8%). Technology stocks held their own. The NASDAQ100 declined 2.1% (down 4.5%), and the Morgan Stanley High Tech index fell 2.4% (down 3.1%). The Semiconductors declined 2.3% (down 0.6%), the Street.com Internet Index 2.1% (down 2.5%), and the NASDAQ Telecommunications index 1.6% (up 1.8%). The Biotechs gained 1.1% (down 2.4%). Financial stocks were under heavy selling pressure. The Broker/Dealers dropped 3.6% (down 21.9%) and the Banks 8.2% (down 21.4%). With bullion jumping $15.70, the HUI Gold index increased a modest 2.3% (up 5.4%).
Well dear reader, as you certainly remember I mentioned once that it is my intention to post with a higher frequency than in the past. Well what happened lately is that the frequency did not go up but down. Why? Well on one side I was simply very busy with all the things that have to be done, when one moves from one country to another. This means finding a new place to live, buying furniture, getting the needed licenses and so on. So most of my spare time was doing precisely the before mentioned tasks. Furthermore I did not feel like having been kissed by the muse (maybe because my grey cells were very much focused on getting ourselves organized). Well anyway I do really hope to get back to the normal frequency soon.
So what happened lately? Well much and of course not so much. On one side we had the oil prices falling down from a new high at the end of last week and last Thursday and Friday a price spike never seen before. Personally I sold all my oil position this week and took my profits (unfortunately I sold before the spike but the average profit of 90% in 2 months is not that bad at all). Why did I do that when I do believe that we will see at least USD 150 barrel this year? Well on one side I did not like the way the authorities were shooting against the high oil prices. One thing is the congress trying to go against the oil producers, which of course is ridiculous but seeing that they are now doing everything they can to influence the oil price to the downside, I thought it is wise to take profits. Of course the reaction this Thursday and Friday proved my feelings wrong. At least for the moment being. Well dear reader I still believe we will see at least USD 150 barrel this year and I truly believe in Peak Oil and therefore strongly believe that we will see much higher prices over the coming months. But dear reader, experience shows that nobody really got poor by taking profits from time to time (although sometime too early) while on the other hand there are ample examples of people losing a lot of money because they did not take profits and waited too long. So my dear reader, as mentioned, I certainly do expect much higher prices ahead. Therefore I will use important corrections to rebuild and increase a position in oil and of course Natural Gas (by the way there is always the possibility that something happens in the Middle East which could lead to a strong spike in oil prices).
Some more news about oil:
French fishermen and farmers, who need fuel for their trawlers and tractors, say their livelihoods are threatened by soaring prices and have blocked oil terminals around France and shipping traffic on the English Channel to demand government help. Italian, Portuguese and Spanish fisherman joined them and went on strike too. British and Bulgarian truckers are staging fuel protests, too.
“Turkey faces similar problems – and even higher prices – $11.29 a gallon, which for a full tank in a midsize car can reach nearly $200, enough for a domestic plane ticket.”
Peak Oil
Well dear reader, is that something we will get have to used to?
1. Production from known oil fields is declining faster than new fields can be developed. Indonesia leaving OPEC is a significant development, as is the decline in North Sea, US, Asian, African, Russian and Middle Eastern oil fields. The new fields in the Gulf of Mexico, Brazil and Angola cannot take up the shortfall in supply in the short term.
2. There is much talk about enhanced oil field recovery, but the developed technologies cannot dramatically increase the production from rapidly depleting reserves.
3. There is no financial or political incentive for OPEC, Russia and the FSU producers to increase production, even if they could.
4. The cost of exploration and production infrastructure development has risen enormously during the past few years, and there are real shortages of drilling rigs, special steel manufacturing and fabrication facilities, ports, vessels, refineries, terminals and pipelines.
5. Despite rapidly rising money supply, there is a reluctance to invest in old technology energy sources and their infrastructure. Funds are channeled into the new technologies, without them having proven their long-term environmental credentials and energy efficiencies.
6. There is a real skills shortage and lack of incentive for people to work in old technology industries and inhospitable, remote and dangerous places.
7 . We have used up the 'easy oil' and the lower quality crudes require massive investment in infrastructure and refining to bring them to market.
8. Many of the 'green initiatives' are actually very energy intensive, especially during the initial manufacturing phase, and don't bring about a significant reduction in oil consumption.
9 . Even if the world enters a new low growth phase, oil consumption won't contract as much. Recent oil consumption growth was 4%/a, and it won't slip too far from this number as money supply is still growing so rapidly, allowing many new participants to use more energy, especially oil based sources.
10. Our education systems and media are not encouraging people to tackle energy issues with a scientific approach. Efforts are directed from a marketing, venture capital, political and emotional angle, thus there is a massive misallocation of effort and investment occurring.
11 .Finally, but not least important, the rising oil price reflects a fully justified lack of confidence in the future value of the US$. It makes a lot of sense to buy long term oil futures with 2008 dollars at approximate current crude oil values.
And still some more
June 4 – Financial Times (John Burton): “Malaysia will raise petrol prices by more than 40% from Thursday as it seeks to rein in government spending on fuel subsidies at the cost of ending a low inflation policy. Government officials said Malaysia was in danger of spending M$50bn ($15bn) on fuel subsidies this year if government-set prices for petrol and diesel were not raised… Before today’s increase, Malaysia’s fuel subsidy accounted for nearly a third of total government spending and was equivalent to about 7% of gross domestic product… The fuel price increase was bigger than those recently announced by Taiwan, Indonesia and India, which raises its fuel prices by 10% from Thursday.”
June 4 – Bloomberg (Kartik Goyal and Soraya Permatasari): “India and Malaysia were forced to raise fuel prices after crude oil almost doubled in a year, risking fanning inflation and social unrest. Gasoline will rise 11% in India’s capital New Delhi… Pump prices in Malaysia will increase 41%... Asian nations are grappling with record crude prices that have raised the cost of subsidies and caused losses for refineries… ‘The countries in Asia, which are dependent on imports, will have to live with the specter of accelerating inflation and slowing economic growth this year,’ said Kaushik Das, an economist with Mumbai-based Kotak Mahindra Bank Ltd.”
And
June 6 – Bloomberg (Tian Ying): “China’s passenger-car sales grew a faster-than-expected 16% last month, as demand spurred by economic growth withstood the effects of the country’s deadliest earthquake in 32 years.”
Does that look like less consumption of oil, my dear reader?
The eye of the hurricane
What else happened this week? Well we are heading towards hurricane season. The forecast is that it will be a season with at least 15 hurricanes. Here of course I am rather talking about the metrological phenomenon and not about other storms that might feel as hurricanes. So what is the storm that might turn into a hurricane? Or are we already in the middle of the hurricane? Well if I look at the markets and the economic situation to me it seems that we are actually in the eye of the hurricane. The last few days have been quite calm with almost no leeway but it seems that winds are picking up again. It could very well end up in a category 8 hurricane. Well now of course you will tell me that you never heard of a category 8 hurricanes. To be honest me neither. But dear readers, what a see ahead seems to me to be at least a category 8 hurricane. Trying to analyze the incoming news it seems to me that we could be in for Katrina’s sister, which without doubt will be a lot more ugly. That would mean that what we had to witness while Katrina unleashed its power over New Orleans might be minor to what could be ahead of us.
Are we playing the game of the musing chairs?
It sure seems so. The music is still playing however what happens when the music stops? What happens to more subprime papers? What happens to the credit card loans? What happens to the car loans? What happens to the student loans? What happens to the huge amounts of Level III assets? What happens to the LBO loans? What happens to any other loan?
Many questions indeed. The answers we will know once the music stops or pauses. Let’s hope they do not stop soon.
Credit crisis
Well dear reader I mentioned already Lehman, following some more information. It really seems that seasoned investors believe that Lehman does not survive.
Elsewhere in the finance conundrum, investors are betting against Lehman Bros. at a record level. Short interest in LEH has soared over the past month, to 13%, an all-time high for the struggling investment house, even higher than at the peak of the Bear Stearns crisis.
Lehman supporters assert that shares of LEH are being unfairly driven down by short-selling funds, namely David Einhorn of Greenlight Capital, who has waged a very public war against Lehman. More likely, short interest in Lehman is skyrocketing because… well… it’s an overleveraged investment bank with huge mortgage-related liabilities.
Credits
Perhaps not so ironically, the “credit default” swap market -- the same beast that foreshadowed Bear’s demise -- is signaling more trouble to come: The cost to insure debt issued by Lehman Brothers and Merrill Lynch is skyrocketing.
Credit default swaps on Merrill Lynch are up 50% since April. The same measure for Lehman Bros. has nearly doubled.
Well dear reader, that means that the likelihood of Lehman Brothers being unable to pay its debts has doubled in less than two months.
Will we see another bail out? Maybe so. Why? Well Lehman, like Bear Stearns before or like the bond insurers Ambac and MBIA pose a huge systemic threat and risk. If Lehman gets bust, its portfolio would hit the open market. That means that assets will hit the market at fire sale prices. That of course will mean more write-downs for basically everybody because the market will show us that some level II and level III assets that are still valued at fantasy prices, will in fact have a much lower price. That could mean, if we like it or not, another couple of billions in write-downs.
Engdahl on www.financialsense.com takes a look at the UK. Please read on.
While attention has been focused on the relatively tiny US „sub-prime“ home mortgage default crisis as the center of the current financial and credit crisis impacting the Anglo-Saxon banking world, a far larger problem is now coming into focus. Sub-prime or high-risk Collateralized Mortgage Obligations, CMOs as they are called, are only the tip of a colossal iceberg of dodgy credits which are beginning to go sour. The next crisis is already beginning in the $62 TRILLION market for Credit Default Swaps. You never heard of them? It’s time to take a look, then.
Read
http://www.financialsense.com/editorials/engdahl/2008/0606.html
FED
Seem that Fed converted itself from the lender of last resort to the garbage collector of last resort. Collecting the garbage from the banks it puts the Fed at risk to use up all their funds.
Currencies
This week marks the euro’s 10th anniversary.
Well the Euro really looks well against the USD. Is that because the Euro is such a good currency? Or is it because the mighty USD is on the way to extinction? Should be put the USD on the list of endangered items (animal might not be the correct expression)? Hey, maybe holding USD bills is not such a bad idea. In some 100 years they might become a collector item. Or should we wait for those 100 dollar bills with at least 6 more zeroes stamped on it? If the Reichsmarks from the Weimar Republic with the zeroes stamped on it are collector items today, than we possibly should wait a couple of months with hording Dollar bills in the hope they get collector items. Shall we start hording the paper already now or shall we wait? Maybe we should wait. Looking at the sheer number of USD bills printed the ones that we will see soon, I mean the ones with some zeroes stamped on it, possibly will be better collection items. By the way do you know how long it will take until the AMERO will be introduced? I do not remember it. But it will be soon anyway.
1000 Mark banknote, over-stamped in red with 1,000,000,000 (1 billion) mark, issued in Germany during the hyperinflation of 1923
is there a more recent example? Yes Zimbabwe
British Pound
Well dear reader, old England is suffering from the same problems as its cousin the US. There is a housing bubble and maybe other bubbles. The UK seems to enter a deep recession, which possibly will lead to the Bank of England lowering its interests. This should lead to a weaker pound sterling.
And the Dollar?
Following a comment found on the net.
On June 3, 2008, The Gulf Times, a newspaper in Qatar, published an editorial which should send chills down the spine of any person who cares about the status of the dollar as the world's reserve currency. The title of the opinion piece said it all: "Paulson dollar hype is not worth a dime."
The article was published so as to coincide with Treasury Secretary Paulson's visit to Saudi Arabia, Qatar, and the United Arab Emirates. In that part of the world, if something gets published, it is a good bet that the government approves of it. Secretary Paulson has recently been quoted in the press as having claimed that the U.S. has the world's most liquid and open markets. He has also uttered the usual garbage about the "fact" that the U.S. supports a strong dollar policy. This, at a time when our total money supply (M3) is expanding at an annualized rate of between 16-17%! The truth of the matter is that our leaders support a WEAK DOLLAR policy. Do not listen to what these people say. Pay attention to what they do!
The reckless expansion of our money supply is THE REASON why the dollar buys less and less with each passing day. Inflation is always a monetary phenomenon. Higher prices are merely a symptom of excessive money/debt creation by central banks, governments, and by fractional reserve banking institutions.
Many nations have "pegged" their currencies to the dollar and are suffering severe problems with inflation as a result. If the U.S. actually had a "strong dollar" policy, the prices of oil, gasoline, diesel, natural gas, coal, uranium, corn, wheat, rice, soybeans, coffee, sugar, pork bellies, beef, chicken, orange juice, lead, zinc, nickel, copper, potash, steel, cement, molybdenum, rhodium, silver, platinum, palladium, and gold would be lower.
Let's get back to the article. Here is the part of the editorial which should concern Americans:
"The Gulf economies should not wait for a long-term US fix out of the shadows of rock-bottom interest rates because they need all the help they can get today in the fight against inflation. That is why they should not be swayed by Paulson's rhetoric and self-interest this week. De-pegging from the dollar now is the way forward."
If the Arab oil producers de-peg from the dollar, the dollar's role as THE currency used in oil markets cannot last long. The brutal reality is that our trading partners are realizing that the Emperor Dollar has no clothes. The dollar is a fiat currency, backed by nothing. Do you think that anyone would have questioned the dollar's role as the world's reserve currency in 1985? In 1945? Can you imagine that ANYONE would have written such an editorial fifty years ago? These days, the unthinkable is thinkable. These days, the unthinkable is becoming reality.
In the early days of the Roman Republic, a silver denarius coin was mostly silver. Later, when Rome became an empire, the emperors gradually debased the currency by shaving the coins and by decreasing the amount of silver in each coin. Currency debasement makes it easier to have huge social programs and endless wars. Bread and circuses, anyone?! The debasement of the Roman monetary system played a big part in the the collapse of the Roman Empire. In fact, the collapse of EVERY great empire has been related to the collapse of its monetary system. That is the brutal truth.
The United States once used only gold and silver coins as legal tender. Even though our Constitution stated that only gold and silver were to serve as legal tender, our Supreme Court and our p0liticians long ago abandoned the honest money system that our Founding Fathers intended for us. Since 1913, the dollar has lost at least 97% of its buying power.
Here is another brutal truth: The U.S. dollar is a piece of paper with ink on it. I seem to recall that the Crane stationery company has the government contract for the paper used to make dollars. It takes no significant effort to create a dollar. It is not rare. It is worth only as much as in the eye of the beholder. It is a "faith-based" currency. The dollar is not backed by anything. If everyone believes that the dollar is worth something, then life goes on as usual. If and when people lose faith in the dollar, then it will revert to its intrinsic worth: ZERO!
If a newspaper in Qatar is questioning the worth of the dollar, what does that tell us? What are other countries saying? China? South Korea? Japan? They hold TRILLIONS of dollars as foreign currency reserves. What will they do? And what will we do if we debase the dollar so much that it loses its status as as the world's reserve currency? How many Americans even understand the significance of this issue? What does that tell us about where we are in our national history?
Money growth
Adam Hamilton of ZealLLC.com reminds us that “Inflation is purely and exclusively a monetary phenomenon”, which doesn’t mean all that much by itself, but becomes much more horrifying when he adds that Money of Zero Maturity has been zooming. In case you were wondering, Money of Zero Maturity (MZM) is considered to be a reasonable proxy for watching the movement of M3, which is the broadest measure of the money supply, which is important because inflation in the money supply means that inflation in consumer prices is coming.
Now that we have the academic stuff out of the way, the truly horrifying part of it all is when Mr. Hamilton says, “Absolute annual MZM growth peaked at a staggering 16.7% in March 2008”, and that “Bernanke’s Fed has been ramping money-supply growth so fast that actual MZM is starting to look parabolic even on a short-term chart. In just over 2 years under him, MZM has ballooned 25.1% unchecked!”
He goes on to say that these rates of growth in the money supply “defy the imagination. At 12% growth compounded annually, it only takes 6 years for something to double. At 16%, this drops to well under 5 years. If the Fed doesn’t’t stop this madness, there could be twice as many dollars floating around in 5 or 6 years as there are today. Even with modest economic growth, this means general price levels would probably almost double.”
Well dear reader if you like to see what wikipedia tells us about hyperinflation, please go to the following link
http://en.wikipedia.org/wiki/Hyperinflation
Gold
Well dear reader, the Sumerians knew already that gold is the ultimate store of wealth. Their gods seem to have had a particular liking for gold. So already some 6,000 years ago Gold was the most important metal. Do you know why? Well there are some interesting theories. If you like to know more about it, let me know.
And today?
From www.lemetropolecafe.com
Quote
I recently saw two articles about long-term monetary value that say it all. One was about a man who, while tearing down a building on his Wisconsin farm, found deteriorated U.S. currency in a rusted box. It was stored sometime during the Great Depression. It was too degraded to spend, however he could exchange it with the Treasury one-for-one for new dollars. He ecstatically estimated there might be $17,000 or more. What the article omitted was the fact inflation had wiped out 95% of its original value. $17,000 in the 1930's would have been a very large sum of money. It would have bought 485 OUNCES OF GOLD (at $35 an ounce). Had that person back in the 1930's squirreled away gold instead of paper currency the current owner would instead have $431,650 (at $890 an ounce).
The other story was on the Antiques Roadshow episode, which aired May 26th, 2008. A family friend's father in Weimar Germany began collecting men's gold rings back between WWI and WWII as a hedge against inflation. After remaining buried in a German back yard for decades the rings were dug up and brought to the U.S. by the collector's daughter. So in effect it was the same time period as the paper dollars in Wisconsin. The Antiques Roadshow appraiser valued the rings at $4,000 for strictly melt value, but at $19,000 for the intrinsic jewellery value. This German saver protected his wealth fabulously, as just 4 or 5 ounces of gold, and as little as $200, became $19,000 almost 80 years later.
Unquote
Once again, my dear reader, it definitely seem that gold is the ultimate store of value. It seems that is the only or at least one of the very few, true currencies.
Gold is the ultimate store of value and unique due to:
• Gold is rare, durable and easily divisible with a high per unit value
• Value is recognized globally and is traded in a continuous market
• Gold is produced for accumulation mainly
• Gold is the only form of money that cannot be debased by the same authorities who print paper currency
• Gold is the only financial medium of exchange that is not someone else’s liability
Commodities
(show chart 200 years cycle + inflation adjusted)
Well dear reader, looking at the 2 charts above, what are our thoughts? Let me know, send me a mail.
