Friday, March 23rd, 2012
Submitted by Brandon Smith of Alt Market
The Oil Conundrum Explained
Oil as a commodity has always been a highly valuable early warning indicator of economic instability. Every conceivable element of our financial system depends on the price of energy, from fabrication, to production, to shipping, to the consumer’s very ability to travel and make purchases. High energy prices derail healthy economies and completely decimate systems already on the verge of collapse. Oil affects everything.
This is why oil markets also tend to be the most misrepresented in the mainstream financial media. With so much at stake over the price of petroleum, and the cost steadily climbing over the past year returning to disastrous levels last seen in 2008, the American public will soon be looking for someone to blame, and you can bet the MSM will do its utmost to ensure that blame is focused in the wrong direction. While there are, indeed, multiple reasons for the current high costs of oil, the primary culprits are obscured by considerable disinformation…
The most prominent but false conclusions on the expanding value of oil are centered on assertions that supply is decreasing dramatically, while demand is increasing dramatically. Neither of these claims is true…
The supply side of the oil equation is the absolute last factor that we should be worried about at this point. In fact, global oil use since the credit crisis of 2008 has tumbled dramatically. This decline accelerated at the end of 2011 and the beginning of 2012 all while oil prices rose:
In its February Oil Market Report, the International Energy Agency (IEA) forecast a reduction in the growth of demand into the Spring of 2012, despite reports from the mainstream media that oil prices were spiking due to “recovery” and “high demand”. Simultaneously, the IEA reported that petroleum inventories rose to the highest levels since October, 2008:
The Baltic Dry Index, which measures global shipping rates and the demand for freight in general, has fallen off a cliff in recent months, hovering near historic lows and signaling a sharp decline in world demand for raw materials used in production. A fall in the BDI has on multiple occasions in the past been a predictive indicator of stock market chaos, including that which struck in 2008 and 2009. A sharply lower BDI means low global demand, which should, traditionally, mean decreasing prices:
So, supply is high across the board, inventories are stocked, and demand is weak. By all common market logic, gasoline prices should be plummeting, and far more Americans should be smiling at the pump. Of course, this is not the case. Prices continue to rise despite deflationary elements, meaning, there must be some other factors at work here causing inflation in prices.
Ironically, stock market activity in the Dow has now come under threat from this inflationary trend in oil. Rising energy costs have essentially put a cap on the epic explosion of equities, and many mainstream analysts now lament over this Catch-22. The problem is that these investors and pundits are operating on the assumption that the Dow bull market is legitimate, and that the rally in oil is somehow an extension of a “healthier economy”. This version of reality, I’m afraid, is about as far from the truth as one can stretch…
In the candy coated world of Obamanomics, high priced stocks are a valid signal of economic growth, and oil is rising due to demand which extends from this growth. In the real world, stock values are completely fabricated, especially in light of record low trade volume over the past several months:
Low trade volume means very few investors are currently participating in active trade. This lack of investment interest in the markets allows big players (such as international bankers) to use their massive capital to swing stocks whichever way they choose, even to the point of creating false market rallies. Throw in the fact that the private Federal Reserve (along with helpful hands-off approach by our government) has been constantly infusing these banks with fiat printed from thin air, and one can hardly take the current ascension of the Dow or the S&P very seriously.
Another issue which should be stressed is the renewed tensions in the Middle East, namely, the very distinct possibility of an Israeli or U.S. strike in Iran, and the possibility of NATO involvement in Syria (which has extensive ties to Russia and Iran). Certainly, this is a tangible danger that would have unimaginable consequences in global oil markets. However, the threat of growing war in the Middle East is in no way a new one, and has been ever present for the past decade. It hardly explains why despite hollow demand and extreme supply, the price per barrel of oil has been an unstoppable rising tide. Attempts by Saudi Arabia to reverse inflationary trends by promising increased production in the wake of Iran turmoil has so far been ineffective.
Off the coast of Ireland:
Massive fields in Mongolia have been uncovered:
And of course, the vast shale oil fields in North Dakota and Montana are finally being tapped:
Oil supply has been ample and large oil reserves are being discovered yearly. Speculation would be the next obvious assumed culprit, and there are certainly some signals of such activity. Oil speculators traditionally use the forced accumulation of oil inventories to reduce market supply and artificially increase prices. Inventories have indeed been high. However, as previously stated, demand for oil has been static or fallen in most countries around the world since 2008, and there has been NO petroleum shortages due to manipulated markets. In fact, there have been no petroleum shortages period. Speculation has the potential to cause sharp but short term shifts in markets, but one must take into account the long term trend of a particular commodity to understand the root cause of its increasing or decreasing value. Again, inadequate supply is NOT the trigger for the ongoing oil price problem, whether by threat of war, or by reduction through speculation.
This schizophrenic disconnection between the stock market, and oil, and true supply and demand, is, though, a symptom of one very disturbing illness lurking in the backwaters of the U.S. fiscal bloodstream; dollar devaluation.
We all understand that the Federal Reserve has been engaged in non-stop quantitative easing measures in one form or another since 2008. We don’t know exactly how much fiat the Fed has printed in that time, and won’t know until a full and comprehensive audit is finally enacted, but we do know that the amount is at the very least in the tens of trillions (be sure to check out page 131 of the GAO report below to find their breakdown of Fed QE activities. This is just the money printing that has been ADMITTED TO, in excess of $16 trillion):
The dollar is being thoroughly squashed. Why is this not showing in the dollar forex index? The dollar index is yet another example of a useless market indicator, being that it measures dollar value relative to a basket of world fiat currencies, ALL of which also happen to be in decline. That is to say, the dollar appears to be vibrant, as long as you compare it to similarly worthless paper currencies that are being degraded in tandem with the greenback. Once you begin to compare the dollar to commodities, however, it soon shows its inherent weakness.
The dollar’s only saving grace has long been its status as the world reserve currency and its use as the primary trade mechanism for oil. This, however, is changing.
Bilateral trade agreements between China, Russia, Japan, India, and other countries, especially those within the ASEAN trading bloc, are slowly but surely removing the dollar from the game as these nations begin to replace trade using other currencies, including the Yuan. I believe commodities, especially oil, have been reflecting this trend for quite some time. The consequences of the dollar’s ties to oil are detrimental to all nations that consume petroleum, and they are clearly moving to insulate themselves from further devaluation.
Even after the release of strategic oil reserves back in the summer of 2011 in an effort to dilute prices, and the announcement of an even larger possible release of reserves this month, oil has not strayed far from the $100 per barrel mark. High Brent crude price have held for years, even after numerous promises from government and media entities admonishing what they called “speculation”, and promises of a return to lower energy costs. Not long ago, $100 per barrel oil was an outlandish premise. Today, it is commonplace, and some even consider it “affordable” compared to what we may be facing in the near future, all thanks to the steady deconstruction of the last pillar of the U.S. economy; the dollar, and its world reserve label.
Ultimately, no matter how manipulated and overindulged the stock market becomes, no matter how many fiat dollars are injected to prop up our failing system, the price of oil is the great game changer. As inflation is reflected in its price, and energy costs burn out of control, the Dow will begin to fall, regardless of any low volume or quantitative easing. In all likelihood, this conundrum will be blamed on as many scapegoats as are available at the moment, including Iran, or China, or Russia, or Japan, etc. Each and every American, and especially those involved in tracking the economy, will have to remind themselves and the public that at bottom, it was the Federal Reserve that created the conditions by which we suffer, including currency devaluation and high oil prices, NOT some foreign enemy.
The one positive element of this entire disaster (if one can call anything “positive” in this mess), is the manner in which the high price of oil tends to dash away the illusions of the common citizen. It is an issue they simply cannot ignore, because it affects every aspect of their lives in minute detail. Costly energy awakens the otherwise ignorant, and forces them to see the many dangers lurking on the horizon. Hopefully, this awakening will not be too little too late…
Tags: Assertions, Brandon Smith, Commodities, Commodity, Conundrum, Credit Crisis, Culprits, Disinformation, Economic Instability, Energy Prices, False Conclusions, Global Oil, Iea, International Energy Agency, Inventories, Mainstream Media, Markets World, Oil Market Report, Oil Markets, Oil Prices, Russia, World Oil Demand, Wrong Direction
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Tuesday, September 20th, 2011
The passive (indexing) vs. active management question is a polarizing debate, but it shouldn’t be. The bottom line is that both strategies have merit when they’re done right.
As Morningstar USA’s President of Fund Research (Don Phillips) notes, credible voices within the index community are being drowned out by a vocal fringe – the indexing extremists. In an article first published earlier this year, Phillips suggests these individuals grossly overstate the indexing case, and that “many of the fund world’s recent stumbles – the misguided expectations surrounding leveraged and inverse ETFs and the poor performance of many commodity products – have come under the indexing banner.” This coming from someone who admits that indexing is a good way to invest and acknowledges to holding much of his personal assets in index funds.
There’s a paragraph in the middle of the article that’s particularly telling as to the state of the debate (in the US, at least):
“At some point, however, many index fans went from making the honest and helpful argument that indexing is good to making the hyperbolic and divisive case that anything other than indexing was not only bad, but also morally suspect. Extreme index supporters went from asserting that indexing beats the average fund to implying that it beats all funds. Ironically, they’ve advanced this claim during a decade when indexing has experienced unusually weak results. For the 10 years through the end of 2010, the Vanguard 500 Index fund placed in the 49th percentile of the large-blend category–hardly in keeping with its perceived dominance. The dichotomy between the facts and their assertions hasn’t humbled the true believers, however. Their words have grown more extreme, as seen in a recent statement from an ETF provider that likened active fund managers to big tobacco companies, claiming that active management was as dangerous to investor wealth as tobacco is to our health.”
As a proponent of active management (undexing), I found Phillips’ article refreshing, although I’m sure it will raise the hackles of many indexers. If nothing else, the ongoing discussion is sure to be entertaining.
Tags: Active Management, Assertions, Commodity Products, Dichotomy, Don Phillips, ETFs, Extreme Index, Extremists, Fund Managers, Index Fund, Index Funds, Index Investing, Indexing, Large Blend, Management Question, Morningstar, Percentile, Personal Assets, Poor Performance, Tobacco Companies, True Believers, Vanguard
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Thursday, August 27th, 2009
Hugh Hendry, CIO, Eclectica Asset Management, has recently published his investment outlook for August 2009. Since the Summer of 2008, Hendry has been a strong proponent of deflation, and continues so, even though his thesis has been getting a thrashing lately. Hendry has discussed investing in long bonds fervently in the past, but had no choice in Late March to reconsider his positions and sell them off, as yields on long term government paper started to climb sharply and the recovery rally of the last 5 months began to take shape. Hendry’s flagship fund was up 40% for the calendar year in 2008, and most of that came from his bets in long term government bonds.
We would note that Hendry is the first to pull the plug when he is wrong in the short term, as he did in March-April. He is no buy and hold investor, nor does he wish for the economy to enter a depression, but he does feel that it is inevitable given the debt deflation that he believes is ahead. One of Hendry’s main assertions is that it will take many years for the developed world to correct its over-indebtedness.
Having said that, here are the first 4 paragraphs from his letter:
Good people are becoming desperate. I know a man who is planning to capitulate and buy stocks. He cannot comprehend what is happening today. He is, to employ Churchill, a fanatic; he won’t change his mind and he can’t change the subject. But, fearing the loss of his franchise, he will change his portfolio. He laments that it is as though last year’s events never happened. Rhetorically, he asks whether we have all been sent through time to invest in equities at the end of the 1970s when stocks were cheap and society had thoroughly deleveraged (the opposite of today). “Why do other investors not contemplate the prospect of further household deleveraging when building their profit forecasts?” he fumes. “Can they not see that the private sector’s deleveraging is more than offsetting the public sector’s expansion?” Despite such ranting my Minskian friend remains a most entertaining and charming individual.
Now I know I have not covered myself in glory these last few months. Stock markets have gained 50% from their lows and the Fund has little to show for it except a modest reversal and no wild swings in our monthly NAV. Nevertheless, I would contend that this game of playing “chicken” with the market is not for us. Our ambition has been modest. To survive the onslaught of a positive change in social mood without being forced to capitulate in the face of a frenzy of optimism; so far so good, I think?
In this regard we have been helped immensely by a quote from Robert Prechter in early April. Having correctly called for a counter-trend rally in stock prices in late February, he then described the most likely nature of the advance, “…regardless of its extent, it should generate substantial feelings of optimism. At its peak, the President’s popularity will be higher, the government will be taking credit for successfully bailing out the economy, the Fed will appear to have saved the banking system, and investors will be convinced that the bear market is behind us.”
So far his prophecy reads well. It is reminiscent of Warburg’s line that the business cycle is “a subject for psychologists” rather than economists. Bernanke is already being compared favourably with Volcker. Continental Europe has apparently “escaped” from recession. Positive economic growth across the world for the remainder of the year seems certain. And yet Prechter went on, “Be prepared for this environment: it will be hard for most investors to resist. But beware… [the next move] will be the most intense collapse in stock prices”
Read more, download here.
Tags: 1970s, 5 Months, Assertions, Bets, Calendar Year, Churchill, Deflation, Eclectica Asset Management, Flagship, Franchise, Government Bonds, Government Paper, Hugh Hendry, Indebtedness, Investment Outlook, Paragraphs, Private Sector, Profit Forecasts, Proponent, Public Sector, Rally
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