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Fighting the Last Battle

Tuesday, November 15, 2011, 1:04 PM

I happen to be in Madrid, Spain at the moment, and I have a few observations. I wandered extensively this morning and noted that Madrid is just the same as any other big city – no surprise there – with crowded streets, a lack of parking, and cars everywhere. While I was envious of all the small cars, especially those with diesel engines (not available in the US, for some strange reason) that probably get close to 60 mpg without involving the massive technology of a hybrid, I only noted a single bicyclist braving the traffic flows.

Like any other major city, the role of energy in supporting its every breath and movement here is obvious. If there’s a Plan “B” here that involves a lot more public transit or reconfiguring the city to operate on less fuel, it isn’t obvious. Perhaps those plans exist somewhere, but if they do, they are not yet in plain sight.

Tonight and tomorrow I get to interact with a variety of notables, including James Turk and G. Edward Griffin (neither of whom I have yet met in person), and present to an audience of approximately 300 precious metals experts.

If ever there was a ripe time to deliver a message that includes both a resource-oriented and monetary perspective on why now is a good time to own gold, I cannot imagine one better than the current climate. 

» Read more

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How To Position For the Next Great Oil Squeeze

Monday, November 14, 2011, 12:13 PM

How To Position For the Next Great Oil Squeeze

by Gregor Macdonald, contributing editor
Monday, November 14, 2011

Executive Summary

  • Why smaller, independent oil companies should thrive as America struggles to increase domestic supply
  • A breakdown of often-touted 'new sources of domestic supply' (shale oil, kerogen, offshore fields, other Western Hemisphere finds) and why they won't come close to meeting US demand needs
  • How to hedge against the next great oil price spike
  • The wisdom of adopting a slower-based oil consumption lifestyle now

Part I - Selling the Oil Illusion, American Style

If you have not yet read Part I, available free to all readers, please click here to read it first.

Part II - How To Position For the Next Great Oil Squeeze

Using the latest data from EIA Washington, I made the following chart of actual imports of crude oil against production. This is a simple and direct accounting of what can become a rather complex topic filled with obfuscation and bad math. For example, by counting biofuels, ethanol, natural gas liquids, and the use of our own natural gas inputs to refine crude oil into gasoline, you can produce rather misleading accounts of net imports, such as this piece from EIA Washington titled How Dependent Are We on Foreign Oil?

Just so that we are very clear on the facts, natural gas liquids (NGLs) contain only 65% of the btu of oil, and, of course, they are not oil. As Jeff Rubin likes to say, "NGLs can go straight to your butane cigarette lighter, not your automobile." But by adding NGLs and ethanol to "oil supply," we can delude ourselves into thinking that the US produces not 5.596 mbpd of crude oil, but rather 10.037 mbpd of liquids.

Despite any legitimate conversation we could have about the usefulness of various energy resources, it would be silly to say (for example) that "we need not worry about expensive oil and its effect on the economy, because we can just switch to ethanol." The vastly smaller btu content of biofuel feedstock makes its inclusion in the accounting unhelpful, to say the least. As one Oil Drum commenter said to my previously cited post:

If the goal is to highlight the decline of crude oil production over time then including all other fuel sources is improper. You can't project a future production trend of one commodity by including other commodities in the analysis.

(Source)

Yes, precisely. To that point, let's now look at the chart.

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Off The Cuff: Markets In Revolt

Thursday, November 10, 2011, 10:31 AM

In this week's Off the Cuff with Mish & Chris podcast, Chris and Mish cover:

  • Yesterday's Market Carnage

    • Are we seeing an important shift in investor sentiment?
  • The Future of Europe
    • Can the Eurozone remain intact? If not, what does that mean?
  • How This Will End
    • Deflation or currency collapse? (or both?)
    • Where should investors looking to preserve purchasing power put their capital?

Chris and Mish have been amazed at how the equity markets have continued to levitate of late, given the absolutely horrible news over the past few weeks. Well, wonder no more. Blow-out spreads in European bond markets and today's equity market carnage are a wake-up call that -- finally -- investors are starting to appreciate the unsustainability of the system. » Read more

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Warning: Italian Debt Breaking Down

Wednesday, November 9, 2011, 7:44 AM

Okay folks, the alert I sent out is close to being validated this morning. I am watching Italian debt yields spiking in real time. Just a few weeks ago, the world was wringing its hands over Italian debt breaching the 6% mark. By late yesterday there was growing concern that Italian debt had climbed past 6.5%, and there was speculation that it might even -- gasp! -- be headed towards 7%.

Well, this morning Italian debt roared right through the 7% mark, and as of 5:37 a.m. (the time of this writing) we are seeing these shocking yields: Italy 10-year 7.37%; 5-year 7.64%; 2-year 8.03%.

What can I tell you? Simply that the game is entering a new phase, one that includes the risk of a massive, systemic banking failure as a possible feature.

» Read more

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Off The Cuff: The Only Way To Win Is Not To Play The Game

Wednesday, November 2, 2011, 12:01 AM

In this week's Off the Cuff with Mish & Chris podcast, Chris and Mish zero in on:

  • The Europe Disaster
    • With the the yields on sovereign debt skyrocketing and Greece potentially rejecting the recently-announced bailout plan, is the European financial system in danger of collapsing in the near term?

  • MF Global
    • What's the significance of the unexpected and instant collapse of this key broker?

Unlike during the past several weeks, the markets are now finally beginning to react negatively to the growing amount of bad data and developments.  » Read more

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ALERT: European Breakdown Approaching

Tuesday, November 1, 2011, 7:54 PM

I am issuing an Alert tonight. After examining the data, I have come to the conclusion that the possibility of a European-centered systemic banking crisis is unacceptably high and that there are certain actions you should take.

For my new subscribers who may not already be aware of this, I will only send an Alert when I am personally moved to action, or would be if I were not already as prepared as I am. The point of an Alert is action. I do not wish to add to anxiety, especially unnecessarily. I take my responsibilities in this regard very seriously.

That said, tomorrow I am going to get more cash from the bank to hold in reserve until things clear up (or break down). The idea here is that cash will be a very useful commodity to hold and then deploy, should the banking system suffer some sort of a freeze-up for any length of time.

The risk now is that the Greece situation could spill over into Portugal, Italy, and Spain, if only because more people may wake up to the idea that these economies are just as incapable of servicing their outstanding debt as Greece. The warning signs are as ominous as any since the crisis began in August of 2007.

Here are a few of them:

» Read more

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The Transition to a Post-Friction Economy

Tuesday, November 1, 2011, 11:21 AM

The Transition to a Post-Friction Economy

by Charles Hugh Smith, contributing editor
Tuesday, November 1, 2011

Executive Summary

  • Entrenched interests keep our markets from being free
  • We're living in a fool's paradise (but for how much longer?)
  • The forced choices headed our way
  • What the post-friction economy will look like
  • 2012-2105: The Era of Transformation begins

Part I - How Much of the US Economy Is Friction

If you have not yet read Part I, available free to all readers, please click here to read it first.

Part II - The Transition to a Post-Friction Economy

In Part I, we pursued the idea that much of the US economy is, in essence, unproductive friction that is overcome with vast borrowing -- itself a form of friction -- and the importing of fossil fuels. We also noted that the Central State/cartel “capitalism” partnership has greatly expanded the unproductive, uncompetitive “friction” segments of the economy and has limited consumer “choice” to purposely-selected menus designed to appear like a “free market” while benefiting State fiefdoms and private-sector cartels.

Entrenched Interests Keep Our Markets From Being Free

Looking at the sources and costs of friction gives us some insight into issues that are often seen as political -- for example, the costs and benefits of borrowing trillions of dollars into existence every year and the costs/benefits of State regulation. Once we recognize how rising systemic friction will eventually freeze the system, then we also recognize that the path we’re on is unsustainable, and the political “rightness” or “wrongness” of increasing debt to fund the forces of friction becomes irrelevant.

The same can be said of State regulation. Given that one of the purposes of government is to protect the nation’s “commons” -- air, water, public lands, and other shared resources -- then some regulation is necessary to limit exploitation and predation of the commons by either private parties or the State itself. 

But we have confused productive regulation with regulation that achieves little beyond diverting funds to unproductive segments of the economy. There are hundreds, if not thousands of examples in every sector from criminal justice to farm subsidies to health care.

How about the enormous expense of the “war on drugs” and the resulting prison complex and criminal justice system? Are the benefits being reaped -- marginal, or even counterproductive, in many analyses -- worth the expense? Those employed in these systems naturally feel the benefits far exceed the costs. But self-interest is simply not an accurate measure of friction; ultimately, only a free market of free citizens can make that assessment.

Insider

The Continuing Crisis

Saturday, October 29, 2011, 12:12 PM

The market rally in response to the European bailout of Greece seems a bit premature, if not overdone.

To their credit, unlike in the US where banks were made whole for their losses, European leaders reached a compromise where bondholders and Greece both took losses. To be fair, in the final accounting, so will the general populace of Europe, to some degree. So it was kind of a shared pain with some of the sharing designed to come later.

Banks that are holding the majority of the bonds have to first eat 50% of the value of those bonds and then raise a lot of capital in part to cover this shortfall.

Unfortunately, the fix solved very little.

» Read more

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How The Coming Decline Will Play Out

Thursday, October 27, 2011, 11:45 AM

How the Coming Decline Will Play Out

by Gregor Macdonald, contributing editor
Thursday, October 27, 2011

Executive Summary

  • Understanding The Economics Driving Energy Transition
  • California Is Serving As The Canary in the Coal Mine
  • Why The Middle Class is Getting So Squeezed While Corporations Are Flush With Cash
  • Why America Won't Change Course Until The Status Quo Becomes Too Painful Not To
  • Predictions on How The Coming Decline Will Play Out (Until We Get Our Act Together)

Part I - The Great American False Dilemma: Austerity vs. Stimulus

If you have not yet read Part I, available free to all readers, please click here to read it first.

Part II - How The Coming Decline with Play Out

Understanding The Economics Driving Energy Transition

Robert Allen of Oxford University has done some of the best work on the Industrial Revolution but he has also helped us understand the historic energy transition from Wood to Coal, in England. Along with the work of Vaclav Smil, Allen has shown that energy transitions are long, drawn out affairs that do not comport with the faith in efficiency that defines contemporary economic theory. This chart of BTU prices shows that natural gas is being offered each day in the bargain bin to the economy, but the economy is so inextricably tied to oil (liquids) that its existing infrastructure cannot take advantage of the opportunity.

Have you heard any economist, from Joseph Stiglitz to Nouriel Roubini, from Greg Mankiw to Robert Barro, or from Robert Reich to Larry Summers, even mention that a million BTU in natural gas can be obtained at a nearly 75% discount to a million BTU in oil? This is precisely the kind of market failure that contemporary economists exhort their students to discount. Faith in price, and the power of price, is thought to be paramount.

As we know, energy costs are part of the basic business proposition for an economy. It is completely understandable that when oil priced at $14 a barrel for nearly 25 years after WW2 (in inflation adjusted terms) a new highway system, built with cheap oil and utilized with cheap oil, returned enormous profit to the economy. California’s embrace of that proposition was a trade in which low margin agriculture was swapped for much higher margin wages in Defense and Aerospace industries. This is what characterized the post-war economy in places like southern California: if you have a very powerful and energy-dense input at your disposal, you will use it ad infinitum to maximize your profit. California’s gargantuan accumulation of wealth, and its rapid build out from 1945-2000, was funded by oil. Now what?

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Massive Rally or Crash?

Tuesday, October 25, 2011, 11:43 AM

Contributing editor Charles Hugh Smith notes that markets are at an important inflection point. The direction things take from here may likely be apparent within the next few days.

As I noted in my previous exploration of the U.S. dollar and the technical evidence for a long-term uptrend in the dollar index DXY, global markets for stocks, commodities and currencies are on a simple see-saw: On one end is the U.S. dollar, and on the other are all other major currencies, global stock markets, commodities, etc.

The U.S. stock market has been recently surging on hopes of a comprehensive settlement to the European debt/banking/euro crisis. Technically, this surge exceeds the recent trading range, and thus is seen by many traders as a valid breakout; i.e., the signal a new Bull market is underway.

This aligns with the views of many experienced technical analysts, who expect a strong rally to start from here and last into early March.  The reasons many expect such a rally, despite the headwinds of global recession, are seasonal and cyclical: Stocks almost always rally strongly in Nov.-Dec., and the third year of the presidential cycle (2011) is generally positive for stocks. In addition, various timing tools and indicators can be interpreted as supportive of a major rally from this point.

A much smaller number of analysts (including Chris) see increasing probabilities of a global stock market crash. » Read more