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Central Follies

Wednesday, April 11, 2012, 5:48 PM

Note: Mish was unavailable for our podcast today, so I am writing up the topics I had hoped to cover for my portion.

Perhaps not enough has been said about the folly of central planning, with 'folly' being a relatively neutral word along the spectrum of possible nouns that might describe what the central banks have been doing. Others might be 'insanity' or 'absurdity.'

For many it is axiomatic that when the government tries to direct an economy by favoring this company over that one, or trying to pick a technology over another, it stands a better than even chance of doing it inefficiently.

But nothing can be more ruinous than attempting to steer the entire economy by fooling around with the price of money itself, as the Fed has been doing. » Read more


Why A Near-Term Market Rollover is Probable

Wednesday, April 11, 2012, 11:44 AM

Why a Near-Term Market Rollover is Probable

by Charles Hugh Smith, contributing editor
Wednesday, April 11, 2012

Executive Summary

  • A plethora of technical indicators show a breakdown is in progress
  • The key charts you need to be aware of
  • Time to place your bets: higher equity prices or higher interest rates?
  • Why a defense strategy in the near term is critical for those holding stocks and bonds

Part I: Are We Heading for Another 2008?

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

Part II: Why a Near-Term Market Rollover is Probable

In Part I, we summarized the global financial meltdown of 2008 as recognition that the collateral beneath an enormous inverted pyramid of leveraged debt had vanished, while all the monetary and fiscal tricks of central banks and governments failed to sustain the illusion of sufficient collateral.

Once again we find that massive, sustained intervention in global financial markets is being touted as successful – everything has been “fixed,” markets have been “stabilized,” and a global “recovery” is well underway,

If we believe this, we might be exposed to a dramatic downside should 2012 turn out to be another 2008, when markets realized that intervention did not create collateral, but instead a temporary illusion of sufficient collateral. 


Promising Investments as the Race for BTUs Heats Up

Tuesday, April 3, 2012, 8:58 PM

Promising Investments as the Race for BTUs Heats Up

by Gregor Macdonald, contributing editor
Tuesday, April 3, 2012

Executive Summary

  • Three attractive sectors to invest in early as we enter the post-oil economy
  • The transition away from oil has already begun -- which energy sectors are leading?
  • The key trends over the next five years
  • How scarcity -- and inflation -- will manifest in this next phase

Part I: The Race for BTUs

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

Part II: Promising Investments as the Race for BTUs Heats Up

Hopefully readers will not be too shocked by my openhandedness towards a cyclical global expansion -- restrained by oil for sure, but made possible by several years of continued reflationary monetary policy and the ability of humans to tactically access new sources of energy.

Let’s remember that a tremendous amount of pain, in industrial terms, has already been taken by the OECD over the past 7 years as it shed nearly 15% of its oil demand. Readers will also recall my previous essays, in which I warned that an export boom was continuing to unfold in the United States. And readers of my work over the past several years know I’ve been adamant that the 5 billion people in the developing world have plowed right through the 2008 financial crisis increasing their reliance on coal.

Thus, I identify three areas of investment as the world stumbles forward with poor growth in the OECD, restrained by oil but becoming increasingly desperate to find some -- any -- additional energy resources. These are not stock recommendations, nor am I making a timing call as to when to invest in these areas. Rather, these are indicative of three means by which an investor could participate in emerging, secular trends over the next 2 to 4 years.


Doing It Right in Canada

Sunday, April 1, 2012, 9:23 AM

I have just returned from a trip to Canada, where I had the chance to present the core ideas of the Crash Course to audiences in Alberta and the city of Guelph. The message was well received in both locations, and I am heartened to see the great work happening across Canada, to not only learn about but act on issues related to the intersection of the economy, energy, and other natural resources.

It was also my distinct pleasure to meet several long-time subscribers along the way, and to chat with you all (hello again!). The most typical refrain I heard from you was why don’t more people see things this way? That is something we’ll be covering in greater detail here in the future, especially once the new website is up and launched and we have a better platform and venue for offering such material. I will note that one of the more important elements of our weekend seminar offerings is on exactly this subject. Our only other seminar being offered in 2012 is on the last weekend of June at Kripalu, and it would be a pleasure to see you there.

On to the markets and other thoughts...

» Read more


How High and When to Sell?

Wednesday, March 28, 2012, 11:24 AM

How High and When to Sell?

by Chris Martenson
Wednesday, March 28, 2012

Executive Summary

  • Confiscation and/or excessive taxation of gold seem low risks at the moment
  • Our price projections for gold
  • How to know when to sell your gold
  • What to exchange your gold for

Part I: Gold is Manipulated (But That's Okay)

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

Part II: How High and When to Sell?

Confiscation and/or Taxation

Here is a quick aside on the prospect of confiscation and/or additional and punitive taxation of gold (and silver) because it comes up often. I think neither is especially likely at this point.

Confiscation will become a concern for me if:

  • Gold is ever remonetized. Should gold become the international choice of cross-border balancing, as I expect it might some day, the chance of it being ‘nationalized’ will skyrocket. However, as was true in the 1930s in the US, I fully expect that holders of gold will be compensated for their holdings. 
  • Gold is demanded for oil. Should a current oil-exporting nation demand that it be paid in gold instead of cash, I would expect gold to be nationalized.
  • Gold crosses $5,000/ounce. Once gold becomes a significant store of value compared to other sources such as money market funds or 401k plans, it might become a target of choice for revenue-strapped governments. As it is right now -- on a relative basis vs. the equity or bond markets -- the size of the entire gold market is a tiny, puny store of value, and therefore not really worth the government's effort.

Should any of these things change, I believe we will have weeks, if not many months, of forewarning of confiscation or additional taxation -- and my alert service will have you prepared well in advance.

There will be rumblings and discussions and other warning signs to forewarn that a change is coming, if one ever does. For now it seems rather unlikely that either confiscation or burdensome taxation is a near and present concern to hold.


Keep Your Eye on Treasurys

Tuesday, March 27, 2012, 6:19 PM
Treasury Market Rumblings

One of the key indicators that I keep a semi-open eye on throughout every trading day is the price of US Treasurys. As you know, the US is living on the kindness of strangers, and if foreign desire for US Treasury obligations wanes, much trouble could quickly mount for the US dollar and general fiscal condition.

As prices for Treasurys rise or sink, interest rates move in exactly opposite directions..

Like any asset class, the price of Treasurys will rise if there are more buyers than sellers, and sink if there are more sellers than buyers.

A natural, normal, and healthy reason for Treasurys to sink in price would be investors leaving the "flight to safety" trade because they perceive economic conditions to be improving. Less good reasons include the fear of inflation picking up, over-issuance by the government, and foreign entities leaving the trade.

» Read more


Off the Cuff: Battling Mixed Messages

Thursday, March 22, 2012, 8:59 AM

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

  • Bernanke vs. Gold

    • How accurate is the Fed Chairman's criticism of the gold standard?
  • Perception vs. Reality
    • Why does the economy feel so bad when the stock market feels so good?
  • You vs. the Herd

    • Why now is the time for having the courage of your convictions.

There are a lot of mixed messages swirling around of late. Sound money advocates champion precious metals, while our Fed Chairman derides the gold standard as an anachronistic failed experiment. A steady drumbeat of discouraging data shows that the global economy still faces serious risk, but the stock market suggests times could hardly be better. It's times like these when a steady hand on the tiller can make all the difference.

» Read more


Important Consequences of Expatriation

Thursday, March 22, 2012, 8:32 AM

Important Consequences of Expatriation

by Mark Nestmann, contributing editor
Thursday, March 22, 2012

Part I: A Primer for Those Considering Expatriation

In Part I of this article, we describe a plan that any U.S. citizen can use to legally and permanently end their future obligation to pay U.S. tax on their worldwide income or estate.

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

Part II: Important Consequences of Expatriation

In this second part, we explain:

  • The nuts and bolts of expatriation, including the legal process of expatriation
  • The tax consequences of expatriation
  • The immigration consequences of expatriation
  • The pros and cons of U.S. investments once you expatriate
  • The tax consequences should you choose to spend more than a few months each year in the United States after expatriation
Expatriation: The Basics

Once you've obtained a second passport and qualified for residence in another country, you can begin the legal process of expatriation.

To do so, you must make an appointment with a U.S. consulate. You generally cannot expatriate within the territorial boundaries of the United States. The consular officer will explain the consequences of expatriation and have you sign some forms.

Two or more appointments may be necessary to complete the process. At the end of whatever sequence of visits applies at the consulate you choose, you'll then hand in your U.S. passport. Anywhere from several weeks to several months later, you'll receive an official document called a "Certificate of Loss of Nationality" (CLN). With the receipt of this document, you will have officially relinquished your U.S. nationality.


Off the Cuff: US Treasuries - The Coughing Canary

Thursday, March 15, 2012, 12:28 PM

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

  • Risk "On"

    • Painful days for those holding precious metals, bonds or the yen
  • US Treasurys
    • Are we seeing a game change of historic proportion?
  • Not all numbers are trustworthy

    • The recently-released bank stress test results insult our intelligence

From now on, you're going to hear a lot more about the US Treasury market. Rates are beginning to creep up, which for a global economy hooked on free debt is like sunrise to a vampire. The Treasury market is monstrous, and when it rolls over, it will take nearly every asset class down with it. Suffice it to say, we're watching it very closely.

» Read more


Get Ready for Oil Price Volatility to Kill the 'Recovery'

Tuesday, March 13, 2012, 11:52 AM

Get Ready for Oil Price Volatility to Kill the 'Recovery'

by Gregor Macdonald, contributing editor
Tuesday, March 13, 2012

Executive Summary

  • The market is losing faith in the transportation sectors ability to deal with $100+ oil
  • Why greater volatility in the price of oil is a safe bet in 2012
  • Why oil has a hard price floor and soft price ceiling
  • How greater oil price volatility will (negatively) impact the global economy

Part I: Understanding the New Price of Oil

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

Part II: Get Ready for Oil Price Volatility to Kill the 'Recovery'

To the extent that the US economy has been redefined as the health of its corporations, rather than the health of its people, it makes sense that many may hold the view that oil prices have an “unclear” effect on the economy.

To be sure, if your corporation is sited in the US and your labor force is manufacturing goods in Asia -- which runs on coal -- then at least for a while, a shield from rising oil prices can be sustained. However, the 2 mbd taken offline from US consumption and the 1.0 mbd taken offline in Europe over the past seven years have removed about as much discretionary demand as possible. From this juncture, the next layer of demand to be removed will directly impact the industrial economy, especially through its transport and logistics systems.

As we came out of the September 2011 lows in global stock markets and oil once again regained the $90 level, I began to watch the Dow Jones Transportation Index (TRAN) for signs of recovery or recession. As many of you understand, I have been a long-time advocate of rail transport for its outsized advantages compared to trucking and automobile transport, owing to its incredible energy efficiency. And the railroads have indeed thrived in the first stage of Peak Oil, taking share away from trucking.

However, despite strength in the TRAN, largely owing to the representation of railroads, there is still a large portion of the global economy running on airlines, trucking, logistics, and delivery services. Companies like FedEx and UPS use a lot of oil and cannot escape their reliance on it in their mission to connect the world globally through door-to-door services. Equally, it is not just consumer-related demand that drives the global delivery companies. World industry uses FedEx and UPS to ship critical parts throughout the global supply chain.

Here is a chart of the components of the Dow Jones Transportation Index (TRAN).


As you can see, while railroads compose 29% of the TRAN, airlines, delivery services, trucking, and other truck and transport services compose 44% of the index.

Now, as I said, I have been waiting to see how durable the recovery in the TRAN would be once we started hitting the wall of higher oil prices. Using the iShare ETF which represents the TRAN, symbol IYT (NYSE), I have noticed the following turn in the chart:

Some of you may be familiar with Dow Theory, which holds that the Transportation Index (TRAN) needs to continually confirm new highs in the broader Jones Industrial Average (INDU) to maintain the prospect for even higher stock prices on the back of a healthy economy. I don’t wish to invoke that particular theory here, as that would over-complicate my analysis and force a digression into the flaws of using the broader Dow Jones Industrial Average (INDU) as a tell on the economy.

Instead, I want to keep it simple: Reflationary policy can keep economies from collapsing, push up the prices of stocks, and ensure that some moderate consumption flows into demand for goods.

But reflationary policy cannot rescue the most energy-sensitive sectors of the economy. As Bernanke himself said: “The Fed cannot create more oil.” Accordingly, what I find in the above chart of the TRAN is that investors are losing confidence that global logistics can keep expanding, now that WTIC oil has been pressing up against $110 and Brent is trading near $125.