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Daily Digest 7/20 - Peter Doyle Leaves IMF, Afghan Optimism Ignores History

Friday, July 20, 2012, 10:21 AM


Why Falling Interest Rates Destroy Capital (David B.)

A bond issuer is short a bond. Unlike a homeowner who takes out a mortgage on his house, a bond issuer cannot simply “refinance”. If it wants to pay off the debt, it must buy the bonds back in the market, at the current market price.

Let’s repeat that. Anyone who issues a bond is short a security and that security can go up in price as well as go down in price.

Peter Doyle Leaves IMF (Dana T.)

I wanted the opportunity to explain my departure.

3 Ways To Play Peter Schiff’s $5,000 Gold Price Prediction (David B.)

First things first, the constant quantitative easing programs and “Operation Twists” that Bernanke & Co. are pumping into the economy are a recipe for disaster. Schiff likens it to a heroin addiction as he claims that the markets are literally surviving on the stimulus and once it erodes away, we will fall back into a recession. “The Fed saying we’re only going to do QE if the economy needs it is like a heroin addict saying he’s only going to take more heroin if he needs it” says Schiff. And he has quite a valid point, what will come of markets when the Fed is unable to ride to the rescue? Surely there will come a time when printing more money simply is not an option.


If the Strait of Hormuz Closed, Which Oil Importing Region Would Suffer the Greatest Loss? (guardia)

...for 2010, Japan’s imports of petroleum from the Middle East corresponded to 81.5 percent of its total petroleum consumption. Roughly then, for each 100 barrels consumed, 81.5 of those barrels came from the Middle East.

If the Middle East’s exports through the Straits of Hormuz were halted, and therefore 87 percent of the Middle East’s exports were stopped (see point (1) above), and, if the remaining exports were proportionally distributed among all of the export destinations, then Japan’s imports of oil should decline by at least 71 percent. That is, considering the above example, instead of 81.5 barrels of the Middle East’s oil being imported by Japan, this number is reduced by 87 percent, or 71 barrels, to just over 10 barrels.

Afghan Optimism Ignores History (OPA)

Exxon Mobil was one of the eight international companies expressing interest in six blocks in northern Afghanistan. CNPC already won a tender there last year in an area that the country's Mining Ministry estimates holds millions of barrels of oil equivalent. The U.S. Geological Survey estimates the country holds as much as 1.9 billion barrels of undiscovered technically recoverable crude oil reserves. If oil prices stay where they are, that means Afghanistan could eventually earn more than $9 billion per year -- half of the country's 2011 GDP -- from oil.

Gazprom's Monopoly in the European Natural Gas Market Slips (OPA)

Stock traders quickly identified that Novatek, Russia’s second largest natural gas company, will supply the gas, with Gazprom operating as the middleman to ship the fuel. Bank of America Merrill Lynch in Moscow advised their clients to invest in Novatek due to the indications that Gazprom’s monopoly is slipping. Shares in Novatek have increased by 8% already.

Article suggestions for the Daily Digest can be sent to [email protected]. All suggestions are filtered by the Daily Digest team and preference is given to those that are in alignment with the message of the Crash Course and the "3 Es."


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More 3E related Links, Resources and Cartoons


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Peter Doyle link

When I click on the Peter Doyle link, I get the Strait of Hormuz story.


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Peter Doyle

Hi Doug, try this background CNN article http://edition.cnn.com/2012/07/19/business/imf-economist-letter/index.html which in turn links to this June 18 2012 letter (http://cnnibusiness.files.wordpress.com/2012/07/doyle.pdf) from Doyle, which includes the following strong rebuke (my emphasis):

After twenty years of service, I am ashamed to have had any association with the Fund at all.

This is not solely because of the incompetence that was partly chronicled by the OIA report into the global crisis and the TSR report on surveillance ahead of the Euro Area crisis. More so, it is because the substantive difficulties in these crises, as with others, were identified well in advance but were suppressed here. Given long gestation periods and protracted international decision-making processes to head off both these global challenges, timely sustained warnings were of the essence. So the failure of the Fund to issue them is a failing of the first order, even if such warnings may not have been heeded. The consequences include suffering (and risk of worse to come) for many including Greece, that the second global reserve currency is on the brink, and that the Fund for the past two years has been playing catch-up and reactive roles in the last-ditch efforts to save it.



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Food inflation fears grow as corn jumps to record-just beginning

Long-term food crisis is just beginning, say analysts

Myra P. Saefong, MarketWatch


Corn in a drought-stricken farm field near Evansville, Indiana on July 18.

SAN FRANCISCO (MarketWatch) — More than four years after food inflation sparked a wave of riots around the world, consumers are facing the highest-ever prices for corn and may have seen the last of the rock-bottom prices for food staples.

“Food today is as cheap as it will be in the next 20 years,” said Ned Schmidt, editor of the Agri-Food Value View report.

Corn futures closed at a record high on Friday, with the September contract /quotes/zigman/1824756 CU2 +1.39% at $8.24 a bushel on the Chicago Board of Trade. At the start of 2008, as protests against rising food prices broke out in Asia and Africa, corn traded around $4.60. Read more on Friday’s soybean, corn rally.

Soybean futures /quotes/zigman/1824467 SQ2 +1.44% have also reached all-time highs, and wheat /quotes/zigman/1770386 WU2 +0.96% has climbed to levels not seen since 2008.


Drought map

Until recently, the Thomson Reuters/Jefferies CRB Index /quotes/zigman/1680081 XX:CRY -0.13% , a measure of global commodities markets, had been trading around 18% below its peak of the year, now it’s down just 0.2% year to date, and up over 7% for the month.

“A good portion of the resource decline is because [of] the dollar, which has risen to the highest levels since 2010,” against the euro, said Alan Knuckman, chief strategist at OneStopOption.com.

But this week, corn, wheat and soybeans rallied on U.S. drought concerns. “This market has completely reversed from ideal planting and growing conditions that had priced in a perfect crop,” said Knuckman.

Last updated in late June, the U.S. Department of Agriculture forecast an increase of between 2.5% and 3.5% for the consumer price index for all food in 2012, from an increase of 3.7% in 2011 and rise of 0.8% in 2010. But The Food Institute, a non-profit food information source, said the USDA forecast assumes “normal weather conditions and no shocks to the global market for major commodities.”

Weather has been far from normal. June was the fourth-hottest month in the nation since 1880, according to the National Oceanic and Atmospheric Association. And the USDA has cut harvest expectations as a result. Read about the stress on natural resource investors.



Corn is connected to most food items in some way, shape or form, so a new high in that market makes [global food price inflation] far more likely.’


“Scarce rainfall, coupled with record-breaking temperatures created unfavorable growing conditions in many of the major corn-production regions,” the USDA said in its crop production report on July 11.

Corn, whose futures prices climbed nearly 50% in the last month alone, has taken the biggest hit among the grains — and for good reason.

“Corn is probably the most important grain crop due to its myriad of uses,” said Darin Newsom, a senior analyst at Telvent DTN, noting that corn is used in animal feed, in the ethanol market and as a food additive.

Corn “is connected to most food items in some way, shape or form, so a new high in that market makes [global food price inflation] far more likely,” he said. And “given the shortfall in production for corn, prices for other grain and oilseed commodities should continue to climb higher.”

Calming nerves

As increases in food prices spread, concerns over a global unrest grow, but some analysts don’t believe food price inflation is a real concern just yet.




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