Theodore is ocassionally wrong but committment to a secular trend is a wonderfull thing. Be right and sit tight, Ted. Hat tip to Duncan...
Sometimes, a number of forces come together to greatly alter events. I’m reluctant to employ the overused cliché, “A Perfect Storm,” but I am at a loss to imagine a better one to describe the confluence of forces I see converging for silver. Any one of the factors about to impact the price would be formidable, but in conjunction with one another should prove historic in force.
Consider first world supply and demand. Although current production (mining plus recycling) exceeds total industrial demand that’s not the case when investment demand is included. Prior to 2006 a structural deficit existed, where total fabrication demand exceeded total production, causing world silver inventories to decline to the lowest levels in hundreds of years. That ended in 2006. However, starting in 2006, the world began to wake up to the investment merits of silver.
Evidence suggests that investment demand is just beginning. For sure, industrial demand is not disappearing and is certain to grow in the years ahead as world economic growth and population increases kick in. But investment demand is the most immediate potent force in the silver equation. Investment demand, not industrial demand, can spread like wildfire. Investment demand is the real wild card.
Look at the facts. Silver investment demand kicked in with a vengeance in 2006. That’s primarily due to the introduction of new silver investment vehicles called ETFs (exchange traded funds) that allowed entities, especially institutional investors, to buy physical silver where that was not practical before. And buy they did. In the 3.5 years since the introduction of the first silver ETF, the total amount of silver purchased by these investment vehicles is around 400 million ounces. This is a staggering sum that no one ever anticipated. This is silver taken off the market. We can debate when it may come back to the market, but we can’t debate whether it was taken off. And new silver ETFs seem to be created daily throughout the world, promising the trend of growing demand will continue. Never has the world seen such silver investment demand.
Please remember, we are talking about a commodity of finite supply. Every ounce purchased for investment is one ounce less that is available today. After 60 continuous years of inventory destruction, there is very little silver inventory remaining. Every ounce purchased for investment purposes effectively shrinks the remaining inventory further. Compared to the mountain of money and credit available, the amount of available silver is miniscule. The 400 million ounces purchased by the ETFs over the past 3 to 4 years only amounts to $5.5 billion. That’s nothing in terms of dollars, but immense in terms of metal. Future attempts to put equivalent amounts of money into equivalent amounts of metal will send the price to the heavens.
This is not the only part of the silver investment boom. Retail demand in newly minted bullion coins, such as the American Silver Eagle, Canadian Maple Leaf, Austrian Philharmonic, and other coin series has never been stronger. The US Mint and others have struggled for most of the past two years trying to keep up with demand. Generic coins and bars have also experienced record demand and the retail market teeters on the verge of outright shortage.
What is motivating this record silver investment demand? I think it is three things: the greatest quantity of investment funds available to purchase silver, the lowest availability of actual metal that can be purchased, and the growing awareness of what a great investment silver represents. Let’s face it – in an investment world full of uncertainty and risk, there are not many assets that offer protection against total loss with exceptional profit potential. Silver can’t go bankrupt or become worthless, but can and will soar to many times its current price.
The new, and some say permanent, move to frugality and savings brought about by worsening economic conditions also favors increased demand for silver. When savers and investors are uneasy, the appeal of holding an asset that is no one else’s liability is especially comforting, particularly when such an asset can soar in value. Silver satisfies both the fear and greed aspects common to man. How many assets fit that profile?
The China Card
As powerful as those forces are, they are not the main factors of the perfect storm and coming bubble. A force that threatens to profoundly disrupt the silver market is China. After 60 years of it being illegal for Chinese citizens to buy and hold silver (and gold), it has recently become legal. Not only that, the government is actively encouraging citizens to buy silver, allowing it to be sold by banks. Early reports suggest that the Chinese government is succeeding, with stories of bank lines developing for people waiting to buy silver. With the world’s largest population that has an established and ingrained propensity to save, and with an historically attractive asset suddenly available after a void of 60 years, it’s hard to imagine how a rush into silver won’t develop.
In addition, reports of pending export restrictions from China, the world’s largest refiner and third largest miner of silver, threaten to create a one-two price punch never witnessed before. Years ago I wrote, at the urging of my friend and mentor, Izzy Friedman, how China was likely the big silver short, depressing the price to pick up refining market share and dominance in the world production of silver. After the low price drove out world refining competition, China could then be in the position of controlling the price and driving it as high as they desired. I can’t help but think that not only was such analysis by Izzy correct, but it may be about to be realized.
COMEX Crackdown
The most immediate potential force in silver is an issue that has dominated my attention for the past 25 years. The ongoing silver manipulation, caused by an unprecedented concentrated short position on the COMEX, appears to be racing towards a resolution. The main driver behind the pending resolution is the new chairman of the CFTC, Gary Gensler. After only three months, he has grasped and articulated the concept of concentration. I think he may use the term more than I do, as hard to believe as that may be. He understands the role of legitimate position limits in commodity law and has effectively communicated this concept. He is proactive, a rare quality in a public servant. It is an understatement to say he may be the best CFTC Chairman ever.
Even if Chairman Gensler fails to live up to my high expectations in the Commission’s future actions, he may have done enough already to bring the silver manipulation to an end. He has elevated the issue of position limits and concentration to such a level that it guarantees that questions must finally be answered about the unusual short side concentration in COMEX silver futures. He has received many hundreds of public and private messages about this specific issue. He can’t and won’t ignore the questions and demands from the public. He will address them in some way.
We are now at the one-year anniversary of the current ongoing silver investigation by the CFTC. This is the third silver investigation in five years. The current silver investigation came into existence as a result of articles written by me about the revelations in the August 2008 Bank Participation Report. This report showed that one of two US banks (most likely JPMorgan) held a short position equal to 25% of total world silver mine production. This is an unprecedented concentration, never witnessed in commodity market history. I asked the public question – how can such a concentrated position not be manipulative to the price of silver? Instead of answering, the CFTC decided to launch another investigation. This is what a government agency usually does when it can’t answer a simple and direct question.
But the new chairman of the Commission has not evaded direct questions on the important matter of concentration and position limits. He wasn’t the chairman when the question of concentration was asked last year. He wasn’t the chairman when silver was investigated three times in five years. That’s the big difference between then and now. Gary Gensler is the chairman now and that is all that matters. In my opinion, he will soon address the questions in silver.
There is also the question of the short side without concentration. Recently, I indicated that I thought JPMorgan had probably covered its big concentrated short position in other markets, such as the OTC market. In other words, it is my speculation that JPMorgan passed the silver short hot potato to unsuspecting entities. Please remember, this would be a transfer of the short position and its inherent risk to other parties, not an elimination of the position and its risk. It doesn’t really matter if JPMorgan transferred the risk, as far as the market is concerned. The short position still exists.
On just the COMEX alone, including all futures and call options, but subtracting all spread positions, there is close to 500 million ounces of net silver short positions. I don’t care who holds it, this short position exists. Given the current and future realities in silver, this is an incredibly uninformed short position. It is not backed by real silver. Given how much silver exists in good-delivery bullion form and who owns it, there is a severe mismatch between that available silver and the amount the shorts have obligated themselves to deliver someday. The short holders have no prospect of securing real silver, except to buy it in the open market, thus driving prices higher and hurting themselves in the process. The collective COMEX short position stands to lose $500 million for every dollar that silver climbs in price. Silver is about to climb many dollars in price. My point is simple. Forget who owns the COMEX short position; just remember they don’t realize what a precarious position they have placed themselves in. That they will panic and rush to buy at some point is guaranteed.
Industrial Panic
On top of all these powerful forces set to launch a super price bubble the likes of which the world has never witnessed before, looms what I think is the most powerful force of all – the coming industrial user inventory buying panic. As I recently wrote in “A Date With Destiny,” it is almost impossible for the users not to panic, once tightness in the silver market results in delays in shipments to industrial consumers. Such delays will threaten the very existence of many users continuing as ongoing concerns. None of these users will cease to exist without a fight. That fight will involve buying silver, at any price available. This will feed on itself, until it burns out in a frenzied panic. Investors will panic and buy when silver prices soar, but no one will panic more than the users, with the possible exception of the shorts.
Price bubbles are rare. We throw the term around quite loosely nowadays, having recently experienced two bubbles, the Internet stock bubble ending in 2000 and the housing bubble. But bubbles remain the exception, not the rule. There are some characteristics common to all bubbles. You have to start with a good underlying story or investment premise, like a brand new technology or a belief that housing prices only go up. The story is usually legitimate to begin with, but everyone gets carried away and higher prices eventually outstrip the underlying story. But the price rise creates fortunes for those that know when to exit. The silver story is more compelling than any prior bubble. So will be the overrun in price.
You can only have a bubble if large numbers of people participate and there is widespread borrowing to buy the bubble asset. At the end, people are buying only because prices are rising. I believe this will occur in silver and we must be ready to exit when that takes place. But the point is that we are so far away from these excesses that it’s unnecessary to worry about them now. It is wise to put the coming silver super price bubble into proper perspective. We’re not close to it yet.
And please keep this in mind – with no other bubble did we have these conditions; a large and concentrated short position, a looming physical shortage, a downward manipulation that might be attacked by regulators, the entry into the investment equation of the most populous nation on earth, and a prospective industrial user inventory buying panic. It is hard to imagine how silver won’t be the largest bubble in history. You’ve just been given an invitation to participate beforehand.
Copyright © 2009 Ted Butler
Editorial Archive
http://financialsense.com/fsu/editorials/2009/0909.html
Showing posts with label commodities. Show all posts
Showing posts with label commodities. Show all posts
11 September 2009
6 September 2009
Who's short the silver?
hat tip Duncan. More on this story from Ted Butler.
Warnings Ignored
Trouble with you is the trouble with me,
Got two good eyes but you still don’t see.
Trouble ahead, trouble behind,
And you know that notion just crossed my mind.
Casey Jones
Grateful Dead
A remarkable story recently appeared in a leading Chinese business publication that threatens to upend the world of commodities. It seems that the government of China may be preparing the way for state-owned investment funds to walk away or default on OTC commodity derivatives contracts held with foreign banks if those contracts cause loss to the funds. A good discussion of this issue can be found here, along with links to the original story and a related Reuters article Click Here
Even more amazing is that the obligatory follow-up story, in which the threat of default is invariably denied, actually confirms that China is seriously considering defaulting on selected OTC commodity derivatives contracts. Click Here l If there is going to be a default by China in select OTC commodity derivatives, silver is a prime candidate.
What makes the China story so remarkable to me is that it ties together and confirms much of the silver analyses I have published over the years. In addition, it points to the extraordinary situation that presently exists in silver, not just from an investment and regulatory perspective, but also from a view that impacts the strategic interests of nations, including, but not limited to, the US and China. As always, I ask you to decide for yourself based upon the facts and my speculation.
Here are the facts. There is an unusually large concentrated net short position in COMEX silver futures held by 4 or fewer traders, documented by CFTC data. There is no unusually large concentrated position on the long side. Other CFTC data indicate the concentrated silver short position is largely held by one or two US banks, at times reaching 25% of world production. This degree of concentration is unprecedented and not seen in any other commodity. Correspondence from the CFTC to elected officials identifies JPMorgan as the prime holder of the short position, with Morgan having inherited the position in its takeover of Bear Stearns. Requests to the CEO of JPMorgan to deny it holds the large silver short position on the COMEX have gone unanswered.
For years, the CFTC has investigated my allegations of manipulation in silver, and in 2004 and 2008, they denied such a manipulation exists. It is thought they will comment soon on the third investigation, begun a year ago. In none of the three investigations have they contacted me, although I was the impetus behind each investigation. Over the past five years, the silver short position has grown more concentrated. About six years ago, based upon input from my friend and mentor, Izzy Friedman, I first speculated that China was the big short behind the COMEX silver short position. Other articles followed on China and this theme.Click Here
More recently, in December 2007, I publicly and privately warned the CFTC and Commissioner Bart Chilton of what a disaster it would be if the foreign backers to the short position in COMEX silver decided to walk away from their obligations. Click Here In that letter, I wrote;
”…these giant foreign silver shorts represent a grave and unique danger to our country, not just because they hold a controlling position in COMEX silver futures, but also because of the nature of that position.
In its own words, the New York Mercantile Exchange, Inc., (which owns the COMEX) is the world's largest physical commodity futures exchange and the preeminent trading forum for energy and precious metals. As such, the NYMEX/COMEX is a financial institution important to the interests of our country. The highest regulatory attention should be placed on anything that threatened its existence. The 4 large foreign silver shorts represent such a threat.
If and when these four large traders decide they have had enough of the short side of silver, instead of covering their short positions or delivering actual silver, they could declare force majeure and simply walk away and leave the regulators and NYMEX clearing members holding the bag. Since they are outside the jurisdiction of the Commission, there is, currently, little to prevent this.”
I don’t know how I could have been clearer in my warning. I don’t know how the stories coming from China could highlight those dangers any clearer. Not only is the concentrated short position clearly manipulative to the price of silver, the danger of a default has never loomed larger. Perhaps the recent price action is reflecting that growing awareness. In spite of this clear warning, the CFTC concluded, in May 2008, that there was nothing wrong in silver.
It is important to put the current situation into proper perspective. Here’s my take. Sometime around ten years ago, the now-disgraced derivatives powerhouse AIG, through their China connections, convinced certain state-owned companies of that country to enter into massive OTC short contracts on silver. China’s growing share of silver refining production was the cover story. The real purpose, however, was to give AIG backing for selling short silver contracts on the COMEX for the purpose of hoodwinking the technical funds into and out of paper positions on the COMEX. This worked like clockwork for years. Pressure from me and many readers, through then-New York Attorney General Eliot Spitzer quietly forced AIG to abandon and transfer their COMEX silver (and probably gold) short position to Bear Stearns, another large clearing firm, like AIG. The Chinese OTC silver short position was assumed by Bear Stearns as a counter-party and Bear Stearns then continued the COMEX manipulation and fleecing of the technical funds and other speculative traders.
The frequent complaints to the CFTC about the outsized short position and obvious manipulative trading activities on the COMEX were rebuffed by the Commission because Bear Stearns, like AIG before them, could show on paper that they had existing OTC offsets with China that “backed” the COMEX short positions. As has been shown in other financial scandals, like the Madoff swindle, bureaucrat regulators are often no match for well-connected and persuasive Wall Street power brokers.
When Bear Stearns collapsed in March 2008 (incidentally at the then-highest price for silver in decades - $21), there was no one willing to take over their giant COMEX silver short position and the offsetting Chinese OTC contracts. Enter JPMorgan Chase. Remember, this was a time of great stress to the financial system and all efforts were directed to quickly fixing problems that arose. The giant silver short position at Bear Stearns was one such problem. With federal government guarantees against loss and criminal prosecution, JPMorgan did assume the role of master of the silver market. All this was revealed in subsequent Bank Participation Reports and in correspondence from the CFTC to various lawmakers. Since that time, JPMorgan has managed the giant silver short position. My speculation includes that Morgan has quietly offset its COMEX short position over the past year and a half with other unsuspecting parties in the OTC market.
What does this all mean and where do we go from here? Get ready for great and growing price volatility. I’ll have specific market comments for subscribers over the next couple of days, once the new COT and Bank Participation Reports are released. But this much is clear – the long anticipated default of the massive OTC silver derivatives position by China appears to be at hand. It’s hard to imagine a more profound event. All at once, the backing and excuse for the concentrated short position on the COMEX is exposed for the fraud it has always been. No longer can the CFTC pretend that the COMEX silver short position is backed by anything legitimate. Not when China, itself, is saying it may default. So many game changes have emerged in silver over the past few months that it is hard to appreciate them all. These recent announcements by China concerning its future intentions on select OTC commodity derivatives could be the most important of all.
I still have great faith that the new chairman of the CFTC, Gary Gensler, has every intention of doing the right thing and will adjust and enforce legitimate speculative position limits in COMEX silver. The new reports out of China make it more imperative that he do so quickly. The threat from China that it may default on contracts that back the concentrated COMEX short position raises the stakes immensely. Unlike his predecessors, and for the good of the country and market integrity, Chairman Gensler must not ignore these warnings.
Note to subscribers – because of the potential regulatory significance of this issue, I am putting this article out in the public domain. I’ll have specific market comments available over the weekend.
Warnings Ignored
Trouble with you is the trouble with me,
Got two good eyes but you still don’t see.
Trouble ahead, trouble behind,
And you know that notion just crossed my mind.
Casey Jones
Grateful Dead
A remarkable story recently appeared in a leading Chinese business publication that threatens to upend the world of commodities. It seems that the government of China may be preparing the way for state-owned investment funds to walk away or default on OTC commodity derivatives contracts held with foreign banks if those contracts cause loss to the funds. A good discussion of this issue can be found here, along with links to the original story and a related Reuters article Click Here
Even more amazing is that the obligatory follow-up story, in which the threat of default is invariably denied, actually confirms that China is seriously considering defaulting on selected OTC commodity derivatives contracts. Click Here l If there is going to be a default by China in select OTC commodity derivatives, silver is a prime candidate.
What makes the China story so remarkable to me is that it ties together and confirms much of the silver analyses I have published over the years. In addition, it points to the extraordinary situation that presently exists in silver, not just from an investment and regulatory perspective, but also from a view that impacts the strategic interests of nations, including, but not limited to, the US and China. As always, I ask you to decide for yourself based upon the facts and my speculation.
Here are the facts. There is an unusually large concentrated net short position in COMEX silver futures held by 4 or fewer traders, documented by CFTC data. There is no unusually large concentrated position on the long side. Other CFTC data indicate the concentrated silver short position is largely held by one or two US banks, at times reaching 25% of world production. This degree of concentration is unprecedented and not seen in any other commodity. Correspondence from the CFTC to elected officials identifies JPMorgan as the prime holder of the short position, with Morgan having inherited the position in its takeover of Bear Stearns. Requests to the CEO of JPMorgan to deny it holds the large silver short position on the COMEX have gone unanswered.
For years, the CFTC has investigated my allegations of manipulation in silver, and in 2004 and 2008, they denied such a manipulation exists. It is thought they will comment soon on the third investigation, begun a year ago. In none of the three investigations have they contacted me, although I was the impetus behind each investigation. Over the past five years, the silver short position has grown more concentrated. About six years ago, based upon input from my friend and mentor, Izzy Friedman, I first speculated that China was the big short behind the COMEX silver short position. Other articles followed on China and this theme.Click Here
More recently, in December 2007, I publicly and privately warned the CFTC and Commissioner Bart Chilton of what a disaster it would be if the foreign backers to the short position in COMEX silver decided to walk away from their obligations. Click Here In that letter, I wrote;
”…these giant foreign silver shorts represent a grave and unique danger to our country, not just because they hold a controlling position in COMEX silver futures, but also because of the nature of that position.
In its own words, the New York Mercantile Exchange, Inc., (which owns the COMEX) is the world's largest physical commodity futures exchange and the preeminent trading forum for energy and precious metals. As such, the NYMEX/COMEX is a financial institution important to the interests of our country. The highest regulatory attention should be placed on anything that threatened its existence. The 4 large foreign silver shorts represent such a threat.
If and when these four large traders decide they have had enough of the short side of silver, instead of covering their short positions or delivering actual silver, they could declare force majeure and simply walk away and leave the regulators and NYMEX clearing members holding the bag. Since they are outside the jurisdiction of the Commission, there is, currently, little to prevent this.”
I don’t know how I could have been clearer in my warning. I don’t know how the stories coming from China could highlight those dangers any clearer. Not only is the concentrated short position clearly manipulative to the price of silver, the danger of a default has never loomed larger. Perhaps the recent price action is reflecting that growing awareness. In spite of this clear warning, the CFTC concluded, in May 2008, that there was nothing wrong in silver.
It is important to put the current situation into proper perspective. Here’s my take. Sometime around ten years ago, the now-disgraced derivatives powerhouse AIG, through their China connections, convinced certain state-owned companies of that country to enter into massive OTC short contracts on silver. China’s growing share of silver refining production was the cover story. The real purpose, however, was to give AIG backing for selling short silver contracts on the COMEX for the purpose of hoodwinking the technical funds into and out of paper positions on the COMEX. This worked like clockwork for years. Pressure from me and many readers, through then-New York Attorney General Eliot Spitzer quietly forced AIG to abandon and transfer their COMEX silver (and probably gold) short position to Bear Stearns, another large clearing firm, like AIG. The Chinese OTC silver short position was assumed by Bear Stearns as a counter-party and Bear Stearns then continued the COMEX manipulation and fleecing of the technical funds and other speculative traders.
The frequent complaints to the CFTC about the outsized short position and obvious manipulative trading activities on the COMEX were rebuffed by the Commission because Bear Stearns, like AIG before them, could show on paper that they had existing OTC offsets with China that “backed” the COMEX short positions. As has been shown in other financial scandals, like the Madoff swindle, bureaucrat regulators are often no match for well-connected and persuasive Wall Street power brokers.
When Bear Stearns collapsed in March 2008 (incidentally at the then-highest price for silver in decades - $21), there was no one willing to take over their giant COMEX silver short position and the offsetting Chinese OTC contracts. Enter JPMorgan Chase. Remember, this was a time of great stress to the financial system and all efforts were directed to quickly fixing problems that arose. The giant silver short position at Bear Stearns was one such problem. With federal government guarantees against loss and criminal prosecution, JPMorgan did assume the role of master of the silver market. All this was revealed in subsequent Bank Participation Reports and in correspondence from the CFTC to various lawmakers. Since that time, JPMorgan has managed the giant silver short position. My speculation includes that Morgan has quietly offset its COMEX short position over the past year and a half with other unsuspecting parties in the OTC market.
What does this all mean and where do we go from here? Get ready for great and growing price volatility. I’ll have specific market comments for subscribers over the next couple of days, once the new COT and Bank Participation Reports are released. But this much is clear – the long anticipated default of the massive OTC silver derivatives position by China appears to be at hand. It’s hard to imagine a more profound event. All at once, the backing and excuse for the concentrated short position on the COMEX is exposed for the fraud it has always been. No longer can the CFTC pretend that the COMEX silver short position is backed by anything legitimate. Not when China, itself, is saying it may default. So many game changes have emerged in silver over the past few months that it is hard to appreciate them all. These recent announcements by China concerning its future intentions on select OTC commodity derivatives could be the most important of all.
I still have great faith that the new chairman of the CFTC, Gary Gensler, has every intention of doing the right thing and will adjust and enforce legitimate speculative position limits in COMEX silver. The new reports out of China make it more imperative that he do so quickly. The threat from China that it may default on contracts that back the concentrated COMEX short position raises the stakes immensely. Unlike his predecessors, and for the good of the country and market integrity, Chairman Gensler must not ignore these warnings.
Note to subscribers – because of the potential regulatory significance of this issue, I am putting this article out in the public domain. I’ll have specific market comments available over the weekend.
4 September 2009
A trickle of humililations begins ~ CHINA AND THE BUZZ OF A PENDING BANK DEFAULT
More on this story... hat tip to Thomas.
CHINA AND THE BUZZ OF A PENDING BANK DEFAULT
Let’s put the pieces together here. Just this past weekend China announced that State Owned Enterprises (SOEs) will be allowed to default on commodity derivative contracts. Think of that. China has given the green light and authorized the defaulting on commodity derivative contracts.
This story broke over the weekend but has not gotten much mainstream media attention on this side of the pond. (North America). The only inference to it was the talk or “buzz” on the Wall Street floor that another bank was rumored to be close to defaulting. As Art Cashin of UBS Securities indicated in the video clip I posted earlier, normally when a market sells off on a rumor and the rumor turns out to be false, the market will tend to correct itself. IT DIDN’T.
The Reuters report cited 6 foreign banks that received letters indicating that the Chinese State Owned Enterprises would be given the green light to default on their derivatives.
A look at what a derivative actually is may be useful here. A Derivative is a financial instrument that is derived from some other underlying asset, index, event, value or condition. Rather than trade or exchange the underlying itself, derivative traders enter into an agreement to exchange cash or assets over time based on the underlying. A simple example is a futures contract: an agreement to exchange the underlying asset at a future date. Commercial and investment banks make up the foundation of the over the counter (OTC) derivatives market. Investors use derivatives to protect against risks, such as sudden changes in price or value of the underlying asset. Others tap derivatives to take on extra risk, in the hope of extra gains.
Well China owns billions of these products and it has finally come to light they have had enough of having the value of their derivatives manipulated by the manipulation of the price of the underlying asset. They have finally woken up to the fact that these derivatives have been bundled together like junk in a manner that resembles the mortgage backed derivatives that brought down the world markets last year.
Back to Reuters. Some of the State Owned Enterprises that stated their potential intentions to default were Air China. China Eastern and Cosco. Mainly in part because they took major derivatives losses over the past year but also, concerns are arising that the derivatives that they were sold by these foreign institutions are garbage, underwater and may never see the light of day. So why continue to pay for them? So the concern in the financial world is that holders of these losing products may just walk away, not unlike a home owner with a $600,000 mortgage on a home valued at $475,000 deciding to just hand in their keys. However, read on...this has nothing to do with morgtgage backed products. This time, the concern may be over Oil.
They (Reuters) cited 6 foreign banks.Where the story gets really intriguing is that among the major derivatives providers according to Reuters but also widely known in the industry, are Goldman Sachs, UBS and JP Morgan.
Here is the looming problem. These products are worth billions. One report that a good friend of mine did showed that if Goldman Sachs for example were to take this one up the rear, they could stand to lose 15 billion dollars. (This number is by no means confirmed)
An important history lesson is needed here. “Potential default” was the concern that sparked and prompted the most recent economic crisis. These intricately weaved products along with highly speculative CDOs and CDSs began to fall apart when the bubble that was in large part significantly contributed to and created by the financial institutions that were packaging this junk started to fall apart.
Imagine the impact for a brief moment if you will, on the impact to the financial landscape if China were to say “we are walking away” from those products. I would imagine that China, being the biggest purchaser of US debt, could surely collapse the US institutions that were at one point deemed too big to fail if they decide to go ahead with this plan.
This is why I don’t take tonight’s news that China purchased 50 billion dollars of IMF bonds lightly. In fact, I take it very seriously. This is why I take the buzz on the floor over the past two days very seriously as well as I do the incredible spike in Gold today. Most importantly, I do not take lightly the recent 25% correction we have seen in the Chinese Stock Market. Can all these events be interconnected some how? Is the Chinese stock collapse giving us a hint?
The Reuters story came out on Mon Aug 31, 2009 at 7:42am EDT. I find it quite interesting that the mainstream media did not take this more seriously. Reuters reported that the above noted Chinese companies have already issued letters to the banks. The Reuters article cites 4 clear points.
• State-owned firms may default on commodity hedges - report
• Bankers dismayed, confused by report; seek more details
• Lawyers question legality of the move
• Traders suspect lurking losses may have prompted warning (Adds analysts comments)
Analysts are fearing that if these three big companies came out and spelled out their losses and dismay at these products then this might prompt other large Chinese corporations to do the same.
Let’s take a closer look at the companies that have been mentioned in these news articles out of China. They are Air China, China Eastern and Cosco. If you ask me, this conundrum might have to do with oil. I deduce from this that if there is a problem brewing it has everything to do with their Oil Derivatives business.
Here’s a brief overview of what might happen should these companies, and others, default. The banks, namely Goldman Sachs, J.P. Morgan and from other accounts possibly Deutsche Bank will find themselves LONG on oil futures with no customers on the short side of the derivatives. This will most likely lead the banks to sell the excess oil futures without a care for the price. This is no different than what happened when Bear Stearns was forced to sell off their gold futures in March of 2008 which then resulted in a sharp downturn in the price of Gold.
Reuters stated:
Spokespersons at Goldman Sachs (GS.N) and UBS (UBSN.VX) declined comment, and media officials at Morgan Stanley (MS.N) and JPMorgan (JPM.N) were not immediately available for comment. All are major global providers of commodity risk management.
We have yet to hear their commentary. A Chinese statesperson was quoted as saying “"If we were among the banks receiving that letter, we would be very angry.” You bet your bottom dollar. You don’t think the firms listed above are angry, or, are they frightened that if the Chinese State Owned entities start taking affirmative action it could theoretically bring down some of the biggest remaining names on Wall Street?
Remember Reuters initial story was titled Beijing's derivative default stance rattles market. Read it thoroughly for more information.
Then, read the story that broke last Saturday to get a clearer perspective before the political and corporate spin started to enter the story. China warns banks on OTC hedge defaults –report.
“BEIJING, Aug 29 (Reuters) - Chinese state-owned enterprises (SOEs) may unilaterally terminate derivative contracts with six foreign banks that provide over-the-counter commodity hedging services, a leading financial magazine said.
China's SOE regulator, the State-owned Assets Supervision and Administration Commission (SASAC), had told the financial institutions that SOEs reserved the right to default on contracts, Caijing magazine quoted an unnamed industry source as saying.”
On September 1, 2009 Reuters said that the Banks, not the commodities would be at risk if China followed through.
Yes, legal battles would ensue should this happen and we can also expect to have Chinese political figures downplay the story in an effort to avert panic. However, if they can prove that these derivatives or the underlying asset was manipulated in a manner to profit the bank that issued the product then that may even do more damage than the default themselves.
Perhaps the “buzz” on the floor is indeed true. Perhaps we are going to see action that could annihilate one of the biggest Wall Street firms ever.
If there is one thing I have learned of late is that when the Chinese speak, we must listen. Their list of allies is ever growing and they are simply fed up of having to swallow the US garbage that has turned out to be toxic and dangerous to their highly controlled and coveted state owned enterprises.
I leave you with these thoughts that I alluded to above. The Chinese market has corrected 25%. This news broke this past weekend. New York saw a sharp sell-off on Monday. Buzz of a bank default hit the floor. The rumor did not abate and the selling intensified. The selling carried over into Tuesday. Gold, a classic hedge against troubled times has broken out to the upside, China has purchased 50 billion in IMF bonds and has been questioning the US dollar now for upwards of a year. China was up 5% overnight and Gold has continued to climb this morning.
Where there is smoke there is often fire.
CHINA AND THE BUZZ OF A PENDING BANK DEFAULT
Let’s put the pieces together here. Just this past weekend China announced that State Owned Enterprises (SOEs) will be allowed to default on commodity derivative contracts. Think of that. China has given the green light and authorized the defaulting on commodity derivative contracts.
This story broke over the weekend but has not gotten much mainstream media attention on this side of the pond. (North America). The only inference to it was the talk or “buzz” on the Wall Street floor that another bank was rumored to be close to defaulting. As Art Cashin of UBS Securities indicated in the video clip I posted earlier, normally when a market sells off on a rumor and the rumor turns out to be false, the market will tend to correct itself. IT DIDN’T.
The Reuters report cited 6 foreign banks that received letters indicating that the Chinese State Owned Enterprises would be given the green light to default on their derivatives.
A look at what a derivative actually is may be useful here. A Derivative is a financial instrument that is derived from some other underlying asset, index, event, value or condition. Rather than trade or exchange the underlying itself, derivative traders enter into an agreement to exchange cash or assets over time based on the underlying. A simple example is a futures contract: an agreement to exchange the underlying asset at a future date. Commercial and investment banks make up the foundation of the over the counter (OTC) derivatives market. Investors use derivatives to protect against risks, such as sudden changes in price or value of the underlying asset. Others tap derivatives to take on extra risk, in the hope of extra gains.
Well China owns billions of these products and it has finally come to light they have had enough of having the value of their derivatives manipulated by the manipulation of the price of the underlying asset. They have finally woken up to the fact that these derivatives have been bundled together like junk in a manner that resembles the mortgage backed derivatives that brought down the world markets last year.
Back to Reuters. Some of the State Owned Enterprises that stated their potential intentions to default were Air China. China Eastern and Cosco. Mainly in part because they took major derivatives losses over the past year but also, concerns are arising that the derivatives that they were sold by these foreign institutions are garbage, underwater and may never see the light of day. So why continue to pay for them? So the concern in the financial world is that holders of these losing products may just walk away, not unlike a home owner with a $600,000 mortgage on a home valued at $475,000 deciding to just hand in their keys. However, read on...this has nothing to do with morgtgage backed products. This time, the concern may be over Oil.
They (Reuters) cited 6 foreign banks.Where the story gets really intriguing is that among the major derivatives providers according to Reuters but also widely known in the industry, are Goldman Sachs, UBS and JP Morgan.
Here is the looming problem. These products are worth billions. One report that a good friend of mine did showed that if Goldman Sachs for example were to take this one up the rear, they could stand to lose 15 billion dollars. (This number is by no means confirmed)
An important history lesson is needed here. “Potential default” was the concern that sparked and prompted the most recent economic crisis. These intricately weaved products along with highly speculative CDOs and CDSs began to fall apart when the bubble that was in large part significantly contributed to and created by the financial institutions that were packaging this junk started to fall apart.
Imagine the impact for a brief moment if you will, on the impact to the financial landscape if China were to say “we are walking away” from those products. I would imagine that China, being the biggest purchaser of US debt, could surely collapse the US institutions that were at one point deemed too big to fail if they decide to go ahead with this plan.
This is why I don’t take tonight’s news that China purchased 50 billion dollars of IMF bonds lightly. In fact, I take it very seriously. This is why I take the buzz on the floor over the past two days very seriously as well as I do the incredible spike in Gold today. Most importantly, I do not take lightly the recent 25% correction we have seen in the Chinese Stock Market. Can all these events be interconnected some how? Is the Chinese stock collapse giving us a hint?
The Reuters story came out on Mon Aug 31, 2009 at 7:42am EDT. I find it quite interesting that the mainstream media did not take this more seriously. Reuters reported that the above noted Chinese companies have already issued letters to the banks. The Reuters article cites 4 clear points.
• State-owned firms may default on commodity hedges - report
• Bankers dismayed, confused by report; seek more details
• Lawyers question legality of the move
• Traders suspect lurking losses may have prompted warning (Adds analysts comments)
Analysts are fearing that if these three big companies came out and spelled out their losses and dismay at these products then this might prompt other large Chinese corporations to do the same.
Let’s take a closer look at the companies that have been mentioned in these news articles out of China. They are Air China, China Eastern and Cosco. If you ask me, this conundrum might have to do with oil. I deduce from this that if there is a problem brewing it has everything to do with their Oil Derivatives business.
Here’s a brief overview of what might happen should these companies, and others, default. The banks, namely Goldman Sachs, J.P. Morgan and from other accounts possibly Deutsche Bank will find themselves LONG on oil futures with no customers on the short side of the derivatives. This will most likely lead the banks to sell the excess oil futures without a care for the price. This is no different than what happened when Bear Stearns was forced to sell off their gold futures in March of 2008 which then resulted in a sharp downturn in the price of Gold.
Reuters stated:
Spokespersons at Goldman Sachs (GS.N) and UBS (UBSN.VX) declined comment, and media officials at Morgan Stanley (MS.N) and JPMorgan (JPM.N) were not immediately available for comment. All are major global providers of commodity risk management.
We have yet to hear their commentary. A Chinese statesperson was quoted as saying “"If we were among the banks receiving that letter, we would be very angry.” You bet your bottom dollar. You don’t think the firms listed above are angry, or, are they frightened that if the Chinese State Owned entities start taking affirmative action it could theoretically bring down some of the biggest remaining names on Wall Street?
Remember Reuters initial story was titled Beijing's derivative default stance rattles market. Read it thoroughly for more information.
Then, read the story that broke last Saturday to get a clearer perspective before the political and corporate spin started to enter the story. China warns banks on OTC hedge defaults –report.
“BEIJING, Aug 29 (Reuters) - Chinese state-owned enterprises (SOEs) may unilaterally terminate derivative contracts with six foreign banks that provide over-the-counter commodity hedging services, a leading financial magazine said.
China's SOE regulator, the State-owned Assets Supervision and Administration Commission (SASAC), had told the financial institutions that SOEs reserved the right to default on contracts, Caijing magazine quoted an unnamed industry source as saying.”
On September 1, 2009 Reuters said that the Banks, not the commodities would be at risk if China followed through.
Yes, legal battles would ensue should this happen and we can also expect to have Chinese political figures downplay the story in an effort to avert panic. However, if they can prove that these derivatives or the underlying asset was manipulated in a manner to profit the bank that issued the product then that may even do more damage than the default themselves.
Perhaps the “buzz” on the floor is indeed true. Perhaps we are going to see action that could annihilate one of the biggest Wall Street firms ever.
If there is one thing I have learned of late is that when the Chinese speak, we must listen. Their list of allies is ever growing and they are simply fed up of having to swallow the US garbage that has turned out to be toxic and dangerous to their highly controlled and coveted state owned enterprises.
I leave you with these thoughts that I alluded to above. The Chinese market has corrected 25%. This news broke this past weekend. New York saw a sharp sell-off on Monday. Buzz of a bank default hit the floor. The rumor did not abate and the selling intensified. The selling carried over into Tuesday. Gold, a classic hedge against troubled times has broken out to the upside, China has purchased 50 billion in IMF bonds and has been questioning the US dollar now for upwards of a year. China was up 5% overnight and Gold has continued to climb this morning.
Where there is smoke there is often fire.
2 September 2009
18 July 2009
Commodities is the place to be, says Jim Rogers
14 Jul 2009, 0013 hrs IST, Andy Mukherjee, ET Now
In an exclusive interview with ET NOW , Mr Rogers reiterated his view that a currency crisis could happen any time in the near future. But he’s not sure yet who’s going to pay the price — pound sterling, US dollar or even the rupee. Excerpts: ( Watch )
The commodities rally seems to have paused. The Rogers International Commodity Index has come off 13% since June 12. This pullback, essentially as I can see, is because of tin, energy and silver even as some of those agri commodities like orange juice, sugar and cotton have done well. What are your expectations going forward for commodities?
That's the way I know you know about commodities. You read The Economic Times and your ET TV. So, you know that the markets always have corrections whether they are going up or down. Nothing goes straight up or down forever. So, it's having a normal correction. In my view, the best place to be is in real assetscommodities, because if the world is going to recover, they (commodities) will recover first because of the shortages and if the world economy is not going to recover, they are still the best place to be, because governments around the world are printing huge amounts of money. So, if you got to own something, I don't much to own besides commodities.
In India, we are getting worried about the monsoon. We are looking out of our windows and not finding any clouds, and there is also talk about El Nino weather formation. Is this something you would advise investors to keep an eye on?
Of course, I would. The world's inventories of food are at the lowest they have been in decades. We haven't have had any serious weather problems around the world for several decades as a matter of fact. So, with fairly good weather, we have been having bad harvest or we have been consuming more than we have been producing. Can you imagine what's going to happen to the price of agriculture if we have bad weather around the world?
The last time we met here in Mumbai you had a sachet of sugar in your pocket and you pulled it out to underscore your point of impending shortage about agri commodities. You have been right about sugar as far as we can see from the price charts. What are you hiding today in your pockets? A silver coin, a hip flask full of crude oil, may be?
I do actually have a silver coin in my pocket. I don't know how you knew. I also have a gold coin, but the silver one is probably my better play. If I were a bright young man, I would be buying sugar now and silver, given the state of the world. That's not a recommendation, but I am just saying I do own some silver. Silver is cheaper than many things on a historic basis and I do own some silver. The dollar has fallen almost 10% since the beginning of the stocks rally in March. Commodities have risen 94% of the time that the dollar has fallen. A very strong correlation. Do we expect the dollar decline and the commodity run-up, therefore, to continue? It's not always a strong correlation. You are right; there has been (a correlation) in recent months, recent years even. But no, there are many times when the dollar and commodities go entirely separate ways. So, don't get it into your head, and I know many times that the press do have it in their head that commodities and dollars go opposite ways. I am not terribly bullish on the dollar in long term. US dollars are a terribly flawed currency and down the road I hope I don't own any US dollars. I still own some of them at the moment, but it's not getting better for the US. The dollar any way is getting worse. The fundamental for commodities continue to improve. The fundamentals for the US dollar do not continue to improve. They are deteriorating.
Are you still sticking to your prediction of a currency crisis sometime in a year or two?
Yes. The world is full of currency imbalances and economic trade imbalances would have to be resolved or corrected, one way or the other. Unfortunately, given the state of politicians and it's not just the current state of politicians, but politicians throughout history have usually got things wrong. So, we are going to have some problems in the currency market. I don't know when. May be not. I may be wrong. But having seen that sort of thing before in history somebody would have to pay the price whether it's the pound sterling or the US dollar or the rupee, I have no clue. No idea where it’s going to stop, but we are going to have problems in the currency markets.
What’s your view on global equities now? Do you think emerging markets’ premium over developed country markets has gone a way too high?
I don't pay any attention to things like emerging markets premium. You talk about it on TV, but every market is different. Why can't I just go out and buy emerging markets when it is likely to go broke. Every market is different, every country is different, every economy is different and every sector of the economies is different. Just because you are in an emerging country does not mean you are going to make money if you get the wrong sector. I have not bought any stocks anywhere in the world in the last couple of years except China. I did buy some Chinese shares back in October-November. I have not been buying anything other than that for some time. I have been worried about the world economy, about the world stock markets. If you got to be somewhere and if there is going to be a recovery, it will show up in commodities best of all, and if there is not going to be any recovery, commodities are still a better place to be.
So what are you buying nowadays?
If you want to put in your money somewhere, put it in commodities. That's the only thing I bought recently. I have bought some yen and swiss francs. If you know enough about currencies to figure out who is going to benefit, if I am right about the currency turmoil coming, then you can buy some of the currencies and if you think that the rupee is the place to be, then you can buy some rupees.
Long-term inflation expectations in the US as reflected by the five-year forward breaking rates on treasury inflation protected securities. Those have hardened considerably since the beginning of the year. That's also your view, right? Too much money in the financial systems and monetary authorities the world over don't have a credible plan to withdraw liquidity?
I cannot conceive of lending money to the US government for 30 years in US dollars for 3, 4, 5 or 6% interest. It's just inconceivable to me that I would let them have my money for 30 years and they would pay me back someday in US dollars at such a low rate of interest. I expect problems in the bond market. I don't know when. I am not sure about the bond market. I was short in the bond market, but I got out. I expect to see serious problems in the bond market down the road.
In the near term, markets seem to be more concerned about growth than they are about inflation. The difference between the 10-year and the two-year bond yield in the US has narrowed some 40 basis points since early June. Unlike you Jim, people are actually going out and buying long maturity treasuries because they don't see growth, don't see inflation. So, what do say to these bond buyers? Good luck?
When you see anomalies like this in the market, you are supposed to take advantage . The spread is very low. So, why would anybody buy a 10-year when he can buy a two-year ? Not worth the extra risk to go out 10 years. I would urge people to keep their wits. Now, granted Mr Bernanke and the US are buying a lot of government paper and driving the price up. That's why I am not sure. He has got more buying power than I do, at least for the foreseeable future. So, you are seeing longer bonds going up. That gives you an opportunity to get out if you own them or think about selling them short if you don't own them and know how to sell short.
RAPIDFIRE ROUND
Ben Bernanke: Hero or villian?
He's an idiot. ( Watch )
US stocks: Buy now or stay away?
I'm not buying them.
US banking stocks: Short them or stay away?
I'm doing neither. I am watching. They're down a whole lot.
US bonds: Short them or stay away?
I'm doing neither right now. My next move will probably be to sell them short.
In Asia: Sri Lankan stocks or Indian equities?
I'd rather buy Sri Lanka than India.
Chinese stocks or Indian stocks?
I'm not buying either at the moment. I don't own any Indian stocks. I own Chinese shares which I am not selling. The Indian... I wouldn't buy either.
Gold or silver?
I'd rather buy silver today. I own both and I'm not selling either.
15 June 2009
Only Green shoots are bamboo, apparently
In April, China announced that it purchased 454 metric tons of gold over the past six years. However, gold isn’t the only metal the Chinese have been buying. According to Michael Gaylard of Freight Investor Services, “They are building up some stockpiles right across the commodity spectrum, from base metals to coal.”
China is taking advantage of the low commodity prices to scoop up bargains. The nation has been buying so much copper that the market slipped into a deficit in February, drawing down stockpiles, as average mine utilization fell 9%. Iron ore imports were up 33% in April, to a record 57 million metric tons. Chinese purchasers visited Mozambique in May to lock in deals for base metals like aluminum. The nation just finalized a $9 billion deal with the Democratic Republic of Congo to develop copper and cobalt mines in exchange for infrastructure projects like roads, schools and hospitals. Recently thwarted in its attempts to invest in Rio Tinto, China has reached an agreement to acquire an Australian miner, Oz Minerals.
In addition to coal, China is assuring its access to adequate energy supplies. The nation increased its oil imports 13.6% in April. The government also awarded a US$25 billion loan to two Russian energy companies to lock in 300,000 barrels of crude per day for 20 years. This is part of the Chinese strategy to increase its crude stockpiles from about 30 days of use to 90-100 days supply.
China is not neglecting its need to secure food stores, either. The official Xinhua news agency is citing experts who recommend the nation accumulate 50 million metric tons of soybeans. The Chinese are purchasing tons of soybeans now, to try to avoid end of crop year rationing. Stockpiles are expected to run very low before the new crop is harvested in the fall, as Argentina’s harvest was much smaller than expected. Much higher prices are anticipated this summer.
Although soybeans have gained more than 46% since March, there is still room for appreciation. As of two weeks ago, Chinese soybeans cost more than $2 per bushel more than U.S. beans, so the backhaul and arbitrage makes it worthwhile to import this essential foodstuff.
I predicted tight supplies and Chinese purchases in my essay A Growing Problem, which was published on this website in December. That week, we saw a bottom in the grain complex, and the beginning of a robust rally in the CRB.
The Move to Real Assets
Readers of lemetropolecafe.com are already aware that back in April 2006 I formulated and publicized a theory that China was quietly shifting from dollar-denominated Treasury assets into commodity stockpiles. Their targets included especially copper and other metals, but also agricultural commodities. Peter Rhalter on the Café christened it the “China Hoard Theory.”
Through the years I have uncovered additional data to support my theory. I detailed the rotational model the Chinese use to purchase metals on the London Metal Exchange, allowing inventories to build and the price to fall. Once the commodity was cheap again and inventory was plentiful, China would rotate back to purchasing that metal. I articulated the backhaul shipping mechanism they used to cheaply ship heavy commodities back to China on the return voyages of ships loaded with consumer goods.
China’s public acknowledgement that it had secretly built gold reserves has opened eyes. This has now spurred important voices in the financial world to align with the China Hoard Theory, acknowledging a broader Chinese strategy to get out of the dollar and into real assets. The Royal Bank of Canada stated that “China is stockpiling commodities such as copper and iron ore as part of a reallocation of its sovereign wealth amid concern that the value of its dollar assets may decline.” In April, Ambrose Evans-Pritchard realized the folly of China's vendor financing with its customer America in a severe economic downturn. Also that month, Jim Puplava and Puru Saxena analyzed the Chinese desire to exchange paper promises for shrinking supplies of depleting minerals. Having correctly called China’s commodity strategy years ago is a great triumph for me as an analyst.
Other pundits have deprecated the commodity rebound, claiming that China is just spending stimulus money that will soon run out. However, I think this uptrend is more than an aberration. Instead of “green shoots” in the U.S. we are seeing bamboo shoots in Asia. Even with China having its worst year since 1992, its first quarter GDP grew 6.1% year-over-year, a strength other countries envy.
Industrial production was strong last month as well. Zapata George Blake notes that tire plants in China are running full shifts - a leading indicator of a rebound in auto manufacturing. This will continue to boost the price of related commodities like palladium, which made a recent high of $262, up 45% for the year.
Other measures corroborate a recovery in China. The CRB Index is up nearly 32% since its lows in December. The Baltic Dry Index, a measure of global shipping demand, reached 4,291 this week, more than six times its December low of 663, but still less than half its 2008 high. It smashed its 200 day moving average to the upside, and went nearly parabolic before correcting. This indicates higher demand as well as some loosening in the credit markets.
The resurgence in these indices, and the rise of U.S. stock markets on poor fundamentals is also signalling a resurgence of price inflation. The world’s central banks can’t flood the globe with liquidity in a move they euphemistically call qualitative easing without pushing the cost of goods much higher. The Federal Reserve is the globe’s worst offender in this area, swapping banks’ toxic assets for Treasuries which these financial institutions can use as collateral for other risky deals. With banks deemed “too big to fail,” the taxpayer is on the hook for any further losses, and the regulators do little to rein in excesses.
I believe that hyperinflation is sadly inevitable, so it’s wise to copy the Chinese. Make sure you have a heavy weighting in the precious metals, the safest assets of all. Then swap your excess dollars for real assets like nonperishable food and other necessities. Avoid leverage in all commodity investments, as the volatility can cause big losses if you are on margin.
http://www.financialsense.com/fsu/editorials/barry/2009/0612.html
China is taking advantage of the low commodity prices to scoop up bargains. The nation has been buying so much copper that the market slipped into a deficit in February, drawing down stockpiles, as average mine utilization fell 9%. Iron ore imports were up 33% in April, to a record 57 million metric tons. Chinese purchasers visited Mozambique in May to lock in deals for base metals like aluminum. The nation just finalized a $9 billion deal with the Democratic Republic of Congo to develop copper and cobalt mines in exchange for infrastructure projects like roads, schools and hospitals. Recently thwarted in its attempts to invest in Rio Tinto, China has reached an agreement to acquire an Australian miner, Oz Minerals.
In addition to coal, China is assuring its access to adequate energy supplies. The nation increased its oil imports 13.6% in April. The government also awarded a US$25 billion loan to two Russian energy companies to lock in 300,000 barrels of crude per day for 20 years. This is part of the Chinese strategy to increase its crude stockpiles from about 30 days of use to 90-100 days supply.
China is not neglecting its need to secure food stores, either. The official Xinhua news agency is citing experts who recommend the nation accumulate 50 million metric tons of soybeans. The Chinese are purchasing tons of soybeans now, to try to avoid end of crop year rationing. Stockpiles are expected to run very low before the new crop is harvested in the fall, as Argentina’s harvest was much smaller than expected. Much higher prices are anticipated this summer.
Although soybeans have gained more than 46% since March, there is still room for appreciation. As of two weeks ago, Chinese soybeans cost more than $2 per bushel more than U.S. beans, so the backhaul and arbitrage makes it worthwhile to import this essential foodstuff.
I predicted tight supplies and Chinese purchases in my essay A Growing Problem, which was published on this website in December. That week, we saw a bottom in the grain complex, and the beginning of a robust rally in the CRB.
The Move to Real Assets
Readers of lemetropolecafe.com are already aware that back in April 2006 I formulated and publicized a theory that China was quietly shifting from dollar-denominated Treasury assets into commodity stockpiles. Their targets included especially copper and other metals, but also agricultural commodities. Peter Rhalter on the Café christened it the “China Hoard Theory.”
Through the years I have uncovered additional data to support my theory. I detailed the rotational model the Chinese use to purchase metals on the London Metal Exchange, allowing inventories to build and the price to fall. Once the commodity was cheap again and inventory was plentiful, China would rotate back to purchasing that metal. I articulated the backhaul shipping mechanism they used to cheaply ship heavy commodities back to China on the return voyages of ships loaded with consumer goods.
China’s public acknowledgement that it had secretly built gold reserves has opened eyes. This has now spurred important voices in the financial world to align with the China Hoard Theory, acknowledging a broader Chinese strategy to get out of the dollar and into real assets. The Royal Bank of Canada stated that “China is stockpiling commodities such as copper and iron ore as part of a reallocation of its sovereign wealth amid concern that the value of its dollar assets may decline.” In April, Ambrose Evans-Pritchard realized the folly of China's vendor financing with its customer America in a severe economic downturn. Also that month, Jim Puplava and Puru Saxena analyzed the Chinese desire to exchange paper promises for shrinking supplies of depleting minerals. Having correctly called China’s commodity strategy years ago is a great triumph for me as an analyst.
Other pundits have deprecated the commodity rebound, claiming that China is just spending stimulus money that will soon run out. However, I think this uptrend is more than an aberration. Instead of “green shoots” in the U.S. we are seeing bamboo shoots in Asia. Even with China having its worst year since 1992, its first quarter GDP grew 6.1% year-over-year, a strength other countries envy.
Industrial production was strong last month as well. Zapata George Blake notes that tire plants in China are running full shifts - a leading indicator of a rebound in auto manufacturing. This will continue to boost the price of related commodities like palladium, which made a recent high of $262, up 45% for the year.
Other measures corroborate a recovery in China. The CRB Index is up nearly 32% since its lows in December. The Baltic Dry Index, a measure of global shipping demand, reached 4,291 this week, more than six times its December low of 663, but still less than half its 2008 high. It smashed its 200 day moving average to the upside, and went nearly parabolic before correcting. This indicates higher demand as well as some loosening in the credit markets.
The resurgence in these indices, and the rise of U.S. stock markets on poor fundamentals is also signalling a resurgence of price inflation. The world’s central banks can’t flood the globe with liquidity in a move they euphemistically call qualitative easing without pushing the cost of goods much higher. The Federal Reserve is the globe’s worst offender in this area, swapping banks’ toxic assets for Treasuries which these financial institutions can use as collateral for other risky deals. With banks deemed “too big to fail,” the taxpayer is on the hook for any further losses, and the regulators do little to rein in excesses.
I believe that hyperinflation is sadly inevitable, so it’s wise to copy the Chinese. Make sure you have a heavy weighting in the precious metals, the safest assets of all. Then swap your excess dollars for real assets like nonperishable food and other necessities. Avoid leverage in all commodity investments, as the volatility can cause big losses if you are on margin.
http://www.financialsense.com/fsu/editorials/barry/2009/0612.html
20 May 2009
Commodities will recover first and then roar on demand and inflation
This is my position, Don Coxe, Rogers and all those who recognise that the supercycle in commodities was about normalisation of prices, not high prices, historically speaking...
What some call the 'Commodity Super Cycle' is a simple rebound from extreme devalorization of commodities as an asset class over nearly 20 years. The process is intensified by extremely fragile and unrealistic world currency values, within which the Euro is likely the weak link, being a de facto money of resource-depleted Europe, forced into circulation in too many countries, too late. The US dollar’s plight needs no commentary.
Due to the massive fossil energy intensity of the current global economy’s structure, and low appreciation of the critical need for energy transition away from fossil fuels, we can be sure that near-term limits to world oil and natural gas supply capacity will have a strong impact on relative asset value sorting in a generally inflationary context. Even using IEA published data, world oil supply capacity could fall as much as 25 Mbd from now to 2025. Any small net increase in supply would need heroic investments, estimated by the IEA at about 26 000 Bn USD through less than 20 years. If we took an optimistic approach on the decline of world oil export supply or 'offer' from 2010, and assumed that net supply fell at a rate of 4% or 5% annual, perhaps due to energy saving and substitution programs in exporter countries (which at present is unlikely), this would translate to a long-term net annual decline in world export supply at well over 2.5 Mbd. This is close to German or South Korean oil import demand. Two years at this loss rate, would equal a little less than Japan's total import needs.
It is not difficult to identify what impact real structural undersupply will have on traded oil prices. The waiting period will be short. Oil prices can only show a massive rebound from almost the moment there is any sign of global economic recovery. The knock-on effect of higher energy prices on food prices will be rapid, as was shown in 2007-2008. This in turn and already poses a serious threat to the duration of sustainability of any global economic recovery, while also helping to rekindle inflation.
To be sure, this should also rekindle interest in Renewable Energy and Cleantech investing, itself a now highly financiarized asset sector, exposed to exactly the same tensions and volatility as 'mainstream' equities and other traded assets. The certain near-term return of Oil Crisis should however not mask the other resource-linked facets of the depletion crisis facing the straight majority of real resources – including the nominally renewable bioresources.
Raching its peak in the slow-growing real economy of the 1990s, an apparent oversupply of energy and natural resources helped push down the baseline for commodities relative to all other asset classes, in some cases to historic lows. This has dangerously masked the real, almost reverse video picture of hard asset production, supply and therefore price outlooks. To be sure, this ‘resource pinch’ is intensified by the extremely classic and conventional Henry Ford-style economic takeoff of the Emerging Economies. We therefore face accelerating depletion of key natural resources, plus structural resource-limiting factors like climate change and population growth.
Asset Value correlation
As already noted, the neat two-part division of hard asset commodities into ‘renewable’ and ‘non-renewable’ breaks down under the onslaught of current-structure global economic growth. Through 2005-2007, running at around 5%pa in a world of about 6600 million consumers and potential consumers, the pressure on real resource supply was easy to demonstrate. Conversely, equity and derived paper assets can be created in an electronic eyeblink, grow with little constraint, and avoid the problem of credibility as long as there is some growth of the ‘underlying security- - the global economy.
The unrealistic hopes embedded in the fragile ‘Chindia decoupling theory’ are based on the mirage of Decoupled Emerging Economy Growth at near double-digit annual average percentage rates, perhaps for 15 or 20 years, or more. In fact, this poses essentially impossible challenges for commodities production and supply. This concerns the near-term real world future, not some mythic Keynes-type long-term ‘when we are all dead’.
As noted above, there are decreasing numbers of ‘firewalls’ between the two theoretically-distinct asset classes inside the commodities sphere (i.e. renewable and non-renewable), as well as between Equities and Commodities. Due to present structure global economic growth, this trend is self-reinforcing. Thus price correlation and linkage, both inside the asset classes as well as between, is a strong real world trend. This again clearly supports the argument for near-term and possibly extreme of most Commodity prices.
This ‘re-linkage’ or new correlation can be observed with almost any real resource commodity. One example is the ags and softs, specially the grains and oilseeds, simply due to the 2005-2007 biofuels boom and slump. This left behind the price linkage of oil with food, but not the massive amounts of biofuels promised by various leaders, such as the RFS program of G W Bush. One major supply-side cause of this is the energy intensity of current agroindustrial production techniques, downstream processing, and transport of these commodities. For sugar and corn ethanol, and soybean or rapeseed biodiesel production, this’ energy price linkage’ is now powerful, providing another quick acting transmission vector for inflationary contagion within the real resources space.
To be sure there is considerable resistance on the part of economic and political deciders, but increasing reactivity and transparence in the pricing system, to pass-through upstream and absolute price rises for energy and food commodities. In other words this means there is now the certainty of ‘dam breaker’ surges in energy, food and fiber prices at the consumer level, both in OECD and in other countries. This sets the likely timeframe for a very sharp upturn in OECD country inflation, and fast growth of Commodity prices, to the near-term, probably Q2 2009 – Q2 2010. Prospects for the majority of real resource prices, as we noted in this article, include nearly stepwise upward change. Whenever there is clear break in price trends for Equities relative to Commodities – signaling deconvergence – this upward movement is likely to amplify and reinforce itself. This may start in Q3-Q4 2009.
span>
http://www.financialsense.com/editorials/mckillop/2009/0519.html
What some call the 'Commodity Super Cycle' is a simple rebound from extreme devalorization of commodities as an asset class over nearly 20 years. The process is intensified by extremely fragile and unrealistic world currency values, within which the Euro is likely the weak link, being a de facto money of resource-depleted Europe, forced into circulation in too many countries, too late. The US dollar’s plight needs no commentary.
Due to the massive fossil energy intensity of the current global economy’s structure, and low appreciation of the critical need for energy transition away from fossil fuels, we can be sure that near-term limits to world oil and natural gas supply capacity will have a strong impact on relative asset value sorting in a generally inflationary context. Even using IEA published data, world oil supply capacity could fall as much as 25 Mbd from now to 2025. Any small net increase in supply would need heroic investments, estimated by the IEA at about 26 000 Bn USD through less than 20 years. If we took an optimistic approach on the decline of world oil export supply or 'offer' from 2010, and assumed that net supply fell at a rate of 4% or 5% annual, perhaps due to energy saving and substitution programs in exporter countries (which at present is unlikely), this would translate to a long-term net annual decline in world export supply at well over 2.5 Mbd. This is close to German or South Korean oil import demand. Two years at this loss rate, would equal a little less than Japan's total import needs.
It is not difficult to identify what impact real structural undersupply will have on traded oil prices. The waiting period will be short. Oil prices can only show a massive rebound from almost the moment there is any sign of global economic recovery. The knock-on effect of higher energy prices on food prices will be rapid, as was shown in 2007-2008. This in turn and already poses a serious threat to the duration of sustainability of any global economic recovery, while also helping to rekindle inflation.
To be sure, this should also rekindle interest in Renewable Energy and Cleantech investing, itself a now highly financiarized asset sector, exposed to exactly the same tensions and volatility as 'mainstream' equities and other traded assets. The certain near-term return of Oil Crisis should however not mask the other resource-linked facets of the depletion crisis facing the straight majority of real resources – including the nominally renewable bioresources.
Raching its peak in the slow-growing real economy of the 1990s, an apparent oversupply of energy and natural resources helped push down the baseline for commodities relative to all other asset classes, in some cases to historic lows. This has dangerously masked the real, almost reverse video picture of hard asset production, supply and therefore price outlooks. To be sure, this ‘resource pinch’ is intensified by the extremely classic and conventional Henry Ford-style economic takeoff of the Emerging Economies. We therefore face accelerating depletion of key natural resources, plus structural resource-limiting factors like climate change and population growth.
Asset Value correlation
As already noted, the neat two-part division of hard asset commodities into ‘renewable’ and ‘non-renewable’ breaks down under the onslaught of current-structure global economic growth. Through 2005-2007, running at around 5%pa in a world of about 6600 million consumers and potential consumers, the pressure on real resource supply was easy to demonstrate. Conversely, equity and derived paper assets can be created in an electronic eyeblink, grow with little constraint, and avoid the problem of credibility as long as there is some growth of the ‘underlying security- - the global economy.
The unrealistic hopes embedded in the fragile ‘Chindia decoupling theory’ are based on the mirage of Decoupled Emerging Economy Growth at near double-digit annual average percentage rates, perhaps for 15 or 20 years, or more. In fact, this poses essentially impossible challenges for commodities production and supply. This concerns the near-term real world future, not some mythic Keynes-type long-term ‘when we are all dead’.
As noted above, there are decreasing numbers of ‘firewalls’ between the two theoretically-distinct asset classes inside the commodities sphere (i.e. renewable and non-renewable), as well as between Equities and Commodities. Due to present structure global economic growth, this trend is self-reinforcing. Thus price correlation and linkage, both inside the asset classes as well as between, is a strong real world trend. This again clearly supports the argument for near-term and possibly extreme of most Commodity prices.
This ‘re-linkage’ or new correlation can be observed with almost any real resource commodity. One example is the ags and softs, specially the grains and oilseeds, simply due to the 2005-2007 biofuels boom and slump. This left behind the price linkage of oil with food, but not the massive amounts of biofuels promised by various leaders, such as the RFS program of G W Bush. One major supply-side cause of this is the energy intensity of current agroindustrial production techniques, downstream processing, and transport of these commodities. For sugar and corn ethanol, and soybean or rapeseed biodiesel production, this’ energy price linkage’ is now powerful, providing another quick acting transmission vector for inflationary contagion within the real resources space.
To be sure there is considerable resistance on the part of economic and political deciders, but increasing reactivity and transparence in the pricing system, to pass-through upstream and absolute price rises for energy and food commodities. In other words this means there is now the certainty of ‘dam breaker’ surges in energy, food and fiber prices at the consumer level, both in OECD and in other countries. This sets the likely timeframe for a very sharp upturn in OECD country inflation, and fast growth of Commodity prices, to the near-term, probably Q2 2009 – Q2 2010. Prospects for the majority of real resource prices, as we noted in this article, include nearly stepwise upward change. Whenever there is clear break in price trends for Equities relative to Commodities – signaling deconvergence – this upward movement is likely to amplify and reinforce itself. This may start in Q3-Q4 2009.
span>
http://www.financialsense.com/editorials/mckillop/2009/0519.html
3 May 2009
China Shows the World How to Get Through a Crisis
By Jim O’Neill, FINANCIAL TIMES
Call me mad but this crisis is good for China. It is also good for China’s role and responsibilities in the world.
Yesterday, we upgraded our gross domestic product forecasts for China for 2009 and 2010; we are now looking for 8.3 and 10.9 per cent, respectively, up from 6 and 9 per cent.
Why the optimism? It was clear that the massive rise in exports, the mainstay of the China growth model until 2008, was not sustainable. At one stage in late 2007, Chinese exports to the US alone were about 12 per cent of total GDP. This meant that exports would suffer badly in the event of something going wrong with demand in the US, and the risk of a protectionist backlash.
This led some of us to expect an end to the fixed Rmb8.28 exchange rate to the dollar and a gradual shift to a more flexible, stronger exchange rate a few years ago.
Fast-forward to the crisis. When this intensified post-Lehman, global trade suffered enormously and quickly, and it was clear that Chinese growth would suffer. It was also reasonably clear that, just as they did in response to the Asian crisis in 1997, Chinese policymakers would react swiftly and shift gears. That they have done.
Three policy initiatives stand out, and the results are starting to bear fruit, hence our upgraded forecasts.
First, in November the authorities announced massive fiscal expansion, centred on fresh infrastructure spending. While my industry has quibbled about its true size ever since, this misses the point. The statement of intent was clear; interestingly, the stock market noticed and has rallied since.
Second, and ultimately perhaps the most important development in the world economy, the government announced plans to develop a full medical insurance policy for the still vast rural community, the beginnings of which it plans to have fully implemented for 90 per cent of the rural community by 2011. This could result in an end to the excessively high Chinese savings rate and allow much stronger consumption.
Third, and critical to our forecast upgrade, the authorities, led by the People’s Bank of China, embarked on a timely reversal of tightening financial conditions of the previous two years. According to our Chinese financial conditions index, conditions have eased a huge 520 basis points since last October.
These three measures have set the scene for an acceleration of Chinese domestic demand for the rest of 2009 and 2010, just the right recipe for China and, critically, the world.
The next stage of China’s development has started and is likely to go on for years. It was partly in anticipation of this that we highlighted owning China "A" shares as one of our most favoured trades for 2009. As they have risen 50 per cent since the November stimulus announcement, the entry point is now less attractive but, as evidence of rising demand accumulates, many investors are rightly going to be attracted back to China.
The "C" in the Bric economies (Brazil, Russia, India, China) has always been the most important of the four and the events of the past five months continue to justify our excitement for the longer term.
Amusingly, in the past year many people have suggested that the Brics story is over. Nonsense - it is still in its infancy. Indeed, the updated longer-term projections we published last summer, suggesting that China could overtake the US by 2027 and that the Brics collectively could be as big as the G7 by 2027, still look decent bets to me.
At some stage in the coming months, once it becomes clear that Chinese GDP growth is safely back above 8 per cent, policymakers will allow for some tightening of financial conditions again, possibly led by the exchange rate.
In the next two years, China is very likely to overtake Japan to become the second-largest economy in the world. Some say that China might get old before it gets rich, but it is getting bigger and richer, that is for sure. One or two of its ageing G20 partners may wish to take a closer look at Chinese economic policy to see how it’s done.
INDIA
The Indian stock market has been doing well after the Satyam scandal. Now, the elections are underway and results will be made public May 16th. Some investors will wait until after the national elections to make sure the probable coalition government will be effective. If the parties on the left, the Marxists, communists, etc. are included, you could have an ineffectual government which could result in a market setback.
COMMODITIES
The U.S. Federal Reserve has tripled the size of its balance sheet in recent months. Deficits in the U.S., Japan, and Europe are at record percentages of GDP. This, plus the big money supply expansion in many parts of the world, both argue strongly for a resurgence of inflation, most probably by the second half of 2010.
Stock markets are discounting mechanisms. One need only look at the current stock market rally worldwide, while world economies continue to weaken, to see that they are discounting a recovery. Is the recovery one year away? Two years? The market thinks it is more likely 12 to 18 months. In any case, the eventual resurgence of inflation is good for commodities, especially gold, agriculture, and oil. We believe that the recovery will include a slow growing, but stable economy for a few years in the developed world, and steady growth in China, India, and a few other countries.
GOLD
Who holds the gold? Recently announced numbers show that China has upped their gold holdings to over 1,000 tons, making them #5, after the U.S., Germany, France, and Italy. India is #10. China’s recent announcement that they had increased their gold holdings indicates once again China’s efforts to strategically position themselves to be a leader in the community of nations. Remember the old cliché about the golden rule? He who holds the gold makes the rules.
http://www.learntotradefutures.com/dcforum/DCForumID27/693.html
Call me mad but this crisis is good for China. It is also good for China’s role and responsibilities in the world.
Yesterday, we upgraded our gross domestic product forecasts for China for 2009 and 2010; we are now looking for 8.3 and 10.9 per cent, respectively, up from 6 and 9 per cent.
Why the optimism? It was clear that the massive rise in exports, the mainstay of the China growth model until 2008, was not sustainable. At one stage in late 2007, Chinese exports to the US alone were about 12 per cent of total GDP. This meant that exports would suffer badly in the event of something going wrong with demand in the US, and the risk of a protectionist backlash.
This led some of us to expect an end to the fixed Rmb8.28 exchange rate to the dollar and a gradual shift to a more flexible, stronger exchange rate a few years ago.
Fast-forward to the crisis. When this intensified post-Lehman, global trade suffered enormously and quickly, and it was clear that Chinese growth would suffer. It was also reasonably clear that, just as they did in response to the Asian crisis in 1997, Chinese policymakers would react swiftly and shift gears. That they have done.
Three policy initiatives stand out, and the results are starting to bear fruit, hence our upgraded forecasts.
First, in November the authorities announced massive fiscal expansion, centred on fresh infrastructure spending. While my industry has quibbled about its true size ever since, this misses the point. The statement of intent was clear; interestingly, the stock market noticed and has rallied since.
Second, and ultimately perhaps the most important development in the world economy, the government announced plans to develop a full medical insurance policy for the still vast rural community, the beginnings of which it plans to have fully implemented for 90 per cent of the rural community by 2011. This could result in an end to the excessively high Chinese savings rate and allow much stronger consumption.
Third, and critical to our forecast upgrade, the authorities, led by the People’s Bank of China, embarked on a timely reversal of tightening financial conditions of the previous two years. According to our Chinese financial conditions index, conditions have eased a huge 520 basis points since last October.
These three measures have set the scene for an acceleration of Chinese domestic demand for the rest of 2009 and 2010, just the right recipe for China and, critically, the world.
The next stage of China’s development has started and is likely to go on for years. It was partly in anticipation of this that we highlighted owning China "A" shares as one of our most favoured trades for 2009. As they have risen 50 per cent since the November stimulus announcement, the entry point is now less attractive but, as evidence of rising demand accumulates, many investors are rightly going to be attracted back to China.
The "C" in the Bric economies (Brazil, Russia, India, China) has always been the most important of the four and the events of the past five months continue to justify our excitement for the longer term.
Amusingly, in the past year many people have suggested that the Brics story is over. Nonsense - it is still in its infancy. Indeed, the updated longer-term projections we published last summer, suggesting that China could overtake the US by 2027 and that the Brics collectively could be as big as the G7 by 2027, still look decent bets to me.
At some stage in the coming months, once it becomes clear that Chinese GDP growth is safely back above 8 per cent, policymakers will allow for some tightening of financial conditions again, possibly led by the exchange rate.
In the next two years, China is very likely to overtake Japan to become the second-largest economy in the world. Some say that China might get old before it gets rich, but it is getting bigger and richer, that is for sure. One or two of its ageing G20 partners may wish to take a closer look at Chinese economic policy to see how it’s done.
INDIA
The Indian stock market has been doing well after the Satyam scandal. Now, the elections are underway and results will be made public May 16th. Some investors will wait until after the national elections to make sure the probable coalition government will be effective. If the parties on the left, the Marxists, communists, etc. are included, you could have an ineffectual government which could result in a market setback.
COMMODITIES
The U.S. Federal Reserve has tripled the size of its balance sheet in recent months. Deficits in the U.S., Japan, and Europe are at record percentages of GDP. This, plus the big money supply expansion in many parts of the world, both argue strongly for a resurgence of inflation, most probably by the second half of 2010.
Stock markets are discounting mechanisms. One need only look at the current stock market rally worldwide, while world economies continue to weaken, to see that they are discounting a recovery. Is the recovery one year away? Two years? The market thinks it is more likely 12 to 18 months. In any case, the eventual resurgence of inflation is good for commodities, especially gold, agriculture, and oil. We believe that the recovery will include a slow growing, but stable economy for a few years in the developed world, and steady growth in China, India, and a few other countries.
GOLD
Who holds the gold? Recently announced numbers show that China has upped their gold holdings to over 1,000 tons, making them #5, after the U.S., Germany, France, and Italy. India is #10. China’s recent announcement that they had increased their gold holdings indicates once again China’s efforts to strategically position themselves to be a leader in the community of nations. Remember the old cliché about the golden rule? He who holds the gold makes the rules.
http://www.learntotradefutures.com/dcforum/DCForumID27/693.html
16 April 2009
A 'Copper Standard' for the world's currency system?
Hard-money enthusiasts have long watched for signs that China is switching its foreign reserves from US Treasury bonds into gold bullion. They may have been eyeing the wrong metal.
China's State Reserves Bureau (SRB) has instead been buying copper and other industrial metals over recent months on a scale that appears to go beyond the usual rebuilding of stocks for commercial reasons.
Nobu Su, head of Taiwan's TMT group, which ships commodities to China, said Beijing is trying to extricate itself from dollar dependency as fast as it can.
"China has woken up. The West is a black hole with all this money being printed. The Chinese are buying raw materials because it is a much better way to use their $1.9 trillion of reserves. They get 10 times the impact, and can cover their infrastructure for 50 years."
"The next industrial revolution is going to be led by hybrid cars, and that needs copper. You can see the subtle way that China is moving into 30 or 40 countries with resources," he said.
The SRB has also been accumulating aluminium, zinc, nickel, and rarer metals such as titanium, indium (thin-film technology), rhodium (catalytic converters), and praseodymium (glass).
While it makes sense for China to take advantage of last year's commodity crash to restock cheaply, there is clearly more behind the move. "They are definitely buying metals to diversify out of US Treasuries and dollar holdings," said Jim Lennon, head of commodities at Macquarie Bank.
John Reade, metals chief at UBS, said Beijing may have a made strategic decision to stockpile metal as an alternative to foreign bonds. "We're very surprised by Chinese demand. They are buying much more copper than they will need this year. If this is strategic, there may be no effective limit on the purchases as China's pockets are deep."
Zhou Xiaochuan, the central bank governor, piqued the interest of metal buffs last month by calling for a world currency modelled on the "Bancor," floated by John Maynard Keynes at Bretton Woods in 1944.
The Bancor was to be anchored on 30 commodities -- a broader base than the gold standard, which had caused so much grief in the 1930s. Mr Zhou said such a currency would prevent the sort of "credit-based" excess that has brought the global finance to its knees.
If his thoughts reflect Communist Party thinking, it would explain the bizarre moves in commodity markets over recent weeks. Copper prices have surged 49 percent this year to $4,925 a tonne despite estimates by the CRU copper group that world demand will fall 15 to 20 percent this year as construction wilts.
Analysts say "short covering" by funds betting on price falls has played a role. But the jump is largely due to Chinese imports, which reached a record 329,000 tonnes in February and a further 375,000 tonnes in March. Chinese industrial demand cannot explain this. China has been badly hit by global recession. Its exports -- almost half GDP -- fell 17 percent in March.
While Beijing's fiscal stimulus package and credit expansion have helped lift demand, China faces a property downturn of its own. One government adviser warned this week that house prices could fall 50 percent.
One thing is clear: Beijing suspects that the US Federal Reserve is engineering a covert default on America's debt by printing money. Premier Wen Jiabao issued a blunt warning last month that China was tiring of US bonds. "We have lent a huge amount of money to the US, so of course we are concerned about the safety of our assets," he said.
This is slightly disingenuous. China has the world's largest reserves -- $1.95 trillion, mostly in dollars -- because it has been holding down the yuan to boost exports. This mercantilist strategy has reached its limits.
The beauty of recycling China's surplus into metals instead of US bonds is that it kills so many birds with one stone: It stops the yuan rising without provoking complaints of currency manipulation by Washington; metals are easily stored in warehouses, unlike oil; and the holdings are likely to rise in value over time since the earth's crust is gradually depleting its accessible ores. Above all, such a policy safeguards China's industrial revolution, while the West may one day face a supply crisis.
Beijing may yet buy gold as well, although it has not done so yet. The gold share of reserves has fallen to 1 percent, far below the historic norm in Asia. But if a metal-based currency ever emerges to end the reign of fiat paper, it is just as likely to be a copper standard as a gold standard.
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/5160120/A-Copper-Standard-for-the-worlds-currency-system.html
China's State Reserves Bureau (SRB) has instead been buying copper and other industrial metals over recent months on a scale that appears to go beyond the usual rebuilding of stocks for commercial reasons.
Nobu Su, head of Taiwan's TMT group, which ships commodities to China, said Beijing is trying to extricate itself from dollar dependency as fast as it can.
"China has woken up. The West is a black hole with all this money being printed. The Chinese are buying raw materials because it is a much better way to use their $1.9 trillion of reserves. They get 10 times the impact, and can cover their infrastructure for 50 years."
"The next industrial revolution is going to be led by hybrid cars, and that needs copper. You can see the subtle way that China is moving into 30 or 40 countries with resources," he said.
The SRB has also been accumulating aluminium, zinc, nickel, and rarer metals such as titanium, indium (thin-film technology), rhodium (catalytic converters), and praseodymium (glass).
While it makes sense for China to take advantage of last year's commodity crash to restock cheaply, there is clearly more behind the move. "They are definitely buying metals to diversify out of US Treasuries and dollar holdings," said Jim Lennon, head of commodities at Macquarie Bank.
John Reade, metals chief at UBS, said Beijing may have a made strategic decision to stockpile metal as an alternative to foreign bonds. "We're very surprised by Chinese demand. They are buying much more copper than they will need this year. If this is strategic, there may be no effective limit on the purchases as China's pockets are deep."
Zhou Xiaochuan, the central bank governor, piqued the interest of metal buffs last month by calling for a world currency modelled on the "Bancor," floated by John Maynard Keynes at Bretton Woods in 1944.
The Bancor was to be anchored on 30 commodities -- a broader base than the gold standard, which had caused so much grief in the 1930s. Mr Zhou said such a currency would prevent the sort of "credit-based" excess that has brought the global finance to its knees.
If his thoughts reflect Communist Party thinking, it would explain the bizarre moves in commodity markets over recent weeks. Copper prices have surged 49 percent this year to $4,925 a tonne despite estimates by the CRU copper group that world demand will fall 15 to 20 percent this year as construction wilts.
Analysts say "short covering" by funds betting on price falls has played a role. But the jump is largely due to Chinese imports, which reached a record 329,000 tonnes in February and a further 375,000 tonnes in March. Chinese industrial demand cannot explain this. China has been badly hit by global recession. Its exports -- almost half GDP -- fell 17 percent in March.
While Beijing's fiscal stimulus package and credit expansion have helped lift demand, China faces a property downturn of its own. One government adviser warned this week that house prices could fall 50 percent.
One thing is clear: Beijing suspects that the US Federal Reserve is engineering a covert default on America's debt by printing money. Premier Wen Jiabao issued a blunt warning last month that China was tiring of US bonds. "We have lent a huge amount of money to the US, so of course we are concerned about the safety of our assets," he said.
This is slightly disingenuous. China has the world's largest reserves -- $1.95 trillion, mostly in dollars -- because it has been holding down the yuan to boost exports. This mercantilist strategy has reached its limits.
The beauty of recycling China's surplus into metals instead of US bonds is that it kills so many birds with one stone: It stops the yuan rising without provoking complaints of currency manipulation by Washington; metals are easily stored in warehouses, unlike oil; and the holdings are likely to rise in value over time since the earth's crust is gradually depleting its accessible ores. Above all, such a policy safeguards China's industrial revolution, while the West may one day face a supply crisis.
Beijing may yet buy gold as well, although it has not done so yet. The gold share of reserves has fallen to 1 percent, far below the historic norm in Asia. But if a metal-based currency ever emerges to end the reign of fiat paper, it is just as likely to be a copper standard as a gold standard.
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/5160120/A-Copper-Standard-for-the-worlds-currency-system.html
15 April 2009
Commodity supercycle thesis remains solid
Most prices for commodities are merely correcting there first massive upleg of a bull market that will be driven by infrastructure spends and chinese financed infrastructure in the third world, my contrarian viewpoint it looks as though things are lining up for the commodity market to regain momentum and continue in its secular bull. While the relative decline of the West is baked in the cake, the long term preasures of demand, future putative supply destruction due to the credit crunch, I would expect stronger commodity prices going forward. Kevin(New Kontent).
Zeal look at the case for copper..
"From a macro perspective copper, and commodities as a whole, will be long-term beneficiaries of the staggering inflationary actions of the world’s governments. Not only is there a massive pipeline of stimulus projects that will directly benefit the infrastructure build out, but rampant and careless monetary policies that have been set into motion will be a huge boon for commodities prices.
We also cannot forget where demand growth will come from in the future. Though this recession has slowed growth from the developing economies in Asia, these countries still have a long ways to go in their strategic development plans.
For example the Indian government says its recently completed fiscal year should see growth around 7%. And even with the current economic calamity it sees growth in the next year exceeding 5%. Moving to the northeast, according to one of China’s largest banks this growing economic powerhouse should see 2009 GDP growth of around 8%.
Interestingly the China Geological Survey is actually worried about commodities production shortfalls in 2009. And this has been evident in 2009’s activity so far at the Shanghai Futures Exchange. The SHFE saw record copper gains in Q1 as the metal has been trading at a premium to the LME in order to encourage producers to ship more copper to China.
Though China and India see growth at less than 10% in 2009, it is growth nonetheless and a lot of this will come in the form of infrastructure growth. China in particular has shouldered a larger portion of copper demand of recent, but when demand eventually picks back up in the rest of the world there will be fierce competition for what is likely to be a shrinking copper supply.
With copper near multi-year lows and demand growth slowing a bit, it is natural that the miners will eventually throttle back production. Production cutbacks are usually lagging and reactionary events in response to shifts in demand. And this is why we are seeing global stockpiles on the rise.
But many of the world’s top copper miners have already adjusted 2009 production forecasts to the downside. Some of these cutbacks are voluntary as a means to conserve copper for when prices and demand are higher. But some of these cutbacks are forced as a result of waning economics.
From mid-2005 to mid-2008 copper averaged over $3, thus prompting aggressive industry-wide exploration and development programs. These high prices also allowed the producers to profitably mine lower-grade ore within the confines of existing operations as well as bring past-producing mines back to life.
But these lower-grade, thus higher cost, operations and development projects that were economically feasible at higher copper prices are now losers. Production cutbacks, mine closures, and the scrapping of now-uneconomical exploration and development projects will eventually translate into materially lower mine production. Supply will eventually shrink enough to balance demand, even if demand stays weak for an extended period of time.
Regardless of where this balance is met, I believe copper has seen its low. And investors and speculators have taken advantage of this wildly oversold environment to reap fantastic gains as the markets bounce back to reality. As mentioned the futures traders have seen the metal pop 50%+ since the beginning of the year. But stock traders have fared even better.
By the time the dust settled at the initial panic low in November, the copper miners had leveraged copper’s losses to the downside in a big way. Even the world’s largest copper stocks had sold off by 80% or so from their highs. As mentioned earlier investors had discounted an apocalyptic ending to the commodities trade and sold their shares with reckless abandon. But in hindsight this November stock-market low was the time to load up on commodities stocks, especially copper stocks.
After coming to the brilliant conclusion that the world wasn’t coming to an end and we weren’t entering into the next Great Depression, buyers returned to commodities stocks and took advantage of their wildly oversold levels.
Copper stocks in particular have been among the best performers in the entire markets in the last 4+ months. Many have already seen triple-digit gains from their bottoms in the midst of an S&P 500 grind that had seen new lows set just last month."
Charts and data
Zeal look at the case for copper..
"From a macro perspective copper, and commodities as a whole, will be long-term beneficiaries of the staggering inflationary actions of the world’s governments. Not only is there a massive pipeline of stimulus projects that will directly benefit the infrastructure build out, but rampant and careless monetary policies that have been set into motion will be a huge boon for commodities prices.
We also cannot forget where demand growth will come from in the future. Though this recession has slowed growth from the developing economies in Asia, these countries still have a long ways to go in their strategic development plans.
For example the Indian government says its recently completed fiscal year should see growth around 7%. And even with the current economic calamity it sees growth in the next year exceeding 5%. Moving to the northeast, according to one of China’s largest banks this growing economic powerhouse should see 2009 GDP growth of around 8%.
Interestingly the China Geological Survey is actually worried about commodities production shortfalls in 2009. And this has been evident in 2009’s activity so far at the Shanghai Futures Exchange. The SHFE saw record copper gains in Q1 as the metal has been trading at a premium to the LME in order to encourage producers to ship more copper to China.
Though China and India see growth at less than 10% in 2009, it is growth nonetheless and a lot of this will come in the form of infrastructure growth. China in particular has shouldered a larger portion of copper demand of recent, but when demand eventually picks back up in the rest of the world there will be fierce competition for what is likely to be a shrinking copper supply.
With copper near multi-year lows and demand growth slowing a bit, it is natural that the miners will eventually throttle back production. Production cutbacks are usually lagging and reactionary events in response to shifts in demand. And this is why we are seeing global stockpiles on the rise.
But many of the world’s top copper miners have already adjusted 2009 production forecasts to the downside. Some of these cutbacks are voluntary as a means to conserve copper for when prices and demand are higher. But some of these cutbacks are forced as a result of waning economics.
From mid-2005 to mid-2008 copper averaged over $3, thus prompting aggressive industry-wide exploration and development programs. These high prices also allowed the producers to profitably mine lower-grade ore within the confines of existing operations as well as bring past-producing mines back to life.
But these lower-grade, thus higher cost, operations and development projects that were economically feasible at higher copper prices are now losers. Production cutbacks, mine closures, and the scrapping of now-uneconomical exploration and development projects will eventually translate into materially lower mine production. Supply will eventually shrink enough to balance demand, even if demand stays weak for an extended period of time.
Regardless of where this balance is met, I believe copper has seen its low. And investors and speculators have taken advantage of this wildly oversold environment to reap fantastic gains as the markets bounce back to reality. As mentioned the futures traders have seen the metal pop 50%+ since the beginning of the year. But stock traders have fared even better.
By the time the dust settled at the initial panic low in November, the copper miners had leveraged copper’s losses to the downside in a big way. Even the world’s largest copper stocks had sold off by 80% or so from their highs. As mentioned earlier investors had discounted an apocalyptic ending to the commodities trade and sold their shares with reckless abandon. But in hindsight this November stock-market low was the time to load up on commodities stocks, especially copper stocks.
After coming to the brilliant conclusion that the world wasn’t coming to an end and we weren’t entering into the next Great Depression, buyers returned to commodities stocks and took advantage of their wildly oversold levels.
Copper stocks in particular have been among the best performers in the entire markets in the last 4+ months. Many have already seen triple-digit gains from their bottoms in the midst of an S&P 500 grind that had seen new lows set just last month."
Charts and data
28 March 2009
2009 Outlook: Commodities
2009 Outlook - Commodities
The first thing we must understand when viewing this sector is the fact that commodities and precious metals went through a 25-year SECULAR BEAR MARKET, which ended in a double bottom that was formed between 1998 and December 2001. Just in time, inventories and international shipping severely reduced the need to hold inventory. Every bit of excess capacity and stockpiles were virtually eliminated worldwide. I have created a MONTHLY chart of the continuous commodity index going back to the 1976 period to emphasize the period where anyone who tried to build a commodity business was ground to dust as every rally was false, and expansion of supply was punished in the marketplace from 1980 through 2001:
1976 1980 1984 1988 1992 1996 2000 2004 2008
Please notice how the BULL market has corrected a Fibonacci .619 of its move off the 1998-2001 lows, which implies that we have just witnessed the first wave up of a 20 to 25-year SECULAR BULL MARKET (and the first corrective wave down of the bull move), and when it turns higher and gives a buy signal, we are most probably staring at the next leg up in commodities directly ahead. The creation of commodity and energy supply is a long process, usually taking 5 to 10 years, and whatever capacity was being built up until the credit crisis began has now been shut down. So, very few new sources of commodities can be expected to emerge. Oil supplies are falling almost 10% a year; a rate faster than the rate of decline in demand.
After the relentless secular bear market and base building period, population growth and the emergence of the BRICS (Brazil, Russia, India, China), as G7 deindustrialization and new found capitalist economies based on Austrian economics, created rising incomes and middle classes in many formally impoverished regions. These societies are based on SAVINGS (as they know the government is good for nothing), producing more than you consume (as not to do so leads to personal demise), and the work ethic to provide a better future for their children. Wealth creation is alive and well in the emerging world. Once they learn to “smell the roses” of their success and consume more (as they are doing daily), these societies will become the wealthiest in the world as the wealth of the world continues to rotate from the Western developed economies to the emerging world. Any historian can tell you this long pattern of wealth rotation has been in place for centuries.
There are BILLIONS of people emerging into higher standards of living, and they live in the MOST economically competitive areas of the world. They are masters of providing “MORE FOR LESS” to their customers, and thus will be the provider of choice for income-constrained western consumers. The formerly Austrian G7 capitalist economies have evolved into quasi-socialist asset-backed economies, where wealth is an illusion of misstated inflation of assets (which we now see reverting back to the real, not nominal values.) They now live in de-industrialized shells of their former economies, incapable of producing more than they consume and creating the savings necessary for rising middle classes and capital investment, which is the seed corn of future wealth.
So the governments of the G7 have resorted to what all empires do as they reach the end of their histories: borrow and print money to support their spending since wealth creation no longer does so. Gold is at or near a new high against every FIAT currency in the world and that is no coincidence. It is a reflection of the declining purchasing power of the currencies in which it is denominated. Take a look at these charts of world currencies and gold (courtesy of Mike Hewitt and www.dollardaze.org ) since 1971, when Breton Woods II forever tore G7 currencies from gold and silver reserve backing:
Thank you, Mike. Notice there is only one currency which has not lost purchasing power and that is the oldest currency in the world: GOLD. As the MONEY printing in the G7 accelerates to underpin the governments and financial systems, you can expect commodities to REPRICE higher to reflect the lower purchasing power of whatever currency in which it is denominated, putting additional buying power in them as investors increasingly seek shelter from the printing presses.
The temporary destruction of demand for commodities has been largely PRICED into commodity prices without disturbing the longer-term bull trend, caused by supply constraints which just recently began in 2001. You can count on the debasement of the G7 currencies to accelerate as investors and G7 currency holders increasingly shun buying paper that “melts in your hand and bank accounts” in favor of? The “Indirect Exchange” (as outlined by Ludwig von Mises) into the shelter provided by tangible assets, such as commodities, precious metals and raw materials. Look no further than the Chinese to see this in action, as they have embarked on a spending spree to rid themselves of the toxic G7 currencies and exchange them for tangibles of all stripes, including commodities.
In Conclusion: The G7 governments are at war with their citizens, only the citizens are largely unaware of it. Citizens have been dumbed down and the media spins the government line to dupe the public into believing that government is for them rather than against them in this period of time. The DARWINIAN struggle to survive and grow is now a showdown between the public sectors, government elites and special interests versus the private sectors and the public at large. As the governments increasingly DESTROY the ability to create wealth in the private sector, incomes have and will continue to collapse, as will tax receipts on the endless list of taxes and fees now imposed.
As these sources of income recede, the only options will be to borrow from future generations through treasury issuance to the central banks, aka “PRINTING THE MONEY”. Since there is this little timeless truth known by non-governmental economists as “there is no such thing as a free lunch”, we are headed toward the demise of the G7 financial systems. And of course, this does not include the FREE healthcare and new energy REGULATIONS and TAXES which they are about to impose.
On another note, FASBY 157, which mandates mark-to-market accounting, has succumbed to political pressure and has been eviscerated, effectively allowing the banks to misstate their assets values to models, rather than to market prices. So expect the losses to once again be HIDDEN from view and profits to appear when marked to model, i.e., lying with numbers with government approval. The profits are ILLUSIONS, courtesy of corrupt public serpents, banksters and now the accounting OVERSIGHT board. Insolvency is not cured with the stroke of a pen, it is fixed by NEW CAPITAL!
Look no further than recent LOUD outbursts by the G7’s largest creditors such as the Chinese, Russians, Indians and Brazilians, illustrating their dismay. They should, because when the debasement occurs, it is a theft of the purchasing power they store in G7 currencies and bonds. The rallies in stock indexes are nothing more than bounces in ongoing bear markets. Here is an analogue chart of the 4 biggest bear markets in history:
This is a powerful signpost of future price action. The only thing which may keep us from going to lows at the 3000 to 4000 level in the Dow is the rapidity of the monetary debasement process. Stocks are in many ways TANGIBLE investments and will re-price HIGHER to reflect the diminishing purchasing power of the currency in which they are priced. So the faster the G7 debases their currencies, the more buoyant NOMINAL prices will be. But don’t be fooled, they are declining in real terms “purchasing power” as this chart of the S&P 500 denominated in gold illustrates:
1980 1990 2000
Notice how the rally to new highs from 2002 to late 2007 DISAPPEARS when measured in REAL MONEY. That rally was an illusion of growth provided by FIAT currency and inflation. The true picture of the value of your stocks is displayed in this chart. If you look at bonds, the picture is WORSE…
I believe the recently unveiled public/private partnerships fail because the worth of the toxic assets is ZERO (this is what investors are willing to pay if not offered loans by the government and Fed), and after last week’s debacle in congress does anyone believe they can partner with the government and trust they will honor their agreements?
There is no way to avoid the unfolding, ultimately inflationary great depression because public servants are incapable of doing what is right for their constituents, rather than what is politically beneficial. But profits and opportunities will abound for the astute and informed investor. The abuse of the ability to issue debt and print money will be abused until such time that the financial, currency and banking systems collapse and are shunned by the world publics. Learn how to make money in up and down markets using absolute return alternative investments and seek the “indirect exchange” as outlined by Ludwig von Mises. So it is once again: Hi ho, Hi ho, off to the printing press they go; selling treasuries to create the money and sending you and your children the obligation to pay for it.
Charts and full article
The first thing we must understand when viewing this sector is the fact that commodities and precious metals went through a 25-year SECULAR BEAR MARKET, which ended in a double bottom that was formed between 1998 and December 2001. Just in time, inventories and international shipping severely reduced the need to hold inventory. Every bit of excess capacity and stockpiles were virtually eliminated worldwide. I have created a MONTHLY chart of the continuous commodity index going back to the 1976 period to emphasize the period where anyone who tried to build a commodity business was ground to dust as every rally was false, and expansion of supply was punished in the marketplace from 1980 through 2001:
1976 1980 1984 1988 1992 1996 2000 2004 2008
Please notice how the BULL market has corrected a Fibonacci .619 of its move off the 1998-2001 lows, which implies that we have just witnessed the first wave up of a 20 to 25-year SECULAR BULL MARKET (and the first corrective wave down of the bull move), and when it turns higher and gives a buy signal, we are most probably staring at the next leg up in commodities directly ahead. The creation of commodity and energy supply is a long process, usually taking 5 to 10 years, and whatever capacity was being built up until the credit crisis began has now been shut down. So, very few new sources of commodities can be expected to emerge. Oil supplies are falling almost 10% a year; a rate faster than the rate of decline in demand.
After the relentless secular bear market and base building period, population growth and the emergence of the BRICS (Brazil, Russia, India, China), as G7 deindustrialization and new found capitalist economies based on Austrian economics, created rising incomes and middle classes in many formally impoverished regions. These societies are based on SAVINGS (as they know the government is good for nothing), producing more than you consume (as not to do so leads to personal demise), and the work ethic to provide a better future for their children. Wealth creation is alive and well in the emerging world. Once they learn to “smell the roses” of their success and consume more (as they are doing daily), these societies will become the wealthiest in the world as the wealth of the world continues to rotate from the Western developed economies to the emerging world. Any historian can tell you this long pattern of wealth rotation has been in place for centuries.
There are BILLIONS of people emerging into higher standards of living, and they live in the MOST economically competitive areas of the world. They are masters of providing “MORE FOR LESS” to their customers, and thus will be the provider of choice for income-constrained western consumers. The formerly Austrian G7 capitalist economies have evolved into quasi-socialist asset-backed economies, where wealth is an illusion of misstated inflation of assets (which we now see reverting back to the real, not nominal values.) They now live in de-industrialized shells of their former economies, incapable of producing more than they consume and creating the savings necessary for rising middle classes and capital investment, which is the seed corn of future wealth.
So the governments of the G7 have resorted to what all empires do as they reach the end of their histories: borrow and print money to support their spending since wealth creation no longer does so. Gold is at or near a new high against every FIAT currency in the world and that is no coincidence. It is a reflection of the declining purchasing power of the currencies in which it is denominated. Take a look at these charts of world currencies and gold (courtesy of Mike Hewitt and www.dollardaze.org ) since 1971, when Breton Woods II forever tore G7 currencies from gold and silver reserve backing:
Thank you, Mike. Notice there is only one currency which has not lost purchasing power and that is the oldest currency in the world: GOLD. As the MONEY printing in the G7 accelerates to underpin the governments and financial systems, you can expect commodities to REPRICE higher to reflect the lower purchasing power of whatever currency in which it is denominated, putting additional buying power in them as investors increasingly seek shelter from the printing presses.
The temporary destruction of demand for commodities has been largely PRICED into commodity prices without disturbing the longer-term bull trend, caused by supply constraints which just recently began in 2001. You can count on the debasement of the G7 currencies to accelerate as investors and G7 currency holders increasingly shun buying paper that “melts in your hand and bank accounts” in favor of? The “Indirect Exchange” (as outlined by Ludwig von Mises) into the shelter provided by tangible assets, such as commodities, precious metals and raw materials. Look no further than the Chinese to see this in action, as they have embarked on a spending spree to rid themselves of the toxic G7 currencies and exchange them for tangibles of all stripes, including commodities.
In Conclusion: The G7 governments are at war with their citizens, only the citizens are largely unaware of it. Citizens have been dumbed down and the media spins the government line to dupe the public into believing that government is for them rather than against them in this period of time. The DARWINIAN struggle to survive and grow is now a showdown between the public sectors, government elites and special interests versus the private sectors and the public at large. As the governments increasingly DESTROY the ability to create wealth in the private sector, incomes have and will continue to collapse, as will tax receipts on the endless list of taxes and fees now imposed.
As these sources of income recede, the only options will be to borrow from future generations through treasury issuance to the central banks, aka “PRINTING THE MONEY”. Since there is this little timeless truth known by non-governmental economists as “there is no such thing as a free lunch”, we are headed toward the demise of the G7 financial systems. And of course, this does not include the FREE healthcare and new energy REGULATIONS and TAXES which they are about to impose.
On another note, FASBY 157, which mandates mark-to-market accounting, has succumbed to political pressure and has been eviscerated, effectively allowing the banks to misstate their assets values to models, rather than to market prices. So expect the losses to once again be HIDDEN from view and profits to appear when marked to model, i.e., lying with numbers with government approval. The profits are ILLUSIONS, courtesy of corrupt public serpents, banksters and now the accounting OVERSIGHT board. Insolvency is not cured with the stroke of a pen, it is fixed by NEW CAPITAL!
Look no further than recent LOUD outbursts by the G7’s largest creditors such as the Chinese, Russians, Indians and Brazilians, illustrating their dismay. They should, because when the debasement occurs, it is a theft of the purchasing power they store in G7 currencies and bonds. The rallies in stock indexes are nothing more than bounces in ongoing bear markets. Here is an analogue chart of the 4 biggest bear markets in history:
This is a powerful signpost of future price action. The only thing which may keep us from going to lows at the 3000 to 4000 level in the Dow is the rapidity of the monetary debasement process. Stocks are in many ways TANGIBLE investments and will re-price HIGHER to reflect the diminishing purchasing power of the currency in which they are priced. So the faster the G7 debases their currencies, the more buoyant NOMINAL prices will be. But don’t be fooled, they are declining in real terms “purchasing power” as this chart of the S&P 500 denominated in gold illustrates:
1980 1990 2000
Notice how the rally to new highs from 2002 to late 2007 DISAPPEARS when measured in REAL MONEY. That rally was an illusion of growth provided by FIAT currency and inflation. The true picture of the value of your stocks is displayed in this chart. If you look at bonds, the picture is WORSE…
I believe the recently unveiled public/private partnerships fail because the worth of the toxic assets is ZERO (this is what investors are willing to pay if not offered loans by the government and Fed), and after last week’s debacle in congress does anyone believe they can partner with the government and trust they will honor their agreements?
There is no way to avoid the unfolding, ultimately inflationary great depression because public servants are incapable of doing what is right for their constituents, rather than what is politically beneficial. But profits and opportunities will abound for the astute and informed investor. The abuse of the ability to issue debt and print money will be abused until such time that the financial, currency and banking systems collapse and are shunned by the world publics. Learn how to make money in up and down markets using absolute return alternative investments and seek the “indirect exchange” as outlined by Ludwig von Mises. So it is once again: Hi ho, Hi ho, off to the printing press they go; selling treasuries to create the money and sending you and your children the obligation to pay for it.
Charts and full article
19 March 2009
Satyajit Das update
An update from LNL's financial crisis analyst. He talks about the process by which oil and other commodity prices rose dramatically and then crashed, with huge consequences for the Australian economy; and he talks about his observations from a recent trip to Dubai, which is feeling the full effects of the global financial crisis.
http://mpegmedia.abc.net.au/rn/podcast/2009/03/lnl_20090318_2205.mp3
http://mpegmedia.abc.net.au/rn/podcast/2009/03/lnl_20090318_2205.mp3
7 March 2009
Satyajit Das: Commodities become individuals
“Holes in the Ground” - The End of the Commodity Super Cycle
by Satyajit Das March 02, 2009
Super Short Super Cycles
The commodity “super cycle” proved super short. The commodity “boom” is now officially a “bust.” Mark Twain once described a mine as “a hole in the ground with a liar standing next to it.’’ The end of the commodity price cycle has revealed that standing next to the liar is a crowd of hapless bankers, analysts and investors. So what happened?
The rise in commodity prices was driven by the confluence of a number of factors. Debt driven growth in major developed countries drove strong growth (both export and domestic) in emerging markets, such as China and India. This, in turn, fueled demand for resources. In a virtuous cycle, the growth drove demand in major commodity producers, such as Russia, the Persian Gulf, Australia, Canada and South Africa, whose strongly growing economies fueled further growth globally by way of increased consumption and investment.
The effect of increased demand on prices was exacerbated by decades of significant under-investment in commodity infrastructure (mineral processing; refining) and transport infrastructure (shipping, ports, pipelines), driven in part by low commodity prices.
The commodity boom was aided and abetted by investors, especially leveraged investors such as hedge funds. Hedge funds used commodities to bet on strong global growth and catch the updraft in emerging markets indirectly reducing problems of direct investment. Commodities also provide significant leverage making them more attractive to hedge funds.
Traditional investors also embraced commodity investments. Commodities were seen as a separate investment class with low correlation to traditional investments enabling investors to improve investment returns and reduce risk simultaneously.
The last factor was inflation. Rising commodity prices and strong growth fueled rising prices. This encouraged further investment in commodities as a hedge against inflation. The higher prices went the greater the threat of inflation and the increasing flow of funds into commodities. The momentum was irresistible.
Engaging Reverse Gear
In 2008, each one of these factors went sharply into reverse. The global financial crisis (GFC) resulted in reduced availability and higher cost of debt affecting commodities through several channels. Leveraged investors were forced to liquidate their positions as leverage was reduced and investors redeemed capital. The reduction in debt also reduced global growth sharply and the demand for most resources.
The reversal was exacerbated by several factors. Rising prices and anticipation of higher demand had led to significant investment in certain commodities and infrastructure. The time needed to build capacity meant that this increase in supply coincided with reducing demand, further pressuring prices.
The GFC also reduced cross-border capital flows and global trade. The Institute for International Finance forecasts net private sector capital flows to emerging markets in 2009 will be less than $165 billion ─ 36% of the $466 billion inflow in 2008 and only one fifth the record amount in 2007. The projected decline in capital flows is around 6% of the combined gross domestic product of the emerging countries. This compares to a decline of approximately 3.5% of combined GDP in the Asian financial crisis and 1.5% in the Latin American crisis.
Global trade is also declining. In late 2008, the World Bank forecast a fall in global trade volumes for the first time in over 25 years. The Baltic Dry Index, a measure of supply and demand for basic shipping materials, has fallen 90% since mid 2008. Exports from Japan, Korea, Taiwan and China fell between 10% and 40% in late 2008 and early 2009, also signaling reduced demand for commodities.
Financing pressures also mean that it is increasingly difficult to finance trade. Some countries have had to resort to barter to obtain essential foodstuffs.
Self Harm
Resources companies compounded the problems by aggressive acquisitions that were sometimes debt financed. Expectations of strong global growth and demand, especially from China and other developing countries, encouraged leading firms in the steel, cement and mining industries to undertake ambitious acquisitions in 2006 and 2007.
For example, steelmaker ArcelorMittal undertook a cash-and-stock-financed merger. India’s Tata Steel completed a leveraged takeover of Anglo-Dutch Corus. France’s Lafarge, the world’s biggest cement producer, bought Orascom Cement of Egypt, while its competitor, Mexico’s Cemex, purchased Rinker, a big Australian rival. Xstrata, the mining industry’s serial acquirer, entered into a number of debt-financed acquisitions. Rio Tinto purchased Alcan, increasing its leverage significantly.
Declining sales and cash flows, debt refinancing requirements, difficulties in selling assets and limited opportunities to raise equity to deleverage further complicates the commodity bust. Some companies are seeking state financial assistance to survive. For example, Corus has sought assistance from the British government.
High oil prices also led to aggressive investments in alternative energy technologies that are not economic at lower prices, further complicating the price cycle.
Laws of Financial Gravity
Commodities posted their worst performance on record in 2008. Commentary on commodity markets reflects Mark Twain’s remark that, “I am not one of those who in expressing opinions confine themselves to facts.’’
Unlike financial assets, commodities, for the most part, are subject to the laws of economic gravity – supply and demand. Individual commodities are also highly idiosyncratic – you can’t drink oil, nor can you run your car on gold though, they seem to go quite well on corn tortillas!
The key to commodities is demand. Higher oil prices, for example, led to a sharp reduction in demand as people lowered consumption or used substitutes. Falling prices shift this balance, especially in energy importers such as China, Japan and India.
It is not clear how much lower global growth is impounded in commodity prices. The falloff in exports in Asian countries and the collapse in freight rates is especially worrying. Inevitable protectionism (buy “local” and currency “manipulation” to gain export competitiveness) is also a concern.
Ultimately, commodity prices will depend on recovery in growth, consumption, housing markets, durable goods (especially motor cars) and stability in financial markets and resumption of more normal financing activity. None of this seems likely in the short term.
A key dynamic is whether deflationary pressures (falling prices) emerge. In a deflationary environment, commodities will be hit hard as demand falls further. The lack of income and high real rates of interest will affect prices. In contrast, inflation would be supportive of prices as investors switch from monetary to real assets. Despite strenuous rhetoric and monetary actions by central banks, it is not clear whether debt deflation can be avoided.
Aberrant Tendencies
Short-term factors also affect the outlook. Falling prices have placed enormous pressures on companies and state treasuries dependent on resource based revenues.
Companies with large debt service commitments are being forced to produce at uneconomic prices simply to generate cash flow. Some oil exporters are producing below operating cost to maintain revenues to finance ambitious spending plans conceived in more prosperous times. This overproduction distorts prices.
There are growing supply constraints in some markets. Junior miners are unable to bring resource properties into production because of financing pressures. New investment and expansion has been deferred or abandoned. These bottlenecks may cause short-term supply disruptions creating significant volatility in prices.
A “known unknown” is the performance of the dollar. There is a complex and unstable relationship between commodity prices and the dollar. An International Monetary Fund study noted that a 1% increase in the value of the dollar results in a decrease in oil and gold prices of greater than 1%. This means the elasticity is around 1. It appears to be higher for gold than oil prices. Continued volatility in currency markets, reflecting pressures as sovereigns attempt to finance their budget and financial system bailout requirements, will be mirrored in commodity prices.
Individuals All!
Oil prices may have further downside, in the short run, reflecting continued reduction in demand as growth slows. Production cuts by the Organization of the Petroleum Exporting Countries (OPEC) may not be effective as revenue-strapped sovereign producers adjust volumes to generate cash flow. Ultimately, the laws of supply and demand, production costs and a finite, constrained resource will support the price.
The outlook for alternative energies is less sanguine. Most alternatives require high oil prices to be economic. Support for alternative cleaner energy is likely to wane as the GFC forces governments to defer climate change initiatives in the face of harsh economic conditions.
The dislocation in financial markets has benefited gold. Gold’s performance reflects increasing suspicion about “paper” money and lower interest rates. Governments continue to attempt to reflate domestic economies by traditional Keynesian spending, increasing concern about possible inflation and providing support for gold. There is a fear of a return to a gold standard, leading to hoarding of gold stock. Emerging market demand for gold, a traditional store of purchasing power, may be fueled by the threat of increased social unrest.
Other precious metals, platinum, palladium and silver, are likely to be affected by decreased demand, especially given the problems in the automobile sector globally.
Industrial metals (aluminum, copper, lead, nickel, zinc and tin) and bulk commodities (iron ore and coking coal) have been a major proxy for global economic growth, particularly demand from a rapidly industrializing and urbanizing China and India. Slower growth and problems related to inventories and oversupply may mean a continuation of weakness.
The performance of agricultural prices is puzzling. After falling in line with commodities generally throughout 2008, in December agricultural products decoupled from other assets. For example, some grains rose sharply in prices by 10% to 20%.
Prices (adjusted for inflation) are around 40% below long-run average prices. Grain inventory levels are low – around two months of global demand. Problems affecting financing of crops and trade, low prices and difficulty of hedging (increased in margins and hedging costs) have meant that plantings have been low. Major seed producers report a sharp decline in sales. The increased problems of food production from climate change also mean the risk of supply disruption cannot be discounted.
Historically, agricultural products have performed well in economic recessions. Tightening supply, risk of supply shocks and the appeal of a recession resistance asset may underpin prices in relative terms.
Agricultural products that have been linked to oil prices (such as corn, palm oil, soybeans and rapeseed) will be dependent on the broader performance of energy prices.
Bridges to Nowhere & Velocity of Pigs
During commodity booms, excesses abound. Oil-rich countries enjoying rapid growth in commodity revenues embarked on grand and expensive projects. For example, in this cycle, Dubai undertook an ambitious expansion program based on real estate, luxury hotels, airlines, financial services and English premier league soccer clubs.
The excesses are notable. The recently opened Atlantis Hotel is at the end of the first (and so far only completed) Dubai Palm, a piece of reclaimed land designed to resemble a palm tree. The Atlantis has its own theme park next door, every shop and restaurant conceivable and a mammoth aquarium (featuring 65,000 marine animals). The Palazzo Versace hotel, currently under construction, features a beach with artificially cooled sand to save guests from the hot sand as they walk from water to the hotel.
The most emblematic project of this cycle is a project proposed by Tarek bin Laden, one of Osama bin Laden’s many half-brothers. The project entails twin cities on either side of the Bab al-Mandib (Gate of Tears) strait at the mouth of the Red Sea linked by a 29-kilometer bridge across the strait. The project cost was estimated at $200 billion.
Recently, an acquaintance in financial markets announced his retirement to a life of rustic simplicity in Umbria, Italy. He had acquired a farm and was restoring it with the help of local “serfs” (his word not mine!) The farm would be self sufficient producing essentials of life ─ wheat, milk, wine and meat. The plan was to avoid the coming financial Armageddon in financial markets and the money economy.
The newly minted farmer was especially excited by the farm’s black pigs that reproduce three times each year. He referred to this as the “velocity” of the pig population. The porcine velocity is much greater, ironically, than the current velocity of money in financial markets as the recession sets in and the implosion of the financial system becomes institutionalized.
Grandiose plans tend to be launched towards the end of the boom cycle. Pigs and food may be well be where the smart money heads in these troubled times.
Fundamental demand for food and energy may emerge as key investment drivers – everybody needs to eat and we are still a fossil fuel-driven society.
Satyajit Das is a risk consultant and author of a number of key reference works on derivatives and Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives” (2006, FT-Prentice Hall).
link
by Satyajit Das March 02, 2009
Super Short Super Cycles
The commodity “super cycle” proved super short. The commodity “boom” is now officially a “bust.” Mark Twain once described a mine as “a hole in the ground with a liar standing next to it.’’ The end of the commodity price cycle has revealed that standing next to the liar is a crowd of hapless bankers, analysts and investors. So what happened?
The rise in commodity prices was driven by the confluence of a number of factors. Debt driven growth in major developed countries drove strong growth (both export and domestic) in emerging markets, such as China and India. This, in turn, fueled demand for resources. In a virtuous cycle, the growth drove demand in major commodity producers, such as Russia, the Persian Gulf, Australia, Canada and South Africa, whose strongly growing economies fueled further growth globally by way of increased consumption and investment.
The effect of increased demand on prices was exacerbated by decades of significant under-investment in commodity infrastructure (mineral processing; refining) and transport infrastructure (shipping, ports, pipelines), driven in part by low commodity prices.
The commodity boom was aided and abetted by investors, especially leveraged investors such as hedge funds. Hedge funds used commodities to bet on strong global growth and catch the updraft in emerging markets indirectly reducing problems of direct investment. Commodities also provide significant leverage making them more attractive to hedge funds.
Traditional investors also embraced commodity investments. Commodities were seen as a separate investment class with low correlation to traditional investments enabling investors to improve investment returns and reduce risk simultaneously.
The last factor was inflation. Rising commodity prices and strong growth fueled rising prices. This encouraged further investment in commodities as a hedge against inflation. The higher prices went the greater the threat of inflation and the increasing flow of funds into commodities. The momentum was irresistible.
Engaging Reverse Gear
In 2008, each one of these factors went sharply into reverse. The global financial crisis (GFC) resulted in reduced availability and higher cost of debt affecting commodities through several channels. Leveraged investors were forced to liquidate their positions as leverage was reduced and investors redeemed capital. The reduction in debt also reduced global growth sharply and the demand for most resources.
The reversal was exacerbated by several factors. Rising prices and anticipation of higher demand had led to significant investment in certain commodities and infrastructure. The time needed to build capacity meant that this increase in supply coincided with reducing demand, further pressuring prices.
The GFC also reduced cross-border capital flows and global trade. The Institute for International Finance forecasts net private sector capital flows to emerging markets in 2009 will be less than $165 billion ─ 36% of the $466 billion inflow in 2008 and only one fifth the record amount in 2007. The projected decline in capital flows is around 6% of the combined gross domestic product of the emerging countries. This compares to a decline of approximately 3.5% of combined GDP in the Asian financial crisis and 1.5% in the Latin American crisis.
Global trade is also declining. In late 2008, the World Bank forecast a fall in global trade volumes for the first time in over 25 years. The Baltic Dry Index, a measure of supply and demand for basic shipping materials, has fallen 90% since mid 2008. Exports from Japan, Korea, Taiwan and China fell between 10% and 40% in late 2008 and early 2009, also signaling reduced demand for commodities.
Financing pressures also mean that it is increasingly difficult to finance trade. Some countries have had to resort to barter to obtain essential foodstuffs.
Self Harm
Resources companies compounded the problems by aggressive acquisitions that were sometimes debt financed. Expectations of strong global growth and demand, especially from China and other developing countries, encouraged leading firms in the steel, cement and mining industries to undertake ambitious acquisitions in 2006 and 2007.
For example, steelmaker ArcelorMittal undertook a cash-and-stock-financed merger. India’s Tata Steel completed a leveraged takeover of Anglo-Dutch Corus. France’s Lafarge, the world’s biggest cement producer, bought Orascom Cement of Egypt, while its competitor, Mexico’s Cemex, purchased Rinker, a big Australian rival. Xstrata, the mining industry’s serial acquirer, entered into a number of debt-financed acquisitions. Rio Tinto purchased Alcan, increasing its leverage significantly.
Declining sales and cash flows, debt refinancing requirements, difficulties in selling assets and limited opportunities to raise equity to deleverage further complicates the commodity bust. Some companies are seeking state financial assistance to survive. For example, Corus has sought assistance from the British government.
High oil prices also led to aggressive investments in alternative energy technologies that are not economic at lower prices, further complicating the price cycle.
Laws of Financial Gravity
Commodities posted their worst performance on record in 2008. Commentary on commodity markets reflects Mark Twain’s remark that, “I am not one of those who in expressing opinions confine themselves to facts.’’
Unlike financial assets, commodities, for the most part, are subject to the laws of economic gravity – supply and demand. Individual commodities are also highly idiosyncratic – you can’t drink oil, nor can you run your car on gold though, they seem to go quite well on corn tortillas!
The key to commodities is demand. Higher oil prices, for example, led to a sharp reduction in demand as people lowered consumption or used substitutes. Falling prices shift this balance, especially in energy importers such as China, Japan and India.
It is not clear how much lower global growth is impounded in commodity prices. The falloff in exports in Asian countries and the collapse in freight rates is especially worrying. Inevitable protectionism (buy “local” and currency “manipulation” to gain export competitiveness) is also a concern.
Ultimately, commodity prices will depend on recovery in growth, consumption, housing markets, durable goods (especially motor cars) and stability in financial markets and resumption of more normal financing activity. None of this seems likely in the short term.
A key dynamic is whether deflationary pressures (falling prices) emerge. In a deflationary environment, commodities will be hit hard as demand falls further. The lack of income and high real rates of interest will affect prices. In contrast, inflation would be supportive of prices as investors switch from monetary to real assets. Despite strenuous rhetoric and monetary actions by central banks, it is not clear whether debt deflation can be avoided.
Aberrant Tendencies
Short-term factors also affect the outlook. Falling prices have placed enormous pressures on companies and state treasuries dependent on resource based revenues.
Companies with large debt service commitments are being forced to produce at uneconomic prices simply to generate cash flow. Some oil exporters are producing below operating cost to maintain revenues to finance ambitious spending plans conceived in more prosperous times. This overproduction distorts prices.
There are growing supply constraints in some markets. Junior miners are unable to bring resource properties into production because of financing pressures. New investment and expansion has been deferred or abandoned. These bottlenecks may cause short-term supply disruptions creating significant volatility in prices.
A “known unknown” is the performance of the dollar. There is a complex and unstable relationship between commodity prices and the dollar. An International Monetary Fund study noted that a 1% increase in the value of the dollar results in a decrease in oil and gold prices of greater than 1%. This means the elasticity is around 1. It appears to be higher for gold than oil prices. Continued volatility in currency markets, reflecting pressures as sovereigns attempt to finance their budget and financial system bailout requirements, will be mirrored in commodity prices.
Individuals All!
Oil prices may have further downside, in the short run, reflecting continued reduction in demand as growth slows. Production cuts by the Organization of the Petroleum Exporting Countries (OPEC) may not be effective as revenue-strapped sovereign producers adjust volumes to generate cash flow. Ultimately, the laws of supply and demand, production costs and a finite, constrained resource will support the price.
The outlook for alternative energies is less sanguine. Most alternatives require high oil prices to be economic. Support for alternative cleaner energy is likely to wane as the GFC forces governments to defer climate change initiatives in the face of harsh economic conditions.
The dislocation in financial markets has benefited gold. Gold’s performance reflects increasing suspicion about “paper” money and lower interest rates. Governments continue to attempt to reflate domestic economies by traditional Keynesian spending, increasing concern about possible inflation and providing support for gold. There is a fear of a return to a gold standard, leading to hoarding of gold stock. Emerging market demand for gold, a traditional store of purchasing power, may be fueled by the threat of increased social unrest.
Other precious metals, platinum, palladium and silver, are likely to be affected by decreased demand, especially given the problems in the automobile sector globally.
Industrial metals (aluminum, copper, lead, nickel, zinc and tin) and bulk commodities (iron ore and coking coal) have been a major proxy for global economic growth, particularly demand from a rapidly industrializing and urbanizing China and India. Slower growth and problems related to inventories and oversupply may mean a continuation of weakness.
The performance of agricultural prices is puzzling. After falling in line with commodities generally throughout 2008, in December agricultural products decoupled from other assets. For example, some grains rose sharply in prices by 10% to 20%.
Prices (adjusted for inflation) are around 40% below long-run average prices. Grain inventory levels are low – around two months of global demand. Problems affecting financing of crops and trade, low prices and difficulty of hedging (increased in margins and hedging costs) have meant that plantings have been low. Major seed producers report a sharp decline in sales. The increased problems of food production from climate change also mean the risk of supply disruption cannot be discounted.
Historically, agricultural products have performed well in economic recessions. Tightening supply, risk of supply shocks and the appeal of a recession resistance asset may underpin prices in relative terms.
Agricultural products that have been linked to oil prices (such as corn, palm oil, soybeans and rapeseed) will be dependent on the broader performance of energy prices.
Bridges to Nowhere & Velocity of Pigs
During commodity booms, excesses abound. Oil-rich countries enjoying rapid growth in commodity revenues embarked on grand and expensive projects. For example, in this cycle, Dubai undertook an ambitious expansion program based on real estate, luxury hotels, airlines, financial services and English premier league soccer clubs.
The excesses are notable. The recently opened Atlantis Hotel is at the end of the first (and so far only completed) Dubai Palm, a piece of reclaimed land designed to resemble a palm tree. The Atlantis has its own theme park next door, every shop and restaurant conceivable and a mammoth aquarium (featuring 65,000 marine animals). The Palazzo Versace hotel, currently under construction, features a beach with artificially cooled sand to save guests from the hot sand as they walk from water to the hotel.
The most emblematic project of this cycle is a project proposed by Tarek bin Laden, one of Osama bin Laden’s many half-brothers. The project entails twin cities on either side of the Bab al-Mandib (Gate of Tears) strait at the mouth of the Red Sea linked by a 29-kilometer bridge across the strait. The project cost was estimated at $200 billion.
Recently, an acquaintance in financial markets announced his retirement to a life of rustic simplicity in Umbria, Italy. He had acquired a farm and was restoring it with the help of local “serfs” (his word not mine!) The farm would be self sufficient producing essentials of life ─ wheat, milk, wine and meat. The plan was to avoid the coming financial Armageddon in financial markets and the money economy.
The newly minted farmer was especially excited by the farm’s black pigs that reproduce three times each year. He referred to this as the “velocity” of the pig population. The porcine velocity is much greater, ironically, than the current velocity of money in financial markets as the recession sets in and the implosion of the financial system becomes institutionalized.
Grandiose plans tend to be launched towards the end of the boom cycle. Pigs and food may be well be where the smart money heads in these troubled times.
Fundamental demand for food and energy may emerge as key investment drivers – everybody needs to eat and we are still a fossil fuel-driven society.
Satyajit Das is a risk consultant and author of a number of key reference works on derivatives and Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives” (2006, FT-Prentice Hall).
link
5 March 2009
Non-Opec Oil Production Has Peaked
Yawn. Non-OPEC oil production peaked in late 2006 above 41 Mb/day. It’s unlikely we’ll ever see those production levels again. It’s also unlikely, if you follow oil supply data, that you'd be shocked by that revelation. That said, it’s worth laying out how this happened.
From January 1, 2003 to the price highs 2008, the price of oil went from 30.00 to 150.00. Now let’s take a look at non-OPEC oil production. Remember, much of non-OPEC supply is free market oil which leverages the latest technology and benefits from the profit motive. OPEC supply is about politics, state control, and kingdoms. Non-OPEC supply is about earnings per share, deepwater rigs, and high-tech engineering. So let’s take a trip through Econ 101, where supply always responds to higher prices.
Annual averages of non-OPEC Production in Mb/day
2002 Average 39,520
2003 Average 40,299
2004 Average 40,989
2005 Average 40,799
2006 Average 40,850
2007 Average 40,838
2008 Average 40,319
Although monthly production peaked in late 2006, you can already see indications of the first faltering in the annual averages in 2004. That’s a tell-tale sign of the transition from a legacy inventory of easier oil, which is extracted easily, to a newer inventory of more difficult oil.
If you are not sobered enough by the total lack of supply response, consider this ominous fact: Russia, which is the largest producer among non-OPEC countries, was able to ratchet up production this decade. Russia would add another 2 Mb/day to non-OPEC production in the annual time series above. Astonishing. Even though Russia too has now peaked, without Russia’s massive increase in supply, non-OPEC supply would have fallen into the the bull market in oil!
Tell that to your Econ 101 professor.
In case you do in fact run into your old Econ professor, I’d like to give readers a simple way to talk about non-OPEC supply. The next time you’re talking oil with friends and family, hit ‘em with this: For six years non-OPEC supply was flat, around 40+ Mb/day. This even though prices rose from 30.00 to 150.00. In fact, without Russia, non-OPEC supply would have fallen. What happened is that the legacy cheap oil was increasingly replaced by newer, harder, expensive oil. And now that the price has crashed back down to levels where we began the whole journey? The legacy cheap oil is depleted. The current oil was built upon much higher prices. So, just as you would expect, non-OPEC supply is on a crash course.
Further Reading:
From January 1, 2003 to the price highs 2008, the price of oil went from 30.00 to 150.00. Now let’s take a look at non-OPEC oil production. Remember, much of non-OPEC supply is free market oil which leverages the latest technology and benefits from the profit motive. OPEC supply is about politics, state control, and kingdoms. Non-OPEC supply is about earnings per share, deepwater rigs, and high-tech engineering. So let’s take a trip through Econ 101, where supply always responds to higher prices.
Annual averages of non-OPEC Production in Mb/day
2002 Average 39,520
2003 Average 40,299
2004 Average 40,989
2005 Average 40,799
2006 Average 40,850
2007 Average 40,838
2008 Average 40,319
Although monthly production peaked in late 2006, you can already see indications of the first faltering in the annual averages in 2004. That’s a tell-tale sign of the transition from a legacy inventory of easier oil, which is extracted easily, to a newer inventory of more difficult oil.
If you are not sobered enough by the total lack of supply response, consider this ominous fact: Russia, which is the largest producer among non-OPEC countries, was able to ratchet up production this decade. Russia would add another 2 Mb/day to non-OPEC production in the annual time series above. Astonishing. Even though Russia too has now peaked, without Russia’s massive increase in supply, non-OPEC supply would have fallen into the the bull market in oil!
Tell that to your Econ 101 professor.
In case you do in fact run into your old Econ professor, I’d like to give readers a simple way to talk about non-OPEC supply. The next time you’re talking oil with friends and family, hit ‘em with this: For six years non-OPEC supply was flat, around 40+ Mb/day. This even though prices rose from 30.00 to 150.00. In fact, without Russia, non-OPEC supply would have fallen. What happened is that the legacy cheap oil was increasingly replaced by newer, harder, expensive oil. And now that the price has crashed back down to levels where we began the whole journey? The legacy cheap oil is depleted. The current oil was built upon much higher prices. So, just as you would expect, non-OPEC supply is on a crash course.
Further Reading:
4 March 2009
Asia's miners line up for Outback
SYDNEY - Asian mining firms are closely watching developments related to the US$19.5 billion bid by Chinese aluminum giant Chinalco for a stake in multinational Rio Tinto, amid a developing buying blitz on Australia's cheap resources stocks.
Corporate lawyers say that Japanese, Chinese and South Korean companies are locked in negotiations for equity in a host of mid-sized miners, but the fate of the deals may hinge on whether the Chinalco-Rio deal gets regulatory approval.
"You have a weak Australian dollar, very low price/earning ratios of resource stocks and a lot of cashed-up Asian firms that are underwritten - in some cases at least - by official reserves," said one lawyer involved in acquisition talks. "[But] it counts for nought if the [Australian] regulators start talking tough."
State-owned Chinalco have met with Australia's Foreign Investment Review Board (IRB) to push its case for the purchase of sizeable stakes in some of Rio's key ore, aluminum and power assets, including the vast Hamersley Iron operation in Western Australia.
Chinalco has offered US$7.2 billion in the form of convertible bonds which, once converted to shares, would increase its stake in Rio from 9.3% to 18%. The bonds, which have a 60-year term, would attract annual interest of 9-9.5% and would be redeemable after seven years.
Rio badly needs the cash injection to clear US$38 billion of debt incurred when the multinational bought Canadian aluminum producer Alcan Inc in 2007, and board members are expected to approve the bid when they meet in May. The company is committed to repay US$8.9 billion in October and a further US$10 billion next year.
But investors argue that Rio, Australia's second-biggest resources company, could mortgage its future by hiving off key assets. The Australian government also fears that a takeover could allow the Chinese effectively to dictate terms in their tortuous annual price negotiations with the resources sector.
Big exporters like Rio and BHP-Billiton benefited from annual increases of 80-90% in shipment value during the boom years of Chinese economic expansion. But they were told last week by Baosteel's Shanghai steelworks that they could expect cuts of 30-50% this year due to waning demand.
There is plenty at stake for the slowing Australian economy: the country earned A$31 billion from iron ore exports last year and A$46 billion from coal, and government leaders are anxious that the miners keep the upper ground in negotiations.
The new president of Chinalco, Xiong Weiping, said in Sydney the Rio would set up a separate committee of independent - that is, non-Chinalco - directors to handle price talks and avoid a conflict of interest. That might be enough to mollify the IRB, especially if the review board also imposes a limit on Chinalco's future stake and withholds a board seat.
But that may not satisfy the government. The Australian treasurer (finance minister), Wayne Swan, has said he will seek parliamentary approval to amend the Foreign Acquisitions and Takeovers Act so that access to resources firms is tightened.
The biggest change is likely to be that any investment - particularly those involving instruments such as convertible notes - would be treated as equity. Swan said that Australia welcomed investment but treated resources as a special category. Intending buyers would have to prove that investments in the mining sector were in the "national interest".
Shareholders, especially institutional investors, will also have a strong say in the outcome, as many have been angered that the offering was made to Chinalco at a premium - and that they were left out. There are reports that Chinalco might substitute a rights issue of US$10 billion, but Xiong said in Sydney the firm was unwilling to alter the terms.
"We do not want to see any changes to the packaged agreement. I think the Rio Tinto board and its management team will listen very carefully to the requirements and requests from the shareholders."
Yet while opening the deal to outside investors would water down Chinalco's stake, that might be the price the firm has to pay to force the deal through. And it might be vital if Rio is to keep faith with shareholders and rescue its floundering share price.
Market analysts say a substantial number of institutional investors were caught out when they shorted Rio shares in anticipation of a rights issue to cover the debts and they have lots to lose from the deal. So do Rio's board members, who are struggling to convince analysts the deal is the best option.
There has already been one casualty: the designated chairman, Jim Leng, quit two weeks ago when his case for a rights issue found no support with other board members.
Nationalist sentiment is unlikely to have much bearing with remaining board members, as only two are Australian. One of these, former Cathay Pacific and British Airways boss Rod Eddington, has said he will not vote on the deal due to a perceived conflict of interest: he chairs the Australian operations of investment bank JP Morgan, one of Chinalco's advisers.
Rio chief executive Tom Albanese, a US national, said he stood by the deal, saying it would allow Rio to reactivate iron ore, alumina and coal projects that had been put on hold due to the company's difficult financial situation.
There is still a possibility of a rival bid from another suitor, as the Chinalco deal has not yet been voted on by investors. BHP, which considered launching a formal bid last year, is one possible investor, though it would mean Rio would have to pay a US$195 million "break fee" to Chinalco.
Other Asian miners also cannot be ruled out. China Minmetals wrapped up a A$2.6 billion (US$1.7 billion) takeover of OZ Minerals earlier his month, and Chinese steel producer Anshan Iron & Steel Group will pay A$162 million for a bigger stake in Gindalbie Metals.
Legal firm Corrs Chambers Westgarth, which specializes in mergers and acquisitions, confirmed it had had inquiries from Korean, Japanese and Chinese investors looking to acquire gold, coal, uranium and iron ore projects in Australia.
The investors include Japan's Sumitomo, Mitsui and Mitsubishi UFJ. They are believed to be looking at medium-sized producers such as Aquila Resources, Felix Resources and Gloucester Coal.
Alan Boyd, now based in Sydney, has reported on Asia for more than two decades.
link
Corporate lawyers say that Japanese, Chinese and South Korean companies are locked in negotiations for equity in a host of mid-sized miners, but the fate of the deals may hinge on whether the Chinalco-Rio deal gets regulatory approval.
"You have a weak Australian dollar, very low price/earning ratios of resource stocks and a lot of cashed-up Asian firms that are underwritten - in some cases at least - by official reserves," said one lawyer involved in acquisition talks. "[But] it counts for nought if the [Australian] regulators start talking tough."
State-owned Chinalco have met with Australia's Foreign Investment Review Board (IRB) to push its case for the purchase of sizeable stakes in some of Rio's key ore, aluminum and power assets, including the vast Hamersley Iron operation in Western Australia.
Chinalco has offered US$7.2 billion in the form of convertible bonds which, once converted to shares, would increase its stake in Rio from 9.3% to 18%. The bonds, which have a 60-year term, would attract annual interest of 9-9.5% and would be redeemable after seven years.
Rio badly needs the cash injection to clear US$38 billion of debt incurred when the multinational bought Canadian aluminum producer Alcan Inc in 2007, and board members are expected to approve the bid when they meet in May. The company is committed to repay US$8.9 billion in October and a further US$10 billion next year.
But investors argue that Rio, Australia's second-biggest resources company, could mortgage its future by hiving off key assets. The Australian government also fears that a takeover could allow the Chinese effectively to dictate terms in their tortuous annual price negotiations with the resources sector.
Big exporters like Rio and BHP-Billiton benefited from annual increases of 80-90% in shipment value during the boom years of Chinese economic expansion. But they were told last week by Baosteel's Shanghai steelworks that they could expect cuts of 30-50% this year due to waning demand.
There is plenty at stake for the slowing Australian economy: the country earned A$31 billion from iron ore exports last year and A$46 billion from coal, and government leaders are anxious that the miners keep the upper ground in negotiations.
The new president of Chinalco, Xiong Weiping, said in Sydney the Rio would set up a separate committee of independent - that is, non-Chinalco - directors to handle price talks and avoid a conflict of interest. That might be enough to mollify the IRB, especially if the review board also imposes a limit on Chinalco's future stake and withholds a board seat.
But that may not satisfy the government. The Australian treasurer (finance minister), Wayne Swan, has said he will seek parliamentary approval to amend the Foreign Acquisitions and Takeovers Act so that access to resources firms is tightened.
The biggest change is likely to be that any investment - particularly those involving instruments such as convertible notes - would be treated as equity. Swan said that Australia welcomed investment but treated resources as a special category. Intending buyers would have to prove that investments in the mining sector were in the "national interest".
Shareholders, especially institutional investors, will also have a strong say in the outcome, as many have been angered that the offering was made to Chinalco at a premium - and that they were left out. There are reports that Chinalco might substitute a rights issue of US$10 billion, but Xiong said in Sydney the firm was unwilling to alter the terms.
"We do not want to see any changes to the packaged agreement. I think the Rio Tinto board and its management team will listen very carefully to the requirements and requests from the shareholders."
Yet while opening the deal to outside investors would water down Chinalco's stake, that might be the price the firm has to pay to force the deal through. And it might be vital if Rio is to keep faith with shareholders and rescue its floundering share price.
Market analysts say a substantial number of institutional investors were caught out when they shorted Rio shares in anticipation of a rights issue to cover the debts and they have lots to lose from the deal. So do Rio's board members, who are struggling to convince analysts the deal is the best option.
There has already been one casualty: the designated chairman, Jim Leng, quit two weeks ago when his case for a rights issue found no support with other board members.
Nationalist sentiment is unlikely to have much bearing with remaining board members, as only two are Australian. One of these, former Cathay Pacific and British Airways boss Rod Eddington, has said he will not vote on the deal due to a perceived conflict of interest: he chairs the Australian operations of investment bank JP Morgan, one of Chinalco's advisers.
Rio chief executive Tom Albanese, a US national, said he stood by the deal, saying it would allow Rio to reactivate iron ore, alumina and coal projects that had been put on hold due to the company's difficult financial situation.
There is still a possibility of a rival bid from another suitor, as the Chinalco deal has not yet been voted on by investors. BHP, which considered launching a formal bid last year, is one possible investor, though it would mean Rio would have to pay a US$195 million "break fee" to Chinalco.
Other Asian miners also cannot be ruled out. China Minmetals wrapped up a A$2.6 billion (US$1.7 billion) takeover of OZ Minerals earlier his month, and Chinese steel producer Anshan Iron & Steel Group will pay A$162 million for a bigger stake in Gindalbie Metals.
Legal firm Corrs Chambers Westgarth, which specializes in mergers and acquisitions, confirmed it had had inquiries from Korean, Japanese and Chinese investors looking to acquire gold, coal, uranium and iron ore projects in Australia.
The investors include Japan's Sumitomo, Mitsui and Mitsubishi UFJ. They are believed to be looking at medium-sized producers such as Aquila Resources, Felix Resources and Gloucester Coal.
Alan Boyd, now based in Sydney, has reported on Asia for more than two decades.
link
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