Saturday, August 9, 2008

Oil, US$, Euro, Gold, Nat Gas, etc...

Still want to be a trader when you grow up?

Oil, Gold, Ag, Nat Gas, Silver all down.  Silver alone lost over 12% LAST WEEK.

I wrote this post on April 8, 2008.  The key point in the post was this:

If you have been reading my stuff you know I hate the U.S. $, and I have for years. I gotta say that the Euro, at today's exchange rate, is even less appealing than the U.S. $, and if the ECB begins to cut, the Euro could plunge vs the $. Also, you know my saying: "markets zig and zag, they don't zig and zig and zig" - and the commodity markets have been zigging pretty hard again.

When the ECB cuts that first time and the Euro sags and the Dollar moves hard to the upside it is VERY likely that many of the commodities are going to get rocked. I am preparing now for that opportunity. I don't give specific advice in this forum, but you can figure this one out.

Well the Euro is correcting, and the correction in commodities ain't over, so if you were hoping for a V bottom monday, you got a better chance of an early visit from Santa.  Commodities are NOTORIOUSLY volatile.  There is no such thing as BUY AND HOLD in this market, with the exception of fully paid for bullion.  Speaking of bullion (Gold and Silver), and you know I am a BIG bullion fan, the end of the Euro bubble and the correction in the rest of the currencies is going to make it rough for "Gold Bugs" for the time being.  And NEVER listen to those Gold Bug Jag Offs and their ridiculous analysis which I can some up like this:  

"If Gold and Silver prices go up, the markets are behaving correctly and all is right with the world.  If Gold and Silver head down, or in last week's case get walloped, then it is a huge Government conspiracy to get you out of gold and into the currency."

Not that I saw this past week coming in the Gold & Silver markets.  I didn't.

Oil followers have their fair share of loonies, too.  I got dozens of emails from folks asking me if the Oil price decline was engineered by the Bush Administration to help McCain's campaign.  These folks gotta get a grip!  The world Oil market is the largest, most liquid market on the planet. The Bush administration can't find its ass with BOTH hands, but suddenly they are competent enough to engineer a world wide decline in Oil prices.  

Some of the folks I emailed back said I was being naive, that the Saudi's were releasing more oil, blah, blah, blah...  "Amateurs talk strategy, professionals talk logistics" is a famous military saying.  Well, logistics matter in Oil, too.  These guys are saying that the Bush Administration manipulated the world tanker fleet, pipeline flows, and production flows from the world's exporters - perfectly timed to coincide with the Presidential campaign!  Must be fun to be so detached from reality.

If any of the above were true regarding the Oil markets, we would have seen an increase in inventories - they decreased; and, the U.S. would have experienced a pick up in imports - and imports declined.  So why did the price of Oil go down?  

Sorry conspiracy theorists, the Oil market was over bought, and now is likely oversold (and it can get much more over sold).  That is how markets work.  The Oil market is, in fact, controlled to a large extent by OPEC, but if you say that OPEC engineered this for Bush and McCain, you gotta have rocks in your head.  All of the OPEC countries, not just Saudi Arabia, would have needed to COOPERATE to drive up Oil to nearly $150, and then put increased supply back on the market, allowing for and calculating the time element of the world's tanker fleet all timed perfectly for the American elections!  The law of unintended consequences would negate any potential benefit intended to any particular party.

Back to the real issue:  Oil was $10 in 1999.  Oil is $115 as I write this.  Notice a trend here?

I can see the headlines in August 2010 or 2011 now:

"Oil prices collapse $65 in less than 1 month!  The Oil bubble has popped!  Oil down to $225 per barrel and falling!"

2 years ago, oil fell from $80 to just under $50, rose to $147 at the peak and fell to $115.  During the past 25 years or so, the average decline for crude during the "shoulder period" (the "head period" is peak summer driving and winter heating, the "shoulder period" is the time in between) has been about 26%. If this year met that average we could expect a $38 decline, peak to trough, or $109 per barrel. I would be very surprised by a decline to $100 or lower, but it could happen.  I would give that a very low "probability event horizon".  Any individual stock can go to ZERO. Commodities, while far more volatile than stocks, cannot.  It just feels like it when you are long.

Now, some of the rise in Oil was related to the decline in the U.S. $ in relation to the other major currencies.  The currencies were never worth what their exchange rate implied.  If you think the U.S. has some whacked out social programs, Europe makes us look positively fiscally disciplined.  On the other hand, the U.S. portion of worldwide military spending is over 50%. That is a HUGE drag on the US$ that won't be going away anytime soon.  The U.S. spends more than 3 X on Law Enforcement, "Justice", and the U.S. prisoner population than the Euro zone does.  This is another HUGE drag on the U.S.$ (and just look at what us taxpayers get for our money!).

What I am getting at is this.  ALL currencies are going to lose value in the aggregate as measured by purchasing power.  Right now, looking at the Gold & Silver market for last week, that might sound silly, because if that were true, why is Gold going down?  

In 2000 Gold was $350 per ounce and front month gold is $864 as we speak.  Notice a trend here?  True, Gold has lost 15% from its peak - welcome to the markets.

Trading and investing is notoriously hard on the nerves.  This is one of those moments.  Commodity trading is even worse than stock trading.  And, if you use LEVERAGE it can kill you, especially if you are one of those folks that cannot admit you are wrong every once in a while.  

SO, to sum it up...  EVERYTHING revolves around Oil.  No exceptions. 

If Oil supplies to the U.S. are/become no problem, total imports will rise, and the price will fall back to $50, the housing crisis can be easily resolved, the U.S.$ will rocket higher, the banks re-capitalized, the Dow would break 20,000, and SUV's will once again  conquer the planet.

If Oil supplies continue to decline to the U.S. the opposite will be true.

Which way do you think its going to go?  Then lay your money down.  If you are not a participant, you are nothing more than a JAFO  (Just Another F@#ing Observer).  In the markets, elections, and life JAFO's just don't matter.  Not that JAFO's aren't perfectly fine human beings, they just don't matter and have no impact.  (Actually, they do.  Most JAFO's I know do an AWFUL lot of talking, shouting, and screaming about their ridiculous opinions - in which they have no confidence or they would take action and put some skin in the game.  The bluff & bluster is all show, no dough.  All Hat, No Cattle.  Kind of like people that define themselves as "Country", but never milked a cow, grew a crop, slaughtered a chicken, or owned a horse.  I live half the year with a bunch of suburbanites outside of Nashville that think because they know the words to a couple of "Country" songs, well, they must be "Country".  Very strange.)

None of this will occur in a straight line.

Which, by the way, is what makes trading worthwhile.  Think about it.  The economy is affected by the AVERAGE PRICE of Oil in any given period.  The economy has no idea that a couple thousand barrels of oil changed hands at $147.  NONE.  ZERO. ZIP.  The economy knows only the average price of oil during any given month, quarter, year, or decade.  A TRADER does not give a good tootie about the average price, he only cares where he bought it and where he sold it.

Next year, I think the price of Oil will average $150 give or take, and I think it will have 1 standard deviation of $50, implying $100 low and $200 high.  I am very interested in those 2 numbers, whereas the $150 average (or whatever it is) is the ONLY number that Fed Chairman Ben Bernake and U.S. Treasury Secretary Hank Paulson really should care about.

Now if I am wrong about the AVERAGE price but correct about the high and low prices, I can do well in the trade.  It does me little good to be correct about the average and wrong about the standard deviations.

There is, in my opinion, NO WAY, that the U.S. economy can handle a $150 Oil average price in 2008, and that is why you are witnessing the fall in Oil prices.  The U.S. will need time to adjust, smaller cars, more foreclosures and house abandonments so that workers can live closer to work, or more commercial abandonments so that workers can work from home.

Read that last line again.  The key word is "Abandonments".  There will be plenty of abandoned homes built out in the middle of nowhere and requiring a long car commute.  Additionally, when companies allow and individuals have NO CHOICE but to work from home, there will be considerable abandonment of  commercial properties.  Still want to buy Real Estate?

(You know what they call 1 million Real Estate brokers lined up at the unemployment office?  A good start.)

$200 Oil IS coming, but sustained $200 per barrel is a ways off.

Lastly, the recent rally in financial stocks is giving folks an excellent opportunity to get while the getting is good, in my less than humble opinion.  If you think that the mortgage crisis has passed, and that housing prices have bottomed you can ignore me here.  Otherwise, it is time to exercise the "Sell" key on your keyboard.

Good Luck!

Mentatt (at) yahoo (d0t) com


Anonymous said...

It makes me think of a video I saw of the execution of the Romanian dictator Ceausescu and wife Elena in 1989. Instead of the standard up against the wall execution, blindfolded, tied up etc....they seemed to be in a large courtyard and got to run around a lot with the executioners (off camera) taking shots at them while they ran and tried to hide. It was clear they were trapped in the courtyard and were gonna die, but they did try running, duck and cover, etc.
Very strange '80's snuff flick.
Seems to me, it's like all that money that's floated to the top of the world economy and is now running around trying to find a safe place and keep from dying. Not really doing anything productive, just keep from dying. And the only trickle down is the fear shit and piss.
Yeah, the market can be a cruel bitch, especially when she doesn't have rules and does what she wants.

Anonymous said...

(From the non-regulating bureaucrat):

I still think China has something to do with this oil thing. One article has China dropping their usual oil deliveries by 40% over the last month (for the Olympics). That's a lot! I'll put my suspicion about the Saudi royal family to the back for a moment (they are the biggest oil exporter in the world and they & Iran are the biggest oil suppliers to the emerging Asian countries, and they are tight friends with the Bushes, but anyway ...) I guess we should find out something in September. If the futures rockets back up to $140 next month, in quick measure, I think I may just have a win! :) Something has to resume powering this 9%/10% growth per year Chinese economy, and it isn't the bamboo shoots.

fallout11 said... is a good place to visit for the conspiracy-minded nutters. The posters over their thinks the governement is manipulating the weather spraying chemicals in the air, engineering a Club of Rome style dieoff so they can have a New World Order of chipped humans grown in vats, deliberating holding back the oil, the whole nine. Tinfoil hat wrapped way too tight.

Markets are driven by human emotion as much as, if not more so, than actual fact and logic. Fear and greed rule supreme, which is why volatility exists. As Mr. Jeffers says, it's the averages that matter, that is what has the lasting effect, the signal, not the noise.
My money is chasing inflationary hedges presently. Average, run of the mill goods and services used by ordinary schmucks for the 60%+ of their monthly outlay not already tied up in a house payment are still far outpacing wage gains (what wage gains?). So from that perspective, commodities are entering a "buy now" period.

Anonymous said...

I have been reading your blog for some time now....If you dont mind, can I ask you a question...WTH....I'll go ahead and ask anyway...You talk you walk the talk? or is most of this for effect? Is it difficult to hold on to what you believe (or at least what you post in your blog) during these times? Or do you find yourself in a schizophrenic state when things go against you? .DO NOT BOTHER TO RESPOND IF IT IS GOING TO BE THE USUAL EXPLETIVE FILLED MONOLOGUE for whosoever challenges what you say!

Greg T. Jeffers said...


Wow, that does not sound like the usual drivel!

The answer is, YES I find myself in a pschyzo state WHENEVER things go against me! By things, I guess you mean positions in the markets.

I am not a "BELIEVER" in anything, other than that I believe, no, I am SURE, that I am only as good as my last trade.

As for me walking the walk or talking the talk... I don't know what to say. This is how I make a living. When I am wrong, I am gone. I make DIRECTIONAL bets, not political diatribes.

"Once again, I apologize for all of my shortcomings"


Anonymous said...

C'mon....some of your posts and responses to the post comments could qualify as "Diatribes"...anyways...thanks for the candid diatribe...oops...I mean "response"...and apology ACCEPTED!

bdrube said...


I read a lot of economic and political blogs (of every stripe except partisan Republican) and I usually judge them by my gut feeling of where they fall in a range from knowing what they are talking about to being completely full of shit.

I must say, yours is one of the strongest in the former category. Thank you for making sense (as much as anyone can) of things.

Anonymous said...

Greg, with Russia and Georgia fighting with the oil pipelines within striking distance, do you think oil could be back in the 150 dollar range in a week or two. Jim

Greg T. Jeffers said...


Read JR Nyquist's stuff ( The guy has a great mind, though you might not like his conclusions.

As far as the price of Oil...

IN MY OPINION, for whatever that is worth because it only lasts as long as the DATA supporting lasts...

The CFTC commitment of traders report and the EIA inventory data and the fact that we are in or going into the shoulder period, all argue that we are close to a bottom. Unfortunately, these data points have been making that argument since $128, and Oil has fallen $13 from there.

Any outbreak of multinational hostilities could result in $200 + oil over night. I am not willing to make bets based on that, other than I refuse to go short Oil.

When I say we are close to a bottom, I mean by PRICE, not necessarily time. Further, spikes can move HARD, in either direction, and I cringe at the idea of saying that a spike to the down side could not occur.

The easy, long, directional trade is over for the moment. Until it isn't.

How's that for non commitment?

Sorry, that is the best I can do at this time

Greg T. Jeffers said...

Dear other anon:

My apologies once again. I DO make political diatribes.

What I meant to say was that I don't make them for a living...