Wednesday, May 18, 2011

A Wider View - Part 3

Where was I?

Oh yes, how most folks have gotten the Oil supply and pricing story wrong - so far.

See, "no battle plan survives contact with the enemy".  In this case, I think a great many folks are going to pull their horns in right when they are going to be very, very right.

I am not terribly bullish on Oil prices in the near term, primarily because I foresee one final deflationary disaster that will create the greatest buying opportunity since Noah built hisself a boat... UNLESS something bad happens within the boundaries of the Kingdom of Saudi Arabia.  Look, the U.S Federal Reserve forced a great deal of money into risk assets, and when the Fed begins its exit it is going to have the opposite effect, not to mention all of the emerging markets whose central banks have been printing like mad will have to stop printing and tighten liquidity, too.  If this proves correct, then the deflationary wave will be dumbfounding/tidal in its magnitude. While the Fed has made me look dopey in the near term, I am going to bet big on my vision of the outcome. I know a great many people - the "shorts" and the "doomers" among them - that absolutely HATE Bernake & Co. Not me. I underestimated the capacity of the Fed, and missed a big opportunity. Oh, well. I didn't lose, I just didn't capture the opportunity. You gotta be able to forgive yourself and move on to the next trade. I remember a smart, older trader from my time at Laidlaw; he would say "don't get stuck in a rut on your thinking... keep thinking - and trade."

Too many people in the "Peak Oil discussion" universe get stuck on the price of Oil. Don't. If my deflationary wave comes to pass, it will wash Oil out with everything else - and that includes precious metals, grains (weather permitting), equities, maybe even bonds (got noodle that some more). We are getting a hint of things to come from housing and wages, neither of which are responding positively to the Fed's inflationary call to buy risk assets. These aren't canary's in a coal mine; these are freaking Ostrich's.

I have been hanging onto to my view of that one last deflationary wave, and missed the trade on QE2.  I forgive myself. Now what? Now the Fed does not have the political cover to do QE3, and by the time they do, the wave will be overwhelming (my friend, the Mad Scientist, thinks QE3 is in the cards. Maybe. Even probably. But not until the water is coming over the bow, me thinks).

So what's this have to do with Oil supplies, politics, Matt Simmons, and Dan Yergin?

Simple. The emerging markets are going to continue to compete with the U.S. and the West for a declining volume of exported oil even as the deflationary wave (brought about by the withdrawal of liquidity in the same developing nations that are competing for said Oil) makes the production of marginal, unconventional oil very, very unprofitable.  This, and I reserve the right to change my mind on a dime, will create the entry point for Oil that most of us missed in 2009. Actually, the entry point for equities, real estate, and other commodities, too.

BTW... I was kidding when I said "Simple". Also, shorting is for pros and big boys. Don't try it at home unless you know what you are doing and what risks you are taking.

18 comments:

Stephen B. said...

I guess I'm looking for something that tells me that the fed and the other central banks *have* to stop their printing and quantitative easing. To me it seems that they've eaten the fruit of the forbidden tree and I just don't see why they must restrain themselves from here on.

That said, I certainly can see how oil prices could deflate, IF the banks pull back. Of course, oil could be unaffordable at nearly any nominal price, given people's deflation-destroyed incomes too.

I was holding my cash, proud of myself for being so frugal, waiting the coming deflation wave and subsequent buying op as the world stumbled and crashed, but then felt something of a chump as everybody got bailed out and housing got propped up by tax credits, etc.

We shall see.

Anonymous said...

It seems to me that QE3, is all but a given. I’m not so sure the Fed could wind down even if they wanted to; just look at what happened to the FASB when they tried to impose rational accounting rules on dud assets. With the Fed doing the lifting all the politicians can run around and gripe about the policy while accomplishing nothing. “I didn’t vote for that, but I need you to vote for me so I can do some more useless griping about the Fed…” This group is not serious. Look at the thirty billion in budget cuts that was actually closer to thirty million. Given the size of the deficit thirty billion was a sad joke and what was actually cut was more akin to a rounding error than serious policy. These clowns want the status quo to continue and they want someone else to take the heat for it; think of it more as a mandate than political cover.

Best,
Dan

Donal Lang said...

Couple of comments:

I think your mixing up the tide and the waves. The tide of oil prices is rising, for all the reasons we know. The waves are the short term chaotic events and you'd be a brave man to call them - all we can say is that there is an up-and-down cycle, and that these particular seas are stormy with lots of highs and lows.

Secondly, as I've said before, inflation and deflation are not opposites. Inflation is the devaluation of money, a product of printing more than the value of the economy. Deflation is the devaluation of assets and commodities, but then you have to be selective - which commodities? Oil and copper are world-traded so ultimately based on world demand. Houses are locally traded so based on local economic conditions.
Shares can be either depending on the company and its trading.

But both inflation and deflation can happen at the same time, and different assets and commodities can be defating and inflating in value.

And then your head explodes! ;-)

Greg T. Jeffers said...

The Fed has done nothing except increase bank reserves and increase their balance sheet... I don't care what fruit they have eaten, the emerging market central banks are the ones who literally printed money - and why not. We were driving their currencies higher. They could print with impunity. Well, for a while. They over did it and now they are going to stop and it is this that is going to contribute most to the deflationary wave.

Anonymous said...

Greg- As you are expecting a final big deflationary contraction- where do feel the best place is to build up cash balances?

I am currently building up US Tbill accounts but am open to other ideas.

Thanks,
Marshall

Anonymous said...

QE3 is a given, and so is QE4 for that matter. As long as asset values keep dropping, and high foreclosure rates exist and debts go unpaid, there will be liquidity problems. Every time a debt goes unpaid, someones expected cash income disappears. If the fed doesn't keep creating liquidity, we'll be back to 2008 in a heartbeat.

There is no reserve asset value to fall back on. Everything is leveraged. Until that is corrected, the fed will have no choice.

They won't pull back. They simply can't pull back. They buy treasuries, and the money goes straight out through government expenditures creating liquidity. But as the notes mature, the proceeds, principal and interest go straight back to the US Treasury. Their loans to the government are no interest, by definition. They are not creating debt, per se. I'm no fan of completer credit collapses. I like to be able to cash my paycheck!

The real troublemaker in all of this is Congress, and their inability to stop spending. They continue to create debt that cannot be repaid. This is very dangerous, as it will eventually force the fed to create money simply to finance the debt. That is the the end game that will lead to disaster.

Regards,

Coal Guy

Anonymous said...

I have lived through a regional deflationary bust. I paid great attention to what was happening and took many mental notes.

It seems that when hard deflation takes hold, it just sucks the breath out of almost everything in the affected economy. Those who had cash were able to buy all kinds of assets at bargain prices.

I was luckily one of those who had the cash and took advantage of the bad conditions to pay off RE- never made a mortgage payment since.

Best,
Marshall

Greg T. Jeffers said...

Coal Guy:

Let us assume that you are correct. Lot's of smart folks think like you do. For my part I am agnostic on the subject... but, again let us assume QE3 is coming.

When?

No way does it come before the wave is getting us wet. No need if inflation takes hold and asset prices head higher.

Feel free to correct my thinking. I am fairly confident in my call, but I am willing to listen to reason.

Greg T. Jeffers said...

Coal Guy:

Let us assume that you are correct. Lot's of smart folks think like you do. For my part I am agnostic on the subject... but, again let us assume QE3 is coming.

When?

No way does it come before the wave is getting us wet. No need if inflation takes hold and asset prices head higher.

Feel free to correct my thinking. I am fairly confident in my call, but I am willing to listen to reason.

Anonymous said...

Greg,

I tend to agree with you in the short term. The politics of this thing are against further monetary easing. The economy is starting another downturn as we write here. And that is with QE2 AND a huge federal deficit simultaneously. I don't think anything the fed does right now will stop the next dip. After that, who knows.

The best case would be budget cuts with the fed easing to hold things together as money disappears, and an up and down economy until debt and asset values come back into line.

But, US debt isn't the only turd in the punch bowl. The Eurozone is poised to suck trillions out of the world's economy. Greece, Ireland, Portugal, Spain, and perhaps Italy will default in the next 18 months. Will the banks get 30 cents on the dollar? Businesses and banks don't die from debt, they close when the cash is gone. The same goes for governments, I'd suppose. It is impossible to say just how things will transpire, but it will be SPECTACULAR.

Regards,

Coal Guy

Greg T. Jeffers said...

I think so... in fact, I cleared the decks in my own accounts...

Donal Lang said...

In a fiat money system, if you need growth to pay the interest, then in a time of debt you need low or zero interest so any 'growth' helps pay off the loan capital (losses). That is a justification for low interest rates.
Similarly expansionist money (QE) devalues the fiat currency, reducing the debt and making the economy more competitive.
So the Fed, ECB and Gov'ts are doing justifiable things.

But if international interest rates go up, or QE-driven 'growth' stalls, or a bond sale fails, or just confidence falters in one of the Western blocks, the whole USA $14 trillion bubble collapses along with Europe, Japan, etc.

But what actually happens if fiat money loses confidence? Is it hyperinflation? Or do the banks just shut their doors? Does gov't stop for lack of money? Then what??

Anonymous said...

Donal,

If we knew which way it would go, we could be rich! My guess is that the central banks stay in the business of printing money to buy government debt, as our governments cannot control their spending. The ultimate result of that is hyperinflation. Of course, in a panic, the credit markets could collapse faster than the banks can react. It hurts to think about it.

Regards,

Coal Guy

Anonymous said...

Political not economic problems are going to be the driver of change over the next few yrs. The 67 border issue being pressing now that the POTUS opened his big fat mouth. You have the Palestinians who now know that we support a two state solution with seemingly little conditions. Obama is now trying to placate the Muslims by throwing our only ally in the M.E. under the bus. Has anyone stopped to think how to push 5-6 million more Palestinians into Israel?
On top of this there is no such thing as a Palestinian. They are just refugees from Mostly Jordan,with many migrant workers from Iraq, Syria, Lebanon, Saudi Arabia, etc. Palestine was never an exclusively Arab country, although Arabic gradually became the language of most the population after the Muslim invasions of the seventh century. No independent Arab or Palestinian state ever existed in Palestine. When the distinguished Arab-American historian, Princeton University Prof. Philip Hitti, testified against partition before the Anglo-American Committee in 1946, he said: "There is no such thing as 'Palestine' in history, absolutely not." 1937, a local Arab leader, Auni Bey Abdul-Hadi, told the Peel Commission, which ultimately suggested the partition of Palestine: "There is no such country [as Palestine]! 'Palestine' is a term the Zionists invented! There is no Palestine in the Bible. Our country was for centuries part of Syria."
There are already 7.7 million (5.8 some million Jewish) in a nation the size of New Jersey (pop. Of around 8.8). What incentive is there for the Palestinians to control themselves? None from what I can see, the more they harass and kill the more they get. I think the whole axis of what happens economically is dictated on what happens politically here.

dextred

Anonymous said...

Hahahaha. I just heard the rebuke of Obama by Netanyahu, I wish U.S. politicians had the balls of that man. That was some funny stuff. Couple quick points he made. First that Negotiating with Hamas is in no way different than the U.S. negotiating with al Qaeda. Second Israel will in no way back down to the 67 Borders. They were indefensible then and are more indefensible now. Third that Palestinians will never be allowed to return to Israel. Israel took in almost the same amount of Jews from surrounding nations as Palestinians that left during the 48 invasion of Israel. This goes back to what I said a yr or so ago on here that the Muslims keep the Palestinians in camps in order to create a false impression of the actual situation. The surrounding Arabs use the Palestinians as a proxy to fight their battles because whenever they man up in major military action Israel takes them to the wood shed.

Dextred

Anonymous said...

Dex,

My 10th grade social studies teacher said exactly the same thing about why the camps existed. That was in 1970. Some things don't change.

Regards,

Coal Guy

Anonymous said...

Coal guy,

It is funny how they paint a much different picture than what exists. The thing is that I would venture to say 50% (maybe 60%) plus don't know the truth of the situation.

Dextred

westexas said...

If we go back to the Thirties, it would appear that global crude oil consumption only fell one year, in 1930, and rose thereafter. And US oil prices rose at about 11%/year from the summer of 1931 to the summer of 1937. There were reportedly three million more cars on US roads in 1937, versus 1929.

Of course China would be to our current predicament as the US was to the Thirties, with the key difference being that hundreds of millions of people in developing countries now want to drive a car for the first time, and in many cases they can pay cash for entry level vehicles.