May 22, 2013
When America Stops Importing Energy
By IAN BREMMER and KENNETH A. HERSH
You’ve probably heard by now about the American energy revolution. Breakthroughs in drilling technology have opened access to enough new oil and gas reserves in the United States to dramatically reduce U.S. dependence on foreign oil.
The numbers tell the story: U.S. oil production has reversed its 30-plus year decline; U.S. imports from OPEC producers have fallen more than 20 percent in the past three years; U.S. natural gas reserves and production are up significantly and prices have dropped 75 percent in the past five years. The International Energy Agency forecasts that the United States could become the world’s largest oil producer by 2020 and may be energy self-sufficient by 2035. That’s a game changer.
While this is not a free lunch, it should not be feared. The production process is complicated and expensive, and if the industry is not careful there can be risks to the environment. But the potential is staggering. Significant domestic job growth and economic expansion has begun.
But let’s look beyond the impact on the United States and consider a few of the more profound implications for the rest of the world, because this revolution is also a game changer for international politics and the global economy.
The axiom of “resource scarcity” has been one of the dominant forces shaping global geopolitics and economics since the end of World War II. Now, thanks to the U.S. oil and gas industry’s technological and entrepreneurial savvy, we have ushered in an era in which “resource abundance” will be the norm. The technology will be used to turn the U.S. into an energy exporter and also unlock hidden reserves in other countries. The resulting surge in supply means that the global energy sector will begin to behave like a more “normal” market, one in which demand and supply are in better balance and less power is concentrated in the hands of select producers.
Energy-rich countries like Russia, Saudi Arabia or Venezuela could be in serious trouble. Higher prices and market power have allowed their rulers to boost their domestic popularity with subsidies and other social spending projects, but when their customers produce more of their own energy or have other suppliers available, they will be forced to adapt quickly and intelligently or deal with the consequences.
The other great shift will come from a change in U.S. foreign policy. At the beginning of World War II, the United States supplied about 63 percent of the world’s oil and Texas was the global supplier of last resort. The Arabian Peninsula, Iran and Iraq together produced less than 5 percent. But in 1960, new discoveries encouraged Saudi Arabia, Iran, Iraq, Kuwait and Venezuela to band together to form the Organization of the Petroleum Exporting Countries (OPEC). Over the next decade, Middle Eastern and North African countries ramped up production by 13 million barrels per day, and OPEC members began to claim a bigger share of profits from Western oil companies operating on their territory. Qatar, Indonesia, Algeria, Libya, the United Arab Emirates and Nigeria joined the cartel.
Then came the tipping point. In March 1971, Texas reached maximum productive capacity. Over the next five years, U.S. oil imports nearly doubled and other producers gained critical market power. The Yom Kippur War in October 1973 triggered the OPEC oil embargo and the market distortions we’ve lived with ever since. That’s when access to foreign oil became a central preoccupation of U.S. foreign and security policy.
Fast forward to 2013. As America drives toward a new era of energy self-sufficiency, Washington will be less willing to risk lives and spends billions on ensuring the free flow of oil and gas through dangerous places. That’s especially important for the Middle East — a region where Ottomans, then Europeans, and lately Americans have, for better and for worse, helped keep the peace. The United States isn’t about to abandon the region entirely, not with the global economy still so dependent on the flow of commerce through the Strait of Hormuz and Israel’s security at risk. But it’s natural that as America becomes less reliant on the Middle East for energy, Washington’s willingness to accept risks and burdens there will diminish, or at least become harder to justify in a fiscally constrained era.
Interestingly, even as America becomes less vulnerable to that region’s volatility, China will become more so — and more directly involved in its politics as a result. The International Energy Agency has forecast that China will import nearly 80 percent of its oil by 2030, and much of that crude will come from North Africa and the Middle East. Some estimates suggest that China holds larger shale gas deposits than even the United States, but for the moment it lacks the technology and know-how to exploit them.
Even if China gets up to speed quickly, it will take years for all the requisite infrastructure to be put in place and for its domestic oil and gas industry to mature to the point where it can deliver significant volumes year in and year out.
Thus as China’s willingness to intervene in the politics of other countries rises, its leaders will want to extend their influence. And energy-rich Middle Eastern governments that have lost big customers in America and Europe will welcome all the deep-pocketed foreign friends they can find.
Like all revolutions, America’s new energy bonanza raises some fascinating questions. How might a lighter U.S. presence and heavier Chinese involvement change the world’s most volatile neighborhood? What can the next generation of Saudi leaders expect for their country’s future in a world where OPEC has lost much of its market power? Will Qatar’s support for Muslim Brotherhood governments in other Arab states and China’s interest in using the United Arab Emirates as an offshore trading center for its currency leave the Saudis dangerously isolated? Can Iran’s revolution survive the need to build a more modern economy?
A world in which the United States is less involved in answering these questions is a new world indeed.
Ian Bremmer is president of Eurasia Group and author of “Every Nation for Itself: Winners and Losers in a G-Zero World.” Kenneth A. Hersh is chief executive officer of NGP Energy Capital Management.
This article has been revised to reflect the following correction:
Correction: May 22, 2013
An earlier version of this article contained an incomplete byline. It was written by Ian Bremmer and Kenneth A. Hersh.
Implications of Extreme Gold, Silver Price Volatility
By Patrick A. Heller
May 21, 2013
A man who attended a financial conference earlier this year told me that the famous speaker began his presentation by asking the audience how many thought that the price of gold had peaked. He was stunned that almost everyone other than him raised their hands.
In contrast, I have repeatedly expressed in my writings, interviews, speeches, and radio programs that the world’s financial problems that are the reasons why gold and silver prices have risen steadily for more than 12 years have not been resolved or cured. Therefore, in my judgment, prices of precious metals are due to continue rising for the foreseeable future.
I try to make my explanations straightforward and easy to understand. As a result, I am rarely asked if I think the price of gold (or silver) has peaked. Instead, the questions I hear most often are if the recent price declines have reached bottom or when will prices start to go back up.
In the short term, it is pretty much impossible to tell when prices have bottomed until after the fact. Instead of trying to guess the exact day or the specific price that gold and silver will turn back up, I take the long-term perspective that if gold surpasses $5,000 and silver exceeds $150 (which I consider to be questions of “when” not “if”) it won’t really matter whether someone now pays $1,700 or $1,350 for an ounce of gold or $22 or $35 for an ounce of silver. In other words, I consider today’s prices to be a bargain buying opportunity whether or not we are near the absolute market bottoms.
When markets get ready to turn, they often experience extreme volatility. Yesterday, for instance, the price of silver ranged all the way from $20.20 to $23.30, about at 15 percent swing. Almost no one was a buyer right at the moment that silver was at its daily low, as prices quickly soared. As I write this Tuesday morning, the silver price is about 10 percent above yesterday’s low.
So, did those who bought silver over the past several months when prices were higher than $20.20 overpay? Taking the long-term perspective, I don’t think so. Since most potential buyers didn’t jump in at yesterday’s low, does that mean that it is too late to get into silver? I emphatically say no!
There are technical traders who are waiting until the price of silver reaches higher levels, with many waiting for a price anywhere from $24 to $29 to enter the market. Should the price of silver reach $23 again, there is a strong likelihood that the short-sellers who bombarded the price by selling paper contracts will start closing out their positions by buying contracts to close out their position. Should a rising silver price gain any momentum, the price could easily increase several dollars within one to two weeks.
Gold could experience the same price recovery, though it will move by smaller percentages because it is a much larger (measured by dollar volume) market.
The extreme price volatility indicates that those trying to suppress prices are being seriously challenged by purchasers eager to load up with physical gold and silver. That could (and I have to emphasize “could”) be a sign that we are closer to the day when the nearly eight-month slump in gold and silver prices are over.
When the momentum turns positive, though, don’t expect prices to rise in a straight line. And, if prices rise too much too fast, expect the U.S. government to blatantly manipulate the markets. In the long run I don’t think the U.S. government is in the position to suppress prices of gold and silver indefinitely. Keep that long-term result in mind as we continue to see volatile prices.
Patrick A. Heller is the American Numismatic Association 2012 Harry Forman Numismatic Dealer of the Year Award winner. He owns Liberty Coin Service in Lansing, Mich., and writes Liberty’s Outlook, a monthly newsletter on rare coins and precious metals subjects. Past newsletter issues can be viewed at www.libertycoinservice.com.
Expectations Continue To Clash With Reality
Markets Continue To Set Record Highs, Despite Fed Warnings
May 21 2013, 14:02
The S&P 500 rose 2.07% last week, reaching another all-time high (1667). There was only one down day, Thursday, when it seemed like the Fed might decide to end quantitative easing (QE) earlier than expected, but the bulk of last week's economic news supported continuing economic growth and a bullish outlook for second-quarter GDP and corporate earnings. Still, the overall stock market seems to be looking for an excuse to correct, particularly if the Fed decides to scale back QE sometime this summer.
A Fed "Dove" Says the Full ($85 Billion per Month) of QE May End Soon
The latest excuse for the stock market to correct came from remarks last Thursday by San Francisco Fed President John Williams, who indicated that the Fed's $85 billion per month in quantitative easing (QE) may be reduced "as early as this summer. Then, if all goes as hoped, we could end the purchase program sometime later this year." Although he is not a voting member of the Federal Open Market Committee (FOMC), Williams pointed out that the pace of job growth has picked up, so the Fed may be able to tap on the brakes and reduce its bond buying program. This is significant because Williams is a "dove" (those who favor QE "to infinity and beyond.") Multiple "hawks" have been calling for a cutback on QE, but Williams is the first dove to openly agree, so I suspect the Fed will have an official statement soon.
Meanwhile, over in Japan, we are seeing the fruits of pedal-to-the-metal easing. On Thursday, it was announced that Japan's GDP rose at a 3.5% annual pace last quarter. This was substantially higher than economists' consensus estimate of a 2.8% increase, and the previous 23 years of near-zero growth. It is apparent that the Bank of Japan's strategy to dramatically weaken the Japanese yen to boost exports is working. Overall, Japan's example will likely cause other central banks to continue easing.
As a result of the falling euro and yen, the U.S. dollar index reached a three-year high last week. A strong U.S. dollar is crushing the overseas profits of many multi-national companies, but stocks are still rising since most stocks yield more than a bank CD or a short-term Treasury debt instrument, and companies are still borrowing money to buy back their outstanding shares, boosting their underlying earnings per share.
A New "Energy Glut" is Pushing Inflation below Zero (i.e., Deflation)
Last Tuesday, the International Energy Agency (IEA) reported that the U.S. will account for one-third of all new crude oil supplies within the next five years due to booming exploration for crude oil in shale deposits and new technologies to retrieve those deposits. Specifically, the IEA expects U.S. crude oil production to rise by 3.9 million barrels per day between 2012 and 2018, the equivalent to two-thirds of new non-OPEC production. According to the IEA, the U.S. could become the world's largest producer of crude oil by 2020 and temporally overtake Saudi Arabia. Additionally, the U.S. is also expected to pass Russia as the world's largest natural gas producer and become "all but self-sufficient" in its energy needs by 2035. The IEA also predicted that the U.S. will make a transition from a net energy importer to a net energy exporter, which will likely help further strengthen the U.S. dollar in upcoming years.
This new "energy glut" is starting to make the price at the pump decline dramatically once again. Last Wednesday, the Labor Department announced that the Producer Price Index [PPI] plunged 0.7% in April, due predominately to lower gasoline prices. The core PPI, excluding food and energy, rose 0.1% but food prices fell 0.8% and energy prices declined 2.5%, led by a 6% decline in wholesale gasoline prices. As long as the dollar remains strong and the energy glut persists, food and energy prices will likely stay soft.
On Thursday, the Labor Department reported that the Consumer Price Index [CPI] fell 0.4% in April due predominately to a 4.3% drop in energy prices, including an 8.1% drop in gasoline prices. Excluding food and energy, the core CPI rose 0.1%, which was below economist expectations. In the past 12 months, the core CPI has risen 1.7%, the lowest 12-month rise in two years. The overall CPI is now at its lowest level since 2010, so with the lack of inflation, the Fed has a green light to continue its 0% interest rate policy.
Stat of the Week: Consumer Sentiment Hit 83.7 - its Highest Level Since 2007
Consumers tend to be happier when gas prices are going down, the value of their homes is going up, and their outlook for job security improves. All of that was reflected on Friday when the University of Michigan/Reuters reported that consumer sentiment surged to 83.7 in May, the strongest monthly reading since mid-2007, rising sharply from 76.4 in April, and far above economists' consensus estimate of 77.5.
A second piece of good news was released on Friday when the Conference Board said its Leading Economic Indicators [LEI] rose 0.6% in April, substantially better than the economists' consensus of a 0.3% increase. Seven of the 10 LEI components rose. Overall, due to better-than-expected consumer sentiment and a rising LEI, economists will likely revise their second-quarter GDP forecasts higher.
Most of the other economic news last week was also positive. The Commerce Department said retail sales in April rose 0.1%, substantially better than economists' consensus estimate of a 0.6% decline. Excluding sales at gas stations, which declined 4.7% due to lower fuel prices, overall retail sales actually rose by a healthy 0.7%. Vehicle sales were strong, rising 1%, while clothing sales rose 1.2% and building material sales rose 1.5%. Most retail categories, except gas stations, rose impressively in April.
On Wednesday, the Fed reported that Industrial Production declined 0.5% in April, due predominately to a big 3.7% drop in utility output, due to unusually mild weather. Once again, the negative headline has a silver lining, since a drop in utility charges generally gives consumers more money to spend elsewhere.
In the housing sector, April building permits rose 14.3%, including a 37.5% surge in apartment permits and a 3% increase in single-family permits. That means May's housing starts will likely surpass a disappointing April, when housing starts fell 16.5%. Looking beyond these monthly swings, housing starts in April were 13.1% higher than a year ago. For confirmation of the housing recovery, we will see two major April home sales surveys released this week (existing home sales Wednesday and new home sales on Thursday), plus April durable goods orders, released Friday. We'll also see minutes of the most recent Fed meetings released when Fed Chairman Ben Bernanke updates Congress on the economy. I'll cover these and other events next Tuesday, after the holiday break. Have a great Memorial Day weekend.
Clients denied gold at major banks as shortage intensifies
Read this article on King World News – Courtesy KWN May 21, 2013
Second written part of the same audio interview we posted yesterday:
Greyerz: “This week I want to talk about what we are seeing in the physical gold market, and why there is a disconnect in that market. We transfer a lot of gold from Swiss banks and other banks into private vaults for investors.
More often now, than ever, we are encountering incidents when the banks are putting up all kinds of obstacles for these transfers. Signs of potential shortage of physical gold started with ABN AMRO in March (when they) declaring that they would renege on their commitment to redeem gold accounts in physical gold….
“Instead they would redeem in cash. The custodian for ABN AMRO, for the gold, is UBS, and UBS decides to what extent they hedge the ABN paper gold position and where in the world they hold it in storage.
So as there is no more physical redemption of the ABN AMRO gold accounts, it seems therefor that these accounts are no longer backed by physical gold. It’s just backed by paper, and this is of course typical for the paper market, Eric. this paper market, which is 100 times bigger than the physical market, probably has zero percent backing of physical. This is why ABN stopped redeeming in gold.
Then, last week we had an investor being refused to take his physical gold out of a major Swiss bank. They told him that the regulatory authority prevented the bank from giving the client his physical gold. That is of course total nonsense, and eventually we helped the client to get his gold out of the bank.
Another of our clients was told by a major Swiss bank that he can only take out 100,000 Swiss francs of physical gold every six months. They blamed money laundering and terrorist activity for this decision. Yet another client was again told by a major Swiss bank that his storage fees would be going up substantially. When he complained he was told that he should convert to paper gold.
And finally, Eric, another big bank, which has an ETF, told a client who wanted to transfer gold out it that he would have to wait at least two weeks for the transfer. You just wonder why a major bank that is supposed to hold substantial amounts of physical gold needs two weeks of more to transfer gold to a client.
So all of this, Eric, points to the fact that there is a major shortage of physical gold in the banks. These banks obviously don’t want to lose customers, but their behavior and the reluctance to deliver also points to a real shortage in the physical market.
So the disconnect between the paper and the physical market (for gold) is continuing. Refiners still have major production delays and demand continues to be very high, ‘No matter how much they produce,’ as one refiner told me today. And premiums are still high also.”
May 22, 2013 4:24 pm
Brussels to tighten rules on bank bailouts
By Alex Barker in Brussels
Brussels is to impose more stringent conditions on state bailouts for troubled banks, so that shareholders and junior bondholders suffer losses before taxpayers are asked to foot a rescue bill.
The imminent revision of the EU state aid controls uses the recent Spanish bank bailouts as a Europe-wide template, ensuring that all 27 member states impose a minimum of pain on creditors, even when it is politically inconvenient and those governments can afford to use public funds.
Under the European Commission’s new rules a higher level of “burden sharing” will be required for shareholders and junior creditors through a mandatory “bail-in”. Bank restructuring plans will also have to be agreed by Brussels before state support is issued.
So far, creditor “haircuts” have largely been forced on countries receiving EU rescue funds, raising fears in Brussels that without common standards bank bondholders in economically strong member states will be treated more leniently.
The tightening of the state aid rules will come years before the planned introduction of a formal EU regime for winding up failed banks by imposing losses on creditors.
Senior EU officials fear uneven approaches to bailouts could further drive up relative funding costs for banks in southern Europe, given creditors would see a lower risk of a “haircut” from investments in banks in AAA countries such as Germany or Finland.
This updated EU rule book is based on the experience in Spain – where junior bondholders were hit and EU restructuring plans were agreed before the disbursement of bailout funds – and the Netherlands, which hit subordinated creditors in the nationalisation of SNS Real.
However, it stops short of the Cyprus bank restructuring, which imposed losses on senior bondholders and uninsured depositors. The EU is presently negotiating a directive that could bail-in senior bank creditors but these rules are unlikely to be enforced systematically before 2018.
The new state aid guidelines, which will be applied to future bank failures, are under the commission’s executive powers and those involved in the reforms say they could be enforced from the late summer. Senior officials from EU member states are due to be consulted on the plan on Thursday.
Brussels polices state bailouts with the aim of reducing the bill for taxpayers and mitigating the market impact, so that banks reliant on public money cannot undercut their rivals who have no support.
Through the financial crisis, these rules have become the effective resolution framework for Europe and will remain so until common laws are agreed and resolution funds are built-up, which could take five or more years.
Since 2008, EU states have pledged a total of around €4,900bn in state support to banks, covering almost 40 per cent of the bloc’s economic output. So far €1,600bn has been used: state money is propping up 19 of Europe’s top 76 financial institutions and up to 15 per cent of the EU financial sector is under the commission’s state aid framework, according to an International Monetary Fund study.
Provisions in the rules permit state support to be urgently dispersed in an emergency, with provisional authorisation from the commission.
However some banks restructuring plans have taken several years to then negotiate. The new rules aim to make pre-approval the norm, as was the case in Spain.
Joaquín Almunia, the EU commissioner who enforces the state aid rules, has spoken about the revision of the rules as an important opportunity to learn from best practice. He has said the transition to banking union and common bail-in rules “will be characterised by continued exposure of the taxpayers to the cost of banks’ failures and by the need to maintain a level playing field in the internal market”.
“For these reasons, the role of state aid control during this transition period will remain very important as a proven instrument to protect financial stability, the internal market, and taxpayers’ interests,” he said.
The World's Central Banks Added To Their Gold Stockpiles Even As Prices Tumbled
Physical Gold Market Feeding Off Paper Market Selling
May 21 2013, 14:27
By Amine Bouchentouf
The gold market is a complicated global entity. As prices have nosedived this year as a result of investor sell-off, certain corners of the market have showed surprising resilience. In particular, the retail physical market primarily focused in Asia has been extremely robust.
It is not news that gold prices have suffered a painful drop this year, especially in April. This is to be expected since gold has not had a single down year in more than a decade. In particular, we haven't seen a sharp correction of this magnitude throughout this time period (2008 being an exception). So this sell-off is not only to be expected, it is actually healthy for the long-term secular bull market thesis. This is not the time to panic.
Gold Prices Down, Bullion Demand Up
One of the peculiarities of the gold market is its fragmentation. As investors in London, New York, and Berlin sell off massive holdings of gold through ETFs and other derivative products, we've seen quite the opposite occur in places such as Dubai, Mumbai, and Shanghai. There is no question that investors around the world have sold off gold holdings, which is one of the reasons for the price drop. However, in the midst of this sell-off, we see that a countertrend has developed in the physical market.
Dealers in Mumbai, Dubai, and Shanghai are witnessing record demand from local physical buyers. Encouraged by the lower prices, these retail clients have flocked to dealers trying to get their hands on gold while it is trading at these levels. This dichotomy is reflective of the market and how complex it is. While the price in international exchanges has been dropping, it has only served to increase demand for physical bullion.
In Dubai, which is sometimes known as "The City of Gold," merchants in gold souks (markets) have seen such a sharp increase in demand for physical bullion that their premium (the spread between cost and purchase price) is off the charts. Usually, the premium that dealers charge above the current market price ranges between $0.50 and $1.00 above the quoted price (usually the London PM fix price). In the month of April, that spread rose to $10 in Dubai as customers were willing to pay that huge premium in order to secure their physical gold bullion. In markets such as Istanbul, that premium reached $25 in some cases. Buyers calculated that it made more sense to buy gold at $1,380 per ounce with a $10 premium, rather than pay $1,750 per ounce with a $1 premium.
The demand for physical gold has increased so much that gold dealers in Dubai and Mumbai have reported shortages of bullion.
A Critical Market Shift
The gold market has metamorphosed itself several times over the last two decades. In the 1990s, the gold market was pretty much a physical market, with central banks and jewelry making up the bulk of the demand; this also includes individual buyers. After 2001, the gold market went through a financial revolution with the advent of ETFs, futures, and options helping to determine prices on commodity exchanges around the world.
In April 2013, these two worlds collided as financial traders ran for the exits while physical buyers came rushing in as buyers. This dichotomy is important to understand and to keep in mind for anyone who is involved in the gold markets, whether through ETFs, bullion, or both. These two parts of the market feed off each other and have a relationship that needs to be carefully monitored in order to be able to monitor the markets successfully.
Specifically, what the demand from physical side of the market tells us is that investors' faith in gold as a store of value is intact. People -- particularly those in the East and Middle East countries such as Saudi Arabia, India, and China -- still have a gut instinct that gold is the ultimate store of value. And as we saw in April, as soon as prices dropped these buyers flocked to the souks in order to secure their share of the physical gold market.
Remember that gold prices doubled between 2008 and 2013, just like they more than doubled between 2002 and 2007. Having this price correction is only normal, but the fact that the physical market came out roaring during this sell-off leads me to believe that the gold market still has a long way to go before it sputters to a halt.
Disclosure: The author is long gold.
Something very interesting just happened at the 2013 MoneyShow in Las Vegas.
The purveyors of doom and gloom were all still hawking their services there. But the primary solution they offer - a cure-all elixir for everything that ails markets - was beginning to wear thin.
The usual conviction that this one asset is the remedy was gone. And the seats at these sessions were only half-filled.
Indeed, gold is beginning to lose its luster.
The erstwhile commodity fix has been under pressure of late as well. Yet, even while most eyes have been on declining commodities - especially gold, silver, and platinum - something else has been happening.
Crude oil is emerging as a new replacement to reflect stored market value.
That is good for folks like us who invest in the energy sector, because it will provide a floor to downward pressures in oil prices. It will not counter all forces reducing the price of oil, but it is likely to temper such movements, allowing us some leverage.
Take a look...
The Yellow Metal's Fall from Grace
Before 2013, the reliance upon metals as a value play during volatile trading periods has become almost a mantra. Such commodities are usually regarded as barometers for broader market moves, although the precipitous fall in pricing over the past month has called that position into question.
That fall has been considerable.
SPDR Gold Shares (NYSEArca: GLD), the most widely held gold exchange traded fund (ETF), has fallen 15.3% since April 1. Meanwhile, the equivalent for silver - the iShares Silver Trust (NYSEArca: SLV) - is down 21%. ETFS Physical Platinum Shares (NYSEArca: PPLT), the most popular platinum ETF, is the best performing of the three, but it's still down 8.8% since April 1.
Normally, gold is regarded as the primary refuge when markets move south, with silver regarded as a distant second. Both silver and platinum are also regarded as indicators of market improvement (along with copper, a commodity I have long regarded as an "acquired taste" largely dependent these days upon Chinese industrial performance).
What has been happening recently, however, is different. GLD and SLV have declined far more than the overall market has risen. In other words, a cursory view would immediately show that what is happening is way more than the commonly perceived negative side of the "flight to security."
That is, if gold (and to a lesser extent silver) are seen only as a refuge when things so sour, the reverse move of the market up should cause interest in the metal to decline.
The current slide, however, is well beyond the rise in market prices. As of Monday, the S&P had risen 6.7% since April 1, less than half the fall in GLD and only a third of SLV.
With the much announced sales of gold holdings by investors like George Soros and Warren Buffett, the largest slide in some three decades has put the metal's position as a further market barometer in doubt.
At the same time, the price of crude oil has become a more accurate reflection of where markets are moving.
Why Oil's the Better Market Indicator Today
As of Monday, West Texas Intermediate (WTI), the NYMEX benchmark futures contract crude rate, has declined less than 1% since April 1, but has risen 7.7% over the past month, better than the 5.6% improvement in the S&P.
Yet this is not translating into a similar result for Brent, the London-based benchmark comprising the other primary crude oil standards worldwide. There, the price has declined 6.6% since April 1, although rising 3.5% for the most recent month.
Now the focus between these two has fallen upon the "spread" or the difference in price. In every trading session since mid-August 2010, Brent has been priced higher than WTI. Both of the benchmarks have lower sulfur content than some 85% of the oil traded globally on a daily basis while WTI is a slightly better grade than Brent.
Nonetheless, Brent has been trading at a premium to WTI.
One reason has been the glut of volume at Cushing, Okla. (the primary pipeline location in the U.S. and the place where NYMEX sets its WTI daily price). Another is the usage of Brent as a yardstick for more actual oil sales internationally than WTI.
The surplus at Cushing is now being reduced due to a reverse flow on an existing pipeline to Gulf Coast area refineries and the prospects moving forward from new transport networks. Meanwhile, Brent is experiencing added competition from new sour (i.e., higher sulfur content) crude benchmarks rates in determining trading prices.
When combined with additional American domestic oil coming on line, the spread is narrowing. As of Monday, it stands at 8.1% of the WTI price (the better way of measuring the actual spread's impact on the U.S. market). It was discounted almost 23% less than three months ago.
This contraction of the spread will have some interesting benefits for energy traders moving forward and we will discuss these in an upcoming article. But it is also related to the matter we are considering today.
As that spread narrows, WTI becomes a more ready reflection of actual global oil prices. And as the premium returns to New York traded oil, we will also acquire a more ready indicator of crude's rising position as a store of market value.
There are a range of interesting outcomes for the energy investor from this development. While the average investor is not about to begin trading in oil futures, there are several ETFs that would accomplish the same objective.
Using select ETFs to target individual company shares will also result in increased trading leverage.
I will have much more to say about this once the revised oil position settles.
China’s Interest-Rate Challenge
21 May 2013
NEW YORK – China’s successful transformation from a middle-income country to a modern, high-income country will depend largely on the reforms that the government undertakes over the next decade. Financial reforms should top the agenda, beginning with interest-rate liberalization. But liberalizing interest rates carries both risks and rewards, and will create both winners and losers, so policymakers must be prudent in their approach.
In 2012, the People’s Bank of China allowed commercial banks to float interest rates on deposits upward by 10% from the benchmark, and on bank loans downward by 20%. So, if the PBOC sets the interest rate on one-year deposits at 3%, commercial banks can offer depositors a rate as high as 3.3%. Many analysts viewed this policy, which introduced a small degree of previously non-existent competition among commercial banks, as a sign that China would soon liberalize interest rates further.
But any further move toward interest-rate liberalization must account for all potential costs and benefits. Chinese policymakers should begin with a careful examination of the effects of current financial repression (the practice of keeping interest rates below the market equilibrium level).
The degree of financial repression in a country can be estimated by calculating the gap between the average nominal GDP growth rate and the average long-term interest rate, with a larger gap indicating more severe repression. In the last 20 years, this gap has been eight percentage points for China, compared to roughly four percentage points on average for emerging economies and nearly zero for most developed economies, where interest rates are fully liberalized.
Developing-country central banks keep interest rates artificially low to ensure sufficient low-cost financing for the public sector, while avoiding large fiscal deficits and high inflation. But, in the long run, such low interest rates may also discourage households from saving, lead to insufficient private-sector investment, and eventually result in economy-wide underinvestment, as occurred in many Latin American countries in the past.
In many ways, China is breaking the mold. Despite severe financial repression, it has experienced extremely high savings and investment, owing mainly to Chinese households’ strong propensity to save and massive government-driven investment, particularly by local governments.
The adverse effects of financial repression in China are reflected primarily in its economic imbalances. Low interest rates on deposits encourage savers, especially households, to invest in fixed assets, rather than keep their money in banks. This leads to overcapacity in some sectors – reflected in China’s growing real-estate bubble, for example – and underinvestment in others.
More important, financial repression is contributing to a widening disparity between state-owned enterprises (SOEs) and small and medium-size enterprises (SMEs), with the former enjoying artificially low interest rates from commercial banks and the latter forced to pay extremely high interest rates in the shadow-banking system (or unable to access external financing at all).
Interest-rate liberalization – together with other financial reforms – would help to improve the efficiency of capital allocation and to optimize the economic structure. It might also be a prerequisite for China to deepen its financial markets, particularly the bond market, laying a solid foundation for floating the renminbi’s exchange rate and opening China’s capital and financial accounts further – a precondition for the renminbi’s eventual adoption as an international reserve currency.
SMEs and households with net savings stand to gain the most from interest-rate liberalization. But financial repression’s “winners” – commercial banks and SOEs – will face new challenges.
Under the current system, the fixed differentials between interest rates on deposits and those on loans translate into monopolistic profits for commercial banks. (The three percentage-point differentials that Chinese banks have enjoyed are roughly on par with those of their developed-country counterparts.) By creating more competition for interest income and reducing net interest-rate differentials, liberalized interest rates could reduce banks’ profitability, while SOEs will likely suffer the most, owing to much higher financing costs.
Another major risk of interest-rate liberalization in China stems from rising public debt, particularly local-government debt, which has grown significantly in the wake of the global financial crisis. A key parameter for determining the long-run sustainability of public debt is the gap between interest rates and the nominal GDP growth rate. In China, total public debt currently amounts to roughly 60-70% of GDP – a manageable burden. But, after interest rates are liberalized, the public sector’s debt/GDP ratio is expected to increase substantially.
Given these challenges, China’s leaders must take a cautious approach to interest-rate liberalization. Gradual implementation would enable the losers to adjust their behavior before it is too late, while sustaining momentum on pivotal reforms, which should be policymakers’ top priority. After all, as Premier Li Keqiang has put it, “reforms will pay the biggest dividend for China.”
Pingfan Hong is Chief of the Global Economic Monitoring Unit of the United Nations Department of Economic and Social Affairs.
21 May 2013
LONDON – The doctrine of imposing present pain for future benefit has a long history – stretching all the way back to Adam Smith and his praise of “parsimony.” It is particularly vociferous in “hard times.” In 1930, US President Herbert Hoover was advised by his treasury secretary, Andrew Mellon: “Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. It will purge the rottenness out of the system...People will...live a more moral life...and enterprising people will pick up the wrecks from less competent people.”
To “liquidationists” of Mellon’s ilk, the pre-2008 economy was full of cancerous growths – in banking, in housing, in equities – which need to be cut out before health can be restored. Their position is clear: the state is a parasite, sucking the lifeblood of free enterprise. Economies gravitate naturally to a full-employment equilibrium, and, after a shock, do so fairly quickly if not impeded by misguided government action. This is why they are fierce opponents of Keynesian interventionism.
Keynes’s heresy was to deny that there are any such natural forces, at least in the short term. This was the point of his famous remark, “In the long run we are all dead.” Economies, Keynes believed, can become stuck in prolonged periods of “under-employment equilibrium”; in such cases, an external stimulus of some kind is needed to jolt them back to higher employment.
Simply put, Keynes believed that we cannot all cut our way to growth at the same time. To believe otherwise is to commit the “fallacy of composition.” What is true of the parts is not true of the whole. If all of Europe is cutting, the United Kingdom cannot grow; if the entire world is cutting, global growth will stop.
In these circumstances, austerity is exactly the opposite of what is needed. A government cannot liquidate its deficit if the source of its revenues, the national income, is diminishing. It is deficit reduction, not debt, that is profligate, because it implies wastage of available human and physical capital, quite apart from the resulting misery.
Austerity’s advocates rely on one – and only one – argument: If fiscal contraction is part of a credible “consolidation” program aimed at permanently reducing the share of government in GDP, business expectations will be so encouraged by the prospect of lower taxes and higher profits that the resulting economic expansion will more than offset the contraction in demand caused by cuts in public spending. The economist Paul Krugman calls this the “confidence fairy.”
The pro-austerity argument is pure assertion, but it is meant to be a testable assertion, so econometricians have been busy trying to prove that the less the government spends, the faster the economy will grow. Indeed, just a year or two ago, “expansionary fiscal contraction” was all the rage, and a massive research effort went into proving its existence.
Economists arrived at some striking correlations. For example, “an increase in government size by ten percentage points is associated with a 0.5-1% lower annual growth rate.” In April 2010, the leader of this school, Harvard University’s Alberto Alesina, assured European finance ministers that “even sharp reductions of budget deficits have been accompanied and immediately followed by sustained growth rather than recessions even in the very short run.”
But two fallacies vitiated the “proofs” offered by Alesina and others. First, because the cuts had to be “credible” – that is, large and decisive – the continuing absence of growth could be blamed on the insufficiency of the cuts. Thus, Europe’s failure to recover “immediately” has been due to a lack of austerity, even though public-sector retrenchment has been unprecedented.
Second, the researchers committed the arch-statistical mistake of confusing correlation with causation. If you find a correlation between deficit reduction and growth, the reduction could be causing the growth or vice versa. (Or both the deficit reduction and the growth could be due to something else – devaluation or higher exports, for example.)
An International Monetary Fund paper in 2012 brought Alesina’s hour of glory to an end. Going through the same material as Alesina had, its authors pointed out that “while it is plausible to conjecture that confidence effects have been at play in our sample of consolidations, during downturns they do not seem to have ever been strong enough to make the consolidations expansionary.” Fiscal contraction is contractionary, period.
An even more spectacular example of a statistical error and sleight of hand is the widely cited claim of Harvard economists Carmen Reinhart and Kenneth Rogoff that countries’ growth slows sharply if their debt/GDP ratio exceeds 90%. This finding reflected the massive overweighting of one country in their sample, and there was the same confusion between correlation and causation seen in Alesina’s work: high debt levels may cause a lack of growth, or a lack of growth may cause high debt levels.
On this foundation of zombie economics and slipshod research rests the case for austerity. In fact, the austerity boosters in the UK and Europe frequently cited the Alesina and Reinhart/Rogoff findings.
The results of austerity have been what any Keynesian would have expected: hardly any growth in the UK and the eurozone in the last two and a half years, and huge declines in some countries; little reduction in public deficits, despite large spending cuts; and higher national debts.
Two other consequences of austerity are less appreciated. First, prolonged unemployment destroys not just current but also potential output by eroding the “human capital” of the unemployed. Second, austerity policies have hit those at the bottom of the income distribution far more severely than those at the top, simply because those at the top rely much less on government services.
So we will remain in a state of “under-employment equilibrium” until policy in the UK and the eurozone is changed (and assuming that policy in the US does not become worse). In the face of clamor from the right to cut even more savagely, statesmen who are too timid to increase public spending would be wise to ignore their advice.
Robert Skidelsky, Professor Emeritus of Political Economy at Warwick University and a fellow of the British Academy in history and economics, is a member of the British House of Lords. The author of a three-volume biography of John Maynard Keynes, he began his political career in the Labour party, became the Conservative Party’s spokesman for Treasury affairs in the House of Lords, and was eventually forced out of the Conservative Party for his opposition to NATO’s intervention in Kosovo in 1999.
May 21, 2013 8:01 pm
How more money can be bad for you
By Martin Sandbu in Santiago de Chile
The richer ‘Santeguinos’ get, the more time they spend in traffic, writes Martin Sandbu
Whether being richer makes you happier is one of those interminable debates that keep the wheels of academia whirring. Personally, I don’t need cross-country statistics. For proof of the drawbacks of economic progress, I look no further than my eight month old on a recent visit to his Chilean grandparents. Santiago is not 19th-century London or Pittsburgh, or even 21st-century Beijing. But the nasty-looking lead-grey colour of what my son coughed up is eloquent testimony to the lid of smog that oppresses the Chilean capital on bad days.
Here too, air quality is a victim of economic success. Chile’s economic growth stands out even in a region that has thrived through boom and crisis on the back of high commodity prices. It has stayed well clear of the populist sandbanks on which Argentina is stranded. It has escaped Brazil’s slowdown. When President Sebastián Piñera steps down early next year, he may almost have fulfilled his promise of a 6 per cent average annual growth rate.
That growth has done wonders to reduce the worst poverty, even if the country remains shockingly unequal. And Santiago bears the marks of a boom. These range from the frenetic building of flats and shopping malls to the source of the smog – the many cars taking over the streets.
Santeguinos relish the new cars and consumer goods that the low unemployment and easy credit put within reach. Who wouldn’t? But the richer they get, the more time they spend in traffic. A sign of the times: more and more cycle to work.
. . .
A surfeit of cars is not the only thing that stops traffic in Santiago. Student protests do, too. Regular, frequent and large – I attended one with easily 100,000 participants – they track the school year. Apolitical Chileans (they do exist) treat them like a seasonal weather phenomenon. While they are mostly peaceful, the carnival-like marches often end in clashes with riot police.
The biggest marches were in 2006, when they were led by high school student union leaders, and in 2011, when those leaders had moved on to university. This year they are standing for Congress. God knows what they will try to run next.
The students protest against an education system some of whose practices remind one of the US banking system circa 2006. Higher education in Chile has mushroomed. In a little more than a decade, the number of students has trebled; two-thirds are the first from their family to go to university. But the quantity of places, provided by private colleges and funded by subsidised loans, has come at the cost of quality.
Subsidised universities must be notionally not-for-profit. But nothing stops founders of universities – including an education minister – from also owning for-profit property companies that rent the land and buildings at inflated prices. With these incentives, scale is all that matters. Predictably, the education on offer is often overlooked.
It is not so easy to judge the promise of a degree with high wage prospects if nobody in your family has been to university before. So poor students have forked out for what at times has proved a subprime education. They are left with student debt and a degree that doesn’t buy a job well-paid enough to service it. Some don’t even get the degree: the Universidad del Mar recently closed because of financial improprieties, its students left stranded and indebted.
It was a bit of a Lehman moment: letting a university fail like that looks terrible. More are currently under investigation. Rumours are that Mr Piñera is quite happy for this mess to land in the hands of his predecessor and likely successor, Michelle Bachelet, clearing the way for him to return in 2018 (presidents cannot serve consecutive terms).
. . .
Where credit’s due
The government spins the protests into another cost of success: Chileans are richer and aspire to more. It’s an artful excuse and probably true. But it doesn’t help politically. Mr Piñera gave a spirited defence of his policies in his annual address to Congress on Tuesday. But despite the growth, he remains deeply unpopular.
The fact is that many Chileans feel cheated. Student debt is one thing; another is retail chain store credit – a way to get the poor to buy, but often with hidden usurious costs.
Chileans on the right used to hate the left and vice versa. Increasingly they despise both camps. It takes more than growth to be happy – at least with your government.
May 21, 2013, 6:54 p.m. ET
Austerity and Stimulus—Two Misfires
The U.S. and EU made opposing choices. Both failed because the private economy wasn't taken into account.
By CHARLES WOLF JR.
Why is it that in the United States the "stimulus" solution to the economy's ills has performed badly while in Europe the opposite approach, "austerity," has performed even worse?
The answer is that austerity (defined as substantial reductions in debt-financed government spending) or stimulus (defined as high-levels of debt-financed government spending) will promote growth only in some countries and in some circumstances.
Whether either policy will work depends critically on the responses of the private sector. What is missing from consideration today is whether the private sector's reactions will enhance, retard or reverse either a policy of austerity or of stimulus. In both the European Union and the U.S., policies would have been more effective if efforts had been made to anticipate and mitigate the reasons for adverse responses of private businesses.
Four years since the great recession ended in mid-2009, and notwithstanding recent signs of modest improvements, the annual rate of real U.S. GDP growth has averaged less than 2%—which is four percentage points, or $600 billion, below the pace of recovery from prior deep recessions, such as in 1981-82. Recorded unemployment is 7.5% but is actually twice as high allowing for involuntary temporary and part-time employment, as well as discouraged workers who have stopped looking for work.
The stimulus of 2009-12 averaged over 6% of GDP annually—between $1.2 trillion and $1.5 trillion. Yet it has been ineffective.
Austerity in the EU has fared even worse. In the euro-currency area, which includes 18 of the EU's 27 members, government spending has been cut in half, with dire consequences. GDP growth is at a standstill, and recorded unemployment is 12% and rising.
Yet true believers in either policy, which include Nobel Prize winners on both sides, discount the results. Stimulus adherents claim that the poor record simply reflects that the recession was so deep that the stimulus should have been even bigger. Austerity adherents claim that its dismal record simply reflects that it was too severe and imposed too quickly.
Both groups are overlooking the crucial role of the private sector's reactions to austerity and stimulus.
In the U.S., these reactions are crucial because the private sector's size is so large—the majority shareholder, so to speak. Its share of purchased goods and services is approximately quadruple that of government. Several factors are at work. One is what textbooks refer to as "Ricardian equivalence"—that debt-financed government spending in the present may require higher taxes in the future, thereby motivating companies and households to save rather than invest or spend.
An indicator of this is the ballooning of cash reserves on corporate balance sheets to over $2 trillion since 2009, thereby providing a major offset to the stimulus goal of expanding aggregate demand. Other indicators are increased household savings rates (by 3%-4% annually) since 2009, and decreased household debt (by 8%), thus further negating the increased aggregate demand sought by stimulus.
Another impediment is the quandary created for business plans because of uncertainty about where and how stimulus would affect each firm's markets and those of its competitors—uncertainty that is magnified when stimulus is accompanied by profuse, costly and ambiguous regulations.
Finally, stimulus in the U.S. has been undercut by private-investment decisions to invest abroad. Between the recession's turnaround in mid-2009 and the end of 2012, outward-bound U.S. private direct investment rose steadily to $1.73 trillion annually from $1.05 trillion. This outward-bound investment currently exceeds (by $500 billion) the outward flow preceding the recession in 2007.
Private-sector reactions in Europe have also seriously affected austerity's results. The EU's private sector is smaller relative to government than in the U.S.—about 3-to-2 versus 4-to-1. Moreover, the direct involvement of government is more pervasive than in the U.S. For example, European governments are often part-owners of private corporations and sometimes sit on corporate boards.
Austerity in the EU has imposed simultaneous as well as severe spending cuts on both the government and the private economy, thereby reducing opportunities for either one to cushion the adverse impact of austerity on the other. The EU's private businesses also seem less enabling of entrepreneurship and innovation that could facilitate adjustment to austerity.
Neither in the U.S. nor in the EU does the "private sector" speak with one voice or necessarily react in a uniform way. For example, some venture-capital firms and other wealth-management companies in the U.S. have reacted less adversely to government policy than others. Still, the experience to date strongly suggests that the reactions and behavior of private investors and consumers to stimulus in the U.S. and austerity in the EU critically affected each policy's tarnished record. Something for policy makers to keep in mind when devising economic remedies.
Mr. Wolf holds the distinguished chair in international economics at the Rand Corp. and is a professor of policy analysis at the Pardee Rand Graduate School.
Copyright 2012 Dow Jones & Company, Inc. All Rights Reserved
May 21, 2013 5:42 pm
Market Insight: Central bankers turn deaf ear on balance sheets
By John Plender
Negative index-linked bond yields point to fear of resurgent inflation
For much of the past two years, markets have been happy to reward profligate sovereign debtors, provided they had their own central banks to hand, ready and able to print money and thus to prevent formal default. The biggest beneficiaries of this largesse were the US and UK.
Among their more obvious attractions were the fact that they were not the eurozone. So despite poor progress on reducing big deficits and debt, the yields on their government bonds fell and their currencies appreciated. That game is now unravelling.
Exhibit one is sterling, which has recently been weakening on (admittedly modest) good news about the economy, including this week’s better than expected inflation numbers. Since earlier in the year, foreigners have been quitting the gilt market and shedding the currency en route.
This is not just a matter of sterling losing its attractions as a safe bolt hole against a eurozone sovereign debt crisis that is in abeyance, though that is part of the story.
The markets are worried at the snail-like progress of chancellor George Osborne’s treasury in reducing the deficit and debt overhang in the absence of more robust growth. Investors have concluded that the UK will retreat from quantitative easing more slowly than the US and that sterling should therefore weaken against the dollar.
So much the better for the UK, you might say. The UK current account deficit is now running at 3.5 per cent of gross domestic product. After years of such deficits, net investment income from abroad is also on a deteriorating trend. Yet in flow of funds terms, the current deficit needs to come down to accommodate a reduction in the fiscal deficit.
As Andrew Smithers of Smithers & Co suggests, you can prove all manner of things about competitiveness in the UK depending on the starting date chosen for sterling. Yet in a recent note, he points out that the real sterling/dollar exchange rate from 1899 to 2012 remained unchanged. As both countries were then on the gold standard at the end of the 19th century, the chances are that the exchange rate would then have been at its equilibrium level.
Yet UK productivity, measured as GDP at constant prices per head of population, has fallen over the period by 30 per cent compared with the US. If, as a wealth of evidence suggests, economies with strong productivity tend to see relative appreciation in their real exchange rates, then sterling is significantly overvalued.
Given the urgent need for the UK to rebalance the economy towards manufacturing, further sterling weakness would be welcome, especially when inflationary pressure is waning.
The US case is different. There the recent rise in Treasury yields has reflected growing speculation that a staged withdrawal from unconventional central banking measures may come sooner than expected. If the dollar is stronger, it is no longer because it is a haven in a financially unstable world but because yield relationships across the world are working more normally.
This is most obviously the case with the yen-dollar rate. Since November 14, when former prime minister Yoshihiko Noda revealed that he would dissolve the Diet, the US-Japan real yield differential after inflation on the five-year government bond rallied by 108 basis points from minus 83bp to plus 25bp. However, the primary driver behind the move in real yields has shifted in recent weeks as US real yields have risen strongly. As with sterling, the more recent exchange rate movement has been as much or more about dollar strength than yen weakness.
The sheer size of the move in US Treasuries is striking. From the beginning of May to the end of last week, yields on the 30-year Treasury bond rose by nearly 40 basis points while the 10-year yield rose around 30bp. That is a measure of the market’s sensitivity to assumptions about an exit from the era of central bank balance sheet expansion. It is also an indication of how far we are from a return to normality.
Yields on fixed interest bonds are still astonishingly low by historic standards and, despite the protestations of central bankers, this is not because inflation expectations are well anchored because of their magnificent management of their currencies. Negative yields across much of the index-linked market tell us that people are desperate for insurance against resurgent inflation.
Meantime, Jaime Caruana, general manager of the Bank for International Settlements, questioned in a lecture in London last week whether unconventional measures had been effective. The exercise in buying time had not, he felt, been accompanied by appropriate balance sheet, fiscal and structural policies. How true. The snag is that central bankers turned a deaf ear to the BIS’s prescient warnings before the crisis and will no doubt do so once again.
Copyright The Financial Times Limited 2013.
Les doy cordialmente la bienvenida a este Blog informativo con artículos, análisis y comentarios de publicaciones especializadas y especialmente seleccionadas, principalmente sobre temas económicos, financieros y políticos de actualidad, que esperamos y deseamos, sean de su máximo interés, utilidad y conveniencia.
Pensamos que solo comprendiendo cabalmente el presente, es que podemos proyectarnos acertadamente hacia el futuro.
Gonzalo Raffo de Lavalle
Las convicciones son mas peligrosos enemigos de la verdad que las mentiras.
Quien conoce su ignorancia revela la mas profunda sabiduría. Quien ignora su ignorancia vive en la mas profunda ilusión.
“There are decades when nothing happens and there are weeks when decades happen.”
Vladimir Ilyich Lenin
You only find out who is swimming naked when the tide goes out.
No soy alguien que sabe, sino alguien que busca.
Only Gold is money. Everything else is debt.
Las grandes almas tienen voluntades; las débiles tan solo deseos.
Quien no lo ha dado todo no ha dado nada.
History repeats itself, first as tragedy, second as farce.
We are travelers on a cosmic journey, stardust, swirling and dancing in the eddies and whirlpools of infinity. Life is eternal. We have stopped for a moment to encounter each other, to meet, to love, to share.This is a precious moment. It is a little parenthesis in eternity.
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