I’ve found many people are particularly energized about predicting a hard landing for China’s economy, but I believe the country is no sinking ship. China isn’t fast-approaching an iceberg in the dark of the night like the Titanic. Beijing has long been anticipating the ice chunks and subtly adjusting the rudder around inflation without steering the economic ship too far off course.

China’s government angled its vessel away from inflation by increasing the required reserve ratio (RRR) every month for the first six months of 2011 and raising interest rates three times. Once inflation was sufficiently under control, the country began to steer in a direction of growth again.

Recent results show how positive this easing has been. In its latest research this week, BCA Research reported that despite the policy tightening of 2011, the “most recent economic data out of China has all but confirmed that the economy remained incredibly resilient.”

One significant data point is the sharp increase in money supply. After the country hit a low level of monthly money supply growth, the three-month change in M-2 money supply climbed to record levels during the final month of the year, says Greg Weldon of Weldon Financial. He says that money supply “pegged at +6.419 trillion, easily exceeding the previous record 3-month increase, seen at the peak of the global crisis, in March of 2009.

Easing in China is expected to continue through 2012, with ISI Group anticipating a potential RRR cut after Chinese New Year celebrations in February, then possibly again in April, June and August. Also, loans “have become more readily available in recent weeks,” says ISI. This should all be bullish for commodities, such as copper, oil and gold, and also trickle down to boost share prices of natural resources equities.

Chinese Copper Inventories Increase

Base metals were the laggards among commodities last year, with copper one of the worst performers, losing 21 percent.

Global consumption of copper increased only 4 percent in 2011, which is lower than the 10 percent growth in 2010, but higher than the decade-average of around 3 percent, says Macquarie Research. China’s consumption of copper—which makes up 40 percent of the global demand—was a primary reason for decreased consumption, as the country was drawing down on its own supply throughout the year.

This can’t continue forever, Macquarie says, adding that “demand made on new supply direct from producers would need to rise, with positive implications for prices.” Europe’s largest copper fabricator agrees with that sentiment, indicating that it anticipated China’s copper demand would be strong in 2012, according to Barclays.

A recent rise in copper imports is likely the result of restocking China’s depleted copper inventories. As is typical for China, after the metal fell in price last fall, the world’s largest buyer of the metal advantageously scooped up copper to replenish its cupboard, says Barclays Capital. As shown below, copper inventories into China reached a record low in 2011, but have sharply reversed recently.

An increase in copper demand places pressure on the supply side, which continues to experience shortfalls in mine output versus forecasts. These are caused by a variety of factors, such as weather, labor strikes, or simply a poor grade deposit. While Macquarie says there’s a possibility the world’s two largest copper mines, the Los Bronces mine in Indonesia and Peru’s Escondida mine, could deliver year-over-year increases in production, it concludes “it is highly unlikely that miners will succeed in delivering this level of additional output in total.”

While Chinese demand growth for commodities is not expected to be as robust as it has been historically, demand is expected to pick up throughout 2012. As confidence returns, Macquarie says there should be “a slow gradient of recovery in the near term before gathering pace into the mid-year.”

Increasing Reliance on Energy Imports

China’s rapid growth and increasing reliance on other countries for key resources has made a powerful case for commodities over the past several years. These three charts from BCA Research illustrate that once the country shifted from exporting to importing a commodity, there was no looking back.

You can see in all three how dramatically the energy balance has shifted to an ever-increasing dependence on imports. In each major commodity, after China began importing, growth took off.

China became a net importer of crude oil in 1994, and today, is the second-largest oil importer in the world. BCA forecasts the country is expected to surpass the U.S. as the largest oil importer in only a few years.

To obtain more natural gas, China spent years building massive pipelines to transport the commodity from Russia and other western Asian counties, and since 2006, natural gas imports have “gone vertical,” says BCA.

Coal, which accounts for the majority of total energy consumption in China has also been imported since 2008, and since that time, imports rose substantially.

Even with these imports, energy consumption is only a fraction of developed countries. The China story is just getting started: Urbanization just surpassed the 50-percent mark, hitting what I believe to be the pivotal moment that dramatically shifts buying patterns, driving an enormous demand for housing, consumer staples and durable goods. You ain’t seen nothing yet!

Happy Chinese New Year!

This weekend, the world’s largest annual migration takes place. Millions of people in China head home to celebrate Chinese New Year and welcome in the Year of the Dragon. U.S. Global Investors’ research analyst and Shanghai native Xian Liang recently talked about the significance of the dragon in Chinese culture:

“Unlike its western counterpart portrayed as evil, the Chinese dragon is an imaginary, mythical creature. Its body parts are from nine animals, including the horns of a deer, mouth of an ox, nose of a dog, trunk of a snake, and claws of an eagle. It has auspicious power because it can make itself invisible or visible at any time. It can both fly and swim. It makes clouds and rain. Because of these magnificent things, the dragon is associated with royal powers as well.”

After bounding through a tough Year of the Rabbit, we anticipate the Year of the Dragon will breathe fire back into Chinese markets in 2012. Kung hei fat choy!

Regards,

Frank Holmes,
for The Daily Reckoning

P.S. For more updates on global investing from me and the U.S. Global Investors team, visit my investment blog, Frank Talk.

It May Take a Dragon to Breathe Fire Into Markets originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

Don’t get us wrong, we still like gold and silver and will probably recommend jumping back into silver shortly. But you can’t pour gold into a farm tractor and use it to grow more food. You can’t pump silver into a 747 and use it to transport cargo. You can’t use gold or silver to make overall production more efficient and generate a higher standard of living. In fact, you can’t do any of these things without crude oil. This is why crude is and will continue to be the world’s most essential commodity.

5 Reasons to Buy Crude Oil Now

1) Oil supplies have peaked — oil supply lags discovery by approximately 40 years. New oil discoveries peaked in 1965. Not surprisingly, production has basically flat-lined since 2005. Despite all the press given to new deep water discoveries and North American shale supplies, new production is not keeping up with the depletion of old wells.

2) Producing nations are consuming more of their own output and exporting less. Saudi Arabia, Iran, Norway and Venezuela are exporting far less oil than they did in 2006.

3) Global population is growing rapidly and more people are growing accustomed to better, more energy-dependent lifestyles.

4) Crude oil is decoupling from the dollar. For most of 2011, crude oil was a “risk on”, short dollar play. No longer. Crude is rallying in both strong and weak dollar environments. This is bullish.

5) The odds of a preemptive strike against Iran (the 3rd largest oil producer) are the highest they’ve been in years. 33% of global tanker traffic passes through the Strait of Hormuz which Iran has threatened to close in retaliation for global trade sanctions. Expect it to make good on those threats if bombs start falling on its nuclear facilities.

Therefore, we believe crude has a better chance of doubling from its current $100 per barrel level than gold has doubling from its current levels of $1,575 per ounce. It’s not that we hate gold. We don’t. Some of the same conditions that favor crude will also favor the shiny stuff. But for “bang for the buck,” we feel crude oil is the best opportunity on the board right now.

What is the best way to play it? Energy stocks tend to underperform actual energy products during bullish price spikes. Producer/processor Exxon rose 23.3% and refiner Valero rose 54.5% during crude’s last run-up to $147 per barrel in 2008. Crude oil itself nearly tripled. Why trade crude oil producers, refiners and drillers when we can just trade crude oil itself?

I recommend using NYMEX crude oil options. NYMEX crude oil options are the most liquid (no pun intended) oil option market in the world — making buying and selling them about as easy as buying and selling most stocks. NYMEX crude options are a DIRECT PLAY on the price of the oil itself. NYMEX crude oil options also provide big leverage with fixed risk. That means we can devote a small amount of capital to our oil investment while keeping the bulk of our hard-earned dollars in safe, interest-bearing instruments.

There are many different ways to structure a bullish trade on crude oil. But I recommend the kinds of structures that provide plenty of time for the trade to succeed. Even though I expect crude to make a very strong move to the upside in 2012, I could certainly be wrong about that. So my favorite way to bet on crude oil right now is to utilize a “bull call spread” that does not expire until 2015.

This professional trading strategy may sound complicated, but it is really quite simple. And more importantly, is one of the safest options strategies that professional investors use. The bull call spread I like right now combines two different options. The first gives the investor the right to own 1,000 barrels of crude oil at $125 per barrel. The second option creates obligation to sell 1,000 barrels of crude oil at $150 per barrel.

So that means the investor has the right to buy crude oil at $125, but must also sell that crude oil at $150. Therefore, the investor can make the $25 per barrel difference, but no more. $25 times the 1,000 barrel contract size equals $25,000. Subtract the $3,000 cost of the trade to get a net potential of $22,000 — that’s a 7-to-1 maximum upside.

If the trade does not work out as hoped, the investor’s maximum possible loss would be the initial $3,000 cost of the trade. That’s the kind of risk/reward opportunity I like. Oil is a buy…maybe the very best buy in the entire commodity sector.

Regards,

Steve Belmont
for The Daily Reckoning

Crude Oil: The Best Bet for 2012 originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

The euro rose back above $1.30 after dipping into the $1.29 handle a couple of times last night. Spain sold 5.64 billion euros of 3 and 6 month bills compared with a target of 4.5 billion euros. This was a very successful auction, albeit of short term paper. The average yield on the Spanish debt was just 1.735% compared with 5.110% when the bills were issued in the last week of November. The six month yields were also lower at 2.435% compared with 5.227% in November.

The EU helped to insure a successful auction by boosting their anti-crisis efforts, pledging an additional 150 billion euros to the IMF. Four countries not using the common currency also pledged to add to the IMF, but the UK pushed itself further away from the EU by refusing to commit to a specific funding amount. UK officials will define their contribution in early 2012. It almost seems as if the UK wants to see the euro problems continue, and their refusal to commit funds kept the EU from reaching their target of 200 billion euros of additional capital. The UK is certainly making it difficult for the EU, and it will be interesting to see if there are any long term repercussions if/when the Eurozone begins to recover. I’ve already seen that the French central bank president is suggesting the ratings agencies should focus on the UK instead of spending so much time in central Europe. Apparently he was upset with Fitch after they lowered France’s credit outlook.

The pound sterling (GBP) weakened against the dollar after a report in the UK showed home sellers cut asking prices for a second consecutive month. Even though the UK would like to think they can stay out of the Eurozone fray, they are dependent on the European mainland for a majority of their trade, and all of their recent posturing isn’t going to endear them to their neighbors to the east.

As I mentioned yesterday, ECB President Draghi has thus far refused to increase the bank’s direct purchases of sovereign debt. Draghi and the ECB have instead focused on keeping European banks flush with liquidity. We will see just how much liquidity the banks need tomorrow when the ECB opens up a 3-year lending window. Unlimited cash will be offered up to European banks at the benchmark rate of 1% for three year terms. The ECB has also loosened collateral requirements for the loans which should encourage more borrowing by the banks. The only question is whether these banks, which already have been burned by the sovereign debt crisis, will decide to invest some of these new funds back into the debt market. Readers will recall the Fed opened up the vault doors to US banks during the mortgage crisis, but these banks used the additional funds to shore up their balance sheets instead of going out and lending or purchasing mortgage debt. While the banks will look healthier, I’m not so sure the additional liquidity will be able to do much to keep yields down in the sovereign debt markets.

Sweden’s Riksbank cut rates as expected. The 0.25% cut from 2% to 1.75% was the first cut since 2009, but as I said yesterday, the move was predicted by a majority of economists. Sweden’s krona rallied after the cut as investors looked at the rate cut as a positive indication of future growth. There were also many who had thought the cut would be even larger, so the 0.25% move was seen as a reason to move back into krona investments.

The commodity markets have been gyrating like a young Elvis’s hips, with oil swinging higher in the past two days. US crude stockpiles declined for a second week, and there is speculation that the Gulf Cooperation Council, which meets in Saudi Arabia this week, will reduce supplies from Iran. Sanctions against Iranian oil are being discussed as a response to Iran’s nuclear program, and a cut in supply from OPECS second largest producer would definitely impact the price. Oil is inching back up toward $100 per barrel after falling down to just over $92.50 last week.

The move higher has helped boost the Canadian dollar (CAD) and Norwegian krone (NOK), both big oil exporting nations. But another big commodity producer, Brazil, saw their currency fall for the first time in three days after worries over the impact of the death of Kim Jong Il caused investors to exit ‘risk trades’. The Brazilian central bank has done an ‘about face’ recently regarding the value of the real (BRL). Chuck warned that the policy makers in Brazil would rue the day they decided to depreciate their currency, and recent actions suggest they have seen enough. The central bank held an auction yesterday to sell dollars, buying reals. These were repos, so the dollars will be bought back as soon as one month from now, but the immediate impact is to strengthen the real. This is a 180 degree turn from the back in September when policy makers took action to limit the appreciation of the real. They should have listened to Chuck’s warnings!!

The data cupboard was pretty bare yesterday, and housing starts and permits for the month of November will be the only releases today. Since this is a bit later than usual, I am able to tell you that housing starts for the month of November came in slightly higher than expected at 685K, a large 9.3% positive move from October. Building permits were also higher at 681K, a 5.7% gain from October. This is definitely a step in the right direction, and an indication that the US may just be able to muddle through at a stepped up pace. Tomorrow we will get an indication of how the existing homes are selling.

Then there was this… Frank sent me his thoughts on an op-ed piece which ran in The New York Times over the weekend. It definitely generated some talk on the desk this morning, and Frank has a good take on it. So here’s Frank:

The phodder one finds on editorial pages both left and right are often a flight of fancy. Harebrained proposals for this or that which, even on a cursory reading, suggest little analysis or attention to unintended consequences. The good news is that nearly all are ignored and relegated to the ash bin. But these articles can be an indicator of political mood and even if not adopted outright we should view them at least as the smoke indicating a fire out of sight.

Here’s one that really caught my attention… In a New York Times op-ed, Sunday, Ian Ayres and Aaron S. Edlin propose — and I’ve read it a few times to be sure — that a tax be created such that net after-tax income for any filer is limited to 36 times the gross median household income. There are conceptual errors in the presentation such as comparing averages to median which changes some of the answers by a factor of 3x — but let’s move past the sloppy academic work and on to the impact.

Using the most recent IRS data we have, the median US household income is about $51,000 (versus an average of about $80,000). Using the formula presented by the authors this would result in a marginal tax rate of 100% on any amount resulting in after tax income of $51,000 x 36 or $1,836,000. I’ll let that sink in for a second, but note that this would actually impact only about the top 0.3% or about 480,000 households.

Now aside from hitting the US Senate and some in the House in their own pocketbook this will not be received well by the likes of our own recently departed Albert Pujols ($25.4 million per year will be cut by about $23 million), any one of a number of Hollywood notables, but of course the key target — business people — are likely to have a significant change in behavior which I’ll let you predict. This is made even more unusual since one of the authors has written a book on incentives which I need to go out and obtain to understand what I have missed on that topic.

I’ll assume that if called for a vote, the Senate would veto this out of self-preservation but forecast that we see something like this over the coming years as the US struggles to deal with budget issues and an increasing inability to raise revenue or slice expenses. And I’ll leave Chuck and Chris to determine where that takes the US dollar.

Both Frank and I agree that this stands no chance of getting through the Senate, where quite a few Senators would be hit by the cap. But it does illustrate that the larger than life problems we face are going to generate some pretty dramatic proposed solutions. Our debt and deficit problems here in the US or those in Europe won’t be fixed by small little steps, and our current habit of just kicking the can down the road only serves to make the problems even larger.

And I will close today by thanking all of the readers who sent me messages about yesterday’s Pfennig. I agree with most of your comments, the politicians in Washington, DC are the ones who should be brought to justice, not just the Wall Street bankers and scapegoats at the mortgage giants. Thanks again for reading, and for sending me your comments.

Recap… The euro was able to push higher after Spain found more than enough buyers for their debt. German business leaders are positive, and the EU countries pledged 150 billion euros to the bailout fund. The UK refused to commit funds, and the pound sterling dropped as home prices continue to fall. The Riksbank cut Swedish interest rates by 0.25% causing the krona to move higher. Finally, oil prices have been moving up, bringing the Canadian dollar and Norwegian krone along with them.

Chris Gaffney
for The Daily Reckoning

Euro Rallies on Positive IFO Index and a Successful Spanish Debt Auction originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

Also of interest is the fact that the price of crude oil has been trending higher, even while the prices of most other commodities have been drifting lower.

The US is the world’s largest consumer of oil. It’s not growing much. Yet there oil sits, with a three-figured handle. I think it is a sign that challenges on the energy front will prove more stubborn than in the past.

One day last week, I found it interesting that the main two financial dailies I read every morning both featured special pullouts on energy.

The Financial Times report had a number of good nuggets:

• This is the first year the average oil price is $100 a barrel. In real terms, it’s the highest oil price since 1984.
• US consumers are on track to spend $200 billion more on oil this year than in 2010.
• Exxon Mobil’s capital spending budget for the first 9 months — $26.7 billion — was a record.
• Supply is tight; production from non-OPEC countries (such as Russia) has been disappointing.
• The US is an exception. It is reversing a four-decade decline in production and imports are down to 50% of consumption, instead of 60% as recently as 2005. (Canada is increasing production, too.)
• Tight government budgets are leading to lower subsidies for alternative energy. The brunt of this will be felt most acutely in Europe.
• China is the exception; subsidies for alternative energy have actually increased there.
• The nuclear renaissance is still a long way off. One article discussed the various phase-outs going on around the world.
• There is a new enthusiasm for LNG tankers.

Consider the portrait these bullets paint. To me, they speak to the challenge in producing enough energy to make a dent in prices. There are also some opportunities in these bullets — producing good old-fashioned oil still looks to be a good business.

The Wall Street Journal called its report “Big Oil Heads Back Home.” Some main points:

• Oil is shifting its attention from the Middle East to the West — oil sands in Canada, deep-water oil in Brazil and the Gulf of Mexico and shale oil in the US.
• By 2020, shale oil and gas will make up a third of US production, which could shift power away from OPEC. (The Saudis are worried.)
• Smart grids are coming. There was an article about energy-monitoring devices and other means to increase efficiency and save money.
• Interesting article on Churchill County in Nevada, which is enjoying a boom in geothermal energy.
• Biofuel companies are getting into other markets, selling stuff for skin care and beauty products. (Biofuels, like other renewables, are in trouble.)
• US battery companies are having a hard time trying to survive as they get strong competition from overseas and the adoption of electric vehicles remains slow.
• Townsville, Australia, plans to lay a cable to take hydropower from Papua New Guinea, some 600 miles away.
• How China slowing its nuclear program over safety worries is creating opportunities for some firms.
• How “clean coal” is a boon to companies selling filters and other means to reduce emissions.

This report was more focused on the ways in which people are changing their behavior, about how people are figuring out new ways to create energy and to get it where it needs to go. It’s also more about the frontiers of energy and how they will contribute meaningful slices to the pie.

It also makes me think about how energy is as much about place as it is about any particular source. In Nevada, they can tap geothermal. In Australia, they are trying an innovative way to tap a river in Papua New Guinea for hydro-power.

You can’t really say geothermal is a great energy source. It is in some places, yet it won’t work in others. Ditto, hydro-power. But these stories show you how innovative people can be. And they show you how things can happen that no one would’ve guessed even a handful of years ago. I mean, US oil and gas production up enough to threaten the Saudis? That would’ve been a surprising prediction not too long ago. Yet it’s happening.

These stories also show how political energy is. Everywhere. Government policy has a big impact on the energy mix pursued. Big subsidies for solar, particularly in Europe, essentially built that industry to a point it would never have reached without the help. But now, with austerity measures and tight budgets, a shift in policy can destroy it.

An energy investor has to keep an eye on a lot of things. Technologies change. Consumer patterns change. Government policies change. But the overall backdrop is pretty strong for the producers of energy. The most powerful evidence is the most obvious: Amidst all the turmoil and slow growth in the big markets of the US and the EU, oil is over $100 a barrel.

Regards,

Chris Mayer
for The Daily Reckoning

$100 – The New Floor for Crude Oil originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

The Swiss National Bank (SNB) was back in the news again overnight, once again making statements that should send chills down the back to franc holders. Once again, a high-ranking member of the SNB reminded the markets that the SNB is “permanently monitoring developments” and are “ready to take further measures if needed.”

This is a real stretch, but it’s how I see things these days, so if you don’t want to deal with this, skip ahead, I won’t mind… But, to me, central banks around the world have watched the US fritter away their future with deficit spending, and they’ve watched the dollar slide down the slippery slope since February of 2002… And they say to themselves… “Hey, this is ridiculous! We want price stability, but the US keeps pushing their dollar weakness on us… And now their economic mess is flowing to the shores of other countries all around the world. What’s next from the US?” I’m not saying there are currency wars going on, but what I am saying is that the rest of the world is getting tired of what the US is trying to pull off…

And then back to the Eurozone mess again… I saw a quote from German Chancellor Angela Merkel about those saying that Germany and the European Central Bank (ECB) could sell some of their gold to help, that they won’t get anywhere with that idea.

Remember when I did the numbers on the US gold holdings for you? Unless gold is going to be revalued at about $10,000 an ounce, even selling the gold the US holds wouldn’t make a very large dent in their debt… UGH! I’m sure the same holds true for the Eurozone… Recall that most of those countries including Germany sold a boatload of their gold holdings back in the late ‘90s to that they could reach the deficit rules of joining the euro… So, they may not have as much gold as the markets believe they do…

Speaking of the US… I told you yesterday that later this week, we’ll see the trade deficit, and monthly budget deficit prints… I took a peak at the US debt clock yesterday, and I saw that our unfunded liabilities are $116,302, 408,000,000. That’s $116 trillion for those of you whose eyes just went cross reading the whole number. That’s over $1 million per US taxpayer… Well, my friend, Dennis, sent me a note yesterday that a CFP accountant put together that shows, the other day we had 8,000 people here in the US who reached the age of 65, and began to draw on the things they had made contributions to all their working lives… No biggie, right? Well, it just so happens that according to AARP, the 8,000 daily birthdays are projected to be repeated every day for the next 17 years!

Can you say, busted? The US has begun the 17-year march to its ultimate challenge. And it won’t take 17 years for the markets to realize what’s going on… They’re slow, but not that slow! And the dollar? Ahhh grasshopper… Well, it won’t be the reserve currency of the world in 10 years, much less 17 years, and the economic malaise that that will cause is beyond our comprehension… Because we don’t remember what it’s like to not have the reserve currency of the world, along with all its benefits… Like commodities being priced in dollars, the ability to print money at any pace, the ability to obtain loans (to finance our debt) at cheaper levels… (Look at a Treasury rate versus the rate the rest of the world has to pay to obtain a loan to finance their debt)…

But… If you need a visual… I’m always reminded of when the Beatles came to the US — remember on the Ed Sullivan Show back in 1963, I believe… Anyway, the TV would show us pictures of Liverpool, where the Beatles came from, and the pictures were so depressing… The Liverpool/UK economy was just muddling through, and that was over 25 years after they had lost the status of reserve currency of the world for the pound!

Boy! Have I ever gone off on a tangent this morning! So, let’s see if we can get back on track… Oh yes! Remember yesterday, I said in the Pfennig… “Gold should be up… And probably up more than $10.” Well, maybe the markets read that and reacted… HAHAHAHAHAHAHAHA! Now that’s funny! Anyway… Gold rallied $50 in total yesterday, bringing the shiny metal near $1,800 once again. Gold is down $5 this morning, but that doesn’t erase the $50 gain yesterday!

The price of oil has really moved higher again the past few days… Just three weeks ago, the price of oil was $10 cheaper than it is today… So, in other words… The price of oil has gained $10 in the past three weeks! I noticed it Sunday, when I went to fill up my gas tank… OUCH! But oil supplies have shown that they are going down, which is not a good time for that to happen, with winter on its way. Which tells me that we could very easily see oil at $100 by Christmas… UGH!

But… The one good thing that a higher oil price does, is that it gives the petrol currencies a lift… Canada, UK, Norway, Russia, Brazil, and Mexico all benefit from a higher oil price.

In the case of Canada… The benefit it has received from the higher oil price, has been offset from the Bank of Canada’s Finance Minister, Jim Flaherty, who threw a cat among the pigeons yesterday by admitting that he won’t be able to fulfill his plan to balance the budget within three years, and will have to cut economic projections… The markets didn’t like what Flaherty had to say, and thus they sent the Canadian dollar/loonie (CAD) to the woodshed… Good thing the loonie had the buffer of higher oil prices in its back pocket!

Then there was this… My friend, David Galland, is the absolute best writer in the business. He has a way of saying something that makes you stop, and think. I strive to write like that… Anyway… David was talking about the unintended consequences of the Dodd-Frank legislation… Let’s listen in…

Very few people are focusing on the potential damage this ill-conceived and hastily assembled homage to the ability of bureaucrats to conceive of all manner of problems where problems don’t exist then apply solutions to those problems that only create new problems without solving the original problems at all will bring to many sectors.

I suspect that by the time this crisis runs its course, historians will find Dodd-Frank to be highly analogous to Smoot-Hawley or the New Deal legislation, both of which ultimately served no other purpose than to make a bad situation much worse.

I tell people all the time that lawmakers that never spend a day in the markets’ shoes should never legislate the markets… Oh, I know, I’ll receive all kinds of emails from readers who think I’m saying that there should be no regulations in the markets… But that’s not what I’m saying, read it again…

To recap… The currencies, led by the euro, have range-traded for the past two sessions, with no one willing to go long or short ahead of the Italian Budget Vote. Gold did gain $50 yesterday, so at least one currency wasn’t range-trading! Chuck talks about the unfunded liabilities and how they will continue to grow… and what the dollar and the US economy has to look forward to, when the dollar is no longer the reserve currency of the world…

Chuck Butler
for The Daily Reckoning

SNB Threatens to Weaken Franc Again originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

I’ve said for some time now that the reason the euro (EUR) was able to maintain its very strong margin against the dollar was that the dollar was uglier… It was an ugly contest and the dollar was the winner… But guess who’s catching up? The markets are looking over the euro with a magnifying glass these days, and they don’t like what they see… Pimples, skin rashes, hairy growths… You name it… Not only does the dollar have them, but so too, the euro…

And with that thought this morning, it’s no surprise that the euro has taken on more water overnight, after falling in value versus the dollar all day yesterday. You know… I’ve told you over and over and over again that the euro is the offset currency to the dollar, which means that it’s the Big Dog when it comes to anti-dollar currencies… And if the Big Dog gets off the porch to chase the dollar down the street, the little dogs (the other currencies) will too… Well… It goes both ways… If the Big Dog has been sent to the doghouse, the other little dogs get sent there too…

And just like when the Big Dog was chasing the dollar down the street, the little dogs would go faster, thus outperforming the euro… I told you before all this began that a perfect storm was brewing for a short-term period of dollar strength… Well the little dogs are selling off faster than the Big Dog, too… It goes both ways, folks… And that’s not to be flippant about it; just making certain that everyone understands what’s going on…

There’s a black cloud out on the ocean, and it’s heading toward the US… This black cloud is brought to you by our illustrious lawmakers, who are still hell-bent on telling everyone that China is responsible for all that ails our economy… Yesterday, I told you that there was a new bill circulating the halls on the hill that would pressure China to allow a faster appreciation of their renminbi (CNY)… I even heard the president applaud the coming of this bill…

Let me explain what I mean by a black cloud heading toward the US. By passing this bill, the US could very well start a trade war with China… And there’s this thing called “protectionism” that usually bangs a currency from a country that enacts protectionism. But that’s on the side here… The thing that scares the bejeebers out of me is the fact that the U.S. has depended on China for almost a decade now, as the deficit spending exploded to the upside. They depended on China to show up at the Treasury Auctions with fists full of dollars, to buy our debt issuances (Treasuries)… But now, these elected officials believe that possibly ticking off a country that we’ve depended on, won’t be a Big Deal… I don’t agree with that… Not one iota! This is going to get ugly… And since we’ve become a debtor nation, which depends on the kindness of strangers, I don’t think the “ugly” part is going to reside in China, but here…

Of course the Chinese are already saying the right things… Like that they “regret” the Senate voting yesterday… The Chinese Foreign Ministry has already challenged that the bill violates the World Trade Organization (WTO) rules… But that’s not where the problems reside in my opinion… Instead, a trade war is NOT what the world economy needs at this time… I’ve written about this before…

Back in November of 2009, I had this to say about protectionism and trade wars…

I’m not for any protectionism measures, as I see grave things or I should say, grave unintended consequences coming from protectionism measures… Can you say Smoot-Hawley? I thought you could! For non-history buffs, go ahead and Google Smoot-Hawley, and you’ll see that most economists blame these protectionism measures as one of the key reasons the Great Depression was so bad.

If you do not stop to learn from the mistakes that took place in history, then you will repeat them… it’s that simple…

So… Yes, the dollar is swinging a mighty hammer, and the currencies are getting hammered by the mighty hammer right now… But this could all come crashing down, should the markets get a good whiff of these protectionism measures that the US is implementing…

So… If the currencies become embroiled in a trade war, what will be the shining light for investors? Whoa, there partner… If you thought I was going to go out on a limb, and possibly lose my job by saying what investment I think is going to be the shining light, and then it doesn’t, and the lawsuits come flying in the door… You’re mistaken… I would never get on that ship named “Chance”… However, I can tell you that in my opinion, which of course could be wrong… I would look to gold…

Speaking of gold… Well.. It was up $15 when I came in, but is now up only $8… But still, it’s up versus the dollar which is something all the other currencies can’t say, not even Japanese yen (JPY), or Chinese renminbi today! The shiny metal has slowly risen from its brief dip below $1,600… I prefer these smaller moves in assets, especially gold, given the propensity for the “afterhours trades” to increase when the upside moves are larger for gold. That’s a wink, when I talk about the “afterhours trades”…

I have quite a few readers that have taken the ball on my challenge to research these “afterhours trades” on their own, and then let me know if they agree that the price of gold and silver is being manipulated… Well, most of them send me stuff they read, that explains the price drop of gold and silver, and most of them all talk about the price manipulators, or “banksters” (the bullion banks) as one article calls them… I think that the more the public is aware of what I feel is going on here, and I’m not the only one, maybe they will petition the regulators and get to the bottom of this!

In Australia overnight, the Aussie dollar (AUD) plummeted to the 94-cent handle, a level we hadn’t seen in a year… And now after a couple of months of saying that they weren’t entertaining a rate cut, the Reserve Bank of Australia (RBA) is beating around the bush with a bias to cut rates… Well, probably not the RBA, but the markets are putting words in the RBA’s mouth… RBA Governor Stevens last said that, “an improved inflation outlook would increase the scope for monetary policy to provide some support to demand, should that prove necessary.”

Basically, that’s central bank parlance for… “If you want a rate cut, you’ll have to wait until inflation falls”… The markets are beginning to believe that inflation for Australia is going to even out around 2.5%, which is still higher than the 2% target ceiling, but lower than the previous figure of 3%… So, the markets believe this will be enough to get Stevens to cut rates… And for that… Not reality, the Aussie dollar is getting sold… Go figure… Weren’t the markets all wrong a couple of months ago, when they called for a rate cut, and never got one, then?

The price of oil has really hit the slippery slope, eh? Yes, I like that when I go to the gas station… And it’s much better for the US economy… But, it doesn’t play well, and share its toys with the petrol currencies of: Canada, Norway, UK, Mexico, Brazil and Russia… So… On top of the dollar strength, these currencies lose even more because the price of oil is taking a ride on the slippery slope.

So… Do you believe the price of oil is going to continue to go south/down? Or the Southbound Train Going Down? I guess, if the global recession comes about because of the newest version of Smoot-Hawley, then the price of oil will continue on the Southbound Train Going Down…

Then there was this… From The Baltimore Sun…

The US futures regulator delayed a final vote on controversial measures to crack down on excessive speculation in commodity markets because it lacks the three votes needed for approval, sources familiar with the situation told Reuters on Wednesday.

The US Commodity Futures Trading Commission announced on Tuesday it was delaying by another two weeks to October 18 its meeting to consider the long-awaited rule on position limits. It was the second time a vote had been postponed.

What? Just what the heck is going on at the CFTC? They can’t see what’s been going on, and the need to pass a measure to crack down on excessive speculation? Are there “outside” forces putting pressure on the CFTC to not vote on this measure? One would have to think there is, otherwise the CFTC would do what’s right for the people of the United States!

To recap… The perfect storm for dollar strength that I talked about weeks ago is beginning to really set in, with the dollar hammering the currencies (not gold, though!)… The big news is that congress is going ahead with the bill to place pressure on the Chinese to allow a faster appreciation of the renminbi… Chuck thinks this is going to ignite a trade war, and possibly bring back the ghost of Smoot-Hawley… The petrol currencies are especially taking it on the chin, due to the drop in oil prices…

Chuck Butler
for The Daily Reckoning

The Ghost of Smoot-Hawley? originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

So what’s happening? Is it 2008 redux? Or are things now worse than 2008 and we just don’t know it yet? Oh, for a copy of a tomorrow’s newspaper! Still, let’s do the best we can with what we’ve got.

Let’s start with oil. In an eerie similarity to 2008, oil prices ran up for much of 2011. Posted US oil prices were well over $100 per barrel for a while. Then prices faded a bit, and traded in a $90-100 range. In August, oil prices suddenly dropped nearly 17% within a couple of days, into the high $70s. US oil prices are now in the mid $80s per barrel.

To state the obvious, there’s a lot of money in play. Here’s the raw math. The US consumes over 20 million barrels of oil per day, while world consumption is over 90 million barrels per day. So roughly, a $10 price decrease per barrel pulls $200 million per day out of the cash flow of the domestic oil industry. That same $10 price decrease pulls about $900 million per day from the cash flow of the global energy industry, from everything from independent oil companies to large state-owned actors.

Thus, if oil prices just stay where they are for any length of time, we’ll see lower top-line numbers across the energy industry, and likely lower bottom-line numbers, as well. Oil producers tend not to make large capital decisions based on temporary price swings, and most of the current cap ex will likely remain programmed. But at least some companies will scale back expenditures where and when possible. So the large, quick oil price swing we’re experiencing could make a major difference to energy sector investors over time.

What’s driving this gyrating action in the oil trading pits? Start with the run-up. Earlier in 2011, events in the Middle East — unrest in Tunisia, Egypt, Yemen, etc., as well as civil war in Libya — contributed to supply fears and higher oil prices. Oil prices climbed a wall of worry, with a particular focus on the perennially worrisome Middle East.

Rising oil prices aren’t all bad, of course. High oil prices support capital investment in energy projects, from shale gas to oil sands to offshore projects and more. So along the way, with rising oil prices, we had nice run-ups in the oil and oil service sectors. But recently, market retreats have taken almost everything down across the board.

Now we’re witness to share price massacres, even for the normally long-term oil business. A broad-based stock market calamity is accomplishing what nothing else has been able to do this year — take down oil prices and pull the support from related share prices in the energy sector. Heck, even the Obama administration’s ill-advised sale of oil from the US Strategic Petroleum Reserve in midsummer didn’t have a fraction of the oil price effect we see in the current market crash.

The precipitous decline in oil prices has given crew cuts to some of the best names in the energy sector — Schlumberger (NYSE:SLB), Baker Hughes (NYSE:BHI), FMC Technologies (NYSE:FTI) and more. The nominal losses in share value seem bad now, but when the dust settles, you’ll have bargains galore in this sector. You’ll have a chance to pad your portfolio with the best of the best names.

It’s hard to say this during a market meltdown, but don’t fear investing in the energy sector. Things will get better because energy sector fundamentals are solid. That is, keep in mind that the oil price crash isn’t due to a sudden increase in global supply, let alone a sudden drop in global demand. It’s much more due to speculators despeculating, which I’ll address below.

First, let’s look at the supply side. Most of the world’s daily oil output comes from legacy fields — some of which are decades old, and “not getting younger,” if you get my drift. For all the new technology that’s bringing “new” oil upward, the global industry still faces the same old issues of inexorable depletion.

On the demand side, there’s also no significant negative change. The general economy may stink, and people may even be rioting in the streets — as in London and other places. Yet one of the last things people do anywhere is cut back on fuel usage. Once people get used to living with the convenience of gasoline, diesel and jet fuel, they won’t give it up easily.

The US Energy Information Agency (EIA) recently confirmed this point about inelastic oil demand. The EIA just released a report stating that worldwide oil consumption will increase in 2011 and 2012, spurred by increasing demand in developing countries. In other words, rising demand is baked into the cake via worldwide growth, no matter what happens in the sclerotic Western economies.

Thus with this in mind, why did we see an oil price crash, and oil share takedown? The bottom line is that oil prices and share prices for oil and service companies are sliding due to massive liquidations of positions by traders and speculators (especially hedge funds) that are caught in a price downdraft. The traders and hedgers have to fire sell positions just to raise cash to cover margin calls.

Looking ahead, the energy sector is destined to recover. I expect oil prices to drift back upward, restoring the otherwise missing cash flows to producers. I believe that oil prices, and share prices within the energy sector, will recover sooner than most other parts of the economy and stock market.

Regards,

Byron King,
for The Daily Reckoning

2008, Redux originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

On the news this morning, the Dow rallied 125 points and is close to 11,000 again after Friday’s late-day sell-off.

Nothing like a little regime change to take our minds off the prospect of total economic collapse this morning, eh?

So far the undeclared Libyan war has cost the US alone an estimated $6.6 billion – a drop in the bucket of a $3.8 trillion annual budget.

But the oil market is sniffing a rat.

With two drawn-out, unaffordable, imperial wars already under way…in addition to the three covert wars in Yemen, Somalia and Pakistan…how long’s it going to take and how expensive will it be to “wage the peace” in Libya now?

Getting Libya’s 1.3 million barrels a day of light sweet crude production back online will be no small task, either.

As a result, a barrel of West Texas Intermediate is $83.40 this morning – up nearly 1.5% from Friday.

File Libya under “unresolved issues.” We’re kicking Monday off with a bunch of them this week.

Israel and Egypt, at peace since 1979, are tiptoeing closer to conflict this morning too.

Last week, while Israel was mixing it up with Hamas in the Gaza Strip, Israeli troops shot and killed five Egyptian soldiers just across the Gaza-Egypt border. Israel says it “regrets” killing the Egyptians. Egypt calls the matter “unacceptable” and is threatening to withdraw its ambassador to Israel.

As we’ve pointed out before, the new military government in Egypt is trying to stay on the good side of the Egyptian people in part by taking a tougher line with Israel. Well worth keeping an eye on.

Addison Wiggin
for The Daily Reckoning

Oil Market Smells a Rat originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

Front and center this morning… Gold is inching toward $1,800 again… Wonder what the “manipulators” have up their sleeves this time? The rally in gold this week has really played along well with my rant on Monday about how when all else has fails, investors put their money in gold… You know, I ran into a guy earlier this year on the speaking circuit who didn’t believe that gold was going higher, and instead chose to hold his money in dollars… Let’s see… That was the beginning of May… Since May, gold has gained $292.00… That’s not working out too well for him, but then, he can always hope for more manipulation…

OK… Yesterday, we saw the currencies trade in a tight range, with a slight bias to dollars, but that has turned around in the overnight markets… Early this morning we had a SNB meeting, and they didn’t have one mention whatsoever about a peg for the franc (CHF)… That news got the franc back in the rally gear, and the other currencies have followed along…

The BOE’s meeting minutes printed this morning, and to the surprise of the markets, two “hawks” have switched over to the “no rate change” side… That news took the wind out of the pound sterling’s (GBP) sails. I’m not a big fan of the pound and haven’t been for a couple of years now. The recent rally has been all about dollar weakness, folks… I doubt it has anything to do with strong pound fundamentals, because… THERE ARE NONE!

Yesterday, the leaders of Germany and France (Merkel and Sarkozy) came out of their “special meeting room” with yet another idea to protect the euro…their plan included a proposal to form a new Eurozone Council, which would govern Eurozone items… I cracked up at Sarkozy’s description of the new Council saying it was a “veritable Eurozone Economic Governance”… Ahhh, yes, the old “veritable Whitman’s Sampler” HA!

The two leaders also stated their absolute will to defend the euro… Then they announced that they will push the 17-Eurozone members to adopt a “golden rule” to balance their public finances, before next summer…

So, no “real meat” here, which was how the meeting was advertised… But, I think that the markets get a feeling of calm whenever the Eurozone’s two largest economies get together and sing from the same song sheet.

I had a reader send me a note yesterday regarding Frank Trotter’s thoughts on the 40-year anniversary of the removal of gold as a backing for the dollar… He thought we were being a little tough on Richard Nixon… That Nixon had no choice given what President Johnson had left him… And while that may have some truth to it (Johnson’s Great Society, and Vietnam War expenses had turned the country into a deficit spending machine), it doesn’t take the blame completely away from Nixon, who also ran up deficits and refused to balance the budget… I’ve just finished a book on this subject, by Richard Duncan called The Corruption of Capitalism… If you’re a history buff, and want to know the “root” of our problems today, this book will answer your question!

Did you see or hear that Texas Gov. Perry, who has thrown his hat in the Presidential campaign ring, took a swing at how the Fed has forced its power on the US economy… He also took a swing at Fed Chairman Bernanke… I can’t go there any longer, so I won’t… But… I can talk about how I feel that the Fed has too much freedom and power to exert their will on the economy and our monetary system. I would think that anyone who went through the paperwork that revealed how and to whom the Fed gave loans would be enough to come to that decision… But there’s more… There’s always been more, folks… And now, as we head for more quantitative easing or whatever the Fed chooses to call it, there’s never been a better time to question what their goals are…

I had a talk with a guy who told me that some “big time dudes” told him that there would be no more quantitative easing… Instead, there’ll just be the printing of money… What? Isn’t that the same thing? Well… QE is money printing, but… With QE you also get asset purchases… Which is what I told you yesterday that Fed Head Lockhart was talking about. So… Should this “guy” be correct, the economy will be flooded with dollars… The Fed has stated that they want more inflation in the economy, and if that’s their route, then, we’ll certainly have it, eh?

And then as long as I’m walking on a thin line here… A friend of mine sent me a note (thanks Brad!) that reported General Electric was going to move their X-ray division from Wisconsin to China and train 65 engineers… Hmmm… Isn’t GE Chairman Jeff Immelt the “job czar” for the president? Does anyone else see the complete craziness of this announcement? I shake my head in disgust, for sure!

OK… I’ve been off on one tangent leading to another here this morning… Focus, Chuck, Focus!

Let’s see here… Oh! This is interesting… The Royal Bank of Scotland (RBS) issued a new report on the dollar/euro, this morning, and they have backed off their previous call for the euro to be 1.32 at year’s end… They have raised that forecast to show the euro at 1.42 at year’s end. They also had this to say… “The prospects for a meaningful dollar rally over the next 4 quarters have been reduced sharply.”

I see that VP Biden is in China to assure the Chinese that the dollar and Treasuries are safe… Now, I’m no scholar, nor am I the sharpest tool in the shed, but I don’t think the Chinese are going to be swayed by anyone… But the timing of the visit is interesting, given that the Net TIC’s Flow that printed the other day showed another loss of foreign investment, and I already told you that the 30-year Auction of Treasuries was awful…  And it was awful because the Chinese didn’t show up…

I find this scary, folks… But once again let me attempt to get this message to the White House… Stop sending people to China, and wasting tax dollars… The Chinese will do what they feel best behooves their country and will not be swayed by visitors bearing gifts…

Speaking of China… I love it when they try to throw the markets off the scent of a rallying currency, by stopping the appreciation, and marking the renminbi (CNY) down… It’s like a Chinese speed bump, or circuit breaker just to remind everyone that was beginning to think that renminbi was a “one way street” that it isn’t!

In Australia overnight, their latest print of wage prices showed an increase of 0.9% in the second quarter versus the previous quarter… This was in line with expectations, but… In my mind, really proves the Reserve Bank of Australia (RBA) is not able to cut rates, as some analysts have called for… In fact, with wages rising, the RBA has to seriously consider raising rates again… And like I said yesterday, I’m still keeping the light on for another rate hike before year-end.

The price of oil is inching back baby step by baby step… After falling to $79.30 on August 9th, the price of oil has gained back to $87.63 this morning… That can’t make the deflation crowd very happen, but, it does put a shine on the Canadian dollar/loonie (CAD)…

US Industrial Production increased in July 0.9% versus June’s revised number of 0.4%… With the increase of Industrial Production, the Capacity Utilization rate rose slightly. So… The economy still has a pulse, folks… Which is what I believe we’ll experience for quite a few years… Muddling through, barely growing, with tons of unemployment…

Then there was this… Longtime friend, Bill Bonner, stopped by to say hi to me, when I was in Vancouver… Bill has been so right on so many things over the years that it makes one’s head spin thinking about it… Yesterday, in his essay “Saving the US Economy by Presidential Decree” he was talking about what he would do if he were president… Here’s a snippet…

My fellow Americans, I don’t know about you, but I’m tired of supporting all these zombies. Why are there so many zombies? Because there’s so much meat for them…

You wanted change… I’ll give you change…

Here’s how to get rid of zombies. I’m proposing to scrap the entire tax code. From now on, Americans will pay 10% of their income…no deductions…no nonsense. You’ll fill out your tax return on a postcard.

Serfs in the Dark Ages were only required to work one day in 10 for their lords and masters. You shouldn’t have to do more.

The federal government will have to get by on that. That’s all. I’m proposing a Balanced Budget Amendment…with a permanent 10% tax rate. No ifs. No buts. No zombies.

I don’t think the “super Rich” would like that too much… But, according to the President, they need to pay more anyway!

To recap… The currencies traded in a tight range yesterday with a bias to buy dollars, but that all changed this morning, as the SNB met and made mention of a peg or further intervention, giving the franc a boost, which led the other currencies higher. Merkel and Sarkozy came out of their magic room with another plan for the Eurozone. Nothing earth shattering, but gave the markets a warm and fuzzy. And the price of oil is rising again…

Chuck Butler
for The Daily Reckoning

BOE Unanimously Leaves Rates Unchanged originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

The thesis of the clip is that economic growth as we know it is over… and when looking at new alternatives it makes sense to note which options are most sustainable.

It’s without a doubt touchy-feely, and it’s also light on detail to support a specific new economic pathway — which makes the whole exercise seem a bit unrealistic — but, it clearly notes that the economic problems we face are grounded in the overwhelmingly consumer- and debt-driven culture. As well as a political worldview that puts GDP growth ahead of almost all else.

Is there another yardstick worth considering? It’s the only reputable one we’ve got now, but perhaps there ought to be.

This is from a recent article by the video’s author Richard Heinberg:

“Although soaring numbers lead to financial euphoria, they can hide social ills like growing inequality; moreover, GDP fails to distinguish between waste, luxury, and the satisfaction of basic human needs. Perversely, GDP often rises during wars or after environmental disasters, due to increased government spending. Despite criticisms, economists and policy makers have stuck with GDP—perhaps because tracking a single number makes their jobs easier.

“But now, the US may have reached its practical GDP limit. The bursting of a once-in-a-lifetime credit bubble, the maxing out of consumer borrowing and spending capacity, and tightening global resource constraints (showing up as stubbornly high oil prices) have caught national economic output in an undertow. Much of the rest of the world is being drawn in, with Greece, Ireland, Portugal, Spain, and Italy swirling ever closer to the drain. During the past two years, Americans bought an anemic recovery—a few hundred billion dollars’ worth of GDP growth—but at the cost of trillions in added government debt.

“Now, as Washington descends deeper into partisan acrimony, efforts to generate further growth with yet more debt have become political orphans that no Republican and few Democrats will claim as their own. If the “recovery” was all smoke and mirrors, we’ve just run out of mirrors.”

And the video:

More on the potential alternatives to GDP that Heinberg considers — including the Genuine Progress Indicator, or GPI, which adjusts GDP for resource depletion, income distribution, crime, leisure, infrastructure lifespan, and so forth — can be found in his Just International post on how GDP is dead.

Best,

Rocky Vega,
The Daily Reckoning

There Is No Recovery… It’s All Been Just More Debt originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.