Crisis? What Crisis?

by Addison Wiggin & Dave Gonigam – March 2, 2011

  • You call this a crisis? How the Libya uprising stacks up against other oil shocks

  • What the oil spike last week might mean for stocks between now and September

  • Gold reaches a record, thanks in part to Chinese demand

  • Looking past the iPad hype… Patrick Cox on the stunning impact of Android

  • “Maybe you’ll see what guns are really good for”… Wisconsin debate gets heated

Loyalists and rebels in Libya are fighting it out over the town of Brega. That’s one of five export terminals in the east of the country. Two U.S. warships loom over the horizon in the Mediterranean.

The flow of Libyan oil to the world market — already a trickle — may soon shut down completely. West Texas Intermediate, the oil price most often cited by the media, cracked $100 yesterday, and as we write, it’s nearly $101.

Brent crude, which tracks the North Sea stuff, has already breeched $116. The press are atwitter with projections of $5 gallons of gas and escalating unrest around the world.

But let’s take a deep breath. Here at The 5, we'd rather take our time and put this mess in perspective: In terms of oil lost to the world market, this is still peanuts compared to previous supply disruptions.

As the world uses a lot more oil now than it did in, say, 1978, the impact of Libya is even more muted than the chart reveals.

Still, the crisis could spread. According to one of the oil industry’s bibles, the annual BP Statistical Review, only three OPEC members have actually grown their production during the last 10 years.

One of them is Libya. The others are Kuwait and Algeria.

“Algeria's leadership,” says The Associated Press this morning, “riddled by corruption and at the mercy of the army, is sitting in a circle of fire, with a restive populace at home and pro-democracy uprisings in neighboring Tunisia and Libya that are shaking the Arab world to the core.”

There’ve been two months of strikes, sit-ins and attempted protest marches. The government just lifted a state of emergency after 19 years. It’s anyone’s guess whether measures like those mean Algeria goes the way of Egypt… or Libya.

At 2.1 million barrels per day, Algeria’s oil production is slightly greater than that of Libya’s, at 1.8 million.

If Algeria goes to pot, figure double the impact. Oil could jump another $15… and oil producers in safer regions of the world will stand to benefit.

Turkey ranks No. 62 on the CIA Factbook’s list of world oil producers — just ahead of Bahrain, where the government is under siege. Turkey is 1,404 miles from Bahrain, well insulated from the upheavals of the Middle East.

And drilling there is comparable to drilling the Permian Basin of Texas in the 1930s, says one oil industry veteran. “You may have no more than 10 rigs capable of drilling at any one time” — in a territory where there’s room for 800. In other words, the story is just getting started.

“Turkey needs oil and gas — lots of it,” Chris Mayer tells us. “It imports nearly all of its oil and natural gas needs. Natural gas prices in Turkey are about $8 — more than double the U.S. price. This is a good market in which to be a producer.”

The aforementioned oil industry veteran has put a significant portion of his net worth behind a $1 billion market cap company that’s sitting on $51 billion of oil and gas in Turkey. The last time he made a bet like this, he put up just $500… and turned it into $1 billion.

No wonder Chris is eager to tell you about this company… so eager, he convinced us to slash the price on his premium advisory, Mayer’s Special Situations, to get you in the tent. He tells the whole story here. Just know that this half-price offer expires tomorrow at midnight. Time’s a-wasting.

“Last week,” Chris writes, turning to the stock market, “oil prices surged 15% and the Dow lost 400 points. The Wall Street Journal reports that in the seven instances in which oil jumped by 10% in two days — one of which was last week — the market declined an average 9.3% in the succeeding six months.

“Here is a slightly edited version of the Journal’s chart:

“Beyond the 2008 drop,” Chris says, “it's not really serious. I mean, it's not a reason to go out and sell all your stocks. But it speaks to how difficult it is for the stock market to make much headway after an oil spike.

"Besides, we haven't really had any significant pullback in the stock market since August. So it's a good time to be careful.”

The major indexes are flat after a big selloff yesterday. The Dow is still above 12,000, and the S&P above 1,300.

If a 9.3% drop is in the cards over the next six months, we’re already more than a quarter of the way there.

Gold and silver are powering to record highs on the back of oil’s strength. Gold is up to $1,438. Silver is up to another post-1980 high of $34.84.

Chinese are stepping up their gold purchases, again. They are inching toward more than double last year’s pace, in fact.

UBS estimates gold purchases by China reached 200 metric tons during the first two months of 2011. That compares to 580 million tons for all of last year. Sales at the Cai Bai market in Beijing, which we visited last year, are up 70% from a year ago, according to China Daily.

Demand is driven by worries about inflation and the poor performance of other investments, according to the World Gold Council.

The new iPad comes out today. But as usual, our Patrick Cox is a step ahead. “The next generation of Android pad computers is simply going to rock,” all but pooh-poohing the gift all Agora employees received for Christmas last year.

“Google bought the original developer Android Inc. in 2005 and pretty much gave it to the Open Handset Alliance,” Patrick explains by way of background. “This was part of Google's strategy to move computing into the cloud and beyond Microsoft's control. I think they've succeeded in that, but ironically, they seem to have overlooked a critical consequence of that move.

“In Q4 2010, the Android OS was the world's best-selling smartphone platform, ending the 10-year rein of Nokia's Symbian. Recent events have solidified this trend.

“Open source advocates may have lost the personal computer battles, but they're set to win the mobile war. This opens the doors for third-party developers like they've never been open before. Most importantly, it does so just as mobile devices, including phones and pad computers, are gaining the power they need to supersede laptops.”

How can you profit from the trend? Check out the wave of innovation Patrick and his colleague Ray Blanco are following. Truly, we’re on the crest of the most amazing — and lucrative — developments… as you’ll see here.

“The recent rise in commodity prices,” Fed chief Ben Bernanke testified to Congress yesterday, “will lead to, at most, a temporary and relatively modest increase in U.S. consumer price inflation.”

Given his history of predictions that didn’t pan out, we suspect this too will be worth filing away for future reference.

That, and this gem:

“We also continue to plan for the eventual exit from unusually accommodative monetary policies and the normalization of the Federal Reserve's balance sheet. We have all the tools we need to achieve a smooth and effective exit at the appropriate time.”

Translation: Yeah, we know we're buying up bad mortgages and the sovereign debt of the U.S…. but we'll be the first central bank in history to outwit the market and sell this garbage to speculators before a real crisis hits.


[Comic relief: Check this out and see how Bernanke is apparently unaware there was once a time the national debt had been paid off. The relevant exchange begins at 0:39.

Obviously, Bernanke didn’t see I.O.U.S.A.]

It appears Washington will avoid a “government shutdown” for at least two more weeks. The House has passed a “continuing resolution” to keep Uncle Sam funded past this Friday, through March 18.

The Senate will likely follow suit today or tomorrow.

Phew. Now we can all go back to following the really important deadline that’s looming this week — the threat of an NFL lockout.

“The reason for the 35% spending increase in Milwaukee County [when Scott Walker was county executive] is," a reader writes, contributing to a surprisingly lively discussion over state balance sheets and the public unions that don’t seem to care whether they're tanking the system or not, "there is an ultra-liberal county board that overrid almost all of the cuts Walker proposed. If it weren't for Walker, the spending increase would have been twice that!”

The 5: Ah yes. And federal spending under Reagan grew 60%, but it was all Tip O’Neill’s fault. We’ve heard the song before. It doesn’t get any better with time.

“The primary goal in Wisconsin,” writes another reader, “is to balance the budget without raising taxes.

“Weakening the public sector unions’ ability to buy politicians is just icing on the cake. If Walker and the Republicans are overreaching (IMHO, they are not even close), the next election will address that.”

“Unions enjoy the government privilege of siphoning funds from a person’s paycheck before they even receive it. What other private entity has the same income taxation power as government?

“Unions are perfectly capable of competing for people’s hard-earned money just like every other private entity.

“Union busting? More like leveling the playing field.”

“I am a Washington state public employee and unsympathetic to the Wisconsin state employees. We make a contribution monthly to our retirement fund. It is matched by the state… but the state does not pay the full amount. Wisconsin has a real benefit… the type that broke most of the auto companies.

“Under my plan, I will get 60% of my salary. Washington has at least three plans, and terms vary. One plan permits employees to self-direct their investments. The liberals thought Bush was crazy when he made that suggestion for Social Security, and our two U.S. senators fought it, but the state already was doing it… successfully.

“Collective bargaining is a forced union situation. Before collective bargaining in Washington, you did not have to belong to the union. Collective bargaining was a deal between union Democrats and Democratic Gov. Christine Gregoire, who benefited from their support and money.

“Now, union membership is compulsory, and I pay more than $70 a month to a union whose politics I hate. The vote to unionize was called at the last minute, and the voting places were union offices. So much for democracy in the union.

“Walker may not be perfect, but I am a union member who supports him.”

“We in Ohio are also fighting the unbelievable generosity of previous administrations," writes a reader from another of the 45 states facing budget deficits till the cows come home, "as well as voters’ ignorance in giving away the financial solvency for our state.

“It was just published in The Columbus Dispatch that the 350,000 union and public officials in our state will cost $1.3 billion in wage and benefit increases with their current contracts for next year.

“Now think about the reality of that for a minute. Roughly 350,000 people will represent 9% of our total deficit ($8 billion projected next year) in a state of roughly 12 million people.

"As a private business owner for 24 years, I only wish I could have, and offer, half the benefits that the entitled few do.

“It really is criminal. The gravy train is over.”

“It always sounds to me that most of the views on here are Republican leaning,” writes a dissenter. “That's fine. You have a right to your opinion. What is not fine is the fact that Republicans have been succeeding in destroying the unions since the despicable Reagan era.

“Unions make concessions when they must preserve the jobs and stabilize the budget. To take away the right to collective bargaining is criminal. If this type of behavior continues in which the Republicans control the flow of wealth to the top, you should all hire armed guards to take your greedy asses to the grocery store. People will put up with only so much greed.

“Hey, you guys like guns. Maybe you will see what they are really good for — balancing the status quo. Just sayin'.”

The 5: Hmn. You are the first to propose violence in this discussion.


Addison Wiggin

The 5 Min. Forecast

P.S.: “Thanks for the bit about the Henry Paulson bronze medal,” writes our final correspondent. “You made me double-check the date. Would have made a lot more sense to run that story one month from now on April Fools’ Day.”

The 5: What, and make people wonder if it was for real? That’d take all the fun out of it.

Friday evening at 6 p.m., we're taking the wraps off a new, first-of-a-kind currency trading service. On more than one occasion, you've asked us for ways to profit from currencies… we've really outdone ourselves this time.

Our world-class analyst Abe Cofnas wrote the book on currency trading — two of them, in fact. But never before have we published anything like what you'll be privy to on Friday. Mr. Cofnas has found a way to trade currencies no other North American newsletter has ever tackled before. His ideas have been the subject of much discussion at the monthly Agora Financial editorial meetings…

But we're getting ahead of ourselves. First up, Abe answers a more fundamental question: Why trade currencies at all?

Trading Secrets of a $4 Trillion Market, Part I

Open this morning's Wall Street Journal and you'll find a full page devoted to forex, the worldwide currency market. It's hot. Trader's are making millions. On any given day, an estimated $4 trillion worth of currencies change hands.

Put another way, in just four days, the forex market’s volume exceeds the annual GDP of the United States. That makes it the world's biggest market by far. The market is on a rapid growth track and is projected to see $10 trillion per day within the next several years.

As a lifelong forex trader, I didn’t learn anything new from the WSJ. In fact, the article warns about what I’ve known for years — trading currencies can be very exciting and rewarding, but it can also be risky. How risky?

Well, let's take a look at how the forex works, and then you'll understand…

The forex itself doesn't have a physical exchange. Instead, it's a global network of thousands of banks and institutions that makes it easy to exchange large amounts of currency for one another.

This is a critical transaction for multinational corporations. After all, the money Coca-Cola makes in Japan is yen — which are no good to folks in the Atlanta home office. And British-owned HSBC bank can’t fill its U.S. ATMs with U.K. pounds…

With so many transactions going back and forth, the forces of supply and demand are always in motion. And that means the value of a currency can change at any given moment.

Playing these changes can lead to streams of income, if you know what you're doing.

Fact is, without a gold standard or exchange rate system in which all currencies are based on similar values, the forex markets can be and are used for speculating and hedging, shifting from one currency to another to capture or protect profits.

For instance, an investment firm may want foreign currency for a savings account in a country with higher interest rates. Or to dump a currency that’s expected to lose value in favor of one on the rise.

The actual changes in value between one currency and another are tiny, often just fractions of a cent. But typical forex transactions are huge, with a single trade involving 100,000 currency units or more. You get the picture. Even those tiny fractions can quickly add up.

Now, unless you're very rich, you can't usually drop $100,000 on a single transaction. So for a long time, only banks, institutions and corporations used the forex.

Then, in 1996, an enterprising group of traders realized the potential forex held for their clients — everyday traders like you and me. With trillions of dollars going back and forth every day, it was natural for "retail" investors to want to reach out and grab some of that action. The MG Forex, Matchbook FX ECN, GFT, CMC Markets and the Saxo Bank were established.

In time, these firms and others competing for retail clients devised new ways to open forex to more and more people. Their innovations are responsible for many of the over-the-top currency ads you see on TV and in the press. As interest grows in currency trading, so does the range of currency trading vehicles. It's all a good thing…

But behind the outrageous promises are scary truths you won't find even in the fine print. Some of the most popular ways to jump into forex hide wealth-stealing secrets that many people realize only after it's too late.

I'll introduce some of those to you tomorrow. — Abe Cofnas


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