September 28, 2012
- Spain goes berserk… Germany inches towards the exit… Amoss fills us in on why “investors will soon be roused from their blissful trances”…
- Burma becoming the new economic goldmine? Mayer fills us in…and lets us in on the little-known history of passports…
- “Mr. Perkins poses an extreme risk to the market when drunk.” The lesson humanity must learn time and time again: do not do anything when drunk…
- Byron clears confusion about peak oil… Question from viewer: are we anarchists? “Fire Obama!” irate reader screams… a Nazi Space Buddha? … and more!
“Investors have embraced an overly simple belief,” Dan Amoss wrote to us early today, “the belief that central banks can prod investors into stocks against their will. Investing is not that simple. The comparison between bond yields and stock yields — two completely different investments — has become absurd.
It’s Friday. You may be surprised by what you read in today’s 5… but the election nears, and sometimes we all go a little stir crazy.
“Bonds are contracts involving a fixed stream of cash flows and a predetermined maturity date,” Mr. Amoss continues. “Stocks are claims on highly uncertain streams of future free cash flows that often stretch out for decades. Many risks can enter the picture and alter the trajectory of free cash flow — and investors’ expectations of them.
“Risks tend to appear out of the blue, and smack investors out of their blissful trance — a trance created by central banks which have shifted far too much attention on the returns of stocks versus bonds…
“Here is just one negative catalyst growing closer as the weeks and months pass: Germany could exit from the Euro, and return to the Deutsche Mark. While a German exit would offer long-awaited clarity about the future of the Europe, it would also spark a mad scramble to adjust to a new reality.
“A German exit would trash the euro’s value against the currency that’s steadily becoming the reserve of choice: gold,” Dan goes on.
“Only weak economies with bankrupt governments would be left standing behind the Euro. The European Central Bank (ECB) would be free to monetize as much Italian and Spanish debt as it wishes. The economists calling for a weaker currency to restore prosperity to the PIIGS countries would get to see their prescription play out in a real-world laboratory. Results would show that currency debasement does not create stronger, more competitive economies. Countries left in the Euro would see collapsing living standards: import prices would rise and capital investment would fall amidst a chaotic currency regime.
“Having seen the example of Greece, the Spanish public suspects austerity will only make things worse. Spain will come to believe that its salvation lies in the printing press — in the ability to inflate away its heavy debt burden. After promising markets that the ECB would buy Spanish debt, Mario Draghi now has no choice but to fire up the Euro printing press.
Most other debt holders will flee the chaos unfolding in Spain. They’ll refuse to hold Spanish bonds at yields too low to compensate for default risk. The ECB, once it establishes a fake, above-market price for Spanish bonds, will ultimately find itself as the only holder of those bonds. This is what happens when central planners impose prices far from what private investors consider fair value (in this case, pushing Spanish debt yields to below 4%, versus a much higher market-based yield). Once the German public sees that the ECB will become the majority holder of Spanish debt, they will insist that German politicians plan an exit from the Euro.
“Yesterday’s anti-austerity protests in Madrid,” GFT strategist David Morrison says, “together with today’s 24-hour strike in Greece, are both reminders that rampant unemployment and a general collapse in living standards make people desperate and angry.”
I think ‘angry’ might be an understatement there, Dave.
The man in the biker helmet beating the police car…yeah…he’s angry…
“Protests against budget cuts have only just begun. Debilitating strikes are on the way,” Amoss goes on, forecasting more turmoil in the already out of control Spain.
“Do you think many investors will hold Spanish bonds while whole regions are threatening to secede, fighting a central government that might morph into a military dictatorship? Or that, in this scenario, “Germany would tolerate staying in a Euro collateralized by Spanish bonds?” he asks. “I don’t think so.”
“Germany will watch as all of this unfolds, and realize that the austerity promises will be broken. The ECB will be left holding hundreds of billions of Spanish debt, with no possible exit, and constant pressure to continue monetizing Spanish debt. It is then that the drive to exit the Euro will pick up speed.
“With this as a backdrop,” Amoss concludes, “the stock market will not remain in its current tranquil state. Investors will soon be roused from their blissful trance.”
“Burma is once again opening up,” Chris Mayer writes. “And once again, it is drawing the fortune seekers. While in Myanmar, I plan to meet with oil and gas explorers, property development companies and more. I’ll travel by plane, train and riverboat as I poke around this newly opened market.
“In the early part of the 20th century,” Chris goes on, “Burma was a place for fortune seekers. Besides exporting rice, teak and oil, Burma had (and has) loads of mineral wealth — tungsten, copper, silver, lead and zinc.
“As I write,” Chris goes on, “I don’t yet have my visa. So there is a chance I never even get off the ground, which brings me to unique hassle of modern-day travel — passports and visas.
“I am always mystified by what countries require. As part of the Myanmar visa application, I had to give them my work history. Now, what possible difference could that make? Are they looking to see if anyone writes in “arms dealer” or “drug lord”?
“The passport, we should remember,” Mr. Mayer continues, “came about as a wartime measure England during World War I. Before 1915, as Paul Fussell writes in his classic Abroad:
“His Majesty’s Government did not require a passport for departure, nor did any European state require one for admittance except the two notoriously backward and neurotic countries of Russia and the Ottoman Empire.”
“On Nov. 30, 1915, the British government passed Regulation 14c. It was a temporary measure, they said, a wartime emergency. Yet here we are and the regulation stands. In fact, the whole world has adopted this way of tracking people and keeping them from going here and there without special permissions, stamps and fees.
“Fussell tells us that the idea of carrying a passport was a shock and something of a scandal when it was first introduced. The passport had to have your picture, your profession and a description of your particular features. You had to describe your forehead, the shape of your nose, mouth and chin, skin complexion and the shape of your face.
“It is amazing to think, as Fussell points out, that when writer D.H. Lawrence and Frieda Weekley fled England for France in 1912, they just left. No passports. No papers to file.”
“Stories like this make you realize how the powers that be have chiseled away at so many freedoms,” Chris writes. “Little by little, they gain ground and never cede it.”
“Well, they never cede it until the burdens become completely untenable, as in Myanmar. Many long years of repression made a country that was once one of the richest in Asia into one of the poorest. The result is so shameful that the ruling military dictatorship gave up voluntarily. I oversimplify, but I am not far from the truth.
“I wonder how long Americans will allow themselves to be pushed around by bureaucrat overlords. How long will the descendents of 1776 continue to meekly take off their shoes and belts as they go through the TSA gauntlet? How long will we suffer the indignity of standing there with our hands up like some idiot criminal while we wait for the scanners to do their work? How long will we act like bovines being shuttled through some filthy pen?
“Probably until it becomes untenable…”
After one good day, the market is already moping around again. Dow is down 48 points to 13,437. Nasdaq shaved off 20 points to 3,116. The S&P cut 6 points to 1,440.
Oil is down 14 cents to $92.05. Gold is down $6.30 to $1,771.30… and silver lost 17 cents to $34.49 an oz.
“Mr. Perkins poses an extreme risk to the market when drunk.” We’re considering adding that statement to the “Comments of the Year” file for 2012.
Last week’s mysterious oil drop continues to puzzle the pundits, but a similar drop in 2009 has, at long last, been resolved…
The culprit? A drunken, blacked-out senior broker at PVM Oil Futures.
“Steve Perkins,” Russia Today reports, “spent $520 million of his client’s cash on oil futures contracts throughout the night during a “drunken blackout”. The US Financial Services Authority made this discovery while investigating a mysterious oil price spike on June 30, 2009.
Apparently, Perkins got drunk, blacked out and purchased 7 million barrels, or 69% of the global oil market in the middle of the night, pushing the price up by $1.50…
Oops.
“The next morning,” RT continues, “an admin clerk called Perkins to ask why he had bought so much crude during the night, but Perkins couldn’t recollect making the trades. Later, after he apparently sobered up and became terrified with what he had done, the broker sent a message to his boss claiming he had to stay at home to care for a sick relative.”
Peak oil (PO), says Byron, “is an analytical tool.” Following his Remade In America investment thesis, we’ve been – understandably – fielding inquiries from readers about Byron’s stance on peak oil.
“Essentially,” Byron says, PO is “a way of looking at global oil output, and evaluating the nature of the production curves.
“Like all tools,” Byron writes, “PO has evolved from the early days of Hubbert and his simple curve. Today PO is a way of forecasting when, where & how to deploy new capital to find “new” oil — for govts, NOCs, Big Oil cos and little oil cos. each have their own agenda…
“Still, the operative idea is that it takes more & more capital to recover the same number of barrels as in the old days. The easy oil is long gone. And keep in mind that, as our capital-deployment system constrains and spirals inward, due to bad money and worse policy, it stands to reason that we’ll have less & less good capital deployment towards energy, leading to less & less future oil…
“To illustrate the point, look at Mexico, and it’s piss-poor record of sustaining its oil industry — in the face of one of the worst decline curves on the planet — due to corruption, cronyism and drawing down oil sector capital to prop up unsustainable socialism. Or look at Venezuela (ditto Mexico) — now importing oil. Or Nigeria (ditto Mexico, on steroids) — a dead oil power walking. Or the UK, which has spent years taxing away the profitability of the North Sea oil biz… I could go on.
“Recent oil prices and PO — the indicators are not trustworthy,” Byron shifts gears. “Talk to me after the US election. I don’t trust anything coming out of the government, big banks, mainstream media, etc about the economy, or even price signals about oil. It’s all way too susceptible to manipulation.”
“Interesting coincidence,” one amused reader writes, “that this discussion about Hitler appeared in The 5 the day the following article came out. Indiana Jones where are you?”
For some odd reason, Hitler is rearing his ugly head in strange ways lately. A couple days ago, it was in India at a clothing store, today, a Buddha statue from space.
Seriously.
The Nazi Space Buddha… a new kids’ toy?.
“Researchers have recently released information on a carved Buddha,” Dvice.com reports, “brought to Germany from Tibet by the Nazis. Astoundingly, the statue is made from a meteorite believed to have fallen some 10,000 years ago along the Siberia-Mongolian border.
“This ancient Buddha,” Dvice goes on, “also known as “Iron Man” to the scientists, ended up in Germany as the result of zoologist and ethnologist Ernst Schäfer’s journey to Tibet in 1938 and ’39. The mission was to find the roots of the Aryan “race.” Instead he returned with the carving of what researchers believe to be is the Buddhist god Vaisravana — somewhat ironically, the god of wealth or war.”
“I’ve never understood,” one confused reader writes, “why government and state workers get such great pensions and benefits. The government gets it’s money from printing or (stealing) taxing the people. I don’t know anyone who gets a pension or for that matter will ever get a pension. All the burden is in each individual’s hands, weather it be a 401k or some other form of savings plan. So what gives?
“I think that takes a lot of Gaul to give the money I earn to someone else for a job that was probably never needed in the first place, while I go without many things trying to save for my later years. How can this be stopped?
“Thanks again to all at Agora.”
The 5: We wish we knew. Our next reader thinks he knows, but we beg to differ… as delicately as possible.
You need to stop getting your information from Huffington Post and CNBC, writes a jaded, if myopic, reader. I am starting to feel like youre leaning too far in the left of center. Is it profits for you or do you really care about America? This is our country still. We need to wake up America before its too late.
“Fire Obama!”
The 5: Hmmmn…
On my Facebook page last week, someone who’d just finished watching I.O.U.S.A. asked if we were anarchists.
We’re certainly “much-less”-archists, we replied… to crickets.
The academic term is “minarchist”… meaning we prefer as minimum government as is possible. Mostly because we don’t like being told what to do.
But, allow us a digression. A political one. (If you don’t like politics, avert your eyes. Save yourself the angst.)
Normally we’d wait for a few weeks to start this campaign, but since you brought it up, we prefer to get this out of the way: don’t vote this year. You’ll only encourage the bastards.
Much to the dismay of some of our family members, back in 2008 we even tried to create a website encouraging non-action. You can still visit the site today at www.stopthevote.com.
We failed.
The site was and still is the least visited site we’ve ever created. Yet being the masochists we are, we keep paying the $50 annual web-hosting fee. We’re hoping one day the idea will catch hold. (Off the backend, we’re hoping you might endulge us, buy a copy of The Great Fiction by Dr. Hans Herman-Hoppe and read it.)
Still, if you insist on voting, you’d better hope Obama wins the election.
[Yep. You read that correctly. We’ll pause and let that one sink in for a bit. And then we’ll check with Andrea, our customer service director, to see how fast the e-mail box is filling up with right-wing hate mail.]
Now that you’re back in your chair and hopefully without your finger on the delete key… hear us out.
With Obama you know what you’re going to get. He’s a guy who believes in his heart (and his errr… your wallet) that government is not only the solution to all your problems, but the source of all your good fortune.
We couldn’t disagree more.
But at least with Obama we know what we’re dealing with. You can look at the headlines every morning and see what government policies have wrought around the globe. Indeed, we spend most of our time calculating the destruction in the 5. The destruction of your savings, your opportunities, your future.
The sooner Obamas policies fail completely (which, a quick tour of history tells us they will) and the charade is ended, the sooner we can get back to the core principles of private enterprise, capital accumulation, investment and cooperation… you know, those small ideas that helped create the most prosperous society in human history. It’s only after the current political environment burns out that these ideas can rise again.
So, by all means, bring it on.
If you think Mitt Romney and Paul Ryan are going to step up and restore these values by virtue of gaining the White House, we think you’re making a big mistake. Romney is a panacea. Repbulicans only want to point the gun at someone else.
If Obama wins, you and I – we -will be forced to make the argument for prosperity through economic freedom and civil liberties to a much wider audience than the 6% voting block currently being targeted by the Republican minority. That’s an argument we believe will eventually prevail. But not before this silly election is over…
In Agora Financial we have a saying “fail quickly, but learn from mistakes”. The sooner the political elite fail, the sooner we can get back to the business of improyourving our lives, without them.
Cheers,
Addison Wiggin,
The 5 Min. Forecast
p.s. What happens after the crash? What’s the way forward?
Well… to help answer and prepare for “that”, we’ve assembled a “round table” of ladies and gentlemen who’ve been working on the same question for years: a billionaire, several best-selling authors, erstwhile bankers and economists, financial gurus, market historians, a philanthropist, a filmmaker… all have sat at the table for a good chat.
If you’d like to join in the discussion, please accept my formal invitation here.