February 10, 2014
- Pipeline clears another hurdle… or does it?
- Byron King on how the “economics and raw cynical politics” of Keystone XL will play out
- Jim Grant on a bigger threat to markets than the Fed
- Business opportunity: Making silver blanks for the U.S. Mint
- Six Benjamins for an “ugly Christmas sweater”… the flip side of boomers hanging onto their jobs for dear life… evidence of a Bitcoin crackdown… and more!
Was the “fuse to the biggest carbon bomb on the planet” just lit?
The “climate change” crowd has been in high dudgeon lately. The pithy phrase above comes from Bill McKibben, co-founder of the activist group 350.org.
Last week, the State Department issued an environmental impact statement about Keystone XL — the proposed pipeline that would bring crude from the Canadian oil sands down to the Gulf Coast. (Why the State Department? Because it would cross a border.)
“Boiled down,” says our energy expert Byron King, “the study determined that building the pipeline will not significantly affect the global ‘climate.'”
But the study is not the last word. That rests with the president.
“Oil sand development in Canada will happen one way or the other,” says Byron, “whatever the U.S. decides to do about the Keystone line. This is a long-term national priority for Canada.”
If Keystone XL doesn’t come about, “Canadian oil will come to the U.S. either through existing pipelines or by rail. It’s going to happen. It won’t not happen.
“In the future, if excess oil supply can’t move south due to U.S. environmental politics, the Canadians have another plan. It’s called the Northern Gateway and will move oil west from Alberta to the Pacific coast” — where it will be shipped to China.
The State Department acknowledged those realities in reaching its conclusions. “Since the oil is going to be produced and transported anyway,” Reason’s Ronald Bailey sums up, “denying a construction permit to the pipeline will have essentially no effect on future trends in man-made climate change.”
“Keystone gets down to economics and raw cynical politics,” says Byron, getting to the heart of the matter. “Who’s making money from building Keystone versus opposing construction?
“Eventually, that Canadian oil will get refined and burned. It’s just a question of on which continent. Opposing Keystone won’t do a thing to save the planet, if that’s your concern.”
Nothing will be decided for at least four more months.
“The State Department is soliciting public comments for the next month,” writes Reason’s Bailey; “it then has 90 days in which to consult with other federal agencies about their views of the Keystone project. That means that any ruling by the Obama administration can be delayed until at least June.
“In 2012, President Obama adroitly avoided making any decision with regard to the Keystone pipeline when it might have affected his campaign for a second term in office. By refusing to decide, the president kept hope alive on both sides of the issue. In this case, the past is probably prologue: Obama will bravely continue to dither over Keystone until after the congressional elections in November.”
That echoes the veteran oil industry journalist Jim Norman. Mr. Norman laid out a provocative thesis in his 2008 book The Oil Card: Since the dawn of the 21st century, Washington has pursued a policy of higher oil prices to squeeze China’s economic growth.
“My view is that the Keystone XL pipeline issue has little or nothing to do with environmental concerns and everything to do with global crude oil pricing,” Norman told us in Apogee Advisory last fall.
“With Keystone, there would come a flood of cheap Canadian crude all the way to the Gulf Coast, where it would be an inevitable downward drag on oil prices both there and globally.
“It would make it much more difficult and costly to keep the lead balloon of Nymex crude prices aloft. The physical glut would pull down the futures. It would force even more production restraint by the Saudis, Mexicans and the rest of OPEC.
“Better to make our fast friends in Canada suffer a bit more than other less-reliable allies. I expect further protracted delays for Keystone, for whatever bogus reason that can be ginned up.”
At least until such time as the Canadians go full speed ahead with the pipeline to the Pacific…
Major U.S. stock indexes are starting the new week flat. The Nasdaq is slightly in the green; everything else is slightly in the red. The S&P 500 sits at 1,794 — up 50 points from where it stood last Wednesday morning.
“Last week saw the force of gravity applied to volatility, as the fear gauge flew and then fell toward Earth like a Sochi snowboarder,” wrote Options Hotline’s Steve Sarnoff over the weekend.
“Equities closed the week heading higher. Positive character of price movement implies a test of overhead resistance. In the weeks ahead, as buyers and sellers battle, price behavior will tell the tale and solve the mystery of who has the overall advantage in price direction.
“Looking ahead, Capitol Hill will welcome the new Fed chair to the hot seat on Tuesday. It is doubtful Ms. Yellen will announce any trimming of the Fed’s tapering course. This may take some wind out of investors’ sails and put stocks and commodities under renewed pressure.”
An even bigger threat to markets than the Fed looms across the Pacific, suggests our Dan Amoss.
Dan pulled tough duty last week in the Bahamas, speaking at the Global Financial Summit. And we mean that in all seriousness. “My cab driver,” he tells us, “was simultaneously eating a cheeseburger, speeding, steering with his knees and weaving in and out of lanes. He drove a few inches from fellow cabbies, carrying on conversations at 40 mph.” And no seat belts.
The keynote speaker was Jim Grant, editor of Grant’s Interest Rate Observer. “He thinks the Chinese shadow banking system is a much bigger threat to markets than the Fed’s wind-down of its QE program,” says Dan.
If you’ve been following closely, you know Dan’s been on this case too. “China has experienced an epic credit bubble since 2008. It now has banking assets equal to one-third of world GDP. For perspective, at the peak of Japan’s economy-wrecking 1980s credit bubble, its banking assets claimed 18% of world GDP.”
Nor is this a distant threat: “An estimated 45% of all private credit in China must be refinanced over the next 12 months,” says Dan.
“In order to thwart panic in the rest of the shadow banking system, the central government must keep backstopping the rest of the dodgy loans that are constantly maturing. It’s an enormous undertaking with unpredictable consequences.”
No lie: New credit created in China is increasingly used to pay interest on old debt. Grant quoted his knowledgeable informant on China: “The new credit expansion you are seeing contains a lot of interest to repay old debt. The banking system is keeping itself liquid at the expense of the real economy. That’s why you have more and more credit for the same level of [economic] activity.”
Ouch. “However China deals with the fallout of all its banking system’s problems,” Dan sums up, “its trading partners will not emerge unscathed. The process is bound to cause hiccups in world trade.”
Gold is drifting up this morning. At last check, the bid was $1,275 — a level last seen in mid-November.
Silver has pushed through the $20 barrier, currently $20.14.
Don’t expect an end to the periodic supply squeezes of U.S. Silver Eagles anytime soon.
Last week, the U.S. Mint issued a report trying to explain the situation. Despite a quadrupling of demand between 2007-13, “the Mint said there is plenty of raw silver material available for purchase in the open market,” MarketWatch reports. “However, periodic shortages of the blanks used for coin production do develop.”
Not exactly new: We noted last April the Mint has been searching high and low for a new supplier of blanks in addition to the three it has now.
Bottom line: Look for continued episodes of rationing — the Mint’s preferred term is “allocation” — to its dealer network. “When that demand exceeds our ability to acquire a sufficient number of blanks,” says a Mint statement, “we then go on allocation until our inventories can be rebuilt again and the supply of blanks increased so that time spent on allocation is minimized.”
And now a sure sign of health in the luxury goods market: People are willing to fork over $595 for what many people on Twitter call “ugly Christmas sweaters.”
But when the sweater is designed by Ralph Lauren and worn by the U.S. Olympic team, all bets are off…
“Classic Americana” is how some people charitably describe them…
Every member of the team wore the wool cardigans with shawl collars during the opening ceremonies last Friday night. Which was fine… for that purpose.
But the home version? Really?
OK, so there is some workmanship involved: “One sweater takes more than 12 hours,” says Elizabeth Park, owner of the California factory where they were made. “Lots of hand whipstitching, and it goes through many hands,” she told the Los Angeles Times.
As mentioned, the sweaters go for $595, and the matching pants $195. Well, they did before they sold out. If you’re really desperate, you’ll have to go the eBay route… and fork over a minimum $2,025.
“You mention in Friday’s 5 that the 55-plus set is hanging onto their jobs for dear life,” a reader writes. “True that, but also consider this anecdote as to what happens when someone does get the proverbial gold watch.
“My supervisor retired, and everyone figured I was the obvious choice for his job. However, I knew better. As soon as he was out the door, his position was eliminated, and I inherited his duties but not his pay. I didn’t even get his administrative assistant — she was ‘repurposed.’ This story is being repeated multiple times — retiring boomers are not being replaced, while us X-ers inherit a world of zero upward mobility. C’est la guerre. At least for the moment, I still have a job, and for that I’m grateful.”
“Speaking of capital controls,” which we mentioned in Friday’s mailbag, “I went into Chase bank Thursday, and they had several little signs stating that no longer can you deposit cash into any account that doesn’t have your name on it.
“I asked the banker, ‘Why’s this?’ He said with a very concerned face things aren’t the same out there in the world… (I felt that he was actually protecting me from, um, from, uh, um, from… well, from something very, very evil.)
“So I said, ‘How am I supposed to buy Bitcoins?’ He said I still have till March 1! Yay! I’m pretty sure this is the reason for the control.”
The 5: Hmmm… Interesting. Anyone else? Does this square up with your experience?
Cheers,
Dave Gonigam
The 5 Min. Forecast
P.S. The aforementioned Steve Sarnoff informs us one of his recent recommendations is already up 84% in a little over a month. That’s almost a textbook play for Options Hotline, now in its 25th year of publication.
No worries if you missed out; as Steve is fond of saying, “There’s always opportunity in options.” His next play is due next Sunday; look here for access.