Saturday, August 29, 2015

Weekly Crude Oil, Gold and Silver Markets Recap with Mike Seery

The markets end a wild week in about the same place it started. Another wild ride that makes us so thankful to have our trading partner Mike Seery back to give our readers a recap of this weeks stressful trading and help us put together a plan for the upcoming week. 

Mike has been a senior analyst for close to 15 years and has extensive knowledge of all of the commodity and option markets.

Crude oil futures in the October contract settled last Friday in New York at 40.45 a barrel while currently trading at 45.00 sharply higher for the trading week as a hurricane is entering the Gulf of Mexico sending prices sharply higher as I have been recommending a short position from 59 over the last three months getting stopped out in today’s trade as everything comes to an end as this market has bottomed in the short term so sit on the sidelines and look at other markets that are beginning to trend.

Many investors are running for the hills today as a relief rally has occurred in many of the commodity markets, however I’m still not bullish, but I’m not recommending any type of bullish position in this market at the current time as the chart structure is extremely poor and the risk is too high currently.

Political tensions with Yemen have also set prices higher but I truly believe this was just massive short covering as many of the funds have been short over many months and exited in today’s trade pushing prices higher but we will have to take a look if the open interest is declining or rising but in my opinion I think we will see the open interest decline which means short covering occurred.
Trend: Mixed
Chart Structure: Poor

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Gold futures in the December contract settled last Friday at 1,159 while currently trading at 1,133 in a wild and volatile trading week as I’ve been sitting on the sidelines as the chart structure is terrible at the current time as the risk/reward is not your favor so look at other markets.

Gold futures are trading above their 20 but still below their 100 day moving average rallying about $90 from their monthly low around 1,080 up to 1,170 in Monday’s trade as the stock market has sent shockwaves throughout the commodities and especially in gold. This market remains extremely choppy as I like trading markets with very tight chart structure as this will take some time to develop so keep an eye on this market but there is no recommendation at this time.

The problem with gold was the fact that the stock market was down dramatically in Monday’s trade but gold was unable to rally as over the course of time as I still see no reason to own gold but there is no trend and as a trend follower I will stick to my rules and look at other markets that are starting to develop.
Trend: Mixed
Chart Structure: Poor

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Silver futures in the December contract settled last Friday at 15.34 an ounce while currently trading at 14.53 down about $.80 for the trading week continuing its bearish momentum and traded slightly below $14 for the first time in 6 years. I am currently sitting on the sidelines as the chart structure is very poor as the 10 day high currently stands at 15.77 as the risk/reward is not in your favor, however I remain bearish so I want to keep a close eye on this as the chart structure will start to improve later next week therefore lowering monetary risk.

Silver futures are trading below their 20 and 100 day moving average telling you that the short term trend is to the downside as volatility is very high as many commodities have rallied this week as silver and gold have followed the footsteps of crude oil which was up about $8 for the trading week as the commodity washout may have stalled for the time being.

In my opinion take advantage of any sharp spike up in silver prices near the $15 level to enter into a short position as the trend is your friend when you trade the commodity markets but make sure you risk 2% of your account balance on any given trade so avoid this market at the current time but we could be entering a short position later next week.
Trend: Lower
Chart Structure: Poor

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Friday, August 28, 2015

A Correction Fireside Chat with the "10th Man"

By Jared Dillian 

I don’t really enjoy these things like I used to. Keep in mind, I’ve traded through a lot of blowups, going back to 1997...1998...2001...2002-2003...2007-2009...2011...Today. They all kind of feel the same after a while.

Nobody wins from corrections except for the traders, which today mostly means computers. I forget who said this: “In bear markets, bulls lose money and bears lose money. Everyone loses money. The purpose of a bear market is to destroy capital.”....And that’s what is going on today.

For starters, long-term investors inevitably get sucked into the media MARKET TURMOIL spin cycle and puke their well-researched, treasured positions at the worst possible time. But I’m not trying to minimize the significance of a correction, because some corrections turn into bona fide bear markets. And if you are in a bear market, you should get out. If it is only a correction, you probably want to add to your holdings.

How can you tell the difference?

My Opinion: This Is a Correction


So what were the two big bear markets in the last 20 years? The dot com bust, and the global financial crisis. Two generational bear markets in a 10 year span. Hopefully something we’ll never see again. In one case, we had the biggest stock market bubble ever and in the other, the biggest housing/debt crisis ever.

Both good reasons for a bear market.

What are we selling off for again? Something wrong with China?

Again, not to minimize what is going on in China, because it is now the world’s second-largest economy. Forget the GDP statistics. After a decade of ridiculous overinvestment, it is possible that they’re on the cusp of a very serious recession, whether they admit it or not. But the good news is that the yuan is strong and can weaken a lot, and interest rates are high and can come down a lot. China has a lot of policy tools it can use (unlike the United States).

Let’s think about these “minor” corrections over the last 20 years.....
1997: Asian Financial Crisis
1998: Russia/Long-Term Capital Management (LTCM)
2001: 9/11
2011: Greece

All of these were VIX 40+ events.


In retrospect, these “crises” look kind of silly, even junior varsity. The Thai baht broke—big deal.

Russia’s debt default was only a problem because it was a surprise. And the amount of money LTCM was down—about $7 billion—is peanuts by today’s standards. After 9/11, stocks were down 20% in a week. The ultimate buying opportunity.

And in hindsight, we can see that the market greatly underestimated the ECB’s commitment to the euro.
So what are we going to say when we look back at this correction in 10-20 years? What will we name it? Will we call it the China crisis? I mean, if it’s a VIX 40 event, it needs a name.

I try to have what I call forward hindsight. Like, I pretend it’s the future and I’m looking back at the present as if it were the past. My guess is that we will think this was pretty stupid.

What to Buy


I saw a sell-side research note yesterday suggesting that this crisis is marking the capitulation bottom in emerging markets. I haven’t fully evaluated that statement, but I have a hunch that it is correct. China is cheap, by the way. But if China is too scary, they are just giving away India. I literally cannot buy enough. And I have a hunch that Brazil’s president, Dilma Rousseff, is going to be impeached and the situation in Brazil is going to improve relatively soon.

Think about it. The most contrarian trade on the board. Long the big, old, bloated, corrupt, ugly, bear market BRICs. Also the scariest trade. But the scary trades are often the good trades. There’s more. If you think we’re in the midst of a generational health care/biotech bull market, prices are a lot more attractive today than they were a few weeks ago. I also like gold here because central banks are no longer omnipotent.

That reminds me—there was something I wanted to say on China. The reason everyone hates China isn’t because of the economic situation. It’s because they made complete fools of themselves trying to prop up the stock market. So virtually overnight, we went from “China can do anything” to “China is full of incompetent idiots.” Zero confidence in the authorities.

You want to know when this crisis is going to end? When China manages to restore confidence. When they have that “whatever it takes” moment, like Draghi. If they keep easing monetary policy, sooner or later there will be an effect.

I Am Bored


I used to get all revved up about this stuff. That’s when I made my living timing tops and bottoms. I don’t do that anymore. I do fundamental work, and I go to the gym and play racquetball. The mark-to-market is a nuisance. Also, if you can’t get excited about a VIX 50 event, you have probably been trading for too long.
There is a silver lining. The disaster scenario, where the credit markets collapse due to lack of liquidity, isn’t happening. Everyone is hiding and too scared to trade.

Honestly, high-grade credit isn’t acting all that bad. And it shouldn’t. I don’t see any big changes in the default rate. Anyway, if you want to go be a hero and bid with both hands, be my guest. It’s best to be careful and average into stuff. These prices will look pretty good a couple of months from now, I think.

Jared Dillian
Jared Dillian

If you enjoyed Jared's article, you can sign up for The 10th Man, a free weekly letter, at mauldineconomics.com. Follow Jared on Twitter @dailydirtnap

The article The 10th Man: A Correction Fireside Chat was originally published at mauldineconomics.com.


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Thursday, August 27, 2015

Why Stocks Could Fall 50% if the Fed Makes the Wrong Move

By Justin Spittler

One of the most brilliant investors in the world just made a stunning call…..


Ray Dalio is the founder of Bridgewater Associates, the world’s largest hedge fund. Dalio manages nearly $170 billion in assets. He has one of the best investing track records in the business. When he speaks, we listen. Dalio has been saying for a long time that governments and businesses around the world have borrowed far too much money. He thinks their high levels of debt have created an extremely fragile and dangerous situation.

The stats back up Dalio’s view. In the United States, government debt as a percentage of gross domestic product (GDP) is 102%...its highest level since World War II.



Countries around the world are in a similar position. Japan’s debt-to-GDP ratio is at 226% and climbing. In Italy, government debt/GDP jumped from 100% in 2007 to 132% in 2014. Dalio explained how these extreme debt levels are one reason for the recent market volatility we’ve been telling you about…

These long term debt cycle forces are clearly having big effects on China, oil producers, and emerging countries which are overly indebted in dollars.

•  In an article published yesterday, Dalio said the Fed should start another round of quantitative easing...…

Quantitative easing (QE) is when a central bank buys bonds or other assets to lower interest rates and boost asset prices. It’s mostly just another name for money printing. The Fed started QE in a desperate attempt to stave off disaster during the 2007-2008 financial crisis. It launched the first round in November 2008…a second round in November 2010…and a third round in September 2012. It stopped its last round of QE last October.

The first three rounds of QE fueled a big bull market in US stocks. The S&P 500 has gained 113% since the Fed started QE in 2008. Dalio thinks the Fed should bring QE back. It’s a bold call, and one that most economists disagree with. Most economists expect the Fed to raise rates soon. Raising rates would tighten monetary conditions…essentially the opposite of QE.

•  Dalio is worried the Fed won’t get it right..…

Dalio thinks the Fed will raise rates, even if it’s just to “save face.” He pointed out that the Fed has threatened to raise rates so many times that not raising rates would hurt its credibility. Dalio’s big concern is that the world is too indebted to handle a rate hike. He thinks it could cause a financial disaster like a stock market crash, or worse.

In a letter to clients earlier this year, Dalio made a comparison to 1937, when the world was in a similar situation of having way too much debt. He explained that the Fed made a huge mistake by raising rates, and it caused the stock market to plummet 50%.

The danger is that something similar could happen if the Fed raises rates today.

•  We asked Dan Steinhart, executive editor of Casey Research, for his take..…

Here’s his response…...


I don’t know what the Fed’s going to do. That’s a guessing game. What’s important is Dalio’s point that we’re in an extremely fragile situation. The world has too much debt, and the Fed’s margin for error is tiny. If it takes a wrong step and stocks plummet 50%, it could cause a bigger financial crisis than in 2008.

So the real question is, do you trust the US government and the Fed to manage this dangerous situation?
I don’t. This is the same Fed that blew two huge bubbles in the last twenty years. First the 1999 tech bubble…then the even bigger housing bubble, which almost took down the whole financial system when it popped in 2007.

And keep in mind – this is all a gigantic experiment. The Fed is using tools, like QE, that it had never used before the financial crisis. No one in the Fed, the US government, or anywhere else knows how this is going to work out.

Who knows…maybe the Fed will surprise us and successfully guide the economy through this dangerous period. But that’s not an outcome I’d bet my savings on. Dan went on to explain two things you can do to prepare for another financial crisis. One, own physical gold. Unlike stocks, bonds, or cash, it’s the only financial asset that has value no matter what happens to the financial system.

Two, put some of your wealth outside the “blast radius” of a financial crisis. We wrote a new book with all of our best advice on how to do this. And we’ll send it to you today for practically nothing…we just ask you to pay $4.95 to cover our processing costs. Click here to claim your copy.



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Wednesday, August 26, 2015

Citizenship as a Weapon: Travel Controls and What You Can Do About It

By Nick Giambruno

It’s an extremely potent weapon, yet most are not even aware of its existence. That is, unless they have been unfortunate enough to be on the receiving end of it.

The weapon I’m referring to is travel controls, also known as people controls. It’s the power any government has to limit the ability of its citizens to travel. They do this by restricting the issuance of travel documents like passports. Any government can use this weapon can at a moment’s notice. It just needs to find a convenient pretext. Many countries in the past have notoriously turned to people controls. For example, the Soviet Union would routinely revoke the citizenship of its perceived internal enemies.

Recently, look at how the Dominican Republic stripped tens of thousands of people of their citizenship with no due process. Or how the Syrian government previously refused to renew the passports of Syrians abroad whom it suspected of being associated with the opposition. Or how the US government revoked Edward Snowden’s passport with the stroke of a pen. These are but a few of countless examples. The point here is not to pick good guys and bad guys. The point is that there are many instances throughout history and modern times that prove that you don’t own your own passport or citizenship… the government does. And they use them as a weapon.

If you hold political views that your government doesn’t like, don’t be surprised if they restrict your travel options. Unfortunately, the situation is getting worse. Over the last couple of years, there have been several attempts to pass a bill that would make it easier for the US government to cancel the passport of anyone accused of owing $50,000 or more in taxes. I suspect that sooner or later Congress will pass this bill. Fortunately, there is a way to protect yourself from these repressive measures. More on that in a bit, but first let’s look at the most common forms of travel controls.

Different Shapes and Colors


Desperate governments always seek to control money with capital controls and people with travel controls.
Here are the three most common forms of the latter:

1. Soft Travel Controls
These include arbitrary fees and burdensome bureaucratic procedures. These measures amount to unofficial travel controls. It’s similar to how FATCA works with money. FATCA doesn’t make it illegal to move capital outside of the US. But it achieves the same effect by imposing onerous regulations that can make it impractical. In the same sense, the government could achieve de facto people controls through deliberately excessive rules and regulations.

2. Migration Controls
Migration controls are official restrictions on the movement of a country’s citizens. Sometimes governments will put restrictions on certain citizens from leaving the country. This is especially true during times of crisis and for those who have accumulated some savings. Many people feel that they can simply wait till things get bad and then exit. But it’s likely the politicians will have slammed the door shut by then. For example, after Castro came to power in Cuba, the government used to make its citizens apply for an exit visa to leave the island. They did not grant it easily.

3. Revoking Citizenship and Passport
This is the most severe form of people and travel controls. Preventing people from leaving has always been the hallmark of an authoritarian regime. Unfortunately the practice is growing in so-called liberal democracies for ever more trivial offenses. In the US, for example, the government can cancel your passport if they accuse you of a felony. Many people think felonies only consist of major crimes like robbery and murder. But that isn’t true.

The ever expanding mountain of laws and regulations has criminalized even the most mundane activities. A felony is not as hard to commit as you might think. Many victimless “crimes” are felonies. A study has found that the average American inadvertently commits three felonies a day. So, if the US government really wants to cancel your US passport, it can find some technicality to do so…. for anyone.

Second Passports - An Antidote to Travel Controls


Here’s what my colleague and the always insightful Jeff Thomas has to say about travel controls:
As a country approaches an economic collapse, a crystal ball is not necessary to predict that, amongst the actions of the government, will be increased currency controls, travel controls, tariffs, and a host of other last-ditch efforts to keep the sheep penned in - to assure their presence for a final shearing.

What remains for the reader to determine, if he is a resident of one of the nations that is presently in decline, is whether he: a) believes that, in the future, his ability to travel internationally may be either restricted or prohibited; and b) whether he should take steps to assure his liberty for the future. If so, it might be wise to do so before he actually has lost his ability to travel.

If you have only one passport, you’re vulnerable to travel controls. I think it’s absolutely essential to obtain the political diversification benefits of having a second passport. You’ll protect yourself against travel controls. You’ll give yourself peace of mind knowing that you will always have options.

Among other things, having a second passport allows you to invest, bank, travel, reside, and do business in places that you could not before. More options mean more freedom and opportunity. I believe obtaining a second passport makes sense no matter what happens.

Unfortunately, getting one isn’t easy. There are no solutions that are at the same time cheap, easy, fast, and legitimate. Worse, there’s a lot of misinformation and bad advice out there that could cause you big problems. It’s essential to have a trusted resource to guide you through the process. That’s where International Man comes in.

You need to know the best countries to obtain a second passport in and exactly how to do it. We cover that in great actionable detail in our Going Global publication. Normally, this book retails for $99. But we believe this book is so important, especially right now, that we’ve arranged a way for US residents to get a free copy. Click here to secure your copy.
The article was originally published at internationalman.com.


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Monday, August 24, 2015

Protection Against this Weeks Correction Was Just One Click Away

This weeks market correction has the average trader and even some pros scratching their heads wondering what they could have done different. But traders like our trading partner John Carter of Simpler Options dream of markets like this. The spike in volatility creates amazing opportunities but also creates sleepless nights for most traders and fund managers alike. But your positions can be held without losing any sleep if you have the right protection in place. Sound difficult or to good to be true? Well, it's neither.

This market correction is not over so this is a perfect time to download John's latest version of his free eBook. And it's great timing since we have been telling our readers that we are partnering with John on another great event in September and you really need to be familiar with John's trading methods to fully take advantage of what we will be doing in the next few weeks.

In this free options trading eBook you will learn.....

  *  How to use leverage to grow your account exponentially or free up excess capital

  *  How to create protection for each one of your positions

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  *  The essentials to managing your position at expiration

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  *  The most important factor to your options trading success

       ......and much much more

It's crunch time, download the eBook here and get ready to benefit during these volatile times.

See you in the markets!
Ray @ the Crude Oil Trader


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Friday, August 21, 2015

Weekly Crude Oil, Gold, SP 500, Coffee and Sugar Markets Recap with Mike Seery

The markets closed out the week in brutal fashion for the bulls this week so we are happy to have our trading partner Mike Seery back to give our readers a recap of this weeks trading and help us put together a plan for the upcoming week. Mike has been a senior analyst for close to 15 years and has extensive knowledge of all of the commodity and option markets.

Crude oil futures in the October contract settled last Friday in New York at 43.11 a barrel while currently trading at 41.00 continuing its bearish momentum hitting a 6 ½ year low as I’ve been recommending a short position from $59 as we have now rolled over three times as we are now currently in the October contract as we started in July contract as prices still have not hit a 10 day high which currently stands at 46.00.

The chart structure will start to improve on a daily basis starting next week as prices are trading far below their 20 and 100 day moving average telling you that the trend is to the downside as the commodity markets continue to look weak as heating oil and gasoline prices continue to hit new lows as well as who knows how low prices could actually go, however if you have missed the original recommendation sit on the sidelines as you do not want to chase markets as you have missed the boat in my opinion.

The stock market has hit a 7 month low which is also putting pressure on commodity markets as everything looks weak in my opinion so continue to place the proper stop loss as worldwide supplies are overwhelming at the current time coupled with the fact of a relatively strong U.S dollar as there is very little bullish fundamental news except for possible shortcoming to push prices up here in the short term as this trade has been tremendous over the last three months.
Trend: Lower
Chart Structure: Improving

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Gold futures in the December contract settled in New York last Friday at 1,112 an ounce while currently trading at 1,157 up about $45 for the trading week on massive concerns of global slowdowns pushing stock prices to a 7 month low therefore putting money back into the precious metals as I’m currently sitting on the sidelines in this market getting stopped out around 1,105 or 10 day high around 10 days ago as Monday’s trade certainly will be interesting in my opinion.

The chart structure is extremely poor at the current time as we’ve had about an $80 rally from recent lows as prices traded as high as 1,168 earlier in the trading session but this market concerns me due to the fact that many of the commodity markets are headed lower as this is just a flight to quality here in the short term in my opinion.

Gold futures are trading above their 20 and 100 day moving average for the first time in several months as it looks to me that prices might head up to the $1,200 level but I have a hard time believing that gold will rally as demand from China and India at the current time are weak so look at other markets that are beginning to trend as I went through this before especially in 2008 when stock and commodity markets kept going down including gold as everybody had to sell everything because of margin calls and liquidity issues so keep a close eye on this market but at this time continue to look at other markets to sell which has been shooting fish in a barrel over the last 6 weeks.
Trend: Higher
Chart Structure: Poor

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The S&P 500 in the September contract is trading below its 20 and 100 day moving average for the first time in several months hitting a 7 month low settling last Friday in Chicago at 2089 while currently trading at 2001 down 88 points for the trading week as I’ve been recommending a short position from 2080 and if you took that trade place your stop loss above the 10 day high which currently stands at 2103 as the chart structure which once was excellent is now terrible.

If you have missed the original recommendation do not chase this market as the risk/reward is not the favor at the current time so look at other markets that are beginning to trend as the energy sector is pulling down the Dow Jones and the S&P 500 rather dramatically in the last couple of days as the commodity markets are showing real worldwide weakness as I will continue to remain short while taking advantage of any price rally.

As I’ve talked about in many previous blogs I hate selling the S&P 500 and I’ve only done it 2 times in the last 10 years but the risk/reward was highly in your favor so I took a shot and who knows how low prices can go as we are still only 5% from the record high as I think the next major resistance level is at 1950 which could be hit next week as volatility is extremely high with major risk at the current time.
Trend: Lower
Chart Structure: Terrible

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Coffee futures in the December contract settled last Friday in New York at 141.15 a pound while currently trading at 132.50 in a highly volatile last couple of weeks as prices are trading right at their 20 but still below their 100 day moving average telling you that the trend is mixed at the current time.

I’m currently sitting on the sidelines in this market as I was recommending a short position several weeks ago getting stopped out at the 10 day high which at the time was at 128 as the chart structure is very poor currently so I will be sitting on the sidelines for some time as prices did hit a 6 week high last Friday but unable to hold those levels due to the fact of a weak Brazilian Real and weak commodity prices throughout the world.

Volatility in coffee is extremely high as coffee historically speaking is one of the most volatile commodities, but I do not like trading choppy markets and at the current time this market is very choppy so I will wait for tighter chart structure to develop therefore lowering monetary risk with the next major level of support around the contract low of 120 as the soft commodities still look very weak as I’m currently recommending a short position in sugar and cocoa.
Trend: Mixed
Chart Structure: Poor

Sugar futures in the October contract settled last Friday in New York at 10.68 a pound while currently trading at 10.56 trading slightly lower for the trading week on very low volatility as I have been recommending a short position from 11.50 and if you took that trade continue to place your stop loss above the 10 day high which currently stands at 10.93 risking around 37 points or $400 per contract plus slippage and commission from today’s price levels.

Sugar futures are trading far below their 20 and 100 day moving average telling you that the trend is to the downside as the daily chart structure is excellent allowing a tight monetary stop therefore lowering risk as a weak Brazilian Real continues to put pressure on prices coupled with the fact that crude oil has hit a six year low which is also a negative influence on sugar prices as sugar is also used as a biodiesel so continue to play this to the downside in my opinion.

The next major level of support is 10.40 and if that is broken I think we could break 10.00 a pound possibly next week as I see no reason to own any commodity at the current time as worldwide deflation currently exists.
Trend: Lower
Chart Structure: Excellent

Get more of Mike's calls on this Weeks Commodity Markets



Why You Should Go to Africa Instead of College

By Doug Casey

Recently Doug Casey was a guest on the always excellent podcast, The Tom Woods Show. Tom and Doug talked about the enormous economic potential in Africa, Doug’s efforts to build a truly free market country, and better uses of your time and money than going to college.

It’s an exciting and informative conversation.


Tom Woods: What a pleasure and a delight it is to welcome back to the show Doug Casey. Doug is a libertarian economist, best selling financial author, international investor, entrepreneur, and the founder and chairman of Casey Research. Doug, welcome back to the show.

Doug Casey: Thanks, Tom. It is my pleasure.

Tom: You’ve been up to some interesting activity in Africa that I’d like to ask you about. Let’s start off by telling us what you’ve been busy doing there.

Doug: Well, the last two weeks, I’ve been visiting the Islamic Republic of Mauritania with a short side trip to Senegal. I’ve been pursuing my hobby, which is to propose to a backward country a plan for complete and total free marketization… including taking the country itself public on a major stock exchange and distributing most of the shares directly to the people who theoretically own the government assets. I felt like I had Maria Muldaur’s “Midnight at the Oasis” playing in the back of my mind the whole time I was there.

Tom: Suppose you got everything you wanted, what would the outcome look like?

Doug: Well, 100% of all government assets, land, state owned companies - everything - initially go into a corporation and we distribute the shares.

Let’s say, 70% pro-rata to every man, woman, and child in the country, so they don’t just theoretically own the government, now they actually do. 15% would be put it in trust for the next unborn generation to defuse that time bomb. 10% would be distributed to people who, let’s say, are of significant help to making this happen, and people who are important, whose rice bowls would be broken, and 5% to take public in major stock markets to raise some capital. Then we get rid of all duties, taxes, and regulations.

Dubai was absolutely nothing in 1980. You know what Dubai is now. If we go back further, in 1960, Hong Kong and Singapore both were very poor and look what has happened to them. So I think in today’s world if somebody is daring enough to want to do this, I think it could be of world historic importance. So I’m looking for the right guy.

Tom: I’d like to get a glimpse inside of a meeting like this. If you’re sitting down with the president, you’re sitting down with top officials, how do you make that case, especially when the response is going to be, “What’s in it for me”?

Doug: Well, that’s always the first question, of course. I start my presentation with three things I can do for you, Mr. President. It’s always a question of the benefit to the buyer. Number one, this plan will make you legitimately a multibillionaire. That always goes down very smoothly, because they know that doing what Mobutu and Mugabe did doesn’t work quite as well now as it did in the past. So it gets their attention.

Number two, the people will love you and treat you as the new George Washington. That sounds pretty good too. Half the time in these places most of the population wants to kill them. And number three, we will put you on the front cover of all the world’s magazines in a favorable light for the next decade. Now that sounds good, because these people, if they are even known to exist, are considered pariahs.

So they always listen to the rest of presentation. Of course then things start to go wrong… usually from people under the president. It’s the people under the president who are usually making the big money, not so much the president himself. So they are often the problem.

It always makes for a fun adventure and interesting cocktail party stories that I can tell and retell to people for hours. But it’s my hobby. It’s not an occupation. I haven’t made any money on it yet, although I always have a plan B when I go to these countries: look for mining concessions and so forth.

Tom: Suppose you had to do it all over again. Let’s say you turned 18 in 2015. Have conditions changed to the point where you would take a different path, and incidentally would you go to college?

Doug: I would definitely not go to college. Even then, I only did it because everybody from my socioeconomic class was going to college, so there was no thought involved on my part. It was just like going from eighth grade into high school. I counsel students against it today. College serves no useful purpose unless you want to learn a trade like doctoring or lawyering or you need a piece of paper to practice a particular occupation, or there is a formal discipline, like a hard science or engineering.

You will pick up lots of bad ideas. You will spend a huge amount of money, get yourself under a huge financial rock that will take you years to dig yourself out from under. What I suggest people do instead is lay out what the most intelligent thing to do with that four years of time and probably $200,000 of capital. I like the idea of traveling. The place that I would put first and foremost on my travel list today for economic reasons is Africa. Go someplace where you can be a big fish in a small pond quickly.

Tom: Back in the ’50s and ’60s in the wake of decolonization in Africa, you had a bunch of Western educated semi-Marxist political leaders who were nationalizing property and confiscating assets from rich people and so on, you wouldn’t touch Africa with a ten foot pole. What has changed since then?

Doug: Well, politics always draws the worst kinds of people of course. Most of the presidents of Africa even today are ex-generals or ex-colonels or something like that. It has economically improved a lot. The population has exploded and it’s going to explode more in the years to come. It’s chaotic. But if you can bring order to chaos, that’s opportunity.

If you go to the Orient, there are a lot of rich, smart people there. You are not going to have much of a competitive advantage. That’s true to a lesser extent in South America too. Africa is actually the place, I think, you want to go.

Tom: Do you have any particular parts of Africa? I’ve heard good things about Botswana. Do you have any place in particular that attracts you?

Doug: Other than South Africa, I’d say Botswana is the most developed country in Southern Africa for sure. But where would I go now? Well, of course, the nice thing about Africa is that it’s divided basically into three parts, Anglophone Africa, Francophone Africa, and Lusophone Africa, and my French is still adequately conversational. I lived in France and Switzerland for a year during college. My Spanish is functional. The language thing is a consideration of course. But on the other hand, most of the educated people in most countries of the world speak English, which is the world’s lingua franca today.

Where would I go? There are around 50 countries in Africa. I like small, obscure ones. Maybe Ghana is too developed. Look at Benin or Togo or maybe the Ivory Coast. Mauritania, where I just was, is actually quite interesting. Guinea-Bissau, Guinea-Conakry, you’ve got lots of choices. Somebody should get on a plane and just take a look. Then when they get into a country, a capital city, which is always where the action happens, get on the telephone to local lawyers and real estate agents and businessmen to set up appointments and see who you can get along with. One thing will lead to another.

I wouldn’t go to Africa as a lifestyle choice. I would go there for economic reasons and for the adventure that it would yield. I’d say as a lifestyle choice, it comes down to South America or the Orient. I lived in the Orient for years and I loved it.

Tom: What about the language barrier?

Doug: Well, I lived in Hong Kong and when I was there it was much more English. Of course everybody in China is learning English today, everybody, everywhere that you basically would want to talk to. I’m not trying to be elitist but the educated people - put it that way - all speak English today as a second language. This is one of the things that will slow down your progress on learning the local language, is that they all want to speak English to you. So that’s a double edged sword… but it’s really an advantage. No, don’t worry about the language problem.

Tom: Well, I sure appreciate your time, Doug Casey. You are the International Man himself, and we are always grateful for your time.

Doug: Well, thank you Tom. It is a pleasure to talk to you under any circumstances.

Editor’s Note: International Man is all about helping you make the most of your personal freedom and financial opportunities around the world. A great way to get started is to check out Going Global 2015. Normally, this book retails for $99. But we believe this book is so important, especially right now, that we’ve arranged a way for US residents to get a free copy. Click here to secure your copy.

The article was originally published at internationalman.com.


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Wednesday, August 19, 2015

Riding the Energy Wave to the Future

By John Mauldin 

“Formula for success: rise early, work hard, strike oil.” –  J. Paul Getty

This week’s yuan devaluation was big news, but it’s really part of a much bigger saga. Events around the globe are combining to create huge economic change over the next few years. We are watching giant, multidimensional chess games played by some master players. Energy is the chessboard that connects all the players. What happens when the board changes shape in the middle of the game? If you don’t know the new energy landscape, you’ll have a hard time playing to a draw, much less winning.

Today I’ll tell you about some big shifts in the energy industry. These shifts are about as positive as can be, unless you need high oil prices to run your country. In the long run, these changes are bullish for the whole world, which I think this will surprise many of you. And though we’ve been used to thinking about energy and technology as two different facets of modern life, today they are inextricably linked.
When energy changes, everything else changes, too.

16 Candles

Thoughts from the Frontline is now entering its 16th year of continuous weekly publication. I constantly meet readers who have been with me since the beginning – and even some who read an earlier print version of my letters. I put TFTF on the Internet in August 2000 as a free letter, starting with just a few thousand names, and was amazed at how rapidly it grew. It took just a few years for me to realize that this new thing called the Internet was the real deal, and I discontinued my print version. We now push the letter out to almost one million readers each week, and the letter is posted on dozens of websites.

I began to archive the letter in January 2001; and every issue – the good, the bad, and the sometimes very ugly – is still there in the archives, just as I wrote it. I will admit there are a few paragraphs, and maybe even a whole letter or two, that I would like to go back and expunge from the record. But I think it’s better just to let it all be what it is.

Investing in energy without the risk....Here's what our trading partner John Carter is doing.

I thank you for allowing me to come into your homes and offices each week. I consider it a privilege and honor to be able to offer you my research and thoughts. This letter has been free from the beginning, and my full intent is that it will always remain that way. Longtime readers know the topics can vary widely over the course of the year. I write about what I find interesting that week. I find that writing helps me focus my own thinking.

If you are reading this for the first time, you can go to www.mauldineconomics.com, subscribe by giving us your email address, and join my one million closest friends who get my letter each week. And if you’re a regular reader, why not give me a 16th birthday present and suggest to your friends that they subscribe too! I also want to thank the staff and my partners, who make it possible for me to spend the bulk of my time thinking and writing. And traveling, of course. And now let’s think about energy.

The Cover Pic Indicator

Contrarian and value investors like to buy assets that are in distress, or at least “out of favor.” You don’t hear much about those assets at the time. That’s part of being distressed – everyone ignores you. So, following that logic, the last thing you want to buy is a stock or industry that appears on the cover page of popular financial publications. Commodity and energy bulls should take note of last weekend’s Barron’s cover.


“COMMODITIES: TIME TO BUY,” Barron’s practically screamed at its readers. In case you can’t read the fine print on the cover, it says, The harsh selloff in energy, gold, and other commodities is starting to look like capitulation. Opportunities in Exxon, Chevron, BHP, Goldcorp. Plus six funds and six ETFs to help build a position in this oversold sector.

I presume the photo is supposed to show the sun rising on an oil rig, not setting. The article quotes some very smart people who are bullish on commodities right now. Some energy stocks look like real bargains. Barron’s is simply repeating the market’s conventional wisdom: After a brutal decline, oil prices are stabilizing and should head higher as the global economy recovers.

That’s a perfectly defensible position – but I think it’s wrong.

It’s wrong because it misses a major shift in the way we produce energy. Many people think OPEC’s high oil and gas prices led to the US shale energy boom. That’s not right. The shale boom was born in a time of lower energy prices, and it was the result of new technologies that make recovering large quantities of oil and gas less expensive than ever.

I used to get the occasional letter from James Howard Kunstler, who would tell me that whatever letter I had just written was completely bass-ackwards, and how his books explained that we were going to run out of energy and then collapse. His books (Wikipedia lists about a dozen) and dozens of others warned us of Peak Oil. (For the record, James, a certain longtime editor on my staff made sure I got all your letters, reports, and more, as he is firmly in your camp! I kept smiling and saying that he was (and is) wrong; but Charley is a phenomenal editor, and you put up with a few quirks for brilliant editing that makes you look better. Besides, if the world does come to an end, I can wend my way to his survivalist farm and beg for a job and food, although I’m not exactly sure I’m ready to milk goats. Just for old time’s sake.)

I have written for years that Peak Oil is nonsense. Longtime readers know that I’m a believer in ever-accelerating technological transformation, but I have to admit I did not see the exponential transformation of the drilling business as it is currently unfolding. The changes are truly breathtaking and have gone largely unnoticed.

By now, you probably know about fracking, the technology where drillers pump liquids into a well to “fracture” the ground and release oil and gas deposits. It’s controversial in certain quarters, especially among those who hate anything carbon-related.

Fracking technology is moving forward like all other technologies: very fast. Newer techniques promise to reduce the side effects, at even lower operating costs. Furthermore, fracking is only the beginning of this revolution. The Manhattan Institute recently published an excellent (bordering on brilliant) report by Mark P. Mills, Shale 2.0: Technology and the Coming Big Data Revolution in America’s Shale Oil Fields. I highly recommend it.

Mills outlines the way the new technologies are turning this industry on its head. Shale production or “unconventional” production is really a completely new industry.

Here is a short quote: The price and availability of oil (and natural gas) are determined by three interlocking variables: politics, money, and technology. Hydrocarbons have existed in enormous quantities for millennia across the planet. Governments control land access and business freedoms. Access to capital and the nature of fiscal policy are also critical determinants of commerce, especially for capital-intensive industries. But were it not for technology, oil and natural gas would not flow, and the associated growth that these resources fuel would not materialize.

While the conventional and so-called unconventional (i.e., shale) oil industries display clear similarities in basic mechanics and operations – drills, pipes, and pumps – most of the conventional equipment, methods, and materials were not designed or optimized for the new techniques and challenges needed in shale production. By innovatively applying old and new technologies, shale operators propelled a stunningly fast gain in the productivity of shale rigs (Figure 4), with costs per rig stable or declining.


[Look at the above chart for a few moments; it’s truly staggering. In just seven years, the amount of oil per well in some shale plays has risen by a factor of 10! That is almost all due to new technologies that are increasingly coming online.]

Shale companies now produce more oil with two rigs than they did just a few years ago with three rigs, sometimes even spending less overall. At $55 per barrel, at least one of the big players in the Texas Eagle Ford shale reports a 70 percent financial rate of return. If world prices rise slightly, to $65 per barrel, some of the more efficient shale oil operators today would enjoy a higher rate of return than when oil stood at $95 per barrel in 2012.

Read that last paragraph again. Some shale operators can make good money at $55 a barrel. At $65, they can make higher returns than they did three years ago with oil at $95. I have friends here in Dallas who are raising money for wells that can do better than break even at $40 per barrel, although they think $60 is where the new normal will settle out. Texans are nothing if not optimistic.

To continue reading this article from Thoughts from the Frontline – a free weekly publication by John Mauldin, renowned financial expert, best selling author, and Chairman of Mauldin Economics – please click here.



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Tuesday, August 18, 2015

This “Pig” Just Made a Massive Bet on Gold

By Dan Steinhart

Stan Druckenmiller is going big on gold.

Druckenmiller is one of the world’s most successful and respected traders. As a hedge fund manager from 1986 to 2010, he generated an incredible average annual return of 30%. Druckenmiller was also George Soros’s right hand man at Quantum, Soros’s famed hedge fund. Quantum’s now legendary 1992 trade shorting the British pound was Druckenmiller’s idea. It made Quantum about $1 billion. People say the trade “broke the Bank of England.”

Most professional investors preach diversification. But Druckenmiller says he’s successful because he’s not afraid to concentrate his bets when he really believes in a trade. He calls it “being a pig.” The first thing I heard when I got in the business, not from my mentor, was bulls make money, bears make money, and pigs get slaughtered.

I’m here to tell you I was a pig. And I strongly believe the only way to make long-term returns in our business that are superior is by being a pig. I think diversification and all the stuff they’re teaching at business school today is probably the most misguided concept everywhere.

Druckenmiller just made a $300 million bet on gold…...

Druckenmiller’s fund recently bought $300 million worth of SPDR Gold Trust (GLD), an ETF that tracks the price of gold. It’s a huge bet, even for a big time trader like Druckenmiller. He put 20% of his fund’s money into this trade, and it’s his largest position. Druckenmiller seems to like gold for the same reasons Casey Research likes gold. He has harshly criticized the Federal Reserve for creating the frothy conditions that led to the 2008 financial crisis. And he says the Fed’s policies today are more reckless today than ever.


If you look at the real root cause behind the financial crisis, we’re doubling down. Our monetary policy is so much more reckless and so much more aggressively pushing the people in this room and everybody else out the risk curve that we’re doubling down on the same policy that really put us there…..The Fed cut interest rates to nearly zero after the financial crisis. This has encouraged all kinds of bad investing and reckless speculation. When the banks pay microscopic interest rates, people get desperate and pile into junk bonds, stocks, and real estate. This drives asset prices higher and higher.....which creates a lot of danger.

It also leads to depreciating paper currencies…which will eventually lead to much higher gold prices. In just the last year, the Japanese yen has dropped 18% versus the US dollar. The euro has dropped 17%...the Australian dollar has dropped 20%...and the Canadian dollar has dropped 17%. Regular readers know this is part of the “Currency Wars.” Governments are devaluing their currencies in an attempt to stoke their economies. Politicians think that making a currency cheaper (usually by printing more currency units) will provide an economic stimulus.It doesn’t work. If devaluing currencies were the path to prosperity, countries like Zimbabwe and Venezuela would be the richest countries on Earth…instead of economic basket cases.

Gold has been struggling....…

The price of gold has fallen 41% since hitting an all time high in August 2011. Druckenmiller’s huge bet indicates that he thinks the bottom is finally in. Druckenmiller has made a career out of getting big calls like this correct. We wouldn’t want to bet against him.

If you agree that gold is near its bottom, you could buy physical gold or shares of GLD like Druckenmiller. That could easily give you a 50-to-75% gain in the coming years. If you want a chance at much bigger gains, consider investing in gold stocks. Gold stocks are highly leveraged to the price of gold. In a bull market, gold stocks rise much more than the price of gold. It’s common for the best run gold companies to increase by 20-to-1 or even 30-to-1 during a gold bull market.

International Speculator is our advisory focused on the best small gold stocks with huge upside potential. Right now, gold stocks look like they’re near the end of one of the worst bear markets in history. In fact, gold stocks are cheaper today than they’ve been in at least twenty years…as we’ll show you in a moment.
International Speculator will teach you how to position yourself in the best gold stocks before the next bull market begins. 

Click here to read more about the opportunity we have to buy gold stocks today… at prices we probably won’t see again for another twenty years once the bull gets going.

The article This “Pig” Just Made a Massive Bet on Gold was originally published at caseyresearch.com.


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Trading Success Doesn’t Have To Be Hard with this Breakthrough Strategy any Trader Can Use

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As unbelievable as this may sound, the strategy is built on sound principles. The approach is disciplined and straight forward. In fact, anyone with basic trading knowledge or the desire to learn can follow along. As the teacher says, “Results don’t lie, success doesn’t have to be hard”.

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See you in the markets putting this to work,
Ray C. Parrish
President/CEO @ the Crude Oil Trader

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Thursday, August 13, 2015

A Great Insight into Why Commodity Weakness Will Persist

By John Mauldin 

In today’s Outside the Box, good friend Gary Shilling gives us deeper insight into the global economic trends that have led to China’s headline making, market shaking devaluation of the renminbi. He reminds us that today’s currency moves and lagging growth are the (perhaps inevitable) outcome of China massive expansion of output for many products that started more than a decade ago. China was at the epicenter of a commodity bubble that got underway in 2002, soon after China joined the World Trade Organization.

As manufacturing shifted from North America and Europe to China –with China now consuming more than 40% of annual global output of copper, tin, lead, zinc and other nonferrous metal while stockpiling increased quantities of iron ore, petroleum and other commodities – many thought a permanent commodity boom was here.

Think again, Australia; not so fast, Brazil. Copper prices, for instance, have been cut nearly in half as world growth, and Chinese internal demand, have weakened. Coal is another commodity that is taking a huge hit: China’s imports of coking coal used in steel production are down almost 50% from a year ago, and of course coal is being hammered here in the US, too.

And the litany continues. Grain prices, sugar prices, and – the biggee – oil prices have all cratered in a world where the spectre of deflation has persistently loomed in the lingering shadow of the Great Recession. (They just released grain estimates for the US, and apparently we’re going to be inundated with corn and soybeans. The yield figures are almost staggeringly higher than the highest previous estimates. Very bearish for grain prices.)

Also, most major commodities are priced in dollars; and now, as the US dollar soars and the Fed prepares to turn off the spigot, says Gary, “raw materials are more expensive and therefore less desirable to overseas users as well as foreign investors.” As investors flee commodities in favor of the US dollar and treasuries, there is bound to be a profound shakeout among commodity producers and their markets.

See the conclusion of the article for a special offer to OTB readers for Gary Shilling’s INSIGHT. Gary’s letter really does provide exceptional value to his readers and clients. It’s packed with well-reasoned, outside-the-consensus analysis. He has consistently been one of the best investors and analysts out there.

There are times when you look at your travel schedule and realize that you just didn’t plan quite as well as you could have. On Monday morning I was in the Maine outback with my youngest son, Trey, and scheduled to return to Dallas and then leave the next morning to Vancouver and Whistler to spend a few days with Louis Gave. But I realized as Trey and I got on the plane that I no longer needed to hold his hand to escort him back from Maine. He’s a grown man now. I could’ve flown almost directly to Vancouver and cut out a lot of middlemen. By the time that became apparent, it was too late and too expensive to adjust.

Camp Kotok, as it has come to be called, was quite special this year. The fishing sucked, but the camaraderie was exceptional. I got to spend two hours one evening with former Philadelphia Fed president Charlie Plosser, as he went into full-on professor mode on one topic after another. I am in the midst of thinking about how my next book needs to be written and researched, and Charlie was interested in the topic, which is how the world will change in the next 20 years, what it means, and how to invest in it. Like a grad student proposing a thesis, I was forced by Charlie to apply outline and structure to what had been only rough thinking.

There may have been a dozen conversations like that one over the three days, some on the boat – momentarily interrupted by fish on the line – and some over dinner and well into the night. It is times like that when I realize my life is truly blessed. I get to talk with so many truly fascinating and brilliant people. And today I find myself with Louis Gave, one of the finest economic and investment thinkers in the world (as well as a first class gentleman and friend), whose research is sought after by institutions and traders everywhere. In addition to talking about family and other important stuff, we do drift into macroeconomic talk. Neither of us were surprised by the Chinese currency move and expect that this is the first of many
.
I did a few interviews while I was in Maine. Here is a short one from the Street.com. They wanted to talk about what I see happening in Europe. And below is a picture from the deck of Leen’s Lodge at sunset. Today I find myself in the splendor of the mountains of British Columbia. It’s been a good week and I hope you have a great one as well.


Oops, I’ve just been talked into going zip-trekking this afternoon with Louis and friends. Apparently they hang you on a rope and swing you over forests and canyons. Sounds interesting. Looks like we’ll do their latest and greatest, the Sasquatch. 2 km over a valley. Good gods.

Your keenly aware of what a blessing his life is analyst,
John Mauldin, Editor

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Commodity Weakness Persists

(Excerpted from the August 2015 edition of A. Gary Shilling’s INSIGHT)
The sluggish economic growth here and abroad has spawned three significant developments – falling commodity prices, looming deflation and near-universal currency devaluations against the dollar. With slowing to negative economic growth throughout the world, it’s no surprise that commodity prices have been falling since early 2011 (Chart 1). While demand growth for most commodities is muted, supply jumps as a result of a huge expansion of output for many products a decade ago. China was the focus of the commodity bubble that started in early 2002, soon after China joined the World Trade Organization at the end of 2001.


China, The Manufacturer


As manufacturing shifted from North America and Europe to China – with China now consuming more than 40% of annual global output of copper, tin, lead, zinc and other nonferrous metal while stockpiling increased quantities of iron ore, petroleum and other commodities – many thought a permanent commodity boom was here.

So much so that many commodity producers hyped their investments a decade ago to expand capacity that, in the case of minerals, often take five to 10 years to reach fruition. In classic commodity boom-bust fashion, these capacity expansions came on stream just as demand atrophied due to slowing growth in export-dependent China, driven by slow growth in developed country importers. Still, some miners maintain production because shutdowns and restarts are expensive, and debts incurred to expand still need to be serviced. Also, some mineral producers are increasing output since they believe their low costs will squeeze competitors out. Good luck, guys!

Copper, Our Favorite


Copper is our favorite industrial commodity because it's used in almost every manufactured product and because there are no cartels on the supply or demand side to offset basic economic forces. Also, copper is predominantly produced in developing economies that need the foreign exchange generated by copper exports to service their foreign debts. So the lower the price of copper, the more they must produce and export to get the same number of dollars to service their foreign debts. And the more they export, the more the downward pressure on copper prices, which forces them to produce and export even more in a self reinforcing downward spiral in copper prices. Copper prices have dropped 48% since their February 2011 peak, and recently hit a six year low as heavy inventories confront subdued demand (Chart 2).


Even in 2013, after two solid years of commodity price declines, major producers were in denial. That year, Glencore purchased Xtrata and Glencore CEO Ivan Glasenberg called it “a big play” on coal. “To really screw this up, the coal price has got to really tank,” he said at the time. Since then, it’s down 41%. But back in February 2012 when the merger was announced, coal was selling at around $100 per ton and Chinese coal demand was still robust.

Nevertheless, Chinese coal consumption fell in 2014 for the first time in 14 years and U.S. demand is down as power plants shift from coal to natural gas. Meanwhile, coal output is jumping in countries such as Australia, Colombia and Russia. China’s imports of coking coal used in steel production are down almost 50% from a year ago. Many coal miners lock in sales at fixed prices, but at current prices, over half of global coal is being mined at a loss. U.S. coal producers are also being hammered by environmentalists and natural gas producers who advocate renewable energy and natural gas vs. coal.

Losing Confidence?


Recently, major miners appear to be losing their confidence, or at least they seem to be facing reality. Anglo-American recently announced $4 billion in writedowns, largely on its Minas-Rio $8.8 billion iron ore project in Brazil, but also due to weakness in metallurgical coal prices. BHP took heavy writedowns on badly timed investments in U.S. shale gas assets. Rio Tinto’s $38 billion acquisition of aluminum producer Alcan right at the market top in 2007 has become the poster boy for problems with big writeoffs due to weak aluminum prices and cost overruns.

Glencore intends to spin off its 24% stake in Lonmin, the world’s third largest platinum producer. Iron ore-focused Vale is considering a separate entity in its base metals division to “unlock value.” Meanwhile, BHP is setting up a separate company, South 32, to house losing businesses including coal mines and aluminum refiners. That will halve its assets and number of continents in which it operates, leaving it oriented to iron ore, copper and oil.

Goldman Sachs coal mines suffered from falling prices and labor problems in Colombia. It is selling all its coal mines at a loss and has also unloaded power plants as well as aluminum warehouses. The firm’s commodity business revenues dropped from $3.4 billion in 2009 to $1.5 billion in 2013. JP Morgan Chase last year sold its physical commodity assets, including warehouses. Morgan Stanley has sold its oil shipping and pipeline businesses and wants to unload its oil trading and storage operations.

Jefferies, the investment bank piece of Leucadia National Corp., is selling its Bache commodities and financial derivatives business that it bought from Prudential Financial in 2011 for $430 million. But the buyer, Societe Generale, is only taking Bache’s top 300 clients by revenue while leaving thousands of small accounts, and paying only a nominal sum. Bache had operating losses for its four years under Jefferies ownership.

Grains and other agricultural products recently have gone through similar but shorter cycles than basic industrial commodities. Bad weather three years ago pushed up grain prices, which spawned supply increases as farmers increased plantings. Then followed, as the night the day, good weather, excess supply and price collapses. Pork and beef production and prices have similar but longer cycles due to the longer breeding cycles of animals.

Sugar prices have also nosedived in recent years (Chart 3). Cane sugar can be grown in a wide number of tropical and subtropical locations and supply can be expanded quickly. Like other Latin American countries, Brazil – the world's largest sugar producer – enjoyed the inflow of money generated from the Fed’s quantitative easing. But that ended last year and in combination with falling commodity prices, those countries’ currencies are plummeting (Chart 4). So Brazilian producers are pushing exports to make up for lower dollar revenues as prices fall, even though they receive more reals, the Brazilian currency that has fallen 33% vs. the buck in the last year since sugar is globally priced in dollars.


Oil Prices


Crude oil prices started to decline last summer, but most observers weren’t aware that petroleum and other commodity prices were falling until oil collapsed late in the year. With slow global economic growth and increasing conservation measures, energy demand growth has been weak. At the same time, output is climbing, especially due to U.S. hydraulic fracking and horizontal drilling. So the price of West Texas Intermediate crude was already down 31% from its peak, to $74 per barrel by late November.

Cartels are set up to keep prices above equilibrium. That encourages cheating as cartel members exceed their quotas and outsiders hype output. So the role of the cartel leader – in this case, the Saudis – is to accommodate the cheaters by cutting its own output to keep prices from falling. But the Saudis have seen their past cutbacks result in market share losses as other OPEC and non-OPEC producers increased their output. In the last decade, OPEC oil production has been essentially flat, with all the global growth going to non-OPEC producers, especially American frackers (Chart 5). As a result, OPEC now accounts for about a third of global production, down from 50% in 1979.


So the Saudis, backed by other Persian Gulf oil producers with sizable financial resources – Kuwait, Qatar and the United Arab Emirates – embarked on a game of chicken with the cheaters. On Nov. 27 of last year, while Americans were enjoying their Thanksgiving turkeys, OPEC announced that it would not cut output, and they have actually increased it since then. Oil prices went off the cliff and have dropped sharply before the rebound that appears to be temporary. On June 5, OPEC essentially reconfirmed its decision to let its members pump all the oil they like.

The Saudis figured they can stand low prices for longer than their financially-weaker competitors who will have to cut production first. That list includes non-friends of the Saudis such as Iran and Iraq, which they believe is controlled by Iran, as well as Russia, which opposes the Saudis in Syria. Low prices will also aid their friends, including Egypt and Pakistan, who can cut expensive domestic energy subsidies.

The Saudis and their Persian Gulf allies as well as Iraq also don’t plan to cut output if the West's agreement with Iran over its nuclear program lifts the embargo on Iranian oil. As much as another million barrels per day could then enter the market on top of the current excess supply of two million barrels a day.

The Chicken-Out Price


What is the price at which major producers chicken out and slash output? It isn’t the price needed to balance oil-producer budgets, which run from $47 per barrel in Kuwait to $215 per barrel in Libya (Chart 6). Furthermore, the chicken out price isn’t the “full cycle” or average cost of production, which for 80% of new U.S. shale oil production is around $69 per barrel.


Fracker EOG Resources believes that at $40 per barrel, it can still make a 10% profit in North Dakota as well as South and West Texas. Conoco Phillips estimates full cycle fracking costs at $40 per barrel. Long run costs in the Middle East are about $10 per barrel or less (Chart 7).


In a price war, the chicken out point is the marginal cost of production – the additional costs after the wells are drilled and the pipelines laid – it’s the price at which the cash flow for an additional barrel falls to zero. Wood Mackenzie’s survey of 2,222 oil fields globally found that at $40 per barrel, only 1.6% had negative cash flow. Saudi oil minister Ali al-Naimi said even $20 per barrel is “irrelevant.”

We understand the marginal cost for efficient U.S. shale oil producers is about $10 to $20 per barrel in the Permian Basin in Texas and about the same on average for oil produced in the Persian Gulf. Furthermore, financially troubled countries like Russia that desperately need the revenue from oil exports to service foreign debts and fund imports may well produce and export oil at prices below marginal costs – the same as we explained earlier for copper producers. And, as with copper, the lower the price, the more physical oil they need to produce and export to earn the same number of dollars.

Falling Costs


Elsewhere, oil output will no doubt rise in the next several years, adding to downward pressure on prices. U.S. crude oil output is estimated to rise over the next year from the current 9.6 million level. Sure, the drilling rig count fell until recently, but it’s the inefficient rigs – not the new horizontal rigs that are the backbone of fracking – that are being sidelined. Furthermore, the efficiency of drilling continues to leap. Texas Eagle Ford Shale now yields 719 barrels a day per well compared to 215 barrels daily in 2011. Also, Iraq’s recent deal with the Kurds means that 550,000 more barrels per day are entering the market. OPEC sees non-OPEC output rising by 3.4 million barrels a day by 2020.

Even if we’re wrong in predicting further big drops in oil prices, the upside potential is small. With all the leaping efficiency in fracking, the full-cycle cost of new wells continues to drop. Costs have already dropped 30% and are expected to fall another 20% in the next five years. Some new wells are being drilled but hydraulic fracturing is curtailed due to current prices. In effect, oil is being stored underground that can be recovered quickly later on if prices rise Closely regulated banks worry about sour energy loans, but private equity firms and other shadow banks are pouring money into energy development in hopes of higher prices later. Private equity outfits are likely to invest a record $21 billion in oil and gas start ups this year.

Earlier this year, many investors figured that the drop in oil prices to about $45 per barrel for West Texas Intermediate was the end of the selloff so they piled into new equity offerings (Chart 8), especially as oil prices rebounded to around $60. But with the subsequent price decline, the $15.87 billion investors paid for 47 follow-on offerings by U.S. and Canadian exploration and production companies this year were worth $1.41 billion less as of mid-July.


Dollar Effects


Commodity prices are dropping not only because of excess global supply but also because most major commodities are priced in dollars. So as the greenback leaps, raw materials are more expensive and therefore less desirable to overseas users as well as foreign investors. Investors worldwide rushed into commodities a decade ago as prices rose and many thought the Fed’s outpouring of QE and other money insured soaring inflation and leaping commodity prices as the classic hedge against it.

Many pension funds and other institutional investors came to view them as an investment class with prices destined to rise forever. In contrast, we continually said that commodities aren’t an investment class but a speculation, even though we continue to use them in the aggressive portfolios we manage.

We’ve written repeatedly that anyone who thinks that owning commodities is a great investment in the long run should study Chart 9, which traces the CRB broad commodity index in real terms since 1774. Notice that since the mid-1800s, it’s been steadily declining with temporary spikes caused by the Civil War, World Wars I and II and the 1970s oil crises that were soon retraced. The decline in the late 1800s is noteworthy in the face of huge commodity-consuming development then: In the U.S., the Industrial Revolution and railroad building were in full flower while forced industrialization was paramount in Japan.


At present, however, investors are fleeing commodities in favor of the dollar, Treasury bonds and other more profitable investments. Gold is among the shunned investments, and hedge funds are on balance negative on the yellow metal for the first time, according to records going back to 2006. Meanwhile, individual investors have yanked $3 billion out of precious metals funds.

Commodity Price Outlook

Commodity prices are under pressure from a number of forces that seem likely to persist for some time.

1. Sluggish global demand due to continuing slow economic growth.
2. Huge supplies of minerals and other commodities due to robust investment a decade ago.
3. Chicken games being played by major producers in the hope that pushing prices down with increasing supply will force weaker producers to scale back. This is true of the Saudis in oil and hard rock miners in iron ore.
4. Developing country commodity exporters’ needs for foreign exchange to service foreign debt. So the lower the prices, the more physical commodities they export to achieve the same dollars in revenue. This further depresses prices, leading to increased exports, etc. Copper is a prime example.
5. Increased production to offset the effects on revenues from lower prices, which further depresses prices, etc. This is the case with Brazilian sugar producers.
6. The robust dollar, which pushes up prices in foreign currency terms for the many commodities priced in dollar terms. That reduces demand, further depressing prices.

It’s obviously next to impossible to quantify the effects of all these negative effects on commodity prices. The aggregate CRB index is already down 57% from its July 2008 pinnacle and 45% since the more recent decline commenced in April 2011. To reach the February 1998 low of the last two decades, it would need to drop 43% from the late July level, but there’s nothing sacred about that 1998 number.

In any event, ongoing declines in global commodity prices will probably renew the deflation evidence and fears that were prevalent throughout the world early this year. And they might prove sufficient to deter the Fed from its plans to raise interest rates before the end of the year.

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The article Outside the Box: Commodity Weakness Persists was originally published at mauldineconomics.com.


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The Next Financial Disaster Starts Here

By Dan Steinhart

Individual investors take note….

Some of the world’s best money managers are betting on the biggest financial disaster since 2008. You won’t hear about this from the mainstream media. Networks like NBC or CBS don’t have a clue… just like they didn’t have a clue the US housing market would collapse in 2007.

Carl Icahn, a super successful investor who’s the 31st richest person in the world, said this investment is in a bubble. He said that it’s “extremely overheated”… and that “there’s going to be a great run to the exits.” And this investment isn’t some complex derivative that only Wall Street and hedge funds can buy. Millions of investors hold it in their brokerage accounts.

The dangerous investment is junk bonds.

Junk bonds are usually issued by companies with shaky finances. They pay high interest rates to compensate investors for their high risk. Low interest rates have pushed investors into these risky bonds. Junk bonds are one of few places where investors have been able to get a decent income stream.

In 2008, the Federal Reserve cut interest rates to near zero to fight the financial crisis. It has held rates near zero ever since. Right now, a 10 year US government bond pays just 2.3%. That’s half its historical average, and near its all time low.

Investors looking for income have turned to junk bonds. This chart shows the growth in junk bonds since 2002. As you can see, junk bonds didn’t grow much from 2002 to 2008. But when the Fed cut rates to zero in 2008, junk bond issuance took off:



JPMorgan reports that the number of junk bond issues soared 483% between 2008 and 2014. You might be thinking that you don’t own junk bonds… so why should you care? It’s true that many investors don’t own junk bonds directly. But many do own them through junk bond ETFs.

The Financial Times recently explained why junk bond ETFs are dangerous.… junk bond ETFs give the illusion of liquidity. Not all that long ago, bankers and asset managers promised to turn subprime mortgages into gold plated, triple A rated bonds.

Today, the apparently miraculous transformation is of deeply illiquid credit instruments, such as junk bonds and leveraged loans, into hyper-liquid exchange traded funds. Junk bonds are not “liquid.” That means there aren’t many investors buying and selling them every day. The Wall Street Journal reported that each of the top 10 bonds in the largest junk bond ETF traded just 13 times a day on average.

That’s not a typo. Investors only buy and sell these junk bonds 13 times per day on average. For comparison, investors buy and sell 47 million shares of Apple (AAPL) on average every day. Junk bond ETFs are extra dangerous because they make junk bonds appear liquid. HYG, the largest junk bond ETF, trades more than 6.8 million shares per today on average. That’s more than McDonald’s stock.

But as Howard Marks, hedge fund manager and one of the most respected investors in the world recently explained:


No investment vehicle should promise greater liquidity than is afforded by its underlying assets. If one were to do so, what would be the source of the increase in liquidity? Because there is no such source, the incremental liquidity is usually illusory, fleeting, and unreliable, and it works (like a Ponzi scheme) until markets freeze up and the promise of liquidity is tested in tough times.

Because junk bond ETFs create the illusion of liquidity, most investors don’t see the danger. They think they can sell their junk bonds ETFs just as easily as they could sell shares of Apple. They’re wrong. If too many people sell junk bonds at once, it could overwhelm the market and cause prices to crash.

Now, none of this has been a problem yet because junk bonds have been in a bull market. According to Bank of America, junk bonds have gained 149% since 2009. But as Howard Marks added, ”Nothing is learned in the investment world in good times.” … “Most of these vehicles haven’t been tested in tough times.”

All bull markets eventually end. When this one ends, junk bonds could cause huge losses to investors who don’t know about these risks. Junk bonds could easily drop 15% or more in one month.

And here’s the craziest part….Some of the world’s smartest and most successful investors are are betting on this exact outcome. They’re betting that the junk bond market will crash.

They’re calling it “The Next Big Short.”

You probably heard about the few hedge fund managers who made a killing when US housing collapsed in 2007. Dallas-based hedge fund manager Kyle Bass made $500 million by betting against housing. John Paulson made $4.9 billion by betting against mortgages. Today, one of the largest private equity firms in the world is raising money to bet against junk bonds... just like Bass and Paulson bet against housing in 2007.

The Wall Street Journal reports:


Apollo [one of the world’s largest private equity firms] has been raising money from wealthy investors for a hedge fund that snaps up insurance-like contracts called credit-default swaps that benefit if the junk bonds fall. In marketing materials reviewed by The Wall Street Journal, Apollo predicted: ETFs and similar vehicles increase ease of access to the high yield [junk] market, leading to the potential for a quick ‘hot money’ exit.”

Other hedge funds like Reef Road Capital and Howard Marks’ Oaktree Capital are also raising money to bet on a junk bond crash.

As you can see from the chart of HYG’s (the largest junk bond ETF) price, junk bonds are down since June:



There’s no way to know if this is the beginning of the end of the junk bond bull market. But if it is, huge losses could come very soon. If you’ve made money investing in junk bonds, it’s time to cash in. Don’t bet against some of the best investors in the world who expect junk bonds to crash. We recommend selling junk bonds now.

P.S. Because this risk and others have made our financial system a house of cards, we’ve published a groundbreaking step by step manual on how to survive, and even prosper, during the next financial crisis. In this book, New York Times best selling author Doug Casey and his team describe the three ESSENTIAL steps every American should take right now to protect themselves and their family.

These steps are easy and straightforward to implement. You can do all of these from home, with very little effort. Normally, this book retails for $99. But I believe this book is so important, especially right now, that I’ve arranged a way for US residents to get a free copy. Click here to secure your copy.

The article The Next Financial Disaster Starts Here was originally published at caseyresearch.com.



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