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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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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Tuesday, August 11, 2015

Closing the Sausage Factory

By John Mauldin

“Bureaucracy destroys initiative. There is little that bureaucrats hate more than innovation, especially innovation that produces better results than the old routines. Improvements always make those at the top of the heap look inept. Who enjoys appearing inept?”
– Frank Herbert, Heretics of Dune

“Economies naturally grow. People innovate as they go through life. They also look around at what others are doing and adopt better practices or tools. They invest, accumulating financial, human and physical capital.
Something is deeply wrong if an economy is not growing, because it means these natural processes are impeded. That is why around the world, since the Dark Ages, lack of growth has been a signal of political oppression or instability. Absent such sickness, growth occurs.”
– Adam Posen, “Debate: The Case for Slower Growth

Today’s letter will be shorter than usual, because I’m at Camp Kotok in Grand Lake Stream, Maine, where the first order of business today is trying to outfish my son (not likely to happen, this year). But I’ve been looking closer at productivity barriers, and I want to give you some points to ponder.

The New Normal?

Like many of you readers, I’m old enough to remember a time when 2.3% annual GDP growth was a disappointment. We always knew America could do better. Not anymore, apparently. Some people actually cheered last week’s first estimate for 2Q real GDP growth. It was 4.4% in nominal terms, but inflation brought the figure back down. While certain segments are growing like crazy, for the most part we are muddling along in a slow growing malaise. You might even call it “stagnant.”

I for one still think the United States can do more. We have a large population of intelligent people who want to build a solid future for their children. They’re willing to work hard to do it. If that’s not happening – and clearly it isn’t – some barrier must be standing in their way. What is this barrier to productivity and growth? There are actually several, but government red tape is one of the biggest. I thought about this after reading an excellent Holman Jenkins column in the Wall Street Journal last week.

Jenkins led me to an audio recording of an interesting discussion on “The Future of Freedom, Democracy and Prosperity,” conducted at a symposium held at Stanford University’s Hoover Institution last month.
Government research & development funding has fallen off considerably from its peak in the 1970s moonshot days. This holds back worker productivity. The federal government is doing too much to slow down business and not enough to boost it.

The three economists who spoke at Stanford all pointed to important productivity barriers emanating from Washington DC.....

One of the participants, Hoover economist John Cochrane, spoke of fears that America is drifting toward a “corporatist system” with diminished political freedom. Are rules knowable in advance so businesses can avoid becoming targets of enforcement actions? Is there a meaningful appeals process? Are permissions received in a timely fashion, or can bureaucrats arbitrarily decide your case by simply sitting on it?

The answer to these questions increasingly is “no.” Whatever the merits of 1,231 individual waivers issued under ObamaCare, a law implemented largely through waivers and exemptions is not law-like. In such a system, where even hairdressers and tour guides are subjected to arbitrary licensing requirements, all the advantages accrue to established, politically connected businesses.

The resources that businesses put into complying with government regulations is staggering. I have often envied people outside the highly regulated financial industry for their freedom to operate rationally. In my business we seem to spend half our time – and an ungodly fraction of our money – just maneuvering through the regulatory morass.

Intrusive federal regulations touch every part of the economy:
  • Energy and mining companies have to deal with environmental protection rules.
  • Drug companies and health care providers must satisfy the FDA and Medicare.
  • Cloud technology companies have to process FBI and NSA demands for user information.
  • Retailers and consumer product makers are required to abide by the fine print on millions of product labels.
I could go on, but you get the point. Anything you do attracts bureaucratic oversight now. We may laugh at “helicopter parents” hovering over their children at school, but we all have a helicopter government looking over our shoulders at work.

Before anyone calls me an anarchist, I think some government regulation is perfectly appropriate. We all want clean drinking water. Everyone appreciates knowing our cars meet crash survival standards. I’m glad FAA is keeping order in the skies.

The problem arises when agencies enforce confusing, contradictory, and excessive regulations and try to micromanage the nation’s businesses. Every business owner I know is glad to play by the rules. They just want to know what the rules say, and that is frequently very hard to do.

A few weeks ago, in “Productivity and Modern-Day Horse Manure,” I explained that growth is really quite simple: if we want GDP to grow, we need some combination of population growth and productivity growth.

The US population is growing, thanks mainly to immigration, but the effectiveness of the workforce is another matter. Baby Boomer retirements are rapidly removing productive assets from the economy. To offset that trend, we need to make younger workers more productive.The red tape that constantly spews out of Foggy Bottom is not helping matters.

Regulatory Capture

The red tape hurts the economy overall, but it does help certain parties. The largest players in any niche often “capture” their regulators. Then they use their influence to tilt enforcement away from themselves and toward smaller competitors.

Put simply, new regulations can be great for your business if you are already well established and have the resources to comply with government mandates. New entrants rarely have those resources. The resulting lack of competition boosts profits for the big players but hurts consumers. The competition that would normally lead to better, less expensive goods and services never happens.

Holman Jenkins makes another great point about how over regulation affects growth.

Another participant, Lee Ohanian, a UCLA economist affiliated with Hoover, drew the connection between the regulatory state and today’s depressed growth in labor productivity. From a long-term average of 2.5% a year, the rate has dropped to 0.7% in the current recovery. Labor productivity is what allows rising incomes. A related factor is a decline in business start ups. New businesses are the ones that bring new techniques to bear and create new jobs. Big, established companies, in contrast, tend to be net job shrinkers over time.

Recall our economic growth formula: population growth plus productivity growth. The US population grew at a peak rate of 1.4% in 1992, and growth has been trending down ever since. Now it is around 0.75% per year. Add that to 0.7% productivity growth, and you see why Jeb Bush’s 4% growth target will be so hard to hit.

Blame Flows Downhill

Business leaders love to complain about the bureaucrats who run Washington’s alphabet-soup agencies. I think the problem goes deeper. With only a few exceptions, the regulators I’ve met over the years have been competent professionals. They weren’t intentionally trying to hurt my business. Often the regulations confused them as much as they confused me.

The real blame, I think, starts on Capitol Hill. Our legislative process is a sausage factory. Congress passes vague, complicated laws riddled with exceptions for this and zero tolerance for that. The result is superficially attractive but a mess inside. People in the alphabet agencies then have to remove the sausage skin and make sense of the contents. This would be a tough job for anyone. I certainly don’t envy them.

Jenkins mentions Obamacare’s convoluted waivers and exemptions. Even its advocates admit the law is a crazy mess. But how and why did it get that way?

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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Saturday, August 8, 2015

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

Fridays can be very telling, and while Fridays close in crude oil was not a clean break through support commodity traders need to be on their toes for Mondays open. So there is no better time to have our trading partner Mike Seery back to give our readers a recap of last weeks commodity futures market 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 September contract settled last Friday in New York at 47.12 a barrel while currently trading at 44.10 trading lower for the 3rd consecutive trading session as I’ve been recommending a short position over the last 8 weeks and if you took that trade place your stop loss above the 10 day high which currently stands at 49.52 as the trend seems to be getting stronger to the downside. Crude oil futures are trading far below their 20 and 100 day moving average telling you that the trend is sharply lower as the chart structure will not improve until later next week as it certainly looks to me that oil prices will retest $40 a barrel as a strong U.S dollar continues to put pressure on oil and many of the commodity markets.

Remember as a trader you must trade with the path of least resistance and the oil market is clearly to the downside as picking bottoms and picking tops is extremely difficult to do successfully over the course of time. Traders reacted to Friday mornings monthly unemployment report showing around 215,000 new jobs created as it certainly looks like an interest rate hike could be eminent in the month of September which is also very bearish the commodity markets in general so continue to play this to the downside, however if you did not take the original trade you have missed the boat as I don’t like to chase markets so look at other markets that are beginning to trend.
Trend: Lower
Chart Structure: Solid

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Gold futures in the December contract settled last Friday in New York at 1,095 an ounce currently trading at 1,095 as this market has been incredibly nonvolatile at the current time as prices have gone nowhere over the last three weeks as I’ve been recommending a short position from 1,170 & if you took that trade place your stop loss above the 10 day high which currently stands at 1,103 risking around $8 dollars or $250 per mini contract plus slippage and commission as the chart structure is outstanding.

I have been trading the commodity markets for a longtime and I can’t remember gold trading in such a nonvolatile manner as prices continually go nowhere which is putting me to sleep as I’m getting frustrated in this market because as a trader you want to look at markets that are moving but the risk/reward is in your favor so I will just keep the proper stop loss and if you are stopped out move on and look at other markets.

Gold futures are still trading below their 20 and 100 day moving average telling you that the trend is to the downside as a strong U.S dollar continues to keep a lid on the precious metal prices and I think that’s going to continue in 2015, however the stock market has hit a six month low and I think that’s starting to support prices as gold has had a very difficult time breaking 1,080 which is been hit on a half dozen occasions only to rally as prices remain in a very tight consolidation but continue to remain short.
Trend: Lower
Chart Structure: Outstanding

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The S&P 500 reacted negatively toward the monthly unemployment report and is trading lower for the 2nd consecutive trading session down another 14 points this afternoon in Chicago trading at 2064 in the September contract as I recommended a short position in Thursday trade while placing your stop loss above the 10 day high at 2110 now risking 44 points or $ 2,200 per mini contract plus slippage and commission as the chart structure is very tight at the current time.

If you have been following my previous blogs you understand I like to sell breakouts as this has not broken out to the downside, however the Dow Jones industrial has hit a six month low and has broken out so I chose the S&P 500 so take a shot as the commodity and stock markets around the world look vulnerable to another leg down.

If you take this trade my recommendation is to place your stop above the 10 day high, however you can also place the stop above the all time high which is 2127 which might be a better place if your account balance can withstand that loss in case we are wrong but it seems hard to believe with commodity prices plunging on a daily basis that the stock market can retain these lofty levels in my opinion as I've been recommending short positions in many of the commodity markets for several months as I think there are problems developing that we don't know just yet.
Trend: Lower
Chart Structure: Solid

You Might Want to Know What's Behind our "Big Trade"

Coffee futures in the September contract settled last Friday at 125.25 while currently trading at 128 a pound up around 300 points for the trading week now trading above its 20 day but still below its 100 day moving average as I’ve been recommending a short position getting stopped out breaking even on this recommendation as this trade fizzled out at the very end.

I’m currently recommending to sit on the sidelines in the coffee market at this time as I’m a little disappointed getting stopped out, however we must move on and look at other markets that are beginning to trend as I’m still recommending a short position in sugar, cocoa, and cotton at the current time but keep a close eye on coffee as the trend can still remain bearish in the next couple of days as the chart structure still remains extremely tight so I’m not giving up on this trade but when prices hit a 10 day high it’s time to move on.

Many of the commodity markets were higher this afternoon as the U.S dollar reversed earlier gains but we are not seeing any real strength in the coffee market at the current time as the long term down trend line is still intact but I’m a short term trader which means I look for a four week high and four week lows as an entry point as you must be nimble and flexible and not always have a biased opinion as prices can change on a dime.
Trend: Mixed
Chart Structure: Solid

Sugar futures in the October contract settled in New York last Friday at 11.14 while currently trading at 10.65 a pound as I’ve been recommending a short position from around 11.50 and if you took that trade continue to place your stop loss above the 10 day high which now stands at 11.64 as the chart structure will start to improve later next week. Sugar futures are trading far below their 20 and 100 day moving average as the trend seems to be getting stronger on a weekly basis trading lower for the 2nd consecutive trading session as I think there is a possibility that sugar will crack 10.00 in next week’s trade as crude oil prices continue to plunge therefore pressuring sugar so continue to play this to the downside in my opinion as the risk/reward is still in your favor.

Many of the commodity markets were higher today including several soft commodities as the U.S dollar reversed earlier gains as many markets were probably oversold but to predict day to day action is extremely difficult as I would rather follow the path of least resistance which is to the downside as I’m strictly a trend follower so continue to take advantage of any rallies as I still think lower prices are ahead as supply issues continue to keep a lid on prices and unless lower production happens in 2016 I think prices grind much lower over the course of time.
Trend: Lower
Chart Structure: Solid

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Friday, August 7, 2015

The Next Silver Bull May Have Already Started

By Laurynas Vegys

Silver is down 7.1% this year. Will this weakness persist? To find out, let’s look at the key factors in the silver market this year.
  • Like gold, silver fell as the US dollar rose on the back of expectations that the Fed will hike rates.
  • World demand for physical silver fell 4% in 2014, largely due to a record 19.5% drop in investment demand.
  • Silver exchange traded funds (ETFs) did not see big liquidations in 2014. ETF holdings grew by 1.4 million ounces and recorded their highest year end level at 636 million ounces.
The first two factors helped push silver 19.9% lower last year. That’s more than gold or any other precious metal fell. Despite this, silver production rose 5% in 2014. That added to the pressure on prices.



Why did miners produce more silver when prices were falling? Because of:
  • By-product metal. Around 75% of the silver mined is a by-product at gold or base metal mines. These producers will keep mining silver, almost regardless of price.
  • Reduced cash costs. The primary silver producers have cut costs since they peaked in 2012. The main way miners do that is by boosting production to achieve economies of scale.
  • Bull market hangover. Precious metals were in a major bull market from 2001 to 2011. Producers built a lot of mines in response. Nobody wants to pull the plug on a new mine that’s losing money if they think prices will go higher.
That’s the backdrop. Now let’s look at this year’s fundamentals.


Supply


Silver mine output has risen for 12 consecutive years (silver mine supply is a little different, due to hedging, but also trending upward). This year could break this trend. Industry experts at GFMS forecast up to a 4% decline in silver output in 2015. Why? It’s not rocket science. There are now fewer major new mines under construction due to lower metals prices. That leaves scrap supply. But scrap comes from jewelry, and sellers are price sensitive. People like to sell granny’s silver tea set when prices are up. We expect subdued scrap supply until silver heads much higher.

Demand


Investment demand - that’s us - is a big chunk of total silver demand: 18.4% as of the latest figures.
There was a big drop in investment demand last year: 19.5%. This tells us that most short-term investors and sellers have left the market. We don’t know any “silver bugs” who were selling. That means that today’s bullion is in stronger hands. And that means that any new buying will have a strong impact on prices.
But will there be buyers?

The Silver Institute expects more silver demand from investors this year. They say that the first half of 2015 sales of silver bars were the fifth highest on record.

Photovoltaics (PV) is another source of silver demand that many analysts expect to rise in 2015 and beyond. Global PV demand is set to increase by 30% in 2015, according to IHS analysts. China alone has plans to install 17 gigawatts of solar capacity by the end of the year.

The solar industry consumes a small amount of silver compared to jewelry and other electronics. Yet, if PV demand delivers in 2015, it will become the third-largest source of fabrication demand for silver.

Wildcard: Tesla plans to put batteries big enough to power a house in every home. What happens if that takes root is anyone’s guess… but it will be big. Really big. And the impact on demand for silver would be just as huge.


The Deficit


Silver supply went into deficit during much of the big run up from 2001 to 2011. That may happen again. Silver Institute expects the silver supply deficit to grow to 57.7 million ounces in 2015. (Note that even if physical mine supply is up, net supply can be down if a lot of the mine supply was forward sold as hedges.) If the institute is right, it’ll be bullish for silver prices.



The Dollar and the Fed


We believe the dollar is grossly overvalued, and we are not alone. HSBC thinks the greenback’s rise since 2014 could be in its final stage. For the three months between April and June, the US dollar fell against every developed-market currency (save for the yen and the New Zealand dollar).

Many investors seem convinced that the Fed will raise interest as soon as September. We view this as unlikely at this stage. Yes, tightening US monetary policy would propel the dollar to new highs. But an even stronger dollar would mean slicing billions off the US GDP; not exactly a desirable situation from the standpoint of the Fed given the sluggish growth of the economy.  We think the Fed could delay raising rates until 2016. It might even stop talking about rate hikes indefinitely. Each delay, the dollar will get whacked, and that’s good for precious metals.

On the other hand, if the Fed does nudge rates higher this year, it would likely dampen the stock market. That would increase demand for silver and gold. This could push silver prices much higher, given the small size of the market.


The Gold-Silver Ratio


The gold-silver ratio (GSR) tells you how many ounces of silver you need to buy one ounce of gold. The record shows that the GSR often surges during a recession. (See the shaded areas on the chart below.)



Silver is about 17 times more abundant than gold in the earth’s crust. Silver and gold prices were close to this ratio for most of history. These facts make many investors think that the GSR should be 17-to-1 and that eventually it will be.

They may be right, but we’ve never found the GSR to be a strong predictor of gold or silver prices. To us, the GSR “suggests a lot but proves nothing.”


Conclusion


The fundamentals are positive for silver in 2015: less mine supply, and the healthy demand we already see is bullish. The greater demand that’s possible could create a real supply crunch. As a result, we expect silver to hold on throughout 2015 and perhaps even increase faster than gold, if the whole precious metals sector turns positive this year.

As for guessing the future, we have no crystal ball. We can say that Louis’ case for 2015 as a win-win year for silver is backed by the numbers.

P.S. If silver moves off its current level of $15 and into the $20 or $30 areas, silver investors could make large gains. But owners of a unique silver-related security could make gains that are five... 10... even 100 times greater. And right now is a once-in-a-decade chance to buy them very, very cheap.

Our friends at Casey Research are the world’s leading experts in this sector. And they’re EXTREMELY bullish on this rare opportunity. Read on here for details.


The article The Next Silver Bull May Have Already Started was originally published at caseyresearch.com.


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Wednesday, August 5, 2015

The Next Big Bull Run....Can you guess what sector we are talking about?

There’s a tiny sub sector of the market that explodes in value every 5-10 years.

  *  In the late 70’s some investors saw gains of 2,464%, 13,025%,
      and 3,479%.
  *  In the mid 80s there were gains of 5,445%, 7,650%, and 7,011%.
  *  And in the early 90s and mid 2000s we saw 3,050%, 2,431%, and
      2,054% gains.

These numbers are simply incredible.....

Our trading partner Doug Casey is telling us that right now the sector is once again ripe for huge gains. I strongly encourage you to check this situation out. You might not get the chance again for another decade. The profit potential on this opportunity is so high and so explosive that we would be a little disappointed if it was “only” good for 500% gains.

I believe the next huge rally in this sector is right around the corner.

And to help you beat the flood of investors that will rush into this investment once the bull run starts, Doug and his staff, the analysts at Casey Research, have put all of their research online, visit here.

I strongly encourage you to check it out....visit the "Casey Research Group"

See you in the markets,
Ray C. Parrish
aka the Crude Oil Trader

P.S. This is by no means “cherry picking” the best gains from these rallies. Here’s a better list of some of the gains investors saw when this unique sector went on a tear.

Stock #1 up 26,040%
Stock #2 up 4,376%
Stock #3 up 1,874%
Stock #4 up 1,850%
Stock #5 up 1,827%
Stock #6 up 5,692%
Stock #7 up 2,431%
Stock #8 up 3,090%
Stock #9 up 3,050%
Stock #10 up 1,400%
Stock #11 up 1,600%
Stock #12 up 971%
Stock #13 up 2,464%
Stock #14 up 1,567%
Stock #15 up 13,025%

And there’s many, many more. Get the story behind these huge gains right here! 



Tuesday, August 4, 2015

When China Stopped Acting Chinese

By John Mauldin

“The one thing I know for sure about China is, I will never know China. It's too big, too old, too diverse, too deep. There's simply not enough time.”
– Anthony Bourdain, Parts Unknown

Much of the world is focused on what is happening in Greece and Europe. A lot of people are paying attention to the Middle East and geopolitics. These are significant concerns, for sure; but what has been happening in China the past few months has more far reaching global investment implications than Europe or the Middle East do. Most people are aware of the amazing run up in the Shanghai stock index and the recent “crash.” The government intervened and for a time has halted the rapid drop in the markets.

There have been a number of concerns about what this means for the Chinese economy. Is China getting ready to implode? Certainly there are those who have been predicting that outcome for some time. In this week’s letter I am going to try to explain both what caused the Chinese stock market to rise so precipitously and then fall just as fast and why we have to view China’s stock market differently from its economy.

As I have been saying for several years, in order for the Chinese economy to continue to grow, the Chinese must shift their emphasis from industrial production and infrastructure investment to a services oriented economy. That is indeed what they are trying to do, and we are beginning to see signs of the services sector taking on a role as important to the Chinese economy as services are to the US economy. They have a long way to go, but they have begun the trip.

A Transformation Like No Other

When the US stock market crashed in October 1987, commentators on that era’s primitive financial media (I recall seeing them on the large wooden box in my living room) rushed to distinguish between the country’s economy and its stock market.

The American economy, they said, is just fine. Life will go on, and businesses will make money. As it turned out, that was good analysis – and it still is today – and not just for the United States. Stock markets do reflect the economy over time, but they can lead it or lag it for years.

Anyone who owns China stocks has probably sought solace in such thinking the last few weeks. The Chinese stock bubble is deflating in spectacular fashion. The sharp decline and Beijing’s flailing efforts to stabilize the market have many economists seeing deeper trouble.

We’ll compare and contrast the Chinese stock market and economy by looking at an unusual but very reliable data source. With apologies to Anthony Bourdain, whom I quoted at the beginning of the letter, we can know China. We just have to ask the right people the right questions.

Back in 1987, as American investors were licking their wounds, the Shanghai skyline looked like this:


Here is a 2013 view from the same spot:


Photo credit: Carlos Barria, Reuters

A lot can change in 26 years. Transformations like this are commonplace in China. Gleaming cities now tower over what was undeveloped land a decade or two ago. Most of those cities even have people living in them, although the ghost cities are legendary.

You can crunch any numbers you like in any way you like, and it will be clear that China’s rapid growth is unprecedented. It is changing the course of human history. China has moved more than 250 million people from living a medieval lifestyle in the country to living and working in these fabulous new cities. And they have built the infrastructure to connect and supply them.

Worth Wray and I explored China from many different perspectives in our e-book, A Great Leap Forward? Our all-star cast of China experts variously see both opportunity and risk. The book is getting rave reviews. If you’re interested in an in-depth analysis of China, it’s the place to start (Click here for more information and to order the book.)

In thinking about China last week, I skimmed through the book and noticed something that, with the benefit of hindsight, is simply stunning. The paragraphs I read brought all the pieces together to explain the Chinese stock market’s epic drawdown.

China GDP Versus China Beige Book

The part that made me sit up straight was in the contribution by Leland Miller of China Beige Book. His chapter “How Private Data Can Demystify the Chinese Economy” comes at the Chinese economy from a unique angle.

We all know government economic data isn’t always reliable. That is especially true in China. It is the only country in the world that can report its GDP quarter after quarter and never have to revise its calculations. That is just the most obvious of its economic data manipulations.

Even knowing that, most China analysts still rely on that GDP number, because it is all they have. That is beginning to change because of the work of Leland Miller. Leland, along with his colleague Craig Charney, decided to build an alternative analysis to government GDP numbers. Using the same methodology that the Federal Reserve uses in its quarterly Beige Book, they gather data from a network of observers all over China. Their clients – who include the world’s largest central banks – provide granular data that gives a much deeper view of the Chinese economy.

In A Great Leap Forward? [get it here on Amazon] Leland describes how China Beige Book picked up on a major change in Chinese businesses. He says the country’s 2014 slowdown was different.

The slowdown of 2013 was the result of subtle credit tightening, few signs of which were evident in official data right up until the June interbank credit crunch caused a market panic. Small and medium-sized companies during that period still wanted to access credit but found – TSF data notwithstanding – that it was difficult if not impossible to do so. 2014, intriguingly, has proven to be a very different story.

One of the most interesting dynamics we’ve tracked across corporate China has been the historical disconnect between company performance and the willingness of those companies to continue to borrow and spend. In many sectors, particularly troubled ones such as mining and property, firms typically reacted to poor results in a peculiarly Chinese way: they doubled down.

Too often, the thinking appeared to be: good results were good, but bad results were not necessarily bad, because the government was expected to step in and bail them out. Perhaps with subsidies, perhaps by ordering loans to be rolled over to another day. Firms often chose to act in demonstrably non-commercial ways.

Since early 2014, however, our data suggest a startling transformation. During the second quarter, CBB data showed a particularly broad deceleration in revenue growth nationwide: for the first time in our survey, not one sector showed on quarter improvement. Yet firms reacted to this slowdown in a surprisingly rational way: capital expenditure growth fell broadly, as did capex expectations, as did loan demand – all to the lowest levels in the history of our survey. The third quarter then showed yet another quarter of weak loan demand, with even lower levels of current and expected capex.

Firms watching the economic slowdown didn’t want to spend – and they didn’t want to borrow either. For the time being, they preferred to watch events unfold from the sidelines.

Leland says, and I agree, that this was a positive development. Both businesses and investors need the discipline of free markets. Experiencing failure forces everyone to learn what works and what doesn’t work.

In a phone call this week, Leland told me their data actually pinpointed this change in the second quarter of 2014. He thinks it was the most important single quarter in Chinese economic history. I’m sure that Leland, as an Oxford educated China historian, doesn’t say that lightly. It was in that quarter, Leland thinks, that Chinese business leaders “stopped acting Chinese.” Faced with falling demand, they did the rational thing and stopped adding new capacity. As he says in the excerpt above, they didn’t want to spend or borrow.

They just sat on the sidelines. That was a good business decision. Unfortunately, it wasn’t consistent with Beijing’s master plan.

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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Sunday, August 2, 2015

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

There's been plenty of traders calling for a bottom in most commodities this week....but not so fast. So there is no better time to have our trading partner Mike Seery back to give our readers a recap of last weeks commodity futures market 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 September contract settled last Friday in New York at 48.14 a barrel while currently trading at 47.90 down slightly for the trading week still trading below its 20 and 100 day moving average as I’ve been recommending a short position over the last several months and if you took that trade place your stop above the 10 day high which now stands at 51.41 as that will improve on a daily basis starting next week. Crude oil futures are trading below their 20 and 100 day moving average telling you that the trend is to the downside as there is very little bullish fundamental news to push prices higher in the short term and I think that will continue for quite some time as the U.S dollar still remains relatively strong despite today’s steep decline.

Many of the commodity markets continue to go lower as deflation is a worldwide problem and has been over the last several years especially when the United States stopped there quantitative easing program which propped up all asset prices including most commodities. With the possibility of China slowing down the perception is that demand will also slow down so continue to place the proper stop loss which is just a little over $3 away as this trade as fallen out of bed over the last two months, but if you have missed this recommendation sit on the sidelines and look for another market that’s beginning to trend as you have missed the boat.
Trend: Lower
Chart Structure: Excellent

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Gold futures in the December contract settled last Friday at 1,086 while currently trading at 1,194 experiencing a wild trading session this Friday afternoon with the U.S dollar trading sharply lower as I’ve been recommending a short position in the August contract as we rolled over into the December contract today so continue to place your stop loss above the 10 day high which stands at 1,110 an ounce. Gold futures have traded sideways for the last two weeks and looks to be forming some type of short term bottom, but I will stick to my trading rules and keep the proper stop loss as I still see no reason to own gold but if we are stopped out move on and look at other markets that are beginning to trend as we have been short from around the 1,170 level as prices have stalled out in recent weeks. The problem with the precious metals and gold in particular is the fact that all of the interest lies in the S&P 500 which is still hovering around all time highs as money flows continue to come out of the precious metals and into the equity markets as I think that trend is to continue throughout 2015 and at this point I would rather own stocks than own gold so continue to play this to the downside in my opinion while risking 2% of your account balance on any given trade.
Trend: Lower
Chart Structure: Outstanding

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Silver futures in the September contract settled last Friday at 14.49 an ounce while currently trading at 14.80 up about $.30 for the trading week still trading below their 20 & 100 day moving average as I’ve been short from 15.80 and if you took that trade place your stop loss at 14.99 which is the 10 day high as the chart structure is outstanding at the current time. Silver prices continue to bounce off of 14.50 as it looks to be forming a bottoming pattern but I will stick to my rules as we are just an eyelash away from getting stopped out as silver had a 40 cent trading range this Friday afternoon as the U.S dollar is down 100 points, however the trend is still lower and if we are stopped out move on and let’s find another market that’s beginning to trend as volatility is relatively low at the current time.

The Federal Reserve continues to want the inflation rate to hit 2% so they can start to raise interest rates but at this point there is very little worldwide demand for any commodity especially due to the fact that China looks to be falling off a cliff as they are the largest importer of commodities in the world and if you have not sold silver at this time the risk/reward is highly in your favor risking $.20 or $200 per mini contract plus slippage and commission as we will see what Monday’s trade brings.
Trend: Lower
Chart Structure: Outstanding

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Coffee futures settled higher for the 3rd consecutive trading session settling last Friday at 122.25 a pound while currently trading at 125.30 still trading below its 20 and 100 day moving average as I’ve been recommending a short position from the 128 level and if you took that trade place your stop loss above the 10 day high which currently stands at 128.20 as the chart structure is outstanding at the current time. The next major level of support is the contract low around 120 but I still think we can retest the January 2014 lows of 105 and if you did not take the original trade I would still sell at today’s price as the risk is around 300 points or 1,200 risk per contract plus slippage and commission. I am currently recommending short positions in cocoa, sugar, coffee as volatility is relatively low but as a trend follower I will stick to my guns on this and continue to place the proper stop loss while maintaining the proper risk management strategy of 2% of your account balance on any given trade.
Trend: Lower
Chart Structure: Outstanding

Sugar futures in the October contract settled last Friday in New York at 11.24 a pound while currently trading at 11.16 basically unchanged for the trading week as I’ve been recommending a short position from around 11.50 and if you took that recommendation the chart structure is outstanding at the current time so place your stop above the 10 day high at 11.72 risking around 50 points or $550 per contract plus slippage and commission. Sugar futures are trading far below their 20 and over 150 points below their 100 day moving average telling you that the trend is getting stronger to the downside as oversupply and over production should continue to put pressure on prices despite the fact that the U.S dollar is down over 100 points but that’s still not supporting sugar prices at this time. The reason I decided to take this trade was the fact of extremely tight chart structure which lowers monetary risk as that met my criteria to enter into a trade as I still think that there’s a possibility that prices could break 10.00 a pound in the next several weeks so continue to play this to the downside as the risk/reward is highly in your favor in my opinion.
Trend: Lower
Chart Structure: Excellent

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