Tuesday, February 23, 2016

Oil Supply Certainty

The advent of fracturing technology, in addition to shale oil recovery, has cast a pall on the outlook for the traditional structure of the energy business. Present overproduction is, as we all know by now, causing financial pain to the many over leveraged explorers and producers in addition to those countries that have developed a dependence on a higher price for their oil exports, leading these countries to dip into their savings to sustain populations that expect a higher standard of living than may be presently realistic. The world price of oil is the result of expectations that develop over time regarding the future price of oil. This is best illustrated by the high prices that persisted only until lately in the grand scheme. Now, it seems that the whole investing world is resigned to a persistent oversupply and low prices for far into the future. Saudi Arabian spokesmen speak today of a refusal to decrease production and lose market share. The whole world seems to be waiting for a higher price for energy to pluck the bond holders out of the fire and rescue the emerging markets from their debt loads, not to mention the large international banks rumored and suspected of holding large positions in commodities. JPMorgan on the ropes today....

I think that world politics are being ignored. The middle east countries are selling some of the holdings of their sovereign wealth funds to raise money lately, but this cannot persist for long before cuts must be made to the standards of living their pampered citizens demand. In fact the turmoil we see in Iraq, Syria, Somalia, et al can be traced to a decline in the outlook by the poorest people in these countries. At the same time the western world is not dependent on the good will of these countries to keep the price of oil low due to the domestic production increases of recent years. The west is distancing ourselves from these countries and their monarchies and dictatorships. We are not willing to expend our blood and treasure to prop up these oil producers. In fact it is to our immediate benefit for supply from the middle east to be disrupted. Russia stands the most to gain from this dynamic.

In short, I think the oil investors are being typically myopic and perhaps missing the longer term real politik that influences the production and distribution of hydrocarbon energy worldwide.


Wednesday, February 17, 2016

What's Eating Devon?

Lesson in trading.

Look for relative strength among members of a sector. Buy the strongest, sell the weakest. Case in point lately is Devon Energy. Today oil up a bit and many oil stocks up. Not Devon which broke down through support.

Something is wrong with Devon. Probably tooooooo much debt.

Carry on,

Friday, February 12, 2016


 I had the opportunity to watch an interview by the staff of CNBC with the CEO of Nordic American Tanker recently. Herbjorn Hansson gave a convincing presentation of a CEO who is focused on running a profitable company and focusing on the business without excess debt. Please watch the video of NAT CEO

Control risk,


Sunday, February 7, 2016

Consumer Demand and Credit

Just a few pictures to tell the story today.


Loan Demand

Auto Loan Demand

Average Amount Financed/ 2011

Auto Loan Amount Outstanding

Securitized Loans Outstanding

This last one has me scratching my head. ??????

So this:

From Reuters

Fed Balance Sheet

My conclusion from this is that consumer loan demand is falling. This would correspond to the top of a business cycle. This is at a time when consumer debt is very high.

In the "Fed Balance Sheet" link is a graph of bank reserves kept at the Fed. As many have noted the banks are not lending, but hoarding. A negative interest rate policy would penalize banks that hold excess reserves and thus theoretically stimulate more lending and securitization. Banks may be wary of having large amounts of securitized holdings, however, and may put pressure on the Fed for another round of Large Scale Asset Purchases (QE).

This is all money printing. How it can NOT show up as inflation is only dependent on where you look for inflation. How much would a new car cost if people could not access credit for the purchase? The same question applies to housing. Appliances?

A continuous flow of new money as credit lent out is essential to keep the prices of assets up. It is the assets that are on bank balance sheets, and on the Fed's balance sheet. There is no going back, only forward, but demographics of an aging population who is retiring or preparing for retirement by attempting to save, has complicated the grand scheme.

More QE will be forthcoming at any slowdown, or catastrophe awaits. This is the conclusion I reach every time I pursue the answer to credit, money, and consumer credit in particular. Consumer credit, in the absence of productivity gain sharing must fail as a house of cards fails. In a complete collapse, for there is not the support at the base in the form of saving and wage power for support during any contraction. Savings are essential.

Just thinking.
Buying more gold and silver for the savings....

control risk,

Saturday, February 6, 2016

The Bell is Ringing

There is a saying that 'nobody rings a bell at the start of a bear market'. But I think a bell is ringing.

The bell is the action of the Japanese Yen. Despite the best intentions of the Japanese govt. and Japanese central bank the yen will not stay down. Japan has one of the highest levels of govt. debt in the world, and they are the worlds third largest economy, second only to the U.S. and China. And China's banks are known to have little in the way of reserves as a slowdown appears to be worsening in that country. The Chinese yuan is falling, the yen is rising, and the U.S. dollar is falling as there dawns the expectation that the central bank of the world, the Fed, will have to put a rate rise on hold or risk a collapse in world markets. It remains to be seen if they can bring themselves to recognize this state of affairs. World debt levels have only risen since the last great financial crisis. And we appear to be on the cusp of another.

Gold, metals, and emerging markets in general have seen relative strength in the last few days. Perhaps on the prospect of a weaker dollar and debt that is easier to repay.

The China problem appears like it will precipitate a Japanese problem. I don't know how it will end, but I must say I have a sense of foreboding.
The Chinese have a cultural affinity for gold. Gold has been flowing to the east for some time now. See this well documented by Jesse at Jesses Café .

See also this great article The Big Reset.

I conclude with these charts.

May you weather the storm.

Control risk,