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Energy & Commodities

Bazooka Ben Goes All In or "The Fed Plays All Its Cards"

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Posted by Peter Schiff - Peter Schiff, CEO and Chief Global Strategist

on Wednesday, 03 October 2012 07:39

There never really could be much doubt that the current experiment in competitive global currency debasement would end in anything less than a total war. There was always a chance that one or more of the principal players would snap out of it, change course and save their citizenry from a never ending cycle of devaluation. But developments since September 13, when the U.S. Federal Reserve finally laid all its cards on the table and went "all in" on permanent quantitative easing, indicate that the brainwashing is widely established and will be difficult to break. The vast majority of the world's leading central bankers seem content to walk in lock step down the path of money creation as a means to economic salvation. Never mind that the path will prevent real growth and may ultimately lead off a cliff. The herd is moving. And if it can't be turned, the only thing that one can do is attempt to get out of its way. 

The details of the Fed's new plan (which I christened Operation Screw in last week's commentary) are not nearly as important as the philosophy it reveals. The Federal Reserve has already unleashed two huge waves of quantitative easing (purchases of either government securities or mortgage-backed securities) in order to stimulate consumer spending and ignite business activity. But the economy has not responded as hoped. GDP growth has languished below trend, the unemployment rate has stayed north of 8%, and the labor participation rate has fallen to all-time lows. In the meantime, America's fiscal position has grown significantly worse with government debt climbing to unimaginable territory. Despite the lack of results, the conclusion at the Federal Reserve is that the programs were too small and too incremental to be effective. They have determined that something larger, and potentially permanent, would be more likely to do the trick.    

However, in making its new plan public, the Fed made a startling admission. At his press conference, Ben Bernanke backed away from previous assertions that printed money would be effective in directly pushing up business activity. Instead he explained how the new stimulus would be focused directly at the housing market through purchases of mortgage backed securities. He made clear that this strategy is intended to spark a surge in home prices that will in turn pull up the broader economy.  Such a belief requires a dangerous amnesia to the events of the last decade. Despite the calamity that followed the bursting of our last housing bubble, economists feel this to be a wise strategy, proving that a poor memory is a prerequisite for the profession.    

But now that the Fed is thus committed, the focus has shifted to foreign capitals. Not surprisingly, the dollar came under immediate pressure as soon as the plan was announced. In the 24 hours following the announcement, the Greenback was down 2.2% against the euro, 1.6% against the Australian Dollar, and 1.1% against the Canadian Dollar. A week after the Fed's move, the Mexican Peso had appreciated 2.7% against the US dollar. Many currency watchers noted that more dollar declines would be likely if foreign central banks failed to match the Fed in their commitments to print money. On cue, the foreign bankers responded.    

It is seen as gospel in our current "through the looking glass" economic world that a weak currency is something to be desired and a strong currency is something to be disdained. Weak currencies are supposed to offer advantages to exporters and are seen as an easy way to boost GDP. In reality, weak currencies simply create the illusion of growth while eroding real purchasing power. Strong currencies confer greater wealth and potency to an economy. But in today's world,no central banker is prepared to stand idly by while their currency appreciates. As a result, foreign central banks are rolling out their own heavy artillery to combat the Fed.    

Perhaps anticipating the Fed's actions, on September 6th the European Central Bank announced its own plan of unlimited buying of debt of troubled EU nations (however, the plan did come with important concessions to the German point of view - see John Browne's commentary). On September 17th, the Brazilian central bank auctioned $2.17 billion of reverse swap contracts to help push down the Brazilian Real. The next day, Peru and Turkey cut rates more than expected. On September 19th, the Bank of Japan increased its asset purchase program from 70 trillion yen to 80 trillion and extended the program by six months. It's clear we are seeing a central banking domino effect that is not likely to end in the foreseeable future.    

Although the Fed is directing its fire towards the housing market, the needle they are actually hoping to move is not home prices, but the unemployment rate.  Until that rate falls to the desired levels (some at the Fed have suggested 5.5%), then we can be fairly certain that these injections will continue. This will place permanent pressure on banks around the world to follow suit.    

All of this simultaneous money creation will likely be a boon for nominal stock and real estate prices. But in real terms such gains will likely not keep pace with dollar depreciation. Inflation pushes up prices for just about everything, so stocks and real estate are not likely to prove to be exceptions.   Even bond prices can rise in the short term, but their real values are the most vulnerable to decline.   In fact, even nominal bond prices will ultimately fall, as inflation eventually sends interest rates climbing. But prices for hard assets, precious metals, commodities, and even those few remaining relatively hard currencies should be on the leading edge of the upward trend in prices. 

Screen Shot 2012-10-03 at 11.43.03 AM

While I believe the Fed's plan will be a disaster for the economy, the silver lining is that it provides investors with a road map. As the policy of the Fed is to debase the currency, those holding dollar based assets may seek alternatives in hard assets and in the currencies of the few remaining countries whose bankers have not drunken so freely from the Keynesian Kool-Aid. We believe that such opportunities do exist. Some broad ideas are outlined in the latest edition of my Global Investor Newsletter, which became available for download this week. I encourage those looking for ways to distance their wealth from the policies of Ben Bernanke to start their search today.

Peter Schiff is the CEO and Chief Global Strategist of Euro Pacific Capital, best-selling author and host of syndicated Peter Schiff Show. 

Subscribe to Euro Pacific's Weekly Digest: Receive all commentaries by Peter Schiff, John Browne, and other Euro Pacific commentators delivered to your inbox every Monday! 

And be sure to order a copy of Peter Schiff's recently released NY Times Best Seller, The Real Crash: America's Coming Bankruptcy - How to Save Yourself and Your Country 
-- Posted Wednesday, 3 October 2012 | Digg This Article | Source: GoldSeek.com- Peter Schiff C.E.O. and Chief Global Strategist


Euro Pacific Capital, Inc.
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Mr. Schiff is one of the few non-biased investment advisors (not committed solely to the short side of the market) to have correctly called the current bear market before it began and to have positioned his clients accordingly. As a result of his accurate forecasts on the U.S. stock market, commodities, gold and the dollar, he is becoming increasingly more renowned. He has been quoted in many of the nation's leading newspapers, including The Wall Street Journal, Barron's, Investor's Business Daily, The Financial Times, The New York Times, The Los Angeles Times, The Washington Post, The Chicago Tribune, The Dallas Morning News, The Miami Herald, The San Francisco Chronicle, The Atlanta Journal-Constitution, The Arizona Republic, The Philadelphia Inquirer, and the Christian Science Monitor, and has appeared on CNBC, CNNfn., and Bloomberg. In addition, his views are frequently quoted locally in the Orange County Register

Mr. Schiff began his investment career as a financial consultant with Shearson Lehman Brothers, after having earned a degree in finance and accounting from U.C. Berkley in 1987. A financial professional for seventeen years he joined Euro Pacific in 1996 and has served as its President since January 2000. An expert on money, economic theory, and international investing, he is a highly recommended broker by many of the nation's financial newsletters and advisory services. 



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Energy & Commodities

Gusher! Why The Imminent Saudi Leadership Crisis & The Islamic Revolution = $300/bbl Oil

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Posted by Marin Katusa via The Energy Report

on Wednesday, 03 October 2012 00:00

There is little that would rock the oil world more than a revolution in Saudi Arabia.

But with a coming leadership crisis, it is becoming all too likely.

Saudi is facing major economic challenges as dramatic increases in social spending and domestic fuel consumption eat through the kingdom's all-important oil revenues.

Saudi Arabia is smack in the middle of the Middle East, an ever-tumultuous region currently rocking and rolling more than usual as the Arab Spring challenges longstanding autocratic assumptions, while war-torn Syria and defiant Iran tip the delicate Sunni-Shia religious balance in the world's most important oil region.

While the House of Saud might present itself as a stable, strong, and cohesive royal family, in truth the king and his successors are growing old and incapacitated in a throne room full of competing contenders. Meanwhile, the only other organized social group in the country—the Islamists—are waiting just outside the door.

Want to See Oil at $300 a Barrel?

To see $300/bbl oil, or to watch the news as Saudi troops attack Tehran, or to see a stranglehold on U.S. oil imports, watch what a failed succession battle in the House of Saud that ends up destroying the whole family and ushering in an Islamist age in Saudi Arabia would do to the price of oil.

It could happen sooner than you think.

A Shaky House of Saud

The king of Saudi Arabia, Abdullah Aziz bin Saud, is almost 90 years old. In Saudi Arabia's royal system, the throne passes not from father to son but from brother to brother. The problem with the system is that none of King Abdullah's brothers are exactly young and full of vigor.

Crown Prince Salman, next in line to the throne, is already 76. He got the Crown Prince nod after two of his elder brothers died. The remaining brothers now average 80 years of age.

A king who ascends the throne in his seventh or eighth decade is unlikely to have the energy or even the time to enact significant reforms. And reforms are needed. I'm not pushing democracy—Saudis don't generally want democracy. What I'm talking about are the endemic problems that are battering the world's biggest oil producer: high unemployment, a corrupt bureaucracy, a crippled economy, a weak education system, and a society full of frustrated youth.

While the country crumbles, the three pillars that have long supported the royal family are also weakening. Massive oil revenues, which have long been used to buy public support, are being squeezed by sharply increased domestic demand. The Wahhabi Islamic establishment that supported the House of Saud is increasingly fractious and is losing credibility. And the royal family itself is struggling to maintain its rock-solid façade after losing two crown princes to old age in just a few years.

The country's foreign relations are little better. The Middle East is in turmoil, and Saudi Arabia's longstanding alliance with the United States is in distress.

Alongside these tangible problems is a multitude of intangible challenges that are revolutionizing the country. The regime used to control the population by controlling access to information, but of course that age is now almost over. The Internet has connected young Saudis with the rest of the world, and that worldview is prompting them to question some of the rules of their society.

Even the religious establishment in Saudi Arabia is seeing its power eroded. Young Saudis are increasingly independent, using the Koran to guide their decisions without following specific decrees from a particular religious leader.

The fact is, Saudi society today bears little resemblance to the passive masses of just a decade ago, and a decade from now the difference will be even bigger.

Trying to lead his country through these modern challenges is a 90-year-old king, backed by a 76-year-old crown prince and their octogenarian brothers.

Not surprisingly, it's not working very well.

New Battles, Old Tactics

When the Arab Spring in Tunisia and Egypt sparked protests in Saudi Arabia, the protesters were not demanding democracy or trying to oust the royal family. No, the young Saudis who filled those streets had more basic demands.

At the top of the list is jobs—60% of Saudi's citizens are under the age of 20, and the unemployment rate for young adults is nearly 40%. These young people want to be given the opportunity to better themselves and their country, but instead they cannot find work and live on government handouts.

Adding fuel to the fire, those handouts have been shrinking. Saudi Arabia's population has skyrocketed in the last half century. In 1972 the country had 6 million inhabitants; by 1992 that number had climbed to 17 million; and today there are 28 million Saudi Arabians. Oil incomes have climbed too, but not nearly apace. As such the government has been struggling to keep the population appeased with fewer dollars per head every year.

The population keeps growing, and each person in the kingdom keeps using more oil. The result: shrinking oil revenues have to go further. It's not a recipe for success, but when you're 89 years old, you go with what has worked in the past.

And that is precisely what happened in the wake of the Arab Spring: King Abdullah drowned the protestors in money—a $130-billion social-spending package that built new housing, increased payrolls, and boosted unemployment payouts. Saudi Arabia's entire annual budget is just $180 billion, so the king almost doubled spending to appease the protestors.

This tactic cannot work forever. Even in Saudi Arabia there is only so much oil money. The Saudi royals already need an oil price of at least $80 a barrel to support all their social programs, and with domestic oil consumption rocketing upward, that baseline price will keep climbing.

But the unrest continues.

The Summer of Saudi Discontent

After King Abdullah offered billions of dollars in social spending, many protestors went home. . .except in the country's oil-rich eastern provinces, where the protests never stopped.

For the last 18 months Saudis in the eastern Qatif region have been demonstrating regularly, demanding the release of all political prisoners, freedom of expression, and an end to ethnic and religious discrimination. When Saudi security forces turned on the demonstrators last November, killing five, the protests took on a distinctly anti-Saud tone.

In June, King Abdullah ordered the country's security forces to go on a state of high alert due to what he called a "turbulent situation" in the eastern region.

The unspoken side to the situation is that the turbulence is distinctly religious.

Most Saudis are Sunni Muslims, and Sunni Islam is the only allowed religion in the country. However, 15% of the country's inhabitants are Shia, and they have faced direct and indirect persecution for decades.

Guess where the Shia live? In those turbulent, oil-rich eastern provinces.

That is one aspect of Saudi discontent. But there are more.

For example, last week Saudi security forces raided al Qaida cells in Jeddah and Riyadh. Evidence recovered during the raids supports the suspicion that a new branch in the Arabian Peninsula is gathering momentum for a wave of attacks. The royal family is at the top of their list of targets. Toppling the House of Saud would be a major victory for al Qaida, simply because of the instability that would ensue.

All told, between external threats, internal divisions, and domestic struggles, the Saudi royal family looks very unstable indeed. So what would happen if the House of Saud crumbled?

Remember, religion is the only social structure in Saudi Arabia. There are no political parties, unions, or social organizations, aside from a few charities run by members of the royal family. Were the House of Saud to fail, the only candidates ready to step up would be the Islamists.

The shift to Islamist rule in Egypt has made the world pretty nervous. Longstanding allegiances are in limbo, and long-term relationships are changing.

Imagine if it happened in Saudi Arabia.

Islamist leadership in Saudi would not be the moderate, democratic version we're seeing in Egypt. The Islamists in Saudi Arabia are Wahhabi Muslims, who practice the strictest and most conservative version of the religion. I can see these imams making several moves.

First, a Saudi Arabia led by Wahhabi Islamists would not stay at peace with the Shia Islamic Republic of Iran. Both branches of Islam believe the other has strayed so far from the path that its followers are infidels. Odds of open war between Saudi Arabia and Iran would shoot sky-high the moment Islamists took power in Saudi Arabia.

Even worse, a Wahhabi Islamist Saudi Arabia might well turn its strongest weapon against the infidels of the West—by turning off the oil taps. It would be the 1973 oil crisis all over again, but in an even more oil-dependent world.

The price of oil shot up 300% in six months during the oil crisis. Today, that would mean an oil price of $300 per barrel.

It would also mean the end of the era of friendly U.S.-Saudi relations. . .and the demise of the petrodollar. That is a story in itself—one of great significance to anyone who owns U.S. dollars. I have discussed previously how a U.S.-Saudi deal to only use dollars to trade oil created a deep pool of support for the U.S.'s currency - and what will happen if the petrodollar dies. The short version is that as the global oil trade moves away from U.S. dollars into yuan, yen, rubles, and pesos, the world would have yet another reason to devalue the dollar.

Expensive oil, open Sunni-Shia war in the Middle East, the loss of one of the world's biggest oil producers as a stalwart ally, and an inevitable increase in religious politics across the Arabian Peninsula—such are the likely outcomes if the House of Saud comes tumbling down.

It is not inevitable. There are 7,000 princes in the Saud royal family, the result of multiple wives and lots of progeny. In that mix there is undoubtedly a prince with the right mix of progressive thought and religious reverence to lead Saudi Arabia through its succession and into the future.

But whenever a throne room is that crowded, it is very easy for a brawl to break out, depriving that perfect prince of his chance and giving the Islamists their opening.

Either way, oil investors with the right picks in their portfolio will prosper, and the Casey Research energy team will be available to guide you along the way.

 
 


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Energy & Commodities

Markets still have big downside risk – be careful!

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Posted by Josef Schachter: Schachter Asset Mgmt.

on Thursday, 27 September 2012 12:16

Hold large cash reserves. Buy late October through mid-December during upcoming tax loss selling season.

Joschachter



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Energy & Commodities

Oil is Not Looking So Hot

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Posted by The Mad Hedge Fund Trader

on Thursday, 27 September 2012 07:47

9-27-12-tmhft-3-OIL2-resize-380x300

I received another one of those scratchy cell phone calls from my friend in the West Texas oil patch. You could almost feel the dust coming through the ether. He said that while Ben Bernanke his committed to buying $40 billion a month of mortgage-backed securities as part of QE3, he has not promised to buy a single barrel of oil. This is bad for oil.

That means Texas Tea has to take the full brunt of collapsing demand caused by economies in free-fall like Europe, China, and Japan. There are no bailouts here. On top of that, Saudi Arabia wants to whip some discipline into its fellow OPEC members.

Saudi Arabia does this by permitting its own production to surge, dropping prices, and inflicting pain on recalcitrant cartel members, especially Iran. Around $80 a barrel is thought to be a price they would be happy with, some $15 a barrel lower than today’s price.

Last week rumors were rife of a “fat finger” trade that drew in high frequency traders and triggered an almost instantaneous $4 plunge in the price of oil. But notice how it has failed to bounce back. This generated chart sell alerts more than you can count.

The break of the 50-day moving average on the charts is thought to be particularly significant, reversing an uptrend that has been in place since June. Notice that the “fat fingers” always seem to hit the “Sell” button and are oblivious to the location of the “Buy” button … maybe they don’t have one.

On top of all this is the never ending threat of a Strategic Petroleum Reserve release by the administration that would cause prices to immediately gap down. It is safe to say that energy is not Obama’s favorite industry. He is essentially sailing “Buy those $100 calls on oil at your peril, because I will render them worthless.” That is what he did with his jawboning campaign in the spring when crude threatened $107. Substantially tougher margin trading requirements for many commodities by the main exchanges quickly followed.

RELATED: Exxon & Rosneft Plan to Drill for Oil in Old Soviet Nuclear Dumping Ground

One factor that no one appears to be watching is the dramatic ramp up in Iraqi oil production. In recent years, we have gone from zero to 3 million barrels a day, and appear to be headed toward 5 million barrels a day by 2015. That is half of Saudi Arabia’s total annual output. Norway and Canada are also increasing production.

Back in the US, conservation is making a dent on the consumption side in a thousand different ways that are impossible to quantify in the aggregate. Every time someone trades in a gas guzzler for a hybrid or electric vehicle they are cutting US consumption by 24 barrels of oil a year. Toyota will sell 2 million hybrids in the US this year, about half in California. That works out to a total oil savings of 48 million barrels a year, 132,000 barrels a day, or 1.3% of our total imports.

Energy savings are going on every day in a myriad of ways, from better building design, to industrial recycling of heat, and conversion of light bulbs from incandescent to fluorescent. It has become a major cost-cutting issue for US corporations. I just checked the specs on my new 80 inch 3D flat screen TV and it uses a quarter of the power of its cathode ray tube predecessor now headed towards the recycling center (notice how all the actors have suddenly aged 10 years). I have always said that this will be the big sleeper on the American energy front.

RELATED: Big Oil Funding U.S. Politics

The final argument is that in the wake of QE3, there is a sudden death of “Risk Off” positions to trade against. Oil is almost one of the only ones out there. So an oil short will partially hedge out downside risk in the substantial “Risk On” positions we have built up in (GLD), (AAPL), and (GOOG).

The extra turbocharger on this trade is that the hedge fund community is still hugely long oil, betting an attack on Iran by Israel that never came. As we move into yearend, the pressure on them to dump their losers will be overwhelming. So I am quite happy to buy the United States Oil Fund (USO) December $32.50-$35 put spread at $1.07 or best.

The (USO) in particular is a great instrument to play from the short side because it has one of the worst tracking errors to the underlying in the entire (ETF) universe. (Only the natural gas ETF (UNG) is worse). Notice how it always goes down faster that it goes up. This is because of the enormous contango in the oil futures market, whereby far month futures trade at gigantic premiums to the front months. The (USO) has to take the hit on the rollovers; hence, its terrible track record.

....view charts and page 2 HERE



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Energy & Commodities

British Columbia's Golden Triangle

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Posted by Lawrence Roulston's Resource Opportunities

on Wednesday, 26 September 2012 11:54

A corner of Canada's western-most province hosts one of the richest mineral belts in the world.
Few investors yet appreciate the enormous value of that region.

goldentriangle



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