EconMatters Global

Oil and Financial Markets: A Bicycle Made For Two

2012-03-09T17:57:00.000-06:00

I must apologize as I feel like I’m jipping Burrito readers again. I usually try to provide an even mix of serious posts with the lighthearted (i.e., a quirky theme or an interesting list). However, this week I have failed in my latest foray into pop culture, and it has left us to take a sudden detour…on a bicycle built for two.

And here’s some more honesty. I have a confession to make: I avidly collect charts. I have this nerdy tendency to snag a chart - be it on a Tuesday afternoon or early on a Saturday morning (as my kiddos watch Megamind for the 57th time). Then I store it like a butterfly in a jam jar, to occasionally revisit from time to time. So although distracted by other themes, I have been able to revert to a few charts from my collection which illustrate how crude oil prices continue to move….in tandem.

This first chart is from just this week, and shows how crude is tracking the stock market, and cyclical equities at that (the performance of cyclical equities is closely tied to the overall economy). This is fascinating because even though there is so much geopolitical tension apparently being priced into crude at the moment, it is still seemingly following the business cycle. And cyclical equities are rallying like a mad thing:

And this is a global phenomenon, as a certain ex-president (no, not a robber from the most excellent movie, Point Break) who just got re-elected is all too aware of. For such an energy-rich country as Russia, a rallying crude price means a rallying stock market, which means a more amenable population:

Next up is a chart from Capital Economics, which is a little dated, but highlights another strong tie to crude – that of its commodity comrade…grains. By no means am I agreeing with their oil forecast (…at all, actually), but the historical trend highlighted between oil and grains since 2007 is strong. But this does mean that if you believe oil is heading lower, you have to believe that grains are heading lower also.

But just as every cloud has a silver lining, just as every rose has its thorn, every rule has its exception. And here it is: the euro. After being in tandem with crude for so much of the global recovery in the past few years, the European debt crisis has weighed heavy on the euro like concrete boots. So after being a proxy of risk appetite for so long, the loss of confidence in the euro as both a region and a currency has detached it from crude like a motorbike from a sidecar.

Brent crude (black line) vs. EUR/USD (blue line), 2010 - present

I sometimes wonder if I pay too much attention to general financial markets and need to focus solely on energy commodities instead. But given my background, it’s difficult to separate or be discerning between the two. The benefit of looking at the various ingredients in the burrito of financial life is that the movement in one can help solidify or undermine an opinion of another. It makes you question everything, which is excellent, and ultimately question yourself. Which is what it’s all about. But enough from me. I leave you with one last insight; I thoroughly recommend Megamind. It’s almost as enjoyable as a good chart. Almost.

About The Author - Energy Burrito is founded by Matt Smith, Commodity Analyst at Summit Energy. (EconMatters author archive here.)

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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Gauging China's Economic Future

2012-03-09T08:00:00.000-06:00

By Ian Fraser via QFinance

China is so vast, its leaders so inscrutable, it’s future so tied to imponderables -- including who will succeed premier Wen Jiabao, whether the country can realistically remain a one-party-state and the true depth of state-sponsored graft -- that its mid-term economic prospects are hard to gauge. The country faces headwinds, including rising labor costs, the risk of higher inflation, slower demand for its exports, faltering capital flows and high local government debts.

But there are also many positives. Its GDP grew by 9.2% last year. And according to the IMF, China's government debt is only 26.9% of GDP, well below the 60% that is seen as the international threshold for stable state finances, and 2011 fiscal revenue was a record-breaking 10.37 trillion Yuan (£1 trillion) which led to a miniscule 1.1% of GDP deficit.

Even allowing for bad debts of some $1.7 trillion owed by local governments, the $200bn or so of non-performing loans which big state-backed banks are said to be nursing, and any other miscellaneous restructuring costs, even the gloomiest forecasts struggle to get the Middle Kingdom's gross debt up above 60%.

The smorgasbord of available evidence has lead to some wild differences of opinion about China's near-term prospects. Some hedge fund investors, including Jim Chanos of Kynikos Associates, believe the country is heading to hell in a handcart – in fact Chanos is betting on a major financial catastrophe in the People’s Republic of China, based on a belief that the banking sector is “built on quicksand”.

On February 27, the World Bank added to the negativity, publishing a report titled “China 2030: Building a Modern, Harmonious, and Creative High-Income Society”. Co-written by the Development Research Centre of China’s State Council to make it more palatable to a local audience, the report warned that unless the country radically overhauls its economic model and rebalances towards greater domestic demand, China will face an economic crisis in the next couple of decades, with growth slowing to 5% to 6% in 2030.

Robert Zoellick, president of the World Bank said that, after averaging 10% annual growth for the past 30 years, China's export and investment-driven economic model is about to hit the buffers, and advised China's leadership to entrench free-market thinking into their policy-making and dismember many of the country's state-owned enterprises.

Zoellick also said Beijing has become so obsessed with growing the economy that other important issues including “environmental and social disparity issues” have been side-lined. He said the one-child policy has stored up a demographic time bomb.

Zoellick’s lecture followed a report from the IMF last November which raised a number of red flags about the robustness of China’s financial system, suggesting the country must commercialize its banking system and gradually remove interest rate controls.

Given the state in which so-called 'free market' economics has left many western economies, these sorts of lectures from visiting dignitaries are sometimes seen as vaguely humorous in China.

Such tensions came to surface when Zoellick’s February 28 press conference was interrupted by a protester named Du Jianguo. Du occupied the podium and shouted slogans and distributed leaflets claiming that the World Bank’s prescription would be “poison” for the Chinese economy. According to a Voice of America report, Du said:

“The World Bank calls for China to privatize our state-owned enterprises, they want to partition these big companies. But actually, they are helping the Western companies to get rid of their Chinese competitors. There is no reason for China to privatize its state-owned enterprises; they’re doing very well so far.”
Before he was escorted from the room, Du said that, contrary to Zoellick's claims, the World Bank's policies would exacerbate China's already growing wealth gap.

There are plenty of investors who remain very bullish about China, reformed or not. The latest to pour scorn on the Sino-bears is the Conservative MP John Redwood. In a recent blog published, Redwood, who is chairman of Evercore's Asia investment committee who worked in the City of London before becoming a conservative MP in 1987, said:

“Last year the Chinese economy grew by 9%. Industrial profits were up by 25%. 12.2 million new jobs were created in the cities, where unemployment averages 4.1%. The economy is running a substantial trade surplus, official government borrowings are light and the overall tax rate is just 22%. The budget deficit is under 2% of GDP. 38% of the workforce is still employed in agriculture, producing just 10% of total economic output. This leaves plenty of scope for more people to come off the land into more productive employment.
Baillie Gifford's emerging market supreme James Anderson, author of a QFINANCE viewpoint, said:

"China is formidably well-placed and has handled its transformation well (...) Whereas the 'China price' used to [describe] the cheapest goods at the lowest possible price, the Chinese population is now able to buy the most expensive luxury products in the world at prices no one else can afford (...) in technological terms, China is joining the West coast of the US as a driver of rapid and disruptive change."
Redwood and Anderson make their points very well and convincingly, and China's near term prospects are certainly ameliorated by the possibility that the People's Bank of China will ease interest rates and that the country will relax capital controls to accelerate the global use of the Yuan (as highlighted in a post by Anthony Harrington). However there's also much that can go wrong so for now I'm still inclined to side with the bears.

Courtesy Ian Fraser for QFINANCE (EconMatters author archive here)

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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Breeding The Culture of Greed: Big Banking Bonuses In The UK

2012-03-08T14:00:00.002-06:00

By David Smith of Economy Watch

Despite losing billions in 2011, bailed-out British banks, including Lloyds and RBS, continued to pay out millions in bonuses to its top executives. The government has also thus far refused to step in, while public pressure mounts on the executives and politicians. Why are big bonuses still a prevalent part of banking culture and is there really nothing we can do?

When Royal Bank of Scotland (RBS) boss Stephen Hester waived his £963,000 bonus in January this year, he wrote a candid letter to his staff revealing the motive behind his decision. Hester confessed to workers at the largely state-owned bank that press coverage “had been discomforting to say the least."

Hester’s surprising admission proved that even bankers are not immune to the psychological pressures of a guilty conscience. The newspaper articles had expressed outrage that a bank, which was bailed out with £45 billion of public money, had paid £785 million in bonuses for 2011 despite losses of £2 billion.

Although Hester waived his bonus under duress, other senior executives at RBS received their million-pound bonuses and the company’s 17,000 investment bankers amassed a total of £390 million.

Meanwhile, Prime Minister David Cameron refused to impose legislative solutions to restrict bonuses at the state-owned bank. He simply urged RBS politely to show “restraint” in its awards for senior executives.

“We are not going to micro-manage bonuses... The banks are doing a good job and making good progress,” was the official Downing Street line.
Professor Stefano Harney, an expert on business ethics at Queen Mary University London, though is one prominent voice who believes the Government should step in to limit executive compensation.

“We need permanent change to proactively tackle the issue,” he said. “Laws must be in place well before we are in the absurd position of a publicly owned bank’s management having the Government over a barrel.”
The UK Government has done nothing yet, but claims it intends to legislate to give shareholders a href="http://www.qfinance.com/corporate-governance-best-practice/executive-rewards-ensuring-that-financial-rewards-match-performance?full">binding vote on executive pay. At present, shareholders have a non-binding, or advisory, vote on pay. Measures under consideration include shareholders getting a veto both on pay packages and on deals given to executives who leave jobs in which they have failed. An announcement could be made in the Queen’s Speech in spring.

Opinions however differ about the effect the proposals would have on the pay structures and bonus packages of Britain’s top executives, which have risen by an average of 4,000 percent in the last 30 years according to the High Pay Commission.

Under the present rules, Professor Cary Cooper, a distinguished Professor at Lancaster University Management School, says there was nothing the Government could do to prevent RBS handing out massive bonuses despite its losses.

The Government missed the opportunity when they bailed out RBS and Lloyd’s in 2008 to put clauses in the contracts saying there could be no bonuses for anyone until the public-owned banks were back in profit.

“The rule ought to be that until the entire bank is profitable, no individual should get a bonus. Some of them were working at RBS when it went bust, so they can partly be held responsible. In hindsight, the Government was in a rush and panicking a bit.”
Cooper dismissed the banks’ argument that high bonuses are necessary to attract and retain the best talent as a myth. It’s the classic blackmail argument used by bankers. But the answer is – ‘well, you are not making profit, so we can’t afford it until you work more efficiently.’

“If they want to go for bigger bucks elsewhere, let them go. It’s a young man’s game and there’s new talent coming through in the banking world all the time. If they are totally money-driven, that’s the kind of greedy attitude that got us into this mess in the first place. The bottom line is they will sell any product no matter how risky to get money.”
The story at Lloyds, the other bailed-out British bank, is more complex, and demonstrates the difficulties of imposing controls on the banks.

Unlike RBS, Lloyds fell foul of new regulations, introduced by the Financial Services Authority after the 2008 crisis, which said that bankers should have to give back part of their bonuses if their bank performed worse than expected. Lloyds, which owns Halifax and Bank Of Scotland, made a £3.2 billion loss after mis-selling PPI credit insurance and was forced to make a retrospective reduction in the size of its 2010 bonus packages.

A total of £2 million was cut from executive compensation. Former chief executive Eric Daniels had to surrender £570,000 of his £1.45 million bonus and other directors and executives gave up between £100,000 and £250,000 each. RBS also mis-sold PPI insurance, but it was not required to claw back bonuses from executives under the new rules because it stopped selling its main PPI product at the end of 2008.

The bonus reductions still left Lloyds’ bankers with huge awards, which totalled £375 million for 2011 and critics argued that £2 million was a paltry sum compared to Lloyds’ huge losses of £3.5 billion for 2011. Also, because the clawbacks are at an executive level, their influence over the majority of bankers will be limited.

Neither is the FSA judgement on the Lloyds’ executives particularly damning to the reputations of the executives. The FSA said withdrawing bonuses did not amount to an admission of guilt over PPI mis-selling, so the bankers would not be disqualified from jobs in banking. Lloyds admitted only that its executives were “accountable”, but said they were not “culpable.”

The City of Greed

So far, we have discussed whether bonuses can be reduced, or clawed back. But many writers and academics have gone further still and questioned the dogmatic belief that bonuses are a sound means of motivating good behavior.
A powerful critique of “The City’s” bonus culture has come from Geraint Anderson, a former stockbroker and hedge fund manager who writes the cult ‘insider’ column Cityboy and unmasked himself as a whistleblower in his 2009 book Cityboy: Beer And Loathing In The Square Mile.

Anderson said:

“Bonuses were a major cause of the short-term reckless gambling that led to the financial crisis. The creation of trillion of dollars of toxic loans primed to explode was not just about bankers being reckless, or stupid. The people who invented them and traded them knew the whole house of cards would fall down at some point. But they also knew they could rake in huge bonuses, which would not be taken back if it was later shown that these supposedly profitable new products were, in reality, disasters waiting to happen.”

From the day Anderson joined “The City” in 1996, it was drummed into him that he had to make as much money as he could, and fast.

“From the word go, I was constantly told by my seniors that the party would end at some point and the building would be a car park in 10 years, so make hay while the sun shines. This pressure causes the mentality of doing whatever you have to do to make money in the short-term. If that means semi-criminal acts, or recklessness, or creating financial products that are doomed to explode in a decade, then that’s fine.”
“That’s the reason we’ve seen insider trading, the spreading of false rumours, and the manipulation of markets. You do whatever is necessary now because most people know the City is a young man’s game.”

Anderson said the financial crisis was a rational, logical outcome of the bonus culture.

“The City is full of very clever, ruthless, greedy people who manipulated the bonus system to line their own pockets. They do not think - funnily enough – about serving society’s needs, but their selfish requirements,” he said.

According to Anderson, he was always an outsider to “The City” culture. Despite his private school and Oxbridge education – which is typical of the white middle-class and upper middle-class “Cityboys” – his father was the Labour peer Lord Anderson of Swansea, and his devoutly religious mother Dorothy was the daughter of Bolivian missionaries.

Anderson fell into a job in the City when his brother Hugh, a banker, organised an interview for him. But he soon got sucked into the avaricious mindset.

“I started as a nice, left-wing hippy type but I became a City boy. If you are always dealing with money and trading money and talking about money it becomes the be all and end all of your existence and the bonus becomes a gauge for how wonderful a human being you are,” he said.
“You believe that the efficient free market correctly evaluates your worth, so if your bonus is half that of Norbert on the next desk it means he is twice as valuable as you are. I became like that and my parents used to tell me at the dinner table to stop talking about money.”

Individuals, like Anderson, who would behave morally and responsibly in other walks of life, end up playing the game and manipulating the system to earn larger bonuses.

“For example, you can increase your bonus if you are good at office politics, which is a huge preoccupation for most City boys. This means stabbing people in the back to steal their thunder. The City is worse than anywhere else in the world for that, apart from possibly politics. If you stab the right person and steal the right thunder you can add £50,000 to your bonus.”
“Bankers will also fabricate profits to boost their bonus. They use creative accounting. For example, they could argue that a CDO will produce lots of profit in the future, but it hasn’t crystallized yet. They look forward and discount back future profits. Then they say ‘look, I’ve made you X amount’. Later, you find out that instead of earning the bank £10 million, they have lost £10 million, but they already have their bonus money. It’s semi-criminal mathematical trickery.”

Do Bigger Bonuses Really Boost Performance?

Academic research also lends support to Anderson’s ‘insider’ debunking of the confident assertion that large bonuses improve performance.
In one famous experiment, Professor Dan Ariely of Duke University, North Carolina, asked Indian villagers to do creativity, memory and motor skill tests. Different groups were offered four, 40 or 400 rupees for achieving high scores. Instead of improving performance, the higher rewards had an adverse effect. Those offered 400 rupees - the equivalent of five months’ local average spending - earned just 20 per cent of the maximum possible compared with 36 per cent for those offered lower sums.

Professor Ariely then conducted a second experiment on 24 US students who received cash rewards if they performed well in maths and repetitive key-pressing tasks. Some were offered from US$15 to US$30, others from US$150 to US$300. For the easy key-pressing tasks, the higher rewards led to a better performance, but in the much harder maths tasks, they had the opposite effect.

Professor Ariely concluded that bigger bonuses could boost performance for simple manual labour, but not for more mentally challenging work, such as working on complicated financial products in the City, or on Wall Street.

The banking industry in America also conducted similar experiments, which confirm Professor Ariely’s findings. In 2005, the Federal Reserve Bank of Boston published research called Large Stakes and Big Mistakes. Behavioural economists offered students bonuses for good performance in tapping a keyboard as fast as they could, and then doing more complex maths.

Again, the bonuses worked well for the simple task, but worsened performance on the harder task.

“Tasks that involve only effort are likely to benefit from increased incentives,” wrote the economists. “While for tasks that include a cognitive component, there seems to be a level of incentive beyond which further increases can have detrimental effects on performance."
The argument that financial incentives are needed to incentivise top bankers not to seek employment elsewhere, also turns out to be questionable.

Harvard academic Boris Groysberg studied 366 Wall Street equity analysts who changed employers between 1988 and 1996 for his book Chasing Stars. All 366 had been rated number one at their old bank, but once they moved on their performance levels plummeted for at least five years.

Groysberg concluded that the focus on individual bankers’ expertise was out of proportion to their skill levels. Success, it turns out, was more dependent on the efficiency of a network of employees, rather than that of a single individual.

Courtesy David Smith at Economy Watch, (EconMatters author archive here)

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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15 Massive Threats To The U.S. Economy

2012-03-08T12:00:00.002-06:00

By Michael Snyder

We live in a world that is becoming increasingly unstable, and the potential for an event that could cause "sudden change" to the U.S. economy is greater than ever. There are dozens of potentially massive threats that could easily push the U.S. economy over the edge during the next 12 months. A war in the Middle East, a financial collapse in Europe, a major derivatives crisis or a horrific natural disaster could all change our economic situation very rapidly.

Most of the time I write about the long-term economic trends that are slowly but surely ripping the U.S. economy to pieces, but the truth is that just a single really bad "black swan event" over the next 12 months could accelerate our economic problems dramatically. If oil was cut off from the Middle East or a really bad natural disaster suddenly destroyed a major U.S. city, the U.S. economy would be thrown into a state of chaos. Considering how bad the U.S. economy is currently performing, it would be easy to see how a major "shock to the system" could push us into the "next Great Depression" very easily. Let us hope that none of these things actually happen over the next 12 months, but let us also understand that we live in a world that has become extremely chaotic and extremely unstable.

In the list below, you will find some "sudden change" events that are somewhat likely and some that are quite unlikely. I have tried to include a broad range of potential "black swan events", but there are certainly dozens more massive threats that could potentially be listed.

The following are 15 potentially massive threats to the U.S. economy over the next 12 months....

#1 War With Syria - U.S. Senator John McCain is now publicly calling for U.S. airstrikes against Syria. A military conflict with Syria becomes more likely with each passing day.

#2 War With Iran - A war in the Middle East involving Iran could literally erupt at any time. The following is from a Reuters news report that was issued on Monday....

President Barack Obama appealed to Benjamin Netanyahu on Monday to give sanctions time to curb Iran's nuclear ambitions, but the Israeli prime minister offered no sign of backing away from possible military action, saying his country must be the "master of its fate."

#3 A Disorderly Greek Debt Default - Many reporters in Europe seem to think that this is becoming increasingly likely. So what would a disorderly Greek debt default mean for the global financial system? A leaked report that was authored by the Institute of International Finance says that a disorderly Greek debt default would have some very serious consequences. You can read the full text of that leaked report right here.

#4 An Economic Collapse In Spain - Spain has one of the largest economies in Europe and it is rapidly becoming a basket case. As I have written about previously, the unemployment rate in Spain has hit 19.9 percent, and the unemployment rate for workers under the age of 25 is up to 49.9 percent. Unfortunately, the situation in Spain continues to deteriorate. The following is from a recent article by Marc Chandler....

However, the devolution in Spain is particularly troubling. The new fiscal compact had just been signed last week, which includes somewhat more rigorous fiscal rule and enforcement, when Spain's PM Rajoy revealed that this year's deficit would come in around 5.8 percent of GDP rather the 4.4 percent target. This of course follows last year's 8.5 percent overshoot of the 6 percent target.
The problem that for Spain is that the 4.4 percent target was based on forecasts for more than 2 percent growth this year. However, in late February, the EU cuts its forecast to a 1 percent contraction. This still seems optimistic. The IMF forecasts a 1.7 percent contraction, which the Spanish government now accepts.

#5 The Price Of Gasoline - The average price of a gallon of gasoline in the United States has risen for 27 days in a row and is now up to $3.77. Virtually all forms of economic activity are affected by the price of gasoline, and if the price of gas keeps going up it is eventually going to have dramatic consequences for the U.S. economy.

#6 The Student Loan Debt Bubble - Just like we saw with the housing bubble, the student loan debt bubble just continues to grow and grow and grow. At some point the nearly 1 trillion dollar bubble is going to burst. What effect will it have on our financial system when that finally happens?

#7 State And Local Government Debt Crisis - It is being reported that California is running out of cash again and there are cities all over the country that are on the verge of bankruptcy. Could we see a significant municipal bond crisis in the next 12 months?

#8 The Collapse Of A Major U.S. Bank - A number of top U.S. banks are looking increasingly shaky. In arecent article, David Trainer explained why he has such serious concerns about Bank of America right now....

In my opinion, there are four actions taken by financial services that signal the company is headed to serious trouble.
1. Management shake-up and major layoffs - lots of layoffs over the past year
2. Exploiting accounting rules to boost earnings - SFAS 159
3. Drawing down reserves to boost earnings: to the tune of $13.3 billion in 2011 and 2012
4. Bilking customers with new fees: tried it before and trying it again
Bank of America has taken all four steps.

#9 A Derivatives Crisis - The International Swaps and Derivatives Association recently ruled that the Greek debt deal will not trigger payouts on credit default swaps. This is seriously shaking confidence in the global market for derivatives. But the global financial system simply cannot afford a major derivatives crisis.

Estimates of the notional value of the worldwide derivatives market range from $600 trillion all the way up to $1.5 quadrillion. The notional value of all derivatives held by Bank of America is approximately $75 trillion. JPMorgan Chase is holding derivatives with a notional value of approximately $79 trillion.

When the derivatives bubble finally bursts it is going to be a financial horror show unlike anything we have ever seen.

#10 The Fall Of The Japanese Economy - The Japanese economy shrank at a 2.3 percent rate during the fourth quarter of 2011. Japan has a debt to GDP ratio of over 200 percent and a major debt crisis involving Japan could erupt at any time.

#11 A "Solar Megastorm" - Scientists tell us that there is a "1 in 8 chance" that a "solar megastorm" will hit the earth by 2014. A recent Daily Mail article detailed what some of the consequences of such an event would be....

'We live in a cyber cocoon enveloping the Earth. Imagine what the consequences might be,' Daniel Baker, of the University of Colorado's Laboratory for Atmospheric and Space Physics told National Geographic when asked about a potential 'megastorm'.
'Every time you purchase a gallon of gas with your credit card, that's a satellite transaction.
'Imagine large cities without power for a week, a month, or a year. The losses could be $1 to $2 trillion, and the effects could be felt for years.

#12 A Major West Coast Earthquake Or Volcanic Eruption - On Monday, there was a 4.0 earthquake in San Francisco and a 6.1 earthquake in Argentina. Is the "Ring of Fire" waking up again?

#13 Tornado Damage To Major U.S. Cities - Last year, the U.S. experienced one of the worst tornado seasons of all time. This year, we have already seen the worst tornado outbreak ever recorded in the United States in the month of March. A couple of towns in Indiana were completely wiped out by that outbreak. So what should we expect when we get to the heart of tornado season this year?

#14 Severe Drought In The United States - Last summer was one of the driest summers on record in the United States, and in many areas there is simply not enough water available for farmers this year. Some are even projecting that we could see "dust bowl conditions" return to some areas of the country eventually.

#15 An Asteroid Strike In 2013 - Although scientists tell us that the probability is extremely low, the truth is that there is a slight chance that a sizeable asteroid could hit the earth in February 2013. The asteroid is estimated to be between 60 and 100 meters wide, and it is projected to pass by our planet "at a distance of under 27,000 km". If it did hit us (and scientists say that the odds of that happening are very low) it would potentially be as serious an event as the Tunguska Event in Siberia in 1908. Mac Slavo of shtfplan.com recently described how awesome the Tunguska Event really was....

On June 30, 1908 an incoming meteor exploded approximately 5 miles above Siberia. The force of the air burst explosion, estimated at between 15 and 30 megatons, or about 1000 times bigger than the atomic bomb that destroyed Hiroshima, was so powerful that it annihilated everything in an 830 square mile area, and reports suggest that that explosion was heard up to 1000 miles away. Because of the remoteness of the impact zone, the Tunguska Event over Siberia had very little effect on the human population in the region, but the destruction of some 80 million trees in the area shows just how powerful a blast was created.

Of course there are so many other "sudden change" events that could potentially happen - a terror event in a major U.S. city, a deadly pandemic, an EMP attack, cyberterrorism or a major political scandal could all possibly cause a stock market crash and an economic collapse in the United States.

In the world that we are living in today, you just never know what is going to happen.

So what are all of you concerned about over the next 12 months?

Do you see the potential for some "black swan events" to happen?

Please feel free to post a comment with your thoughts below....

About The Author - Michael Snyder is the founder and editor of The Economic Collapse

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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Apple's Global Resource Chain

2012-03-08T10:00:00.001-06:00

By Frank Holmes

After Apple reached $500 billion in market capitalization, it was inducted into a very elite club of businesses that have reached this size. Only Cisco, ExxonMobil, General Electric, Intel and Microsoft have made it to the $500 billion mark, says CNNMoney.

Apple’s rise in market cap has been driven by spectacular stock performance. Since October, the tech company’s stock has increased nearly 40 percent, making it the top driver of the S&P 500 rally. This increase caught the attention of many analysts, including Thomas Lee from J.P.Morgan, who declared that the moonshot rise of Apple’s stock has made the company a “sector unto itself.” At a market cap of just under $500 billion, Apple represents 3.7 percent of the S&P 500 Index. Lee says the “sheer magnitude” of the company’s weighting means that…

Apple is the largest cyclical stock in the S&P 500
Among 65 industries, Apple would be the 6th largest industry
Among 10 sectors, Apple would be the 8th largest sector
Apple’s size makes it larger than the Materials, Utilities and Telecom sectors

While it’s a significant driver of the S&P 500’s performance, the business doesn’t operate in a vacuum. Rather, Apple is a chip off the ol’ building blocks of global resources, namely, utilities, materials and energy companies.

In the U.S. alone, Apple relies on wireless networks AT&T, Sprint and Verizon to distribute millions of iPhones to their customers. After the exclusivity agreement between AT&T and Apple ended, Verizon’s market share exploded. Last fall, Sprint boldly agreed to purchase 30 million Apple phones over the next four years, which provides an indication of how optimistic the company is about its iPhone sales.

In China, China Unicom was formerly the country’s only official iPhone carrier, but an additional player has just entered the field. The third-largest telecommunications company in the country, China Telecom, just launched the iPhone, and by all reports, “enthusiasm is high and competition appears good for the market,” says Forbes.

The Wall Street Journal surmised this morning that the new iPad may boost Verizon if Apple’s latest product contains a wireless broadband technology that depends on a monthly subscription plan. The newspaper writes that in 2011, “70 percent of the tablets that were purchased around the world featured Wi-Fi-only connectivity.” This iPad may encourage consumers and businesses to fork over a monthly payment in exchange for a speedy wireless connection.

Beyond communications and wireless businesses, materials companies worldwide benefit from supplying the glass, batteries, wiring and metals for Apple’s products. The New York Times points out that 700,000 people outside the U.S. work for Apple’s contractors, engineering, building and assembling its products. Semiconductors in the iPhone 4 and 4S are manufactured in Austin, Texas; the iPhone’s glass is made in a Corning factory in Kentucky.

In addition, energy companies benefit from keeping millions of iPhones, iPads and iPods charged.

At its live event, Apple said that there are 550,000 mobile apps available now, with 25 billion downloads in over four years. Apps provide opportunity for hundreds of thousands of companies across all sectors. Our iPad and iPhone apps give our investors an interactive way to access and read this blog, our Investor Alert and slideshows.

With rising wealth among emerging markets, we expect millions of new customers will be lining up to purchase their first Apple products over the coming years, while consumers in the developed world seek to upgrade their iPhones, iPads and iPods. We believe this demand will fuel not only Apple, but also its building blocks.

About The Author - Frank Holmes is CEO, Chief Investment Officer of U.S. Global Investors, an investment management firm specializing in commodities and emerging markets based in San Antonio, Texas. Frank is also the co-author of The Goldwatcher. (EconMatters author archive here.)

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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US Drags Down the Global Manufacturing in February

2012-03-08T08:00:00.000-06:00

By Prieur du Plessis

After rebounding from contraction in November last year the global manufacturing sector finds itself on the brink of stagnation again. The GDP-weighted manufacturing PMI that I calculate for the major economies fell to 50.8 in February from 51.5 in January, but is still higher than the 50.3 I recorded in December last year.

The U.S. ISM Manufacturing PMI’s fall to 52.4 in February from 54.1 in January contributed 0.6 points to the fall in the GDP-weighted PMI. Excluding the U.S., growth in the manufacturing sector in the rest of the world remained basically unchanged.

Although still indicating contraction at 49.0 the Markit Eurozone Manufacturing PMI shows that the manufacturing sector in the region is stabilizing.

Growth in Greater China is accelerating, with my seasonally adjusted CFLP Manufacturing PMI up to 51.9 from 51.0 in January, while the manufacturing sector in Taiwan is at long last growing again. The growth outlook in the other BRICS countries has turned for the better, with South Africa’s PMI surging to 57.9 from 43.2 in January while Brazil’s PMI rose to 51.4 from 50.6.

	Manufacturing PMI			Direction	Rate of Change
Country	Feb-12	Jan-12	Dec-11
U.S.*****	*52.4*	*54.1*	*53.1*	Growing	Slower
Eurozone*	*49.0*	*48.8*	*46.9*	Contracting	Slower
Germany*	50.2	51.0	48.4	Stagnating	From growing
France*	50.0	48.5	48.9	Stagnating	From contracting
Greece*	37.7	41.0	42.0	Contracting	Faster
Italy*	47.8	46.8	44.3	Contracting	Slower
Spain*	45.0	45.1	43.7	Contracting	Faster
Ireland*	49.7	48.3	48.6	Contracting	Slower
*U.K.**	*51.2*	*52.0*	*49.7*	Growing	Slower
*Japan**	*50.5*	*50.7*	*50.2*	Growing	Slower
*Australia**	*51.3*	51.6	50.2	Growing	Slower
*Emerging Economies*
Brazil*	51.4	50.6	49.1	Growing	Faster
China**	51.0	50.5	50.3	Growing	Faster
China SA****	51.9	51.0	50.5	Growing	Faster
Czech*	50.5	48.4	49.2	Growing	From contracting
Poland*	50.0	52.2	48.8	Stagnating	From growing
Turkey*	49.6	51.7	52.0	Contracting	From growing
India*	56.6	57.5	54.2	Robust	Slower
Russia*	50.7	50.8	51.6	Growing	Slower
Taiwan*	52.7	48.9	47.1	Growing	From contracting
RSA***	57.9	53.2	49.4	Robust	Faster
Global****	*50.8*	*51.5*	*50.3*	Growing	Slower

Sources: Markit*; Li & Fung**; Kagiso***; Plexus Hodings****; ISM*****.

Sources: Markit*; Li & Fung**; Kagiso***; Plexus Holdings****; ISM*****.

About The Author - Prieur du Plessis is chairman and founder of South African-based Plexus Asset Management, and he writes a blog at Investment Postcards from Cape Town. (EconMatters author archive here.)

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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Eco ways to save money

2012-03-07T20:44:00.003-06:00

By Lucy Bower

Saving the planet doesn't have to cost the earth. Often green products are long-term investments anyway - like energy-saving light bulbs, or solar panelling, which could pay for itself over the course of a few years.

Heating

Try 'zonal heating'. It involves heating only the rooms in your house that you're using at the time, so you should turn the thermostat down in rooms that you're not using. You could do the same thing with your air-conditioning on hot days. More on this here: http://www.thinkmoney.com/money-guides/guides/money-saving-tips.asp

Drive more economically

The Drive 55 campaign is teaching drivers how to drive more efficiently by staying under 55mph, as cars are generally less fuel-efficient when you drive over 55mph. According to the Guardian, you could save as much as 20% of your fuel costs by driving more fuel efficiently this way.

Compost

The green-fingered among you probably make your own compost already - but if you don't you should because it's practically free. All you need is a container, organic waste and some patience. You can make your own compost from shredded leaves, and other organic waste, like vegetable peelings and tea bags. Compost is Nature's way of recycling organic trash, it doesn't cost a dime and it will make your flowers bloom.

Second-hand

Good-quality furniture should never be thrown away, so if you have a piece of furniture that you don't want anymore, you could reupholster it or repaint it, or if not, sell it.

You could sell second-hand clothes or old clothes too, or anything you don't need anymore. And if you want to bring your entertainment costs down you can buy second-hand books, music and films on sites like eBay and Amazon.

Cloth nappies

The Women's Environmental Network says that parents can save nearly £1,000 over the time period (typically 2.5 years) that children are in nappies, by using cloth nappies instead of disposable ones. There is some debate about how environmentally friendly cloth nappies are because you need to wash and dry them. On the other hand, disposable nappies are made using petro-chemicals which can take a long time to biodegrade.

Tumble dryers

I am certainly guilty of using tumble dryers in the winter, although I never realised the amount of damage they do to the environment. Hanging clothes out to dry is always better for the planet than using a tumble dryer and you'll save money on your electricity bill too. Now that winter is (just about) behind us, it should be a more realistic option as well! Find out more about tumble dryer energy consumption here: http://www.dothegreenthing.com/wiki/display/WIKI/Don't+Use+a+Tumble+Dryer

Small changes add up

If you want to save money and be eco friendly at the same time, just a few small changes can make a big difference overall. Not everyone wants to make a huge investment in something like solar panelling, but plenty of us would be happy turning the heating or air conditioning down a bit instead.

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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The U.S. Dollar & Oil Hold Clues about the Future

2012-03-07T12:00:00.003-06:00

By JW Jones

The past few months have been a difficult environment for anyone that was bearish. The next few months may prove to be difficult for everyone regardless of directional bias.

We live in a world where headlines can move the market in split seconds as high-frequency trading robots cause flash rally’s and flash crashes regularly.

As an example, the price action in the Market Vectors Short Muni Index (SMB) on February 28^thdemonstrates the impact that these high frequency traders have on illiquid underlying assets.

We certainly hope there were not any absent minded retail investors that got caught using market orders during the flash rally only to recognize losses as great as 5% or more in a matter of minutes.

The following chart illustrates a flash rally and the monster 40% plus rally witnessed in less than 1 minute. Can someone say fat-finger mistake?

Market Vectors Short Muni Index 1-Minute Chart

In addition to high-frequency trading, we have to constantly monitor the headlines coming out of Europe as one event or official statement has the potential to cause the Euro to rally or selloff almost instantly whether the information is fact or fiction.

We have traded small for the most part during the beginning of 2012 as market conditions have been volatile even if the volatility index (VIX) has not necessarily supported that view.

One after another, perma-bears have capitulated to the bullish camp and now we have pundits calling for the Dow Jones Industrial Average to move over 15,000 by the end of the year.

We both use strategies which in many cases would be considered contrarian by nature. Admittedly we will not get every move in the market correct, but what we will do is layout key areas that price action should migrate to in the form of key price levels across short, intermediate, and long term time frames.

Our objective is to provide readers and our members with actionable information which can be viewed objectively by both bulls and bears alike. With that said, the following viewpoint we have of the marketplace today runs contrary to the collective group of market pundits.

While most market pundits expect higher prices and stronger economic data, there is reason to believe that recent developments could be indicating that volatility may lurk ahead. Volatility could rise up and push equity valuations lower in the near term.

The daily chart of the Ipath S&P 500 VIX Short-Term Futures ETF (VXX) shown below illustrates that the VXX has seen strong volume in the past few weeks. Additionally the VXX appears to be trying to form a bottom.

With volatility at these levels, put protection is cheap and it would appear based on volume that the smart money is getting long volatility. Long VXX trades are designed to either act as a portfolio hedge or as a potential profit mechanism should a correction play out.

Ipath S&P 500 VIX Short-Term Futures (VXX) Daily Chart

By now most readers are aware of the rally that has been taking place in oil futures for the past few weeks. Nancy Pelosi came out with a statement blaming those evil speculators again while Republican Presidential hopefuls used higher oil prices as another key political topic against the current administration.

Just when the noise was starting to rise to a roar, the marketplace was quieted by a rally in the U.S. Dollar on February 29^th. The daily chart of the Dollar Index futures is shown below.

Dollar Index Futures Daily Chart

Do readers find it rather odd that just about the time when oil was on the lips of every media personality in the United States that the Federal Reserve issues a reverse-repo to pull in liquidity? Do you find it at all coincidental or could it be that Mr. Bernanke was told to slow down the rally in oil prices?

After the reverse-repo was performed, the Dollar soared higher and was showing continuation to the upside on Friday afternoon during intraday trade. The Dollar is potentially forming a bottom presently and the fact that the Federal Reserve is aiding in that formation presents additional risk for downside in the S&P 500 Index and precious metals in the near term.

For the past several weeks the U.S. Dollar Index has pulled back and the S&P 500 definitely took notice. However, the Dollar is on the verge of carving out a weekly swing low which could have legs to much higher prices.

While many pundits routinely mock the Dollar and trash it, in the event of a major currency or credit event in Europe the Dollar will be one of the key safe havens that large sums of wealth will migrate too.

If the Dollar Index Futures can push through the downtrend line illustrated on the chart above with strong supporting volume a much larger move higher will likely play out. Should that scenario play out, the S&P 500 Index will likely begin to rollover.

It should be noted that the S&P 500 has struggled on multiple occasions to break above the key 2011 highs. The S&P 500 Index daily chart below demonstrates the resistance directly above current price action.

S&P 500 Index Daily Chart

We have been bearish on the S&P 500 since price was testing the 1,330 price level. After the subsequent breakout we targeted the key 2011 highs as a last stand for the bears. If the Dollar finds a bottom and rallies sharply higher from current levels a correction in the S&P 500 will likely play out.

The other possibility would be a breakout over current resistance levels which would likely see the S&P 500 move to the 1,400 level if not higher in a matter of a few weeks. We are not leaning in either direction in terms of price action currently, but we are expecting the VIX to move higher in coming weeks and months ahead.

In our most recent collaborative missive, we discussed the fundamental case for gold prices going higher over the long term. Cleary the price action this week (specifically the price action on Wednesday February 29^th) has been bearish and we expect to see prices chop around with a potentially bearish view for the next few months.

Gold Futures Daily Chart

While gold has pulled back sharply, the likely move lower in coming weeks and months ahead will offer a strong buying opportunity for investors that are patient. If the Dollar breaks out to the upside which we anticipate, gold should move down into a significant low.

Should this scenario play out an entry point near the low will likely offer strong upside potential. In fact, it might be the last deep low before a prolonged period of choppy price action until the Dollar tops.

We firmly believe that as long as central banks continue to print money with wreckless abandon, the fundamental case for gold remains quite strong in the longer term.

We have received a lot of emails recently asking about our opinions on the future price action in oil. Even though the Dollar may breakout to the upside, oil has a risk premium built into the price already for potential geopolitical conflict. However, military action in the Middle East could easily push prices higher.

Should oil push higher and test the 2011 highs and breakout to the upside, the likely results will be a weakening in the domestic economy as gasoline and diesel prices would surge higher. A surge in oil prices has a direct implication to the domestic U.S. economy as the cost for nearly everything will rise. The daily chart of oil futures is shown below.

Oil Futures Daily Chart

Conclusion for what to expect next:

Ultimately we believe the two most critical assets to monitor at this time are the U.S. Dollar and oil futures. The U.S. domestic economy cannot handle significantly higher oil prices from the current levels without seeing business growth slow. Furthermore, if the Dollar rallies it could put pressure on the equity markets as well.

While the equity markets and the economy are not the same thing, it is important to note that higher oil prices at a certain point will become equity negative.

The VIX is sending a warning that market participants are too complacent and the Dollar is potentially forming a rounded out bottom. These two conditions paired with geopolitical risk in the Middle East represent additional risks to economic growth.

Furthermore, market participants cannot become complacent regarding the potential risk that Europe still poses. With the various risks listed above in mind, we are keeping position sizes small and are attempting to remain Delta neutral in our portfolios. Risk is beginning to elevate to extremes.

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Courtesy JW Jones via Chris Vermeulen (EconMatters author archive here)

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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Volatility Awaiting Bad News to Strike!

2012-03-07T08:57:00.000-06:00

By Chris Vermeulen

Over the past 5 months we have seen volatility steadily decline as stocks and commodities rise in value. The 65% drop in the volatility index is now trading at a level which has triggered many selloffs in the stock market over the years as investors become more and more comfortable and greedy with rising stock prices.

Looking at the market from a HERD mentality and seeing everyone run to buy more stocks for their portfolio has me on edge. We could see a strong wave of fear/selling hit the S&P 500 Index over the next two weeks catching the masses with their hand in the cookie jar . . . again.

If you don’t know what the volatility index (VIX) is, then think of it as the fear index. It tells us how fearful/uncertain investors are or how complacent they are with rising stock prices. Additionally a rising VIX also demonstrates how certain the herd is that higher prices should continue.

The chart below shows this fear index on top with the SP500 index below and the correlation between the two underlying assets. Just remember the phrase “When the VIX is low it’s time to GO, When the VIX is high it’s time to BUY”.

Additionally the Volatility Index prices in fear for the next 30 days so do not be looking at this for big picture analysis. Fear happens very quickly and turns on a dime so it should only be used for short term trading, generally 3-15 days.

Volatility Index and SP500 Correlation & Forecast Daily Chart:

Global Issues Continue To Grow But What Will Spark Global Fear?

Everyone has to admit the stock market has been on fire since the October lows of last year with the S&P 500 Index trading up over 26%. It has been a great run, but is it about to end? Where should investors focus on putting their money? Dividend stocks, bonds, gold, or just sit in cash for the time being??

I may be able to help you figure that out.

Below is a chart of the Volatility index and the gold exchange traded fund which tracks the price of gold bullion. Notice how when fear is just starting to ramp up gold tends to be a neutral or a little weak but not long after investors start selling their shares of securities we see money flow into the shiny yellow safe haven.

Gold & Fear Go Hand-In-Hand: Daily Chart

Looking at the relationship between investor fear/uncertainty and gold you will notice scared money has a tendency to move out of stocks and into safe havens.

Trading Conclusion Looking Forward 3 months…

In short, I feel the financial markets overall (stocks, commodities, and currencies) are going to start seeing a rise in volatility meaning larger daily swings which inherently increased overall downside risk to portfolios and all open positions.

To give you a really basic example of how risk increases, look at the daily potential risk the SP500 can have during different VIX price levels:

Volatility index under 20.00 Low Risk: Expect up to 1% price gaps at 9:30am ET, and up to 5% corrections from a previous high.

Volatility index between 20 – 30 Medium Risk: Expect up to 2% price gaps at 9:30am ET, and up to 15% corrections from recent market tops or bottoms.

Volatility index over 30 High Risk: Expect 3+% price gaps at 9:30am ET, and possibly another 5-15% correction from the previous VIX reading at Medium Risk

Note on price gaps: If you don’t know what I am talking about a price gap is simply the difference between the previous day’s close at 4:00pm ET and the opening price at 9:30am ET.

To continue on my market outlook, I feel the stock market will trade sideways or possibly grind higher for the next 1-2 weeks, during this time volatility should trade flat or slightly higher because it is already trading at a historically low level. It is just a matter of time before some bad news hits the market or sellers start to apply pressure and either of these will send the fear index higher

I hope you found this info useful and if you would like to get these reports free every week delivered to your inbox be sure to join my FREE NEWSLETTER HERE: www.GoldAndOilGuy.com

Courtesy Chris Vermeulen – Free Weekly ETF Reports & Analysis: www.GoldAndOilGuy.com

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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Emerging Market Stocks In Need of Correction

2012-03-07T08:00:00.007-06:00

By Prieur du Plessis

In past articles I referred to the relationship between the MSCI Emerging Market Index expressed in Swiss francs and China’s CFLP Manufacturing PMI. By using arguably one of the world’s only non-fiat currencies the influence of currency movements on the MSCI Emerging Market Index is minimized.

The graph below illustrates just how out of line and inexpensive emerging-market equities were compared to the state of the world’s growth locomotive in the latter half of 2011 as the Eurozone debt crisis spooked investors. The market returned to rationality as the crisis eased in recent months, with the MSCI Emerging Market Index in line with February’s PMI of 51.0.

Sources: CFLP; Li & Fung; I-Net Bridge; Plexus Holdings.

But where to from here?

After collapsing to 48.3 in November last year my seasonally adjusted CFLP Manufacturing PMI for China increased for the third consecutive month to 51.9 in February, with the drop in the reserve requirement rate (RRR) of Chinese banks filtering through to the economy. As the global economy is not out of the woods yet, the further cut in the RRR in February is likely to lend additional support to the seasonally adjusted PMI and therefore China’s economy in coming months.

Sources: CFLP; Li & Fung; NBSC; Plexus Holdings.

After being held in check by the Golden Week celebrations of China’s lunar New Year from the second half of January through mid-February, the unadjusted CFLP Manufacturing PMI is likely to receive a significant seasonal boost in March and April.

Sources: CFLP; Li & Fung; Plexus Holdings.

I therefore argue that the MSCI Emerging Market Index in terms of Swiss francs is likely to be underscored by the expected seasonal strength in the unadjusted PMI, as well as the acceleration in growth as reflected in the seasonally adjusted PMI, on the back of the reduced RRR of Chinese banks.

In a previous note I pointed out that changes in the direction of China’s banks’ RRR were soon followed by directional changes in the Shanghai Composite Index (SSEC 2410.45 ↑0.00%). In the following graph the cumulative change in the RRR was quantified where a 0.5% change in RRR amounts to approximately US$60 billion. When depicted against the MSCI Emerging Market Index in Swiss francs it is evident that changes in direction in the RRR are followed by major changes in direction of the MSCI Emerging Market Index in CHF. The cuts in the RRR in the last quarter of 2008 were followed by a bottom in the MSCI Emerging Market Index in the first quarter of 2009. The hike in the RRR in the first quarter of 2010 was initially followed by the topping out of emerging-market equities, while further increases led to a slump in equity prices. Although equity prices showed an improvement at the start of the fourth quarter last year the cut in the RRR pulled equity prices out of the doldrums.

Sources: NBSC; I-Net Bridge; Plexus Holdings.

The MSCI Emerging Market Index has significantly outperformed the MSCI World Index since December last year and is currently in line with China’s unadjusted CFLP Manufacturing PMI.

Sources: CFLP; Li & Fung; I-Net Bridge; Plexus Holdings.

The Shanghai Composite Index in terms of U.S. dollars relative to the S&P 500 Index (SPX 1343.36 ↓-1.54%) has moved completely out of line with the unadjusted CFLP Manufacturing PMI, though.

Sources: CFLP; Li & Fung; I-Net Bridge; Plexus Holdings.

The appearance of another black swan will alter my view but as things are I am of the opinion that the rally in emerging-market equities is likely to continue over the next few months. That said, the market has had a huge run and, being overbought, it is in desperate need of consolidation or even a major correction. I continue to favor the Chinese stock market above other emerging markets and developed markets.

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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Politics, Social Security and Spine

2012-03-07T08:00:00.006-06:00

By Bruce Krasting

Assuming that no white knight (aka NJ Gov. Christie) enters the scene for the Republicans, this fall will be a race between Mitt & “O”. I’ve listened to them discuss their views on a hot button of mine, Social Security.

Not surprisingly, both sides have dodged this issue. They say we need adjustments and refer to the “need” to extend the retirement age. They also agree that some adjustments in the Cost-Of-Living (COLA) should be considered. Extending the retirement and COLAs would be implemented over twenty years they claim. These are “kick the can” (far) down the road strategies. Those who are under 50 today would feel the consequences.

You can’t blame the politicians for wanting to duck this issue. There is a monster block of voters (primarily the Boomers) who would love to see a plan for SS that pushed things out by fifteen years. If SS became a real topic in the election, it could potentially throw the vote one way, or the other.

The fact is, the next president will be forced to make major changes at Social Security. Ironically, the Social Security Trust Fund might be responsible for tossing SS into the political debate.

An explanation:

Social Security actually consists of two pieces. Old-Age Insurance and Survivors Insurance (OASI) is one part; Disability Insurance (DI) is the other. What Mitt and O are talking about is the Old Age side of the story. This program is not yet falling off a cliff. However, the DI fund is. The question is, “How bad is DI?”

An answer can be found in the 2011 Social Security report to Congress. Ten months ago it said that the DI fund would be exhausted in 2018. This very convenient forecast put the day of reckoning for DI two years outside of the next presidential cycle.

The Intermediate, or base case forecast for the DI Trust Fund:

The next question is, “What’s the SSTF going to say in May 2012 about the new termination date for DI?”The answer depends on whether the folks who write the report for SS have “spine”. If they do, they will say that the Base Case for the DI fund shows it will be exhausted in the fourth quarter of 2016. That would mean that DI benefits would have to be immediately and significantly cut across the board. Those cuts would happen on or about Election Day, 2016.

If the SSTF produces a forecast that puts the death of DI in the 2013-16 cycle, then it is fair game to force the 2012 candidates to put forward their plans for fixing it. The SSTF will probably produce that forecast. If it does, it opens a Pandora’s box on the very big issue of what to do with the (much, much larger) Old Age side of the equation.

My expectation is based on the following: Look again at the SSTF report above . The forecast was that the DI Trust Fund (DITF) fund would end 2017 with a balance of only $7b. This means that the actual “go broke" date was 1/6/2018. (How to Spin a Forecast lesson 101… Gain 6 days, gain a year….)

The first Q 2012 data for the DI funds shows a 7% YoY rise in benefits. This is largely a consequence of the 3.6% COLA increase. (Ben B. maintains this does not exist). The other 3.5% reflects the rising number of folks getting benefits. Tax revenues are behind “schedule” (blame the economy). Finally, interest income is going to be under “budget”. The amount of investable funds is rapidly declining, and interest income on the DITF’s remaining cash is falling with Bernanke’s endless ZIRP.

The 2012 number for the DITF will have to be reduced from last year's estimates by about $5b. This has a multiplier effect, as the COLA re-base repeats itself with every year. The revision for 2012 will add up to more than $20b over the next four years. This minor adjustment will bring the termination date to June of 2017. It's still not close enough to bring the issue onto the 2012 political table. But more adjustments are in order.

The SSTF is stuck with a downbeat economic forecast from the CBO. It can’t have a rosy forecast when its“buds” up the street are saying it isn’t so. Adjusting to the CBO’s dour outlook will knock another seven months off the life of DI.

There are two possible outcomes in the upcoming SSTF report on DI:

A) The DI fund will be exhausted in 2017.

This is the spineless approach as the details will show that the actual date of exhaustion is January of 2017.

B) The DI fund will be exhausted in the 4th quarter of 2016.

That would be “show time”.

By itself the DI problem is solvable. To understand what is going on, look at cash flow. The mumbo-jumbo about Trust Funds is just mumbo-jumbo. The cash flow numbers:

Unless there are changes to the program, the deficits at DI will continue to grow. The long-term, unfunded cost is 0.4 – 0.5% of GDP. That would put the cost of maintaining DI at about 10% of the military, and 5% of the cost for both Medicare and Old Age SS.

In the scheme of things, the problems at DI are small. Other problems are so large in comparison. But a “fix” at DI could add another half-trillion onto the debt/deficit in the decade after it goes broke. That’s not a small number at all.

If Obama is honest, he will acknowledge the problem and propose new taxes to fill the bucket. He will say that America is too rich a country to let disabled workers fall through a crack. He will get votes for that position.

Romney has a problem. He can’t propose higher taxes that would be earmarked to stabilize DI. He will say that DI has to be cut to the point that it becomes Pay-Go without new taxes. He will get votes for that position, but it will expose him to criticism. It will be argued that this is about the 1% versus disabled workers. Obama would have a field day with that position. “O” would be protecting the widows and orphans while Mitt would be keeping the rich, rich.

There must be a fix at DI in the next four years. The next president will guide that resolution through Congress. The “fix” will either socialize the system by diverting tax dollars to it, or the program will be starved. The solution will be a cookie-cutter preliminary version of the much bigger issue of the Retirement Fund. OASI will face a much larger wall in 2017 – 20. What will happen to DI in 2016 will pave the way for what happens to OASI in 2019.

One final chart. This looks at cash flow for DI, OASI and combined SS. We crossed the red-ink line on DI in 2005. OASI went into the red in 2010. Neither fund will ever be in the black again.

Notes:
Both candidates may try to point to fraud and abuse at DI as the problem. There is abuse, lots of it. But if it ended tomorrow, it would not move the needle. The required fix is much larger than the abuse.

Neither candidate wants SS to be an issue. If it becomes one, Obama has more to win and Romney more to lose.
.
About The Author - Bruce Krasting had worked on Wall Street for 25 years--"For 25 years I woke up thinking, "What am I going to do today to make some money in the market". I don't do that any longer. But I miss it." Nowadays, Bruce blogs about his take on financial events at Bruce Krasting. (EconMatters author archive here.)

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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Fed's Zero Interest Policy: Inflation Is a Tax

2012-03-06T14:00:00.001-06:00

By Michael Snyder

Ronald Reagan once famously declared that inflation is a tax, but sadly most Americans did not really grasp what he was talking about. If the American people truly understood what inflation was doing to them, they would be screaming bloody murder about monetary policy. Inflation is an especially insidious tax because it is not just a tax on your income for one year. It is a continual tax on every single dollar that you own.

As your money sits in the bank, it is constantly losing value. Over time, the effects of inflation can be absolutely devastating. For example, if you put 100 dollars in the bank in 1970, those same dollars today would only have about 17 percent of the purchasing power that they did back then. In essence, you were hit by an 83 percent "inflation tax" and all you did was leave your money in the bank. So who is responsible for this?

Well, the Federal Reserve controls monetary policy in the United States, and the inflationary monetary policy that the Fed has gotten all of us accustomed to is taxing the living daylights out of us. This is madness, and it needs to stop.

In previous articles I have discussed how the Federal Reserve creates money. If you have not read those articles yet, you can find a few of them here, here and here.

The Federal Reserve system is designed to have the U.S. money supply expand indefinitely.

And that is exactly what has happened since 1913.

But when the money supply expands, there are very serious consequences.

Every time more money comes into existence, the dollars that you and I are already holding become less valuable because now there are more dollars chasing the same amount of goods and services.

Right now, the U.S. government says that the annual rate of inflation is somewhere around 2 percent. Those of you that have to buy food and gas on a regular basis realize how much of a joke that is.

Thankfully, there are others out there that keep track of these statistics as well. According to John Williams of shadowstats.com, if inflation was measured the same way that it was back in 1980, the annual rate of inflation would be more than 10 percent right now.

But let's use the doctored government numbers for a moment. Using the doctored numbers, what inflation has done to all of us is still absolutely horrific. Just check out the chart below. This is what the Federal Reserve was designed to do. It was designed to constantly expand the money supply and create inflation that never ends....

Most of us have been living in an inflationary environment for so long that we have come to accept it as normal.

Most Americans believe that prices are supposed to just keep going up as time goes by.

Unfortunately, we have now entered an era when prices are going up much faster than wages are. Family budgets are being squeezed tighter and tighter as the inflation tax keeps taking a bigger and bigger toll on all of our paychecks.

I remember the days when I could go into the grocery store and get a large bag of brand name potato chips for 99 cents.

I remember the days when I could get all the groceries that I needed for an entire week for 20 bucks.

Unfortunately, those days are long gone.

Have you been to the grocery store lately?

When I go to the grocery store these days I almost get the feeling that someone is going to ask me to fill out a credit application.

When I get to the checkout counter I almost get the feeling that the cashier is going to ask me if I want to pay with an arm or a leg.

But food is not the only thing going up. Electricity bills in the United States have risen faster than the overall rate of inflation for five years in a row. There are millions of American families that are keeping the heat really, really low this winter in an attempt to make ends meet.

Health care is another thing that has become ridiculously expensive. During the Obama administration, worker health insurance costs have risen by 23 percent.

Has your paycheck increased by 23 percent?

Of course we all know what is happening with the price of gasoline. The average price of a gallon of gasoline in the United States is now up to $3.72. It has increased by more than 90 percent since Barack Obama became president.

This is why so many economists get so upset when the Federal Reserve starts printing money like there is no tomorrow. Inflation is a tax that is very cruel to average American families. It destroys their wealth and it destroys the purchasing power of their paychecks.

Unfortunately, this is always what happens when a society adopts fiat currency. Our dollars are just pieces of paper backed by absolutely nothing. When more pieces of paper are printed up, the value of the pieces of paper already in existence goes down.

This is one of the reasons why so many people out there are talking about "real money" like gold and silver. Unlike fiat currency, precious metals tend to hold value over a very long period of time.

For example, it will take you about three times as much U.S. currency to buy a gallon of gasoline in 2012 as it did back in 1990.

But an ounce of silver will actually buy you more gasoline today than it did back then.

Back in 1990, an ounce of silver would buy you about 4 gallons of gasoline. Today it will buy you more than 8 gallons of gasoline.

Talk about holding value.

We see the same kind of thing happening with gold.

When Barack Obama first took office, an ounce of gold was selling for about $850. Today an ounce of gold costs more than $1700 an ounce.

It is not that gold is becoming so much more valuable. It is just that the U.S. dollar is losing value on a continual basis.

So why don't the U.S. government and the Federal Reserve quit flooding our economy with more paper money?

That is a very good question.

Sadly, our leaders seem to have a never ending addiction to more paper money and the American people are not demanding change.

On Wednesday, Federal Reserve Chairman Ben Bernanke told Congress that the Federal Reserve may have to implement even more stimulus measures in order to help the economy.

Of course such talk is utter insanity considering what Bernanke and his cohorts have already done to the monetary base over the past few years....

Thankfully, the vast majority of that money is still trapped in the financial system. If all of that money was floating around on the street inflation would be far worse.

Those of you that think that the surging stock market is a sign of "economic recovery" should realize that the market has been pumped up by huge amounts of funny money from the Federal Reserve. Just because the number of dollars circulating has increased does not mean that things are getting better.

There is much more to all of this of course, but what is important for the man and the woman on the street is the fact that when the Federal Reserve expands the money supply it is a tax on all of us and it makes all of us poorer.

So what do you think about the inflation tax and the reckless monetary policy of the Federal Reserve?

Please feel free to leave a comment with your thoughts below....

Consumer Income & Spending Cloud US Economic Outlook

2012-03-06T12:00:00.000-06:00

By James Picerno of The Capital Speculator

Consumer income and spending eked out gains last month, although the increases are enough to dispel doubts about the strength and staying power of economic growth. But initial jobless claims are still holding at the lowest levels in four years and so there’s still hope that the cyclical demons can be held off. The critical variable remains the labor market, and the ability of job growth to keep wages growing, which in turn will help keep the pace of income and spending from falling further. The good news is that wage growth rolls on, and so the case for optimism is far from hopeless. But energy prices rising and fears of a fresh round of Middle East turmoil, there's precious little room for disappointment in the economic reports in the weeks ahead.

As for today's news, let’s start by reviewing the latest weekly update for jobless claims. As the chart below shows, new fillings for unemployment benefits dipped slightly to a seasonally adjusted 351,000 last week. If you're an optimist, that's a sign that the recent declines are holding and the flat lining over the past three weeks is merely a pause that will soon give way to further declines. The alternative view is that the economic revival of late is slowing, and the inability of new claims to continue falling is a fresh sign of trouble ahead.

True, personal consumption expenditures (PCE) picked up last month, rising 2.0% vs. a roughly flat performance in December, the Bureau of Economic Analysis reports. But disposable personal income (DPI) growth slowed in January to a sluggish 0.1% gain, down substantially from 0.4% in the previous month.

More ominously, the year-over-year percentage changes for PCE and DPI continue to decelerate. As I've been discussing for months (here and here, for instance), the continued slowdown in these numbers is at the top of my list for things to worry about. Unfortunately, today's update on consumer expenditures and income doesn't remove these clouds on the macro horizon.

The hope is that the labor market will continue to grow and stop if not reverse the deterioration in income and spending. The recent fall in jobless claims suggests that this scenario has some statistical support. But the acid test will be payrolls growth on par with January's encouraging report.

Meantime, optimists can point to the trend in private sector wages, which are still growing at 6%-plus on a year-over-year basis as of January, according to the latest numbers in today's spending and income report from the government. This important contributor to economic growth (private wages comprise 51% of personal income) is a sign that the labor market is still healing and workers are earning more.

The problem is that there's no room for weakness in job growth. Indeed, a dismal report for the February payrolls update would be deeply troubling at this stage. With gasoline prices rising and income and spending levels slowing, we may be facing another rough spring if the labor market stumbles. Next week's update on nonfarm payrolls is more than a week away (scheduled for release on Friday, March 9). Between now and then, don't be surprised if the crowd holds its collective breath.

About the Author - James Picerno is a veteran financial journalist since the early 1990s at Bloomberg, Dow Jones, etc. before becoming an independent writer/analyst/consultant in 2008. James is also the author of Dynamic Asset Allocation (Bloomberg Financial, 2010) and he writes at The Capital Speculator. (EconMatters author archive here)

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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The Truth Behind America's Fiscal And Employment Condition

2012-03-06T10:00:00.000-06:00

By Tyler Durden of ZeroHedge

Two weeks ago we penned "As US Debt Hits New Record, Fiscal 2012 Tax Revenues Are 10% Higher Than Debt Issuance" which unfortunately was very wrong: we completely forgot that tax revenues in the US are a two way street particularly from January through the end of tax season on April 15, when income and employment tax withholdings are offset by tax refunds as consumers rightfully claim (and in the process pad TurboTax revenues simply for having under-exempted themselves) what was overcollected by the government.

Unfortunately, it also means that we showed the US in a far better fiscal light than it is in reality, because contrary to our conclusion that tax revenues are higher than debt issuance in fiscal 2012 (starting October 1, 2011), the reality is not only a mirror image, but worse, with total debt issued now surpassing net revenues (withholdings net of refunds) by a whopping 15%! In other words, for $710.7 billion issued in debt YTD (debt has risen from $14.79 trillion to $15.5 trillion), net tax revenues have risen only by $607 billion. Which means that contrary to conventional wisdom that the US collects in taxes modestly more than it issues, at least through the peak of tax refund season that is certainly not the case. It also means that little by little that neo-Keynesian ideal (where we hope we jest but are no longer sure) of all deficits being funded purely by debt issuance, is slowly coming true.

The chart below shows next tax revenues vs debt issuance YTD - go ahead and check: subtract year to date tax refunds from tax withholdings as of March 1 (link) and compare to debt issuance since October 1, 2011 (link).

Oops.... But wait, it gets worse.

Remember all that talk of a US employment based 'renaissance'? By definition, that would mean that more tax revenues have to be collected YTD compared to 2011, during which period the unemployment rate was logically far higher - after all it is a declining continuum, or so the BLS would have you believe. Because more people employed, means more taxes collected. Logic 101. Well, wrong.

As the next chart shows, comparing net withholdings, or total taxes withheld net of tax refunds, 2012 is now trending below the same period in 2011, by about $10 billion!

As a reminder, here is how the unemployment situtation stood at January 2011, when according to the BLS130.5 Million people worked, when net government tax revenues were on par or better than 2012...

And compare this to the latest employment "data", when once again according to the BLS, 132.4 Million people worked.

So let's get this straight: America has seen the number of people employed rise by 1.9 million people from January 2011 to January 2012, and its unemployment "decline" by 0.7% in the same period, which means more taxes paid and thus withheld, and yet the tax collections have dropped from a period when unemployment was 9.0%?

Right.

Naturally, skeptics will say that this is purely a function of frontloaded tax refunds. Which would be great, however it is not true.

Stone McCarthy deconstructs that myth as follows:

Cumulative individual income tax refund issuance for 2012 passed issuance for the comparable period last year for the first time in the latest week. In the week ended last Friday, income tax refund issuance totaled $26.6 billion, compared to $20,9 billion last year. That brought cumulative issuance to $85.4 billion, up 5.7% compared to the comparable period last year.

Today's Chart of the Day shows cumulative refund issuance through February 17 and for the comparable period for 2012.

Refunds are lagging our forecast, however. We had projected cumulative refund issuance of $102.3 billion through February 17. We forecast total refund issuance to be up 2.6% compared to last year. However, we expected more refund issuance early in the refund seasons compared to last year, when some returns didn't get processed until after February 14.

Refund issuance this year has been delayed by a different set of problems. As we have noted in our prior updates, the IRS has made changes to its systems to prevent fraud, and that caused refunds to go out more slowly than expected in the first few weeks of the refund season. The IRS appears to be catching up, but hasn't said so explicitly. The "Where's My Refund?" page simply now says taxpayers who file electronically can expect their refunds within 10 to 21 days. It will take another week or two before we can start to make reasonable comparisons between refund issuance this year and last year.

Finally, even if in reality the government is somehow goosing (i.e., frontloading) refunds, all it means is that cash available to US consumers is higher than where it should be in reality, as all that has happened is that the variable responsible for 70% of the US economy has obtained more cash earlier than when it should have been disbursed. Which in turn means that the recent Personal Income and Spending data, which was so disappointing it caused Goldman to lower its Q1 GDP tracking forecast (and that is even before the gasoline price shock), is even worse when one factors out the time effect of refund collection - traditionally an economic boost as the cash is spent as quickly as it is received.

So.... what is this about the US economy improving again?

Courtesy Tyler Durden, founder of ZeorHedge (EconMatters author archive here)

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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How Strong Were The February Retail Sales Figures?

2012-03-06T08:00:00.003-06:00

By Martin Denholm of Wall Street Daily

“Helped by Springlike Weather, Retail Sales Beat Estimates,” chirps a headline in today’s New York Times.

So by that rationale, un-springlike weather would have caused retail sales to miss their estimates?

I’m always surprised by how often this weak, weather-based business journalism gets out to the masses (theNYT wasn’t the only media outlet to cite this as a reason today) – particularly when referring to retail or auto sales. Does the weather really make that much difference to shopping habits? Seems pretty simplistic and lazy to me.

Sure, nice weather could have helped. But I can’t ever recall anyone telling me they went shopping because the weather was nice. In fact, I’d have thought the opposite is true: that good weather would tempt people to do things outside, not inside. If sales had instead fallen short in February, surely the weather could be blamed for that, too!

Simply put, it’s misleading. So with that said, let’s get to the real story behind the solid sales figures…

The Analysts Shoot… And Miss Badly

Need proof that you should take analysts’ forecasts with a fat helping of salt?

Look no further than their terrible guesswork for February retail sales.

The consensus estimate was for same-store sales (stores open a year or more) to rise by 3.4%. But the actual number raced in at 4.7% among the 18 retailers that reported results last month.

The figure climbed to 6.4% for department, clothing and discount stores, according to Thomson Reuters. And it was the industry’s best performance since June 2011, according to Retail Metrics.

But anyone who thinks the weather played a pivotal part in such results is kidding themselves. Americans face real challenges from rising food and gasoline costs, plus high unemployment – all problems that the weather can’t alleviate.

But discounts can!

It’s All About Sales, Not Sun

February is an important month for retailers.

With the holiday season long gone, it’s traditionally when stores look to clear their existing inventories in order to make room for their spring collections. And they usually do it via sales.

Take Nordstrom (NYSE: JWN), for example. The company’s sales were forecast to rise by 5.6% for the month, compared with February 2011. But it racked up 10.2% growth instead, thanks to a big shoe sale.

Traditional discount stores like TJX Companies (NYSE: TJX) and Ross (Nasdaq: ROST) also enjoyed large year-over-year same-store sales increases of 9%.

And Costco’s (Nasdaq: COST) same-store sales jumped by 8%, as consumers trolled for both in-store discounts, as well as the company’s cheaper gasoline.

The Gap (NYSE: GPS) posted the biggest surprise of the day. Analysts had expected the company to continue its long trend of disappointing same-store sales results, with another 1.4% drop. But attractive promotions meant it torched the estimate and posted a 4% rise instead. Its Banana Republic brand led the way, with an impressive 12% jump over February 2011, which made a mockery of the 2.2% “forecast.”

But remember, the numbers reported are sales – not profits.

While foot traffic and revenue is welcome, it means little if discounts and other promotions eat into the bottom line. For example, The Limited (NYSE: LTD), which owns Bath & Body Works and Victoria’s Secret, said margins fell, despite an 8% same-store sales rise.

There are other factors to keep in mind, too…

It’s NOT the Weather, Stupid!

While February’s results were impressive, it’s worth noting that some retailers don’t report official monthly sales numbers. This includes heavyweights like Wal-Mart (NYSE: WMT) and JC Penney (NYSE: JCP). So the data is somewhat incomplete.

And quoted in MarketWatch, Craig Johnson of Customer Growth Partners reveals the companies that do report monthly sales figures account for just 7.4% of the $250 billion worth of retail spending each month.

In addition to potential profit erosion, Customer Growth Partners issues a grim statistic. The group says that for every $0.10 rise in gasoline prices, it sucks out $1.4 billion per month from consumer spending. That’s a crucial aspect, given that gas prices continue to rise and consumer spending accounts for about two-thirds of U.S. economic activity.

So the real tale of the tape for retailers will probably come later this spring, as sales wear off and gas prices take a bigger bite out of disposable income.

Bottom line: When it comes to the retail sector, ignore those in the media who regularly attribute sales figures – be they good or bad – to the weather. Macroeconomic trends and analysis of individual retailers themselves are far more important metrics.

Courtesy Martin Denholm at Wall Street Daily (EconMatters author archive here)

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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Will Oil Continue Heading Higher?

2012-03-05T14:00:00.000-06:00

By Frank Holmes

Does it feel like it costs an arm and a leg to fill your car these days? While consumers may continue to feel the bite from higher gasoline prices, investors can use these rising prices to their advantage.

Beginning in March, crude oil has a seasonal wind at its back. For nearly 30 years, the third month of the year has been the best month for crude oil. As you can see in the chart below, over the past 5-, 15- and 30-year cycles, West Texas Intermediate crude oil prices head higher in March, and have generally continued to climb through September.

On Yahoo! Finance earlier this week, Daily Ticker host Aaron Task and I discussed the many factors that should continue to drive oil higher over the next year. While many would like to attribute the rise in oil to the geopoliticaldevelopments in Iran, there are more global supply and demand fundamentals to consider. Credit Suisse points to the world’s dwindling inventories of oil as an example. Currently, the number of days of oil demand cover is at a low of about 57, the same level we saw in 2004 and late 2007. This low supply to cover demand means that any disruption in supply will likely drive prices higher.

We expect inventories to be further depleted, as demand continues, especially from emerging markets. Inventories for February and March should show a further reduction, as “oil demand growth was building positive momentum in the fourth quarter in all our regions except Europe,” says Credit Suisse.

According to Bloomberg News today, China plans on stockpiling more oil to reduce its local price fluctuations. Countries such as the U.S. generally store emergency oil to ensure its residents, businesses and manufacturers have plenty of stock at a price that’s not too high. As part of a three-phase program to increase its strategic petroleum reserves, China is building four emergency oil-storage facilities across western China, in the east and in the south. By the end of this year, its oil facilities are “expected to bring national crude-storage capacity to 270 million barrels” when construction is complete, says Bloomberg.

By comparison, the U.S. currently has the largest emergency petroleum supply in the world, stockpiling about 570 million barrels of crude oil at four sites located along the Gulf of Mexico.

China is not the only emerging market expected to consume more oil. When I was in Bogata, Colombia a few weeks ago, I saw gas stations posting prices around $5 a gallon. And its citizens can only fill up their gas tanks a few times a week. Yet the economy is booming and the streets are jammed with cars. There’s still tremendous demand in this country, as well as many other growing emerging markets, even with higher gasoline prices.

One question I’m asked when oil jumps in price is, will it hurt the U.S. economy? I don’t believe so. Many analysts believe the economy is in a better position to adjust to higher prices, especially when you compare last year’s oil spike to this year’s.

In 2011, fuel prices rose more than 50 percent in a matter of only a few months, says BCA Research. This “very quick and forceful advance” occurred at the same time that U.S. consumers were driving more miles, the number of unemployed workers was at a high, and job creation was nonexistent, says BCA.

This year, the rise in fuel costs has been more gradual, says BCA. What’s more important to BCA is that “consumers are in better shape than they were last year,” with job creation, unemployment, and income expectations all posting improved numbers. In addition, the U.S. has experienced an unseasonably mild winter, giving furnaces a welcome respite and their owners lower heating bills, making the higher payment at the pumps a little more palatable.

In addition, central banks around the world are in “full-on expansion mode,” says BCA. This needed liquidity and support for growth provides an injection of confidence directly into the global consumers’ veins.

Beware of biases by oil analysts: Deutsche Bank research going back to 1999 found that analysts “consistently underestimate” the Brent oil price by an average of 27 percent. The chart below shows the forecasted price made by analysts compared to the actual Brent oil price outturn. Every year, analysts have underestimated how strong Brent will be, ranging from as little as 2 percent to as high as 54 percent. Using the average forecasting error, Brent could be as high as $135 a barrel.

We expect there to be corrections in the price of oil throughout 2012, just like the ups and downs commodities experience from year to year. While the world is hungry for energy, there’s no free lunch on the Periodic Table of Commodities, and historically, from year to year, commodities fluctuate. Crude oil, for example, has seen its share of ups and downs: In 2008, oil lost 53 percent; in 2009, it increased a substantial 78 percent.

Why Even High Gas Price Can't Save GM's Chevy Volt?

2012-03-05T12:00:00.005-06:00

By Tyler Durden of ZeroHedge

On Thursday, we were the first to expose GM's latest strong car sales data as nothing more than the latest in a long series of accounting gimmicks known as 'channel stuffing' when excess inventory is offloaded to a vendor channel (see chart below). In this case GM dealers, while allowing the company to book revenue, and, of course, profits (most likely on a FIFO basis thus further making numbers a complete myth in a time of once again surging input costs).

The problem with channel stuffing is it can only go on for so long before the intermediary collapses under its own weight due to so much excess inventory the only next possible step is wholesale dumpin, in the process destroying the brand. Sure enough, it took about 24 hours for this latest speculation to be proven right as GM announce it was "temporarily" halting production of its Volt electric car.

Per The Hill: "We needed to maintain proper inventory and make sure that we continued to meet market demand," GM spokesman Chris Lee said in a telephone interview." Translated into English, this means that GM has flooded dealer floors with so many of the spontaneously combusting cars that it has managed to bring demand to zero.

But not before it took benefit for "selling" them over the past several months, in the process completely fooling the market and the adminstration sycophants into believing that the SAAR (Seasonally Adjusted Annual Rate) for US auto sales has risen to a whopping 15.1 million in February compared to 13.3 million year ago, and 14 million expected, when in reality all that has happened is that excess inventory has flooded the market and now sales, which can no longer be masaged via channel stuffing, are about to drop off a cliff. And adding insult to injury, the halt also means that thousands of GM workers will now be "temporarily" fired. One wonders how many millions of workers will be laid off when the SAAR decline to its fair value, somewhere about 2-3 million lower?

Oil, Housing and Stocks, Oh My!

2012-03-05T10:00:00.001-06:00

By Louis Basenese of Wall Street Daily

Don’t Sweat the Triple Dip

The latest S&P/Case-Shiller report out this week showed that home prices across the United States continue to fall.

With one exception: Detroit.

Residents in the Motor City enjoyed a 0.5% increase in home values in 2011. (Woo-hoo!) Must be the positive influence of all those Chrysler commercials featuring Eminem. Or not.

In all seriousness, I’m not surprised home prices keep falling. When I declared a bottom in the real estate market, I told you that prices are going to be the last thing to recover. So don’t sweat the fact that they’re decreasing. Instead, pay attention to the other data. It continues to improve.

In fact, just last week the National Association of Realtors reported sales of previously owned homes rose 4.3% in January to a seasonally adjusted annual rate of 4.57 million. Which is the highest level in nearly two years.

So don’t be fooled: Regardless of housing prices, the real estate market’s looking up.

The Oil to Natural Gas Ratio is Completely Out of Whack

As I noted last week, oil prices keep climbing, causing more pain at the pump for all of us. But we’re not the only country struggling.

It turns out that Brent crude oil prices are standing at or near record highs in multiple currencies.

What’s the big deal? Well, if prices keep climbing, overall demand is bound to cool off. And that should help bring the oil to natural gas ratio – which is completely out of whack – down a bit.

Based on current prices for oil and natural gas, the ratio now stands at 43, compared to a long-term average of 10.

Let’s just say a reversion to the mean is long, long overdue. And when it materializes, natural gas prices are going to climb higher.

If you want to profit from this situation, San Juan Basin Royalty (NYSE: SJT) and companies in the hydraulic fracturing services space remain my favorite ways to do it.

Yes, Stocks Are (Still) Cheap

Albert Edwards, Global Strategist at Societe Generale isn’t a believer! He says the triumphant rise in stock prices promises to be short-lived.

“Hope still beats in the breast of equity investors,” says Edwards. “The market will rip out that hope and consume it in front of investors’ eyes.”

Umm, anyone got a number for psych services for Monsieur Edwards? Because that’s about the darkest assessment I’ve ever heard about stock prices. And I’m just not buying it.

Even after a record-setting start to the year, stocks are still cheap. Incredibly cheap, based on the latest analysis from Citi’s Tobias Levkovich.

He calculated the spread between the S&P 500 earnings yield and the 10-year Treasury rate, and found it’s currently between two and three standard deviations away from the average. In other words, it’s trading at an extreme. Stocks should not be yielding this much more than bonds.

The last time the spread got this lopsided was back in early 2009, right before stocks staged a massive rally. Coincidence? I think not!

Based on his analysis, Levkovich predicts that stocks could jump 24% over the next year. I’m betting he’s right… and the melodramatic Edwards is wrong.

Massive Currency and Trade Ware on the Horizon

2012-03-05T08:00:00.001-06:00

By Mike "Mish" Shedlock

In hope-against-hope scenario, countries with balance-of-trade surpluses struggle to maintain it. Put Japan, Germany, Brazil, and China in that group.

In that group, Japan is losing the Balance of Trade Battle.

Japan’s trade deficit widened to a record level in January, as falling exports combined with surging imports of energy.

Imports rose 9.8 per cent from a year earlier, while exports were down 9.3 per cent, resulting in a record monthly deficit of Y1.48tn ($19bn).

Last year Japan’s trade balance fell into an annual deficit for the first time since 1980, driven by subdued global demand and soaring fossil fuel imports in the wake of the Fukushima nuclear power crisis.

Japan reported a trade deficit equivalent to 1475 Million JPY in January of 2012. Exports have been the main engine of Japan's economic growth in the past six years. Japan imports raw materials and processes them into high technology products. Japan’s major exports are: consumer electronics, automobiles, semiconductors, optical fibers, optoelectronics, optical media, facsimile and copy machines. Its main trading partners are The United States, China and European Union.

Brazil Declares New Currency War on US and Europe

The Financial Times reports Brazil declares new ‘currency war’

Brazil has declared a fresh “currency war” on the US and Europe, extending a tax on foreign borrowings and threatening further capital controls in an effort to protect the country’s struggling manufacturers.

Guido Mantega, the finance minister who was the first to use the controversial term in 2010, said the government would not “sit by passively” as developed nations continue to pursue expansionary monetary policies at the expense of Brazil.

“When the real appreciates, it reduces our competitiveness. Exports are more expensive, imports are cheaper and it creates unfair competition for businesses in Brazil,” he said on Thursday after announcing changes to the so-called IOF tax.

In a presidential decree, the government extended the existing 6 per cent financial transactions tax on overseas loans maturing in up to three years. Previously, the levy was applied only to loans with maturities of under two years.

President Dilma Rousseff later weighed in on the debate, vowing to defend Brazilian industry and stop developed countries’ policies from causing the “cannibalisation” of emerging markets.

The move comes as Brazil’s central bank also steps up direct intervention in the market, selling dollars and offering derivatives called reverse currency swaps to curb the real’s near 9 per cent surge against the US dollar this year.

Brazilian Real vs. US Dollar

The chart shows the Brazilian Real has pretty much been on a tear vs. the US dollar since 2003. Now Brazil is concerned about loss of exports, just as Japan is concerned about loss of exports.

Mathematically speaking, the desire for every country to be net exporters is impossible. Massive trade wars are on the horizon as a result.

About The Author - Mike Shedlock / Mish is a registered investment advisor representative and he writes at Mish's Global Economic Trend Analysis (EconMatters author archive here)

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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Gold & Silver Face the Fed

2012-03-04T14:00:00.000-06:00

By Ashraf Laidi at ashraflaidi.com

Silver is up three times as much as gold so far this year; +26% YTD, versus +9% for gold. This is starting to look like 2010 when silver rose 80% vs. 28% for gold. The 2011 damage in silver was primarily caused by the near-quadrupling of margin requirements from the CME, causing a 10% decline in silver in contrast to a 10% rally for gold. While both metals are due for one more leg down, silver is expected to maintain its oupterformance relative to gold, bringing the gold/silver ratio down to the high 30s from the current 48.

Gone are the days when metals used to rally on sovereign debt woes alone. Central bank asset purchases have taken over as the more consistent fundamental catalyst to trend shifts in gold and silver. The money/yield substitution notion by gold has been behind the 17% and 43% rally in gold and silver from the week of the LTRO-1 (December 20, 2012). The subsequent week was also accompanied by certainty of at least 50 bln in asset purchases from the BoE and Yen 10 trillion from the Bank of Japan.

Bernankes Wednesday remarks dampening the possibility of further Fed stimulus emerged via a reference to inflationary pressures rather than an acknowledgement of improved economic performance. Expectations of QE3 by the Fed have become part and parcel with a falling US dollar, rising euro and rallying commodities. Any blow to those expectations hampers the current uptrend in risk assets.

Looking ahead, bond vigilantes will scrutinize the inflation and growth implications of upcoming data, which could provide the next dose of upward momentum for bond yields. The combination of prolonged strength in energy prices and continued improvement on the US labour market front would be sufficient in raising interest rate expectations, causing the rest of FOMC members to potentially reconsider their future speeches regarding the recently extended zero rate policy. This would cast a pall on metals, to the benefit of the USD.

Implications for gold, silver

Gold remains supported by a confluence of two major moving averages (100 and 200 daily moving averages at 1692 and 1675 respectively). These are considered immediate support levels, which could well be tested on the next profit-taking bout in equity indices. Long-term gold investors ought to keep a check on 1620s, which remains the long term trend-line support extending from the lows of September 2008. As long as this level survives prolonged deleveraging, fresh buying will likely lift the metal back towards the 1800s. A resurfacing of sovereign debt woes combined and renewed central bank easing policies stands as the likeliest fundamental catalyst.

Silver investors may have finished licking their wounds from last years quadruple hike of margin requirements from the CME, which dragged the metal by 10%by end of 2011. Removing that intervention from the authorities, the situation would not have been as dire for the metal, considering that the fundamentals for commodities have improved due to stabilization in the BRICS. Technically, silvers weekly chart failed to cross its April trendline resistance, which coincided with failing the 55-week MA. As long as it holds above $29, silver is likely to regain the $42-$42 territory. Any decline below $29 risks extending losses towards 26, which denotes the last defending foundation for the 4-year uptrend. Considering silvers exposure to industrial demand relative to gold, the perfect storm would be prolonged LTRO & QE from the ECB/BoE and continued pick-up in EM demand for commodities.

Our readers were warned back in December of the potential decline in the gold/silver ratio, when it stood at 54.

About The Author - Ashraf Laidi is an independent global markets strategist with over 15 years' experience. Author of "Currency Trading & Intermarket Analysis", he is the founder of AshrafLaidi.com, and served as Chief Strategist for CMC Markets with several #1 rankings at FXWeek and Reuters. Ashraf holds an MBA from the George Washington University. and is fluent in English, Arabic, French, and Spanish.

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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What Powers China's Energy Machine?

2012-03-04T12:00:00.001-06:00

By Frank Holmes

What does it take keep the world’s largest consumer of energy powered? National Geographic photographer Toby Smith spent two years deep inside of China in search of this answer, and found a country that relies on much more than coal for its energy.

The result is a fascinating and comprehensive slideshow offering viewers a “Rare Look Inside China’s Energy Machines.” His photographs illustrate the massive infrastructure, development and engineering taking place around China today.

Energy around the world has become a lot more varied over the past few centuries. Only 100 years ago, wood and coal were the only two sources. Fast forward to today, and the global energy picture is much more diverse, with the use of oil, gas, hydropower and nuclear energy to power our cities, farms, homes and vehicles. Since 1970, renewables have emerged as an additional energy source and are expected to outpace hydropower by 2040.

To capture China’s use of energy, Toby Smith traveled to 11 provinces, snapping pictures of solar panels, wind turbines, power plants and hydropower stations. In Inner Mongolia, he photographed a blast furnace where the country develops its steel, an open cast mine in the top producing area in China, and a coal-fired power plant that relies on steam to turn its turbines.

In Shandong Province, he visited a paper mill and an oil and gas refinery that uses agricultural waste (mostly cotton stalks) to generate electricity. In a port in Guangxi, he saw coal unloaded from Indonesia. In Sichuan Province, he captured an underground turbine hall used for hydroelectricity and a shale gas development, where some of the largest stores of natural gas are found.

View Smith’s stills now to see how far the country has come in only a few short decades.

Crazy Idea of The Day: Releasing SPR Oil Stocks to Lower Gasoline Prices

2012-03-04T10:00:00.002-06:00

By Energy Burrito

This is my final rant about gasoline prices (for now), so please humor me. First up, I have two bugbears relating to current gasoline prices:

a) higher prices are hurting the economy, and

b) this isn't a supply-driven issue (so there is no need to tap emergency reserves).

Higher prices are hurting the US economy, because every single cent rise in gasoline prices equates to crimping $1.4 billion in consumer spending (annualized). The relevance of this is even greater when you consider how consumer spending has a very different impact, depending on what it is spent on.

My point is this: the US imports approximately 50% of its oil. So if $1.4 billion of consumer spending is going on higher gasoline prices, approximately half of this is leaving the country to pay for the oil. However, if that $1.4 billion was available to be spent elsewhere, whether it be at McDonald's, Target, or Redbox, closer to 100% of it would stay in the US economy (although, yes, some would be spent on foreign goods). So not only are higher gasoline prices crimping consumer spending, but they are directing money out of the US economy.

My second bugbear is that higher gasoline prices are not a supply-driven issue here in the US. Both last week's post and some of the five reasons below highlight why - based on the fundamentals - prices should likely be falling. And this is why the government should not release emergency stocks from the Strategic Petroleum Reserve. It would be like putting a band-aid on your finger when you just grazed your knee - the emphasis is on the wrong place. Plus an emergency stock release would be political in nature, but not effective. Hark, reasons for weaker prices:

1) MasterCard SpendingPulse shows that Americans have cut back on gasoline spending for the past 48 consecutive weeks.

"Gasoline demand continues to post steeper year-over-year declines as we near the end of February, in tandem with the steady rise in gasoline prices," said John Gamel, gasoline analyst with MasterCard.

2) US gasoline stockpiles sit at 229.93 million barrels, above the five-year average and just shy of the levels of both last year and 2010. There is no supply shortage.

US gasoline inventories

3) US gasoline demand is currently down 6.7% on just last year.

4) Lower utility bills from lower natural gas prices are doing little to offset the impact of higher driving costs:

5) According to the EIA, recent product demand has hit a 13 year low.

So that leaves us with one reality. And that is gasoline prices are at a record level for this time of year, and this is, in large part, due to geopolitical tension with Iran, and the tightening effect that is having on the global crude market. Releasing emergency stocks in the US would do nothing but cause a knee-jerk sell-off for gasoline, which would then be unwound.

EIA retail gasoline prices

Buffett on Buybacks—Price Matters

2012-03-04T08:00:00.002-06:00

By Charles Rotblut

Warren Buffett published his annual letter to Berkshire-Hathaway (BRK.B) shareholders last Saturday. I always enjoy reading these, not only because I am a Berkshire shareholder, but also because intermixed with Buffett’s discussion of how the company has performed are words of investing wisdom.

This year’s letter was no different. Buffett devoted many paragraphs to the subject of share buybacks, a topic he has opined on before. This year, he focused specifically on valuation and price performance.

Regarding valuation, here is what the Oracle of Omaha wrote:

Charlie [Warren Buffett’s partner] Sand I favor repurchases when two conditions are met: first, a company has ample funds to take care of the operational and liquidity needs of its business; second, its stock is selling at a material discount to the company’s intrinsic business value, conservatively calculated.

We have witnessed many bouts of repurchasing that failed our second test. Sometimes, of course, infractions—even serious ones—are innocent; many CEOs never stop believing their stock is cheap. In other instances, a less benign conclusion seems warranted. It doesn’t suffice to say that repurchases are being made to offset the dilution from stock issuances or simply because a company has excess cash. Continuing shareholders are hurt unless shares are purchased below intrinsic value. The first law of capital allocation—whether the money is slated for acquisitions or share repurchases—is that what is smart at one price is dumb at another. (One CEO who always stresses the price/value factor in repurchase decisions is Jamie Dimon at J.P. Morgan (JPM); I recommend that you read his annual letter.)

Regarding price performance, Buffett argued that investors are better served if a stock price doesn’t move higher when buybacks are made. Rather, he said that long-term shareholders are better served if the stock price languishes for a period of time. Using IBM (IBM), a stock that Berkshire-Hathaway owns, as an example, Buffet explained his rationale:

If IBM’s stock price averages, say, $200 during the [next five years], the company will acquire 250 million shares for its $50 billion. There would consequently be 910 million shares outstanding, and we would own about 7% of the company. If the stock conversely sells for an average of $300 during the five-year period, IBM will acquire only 167 million shares. That would leave about 990 million shares outstanding after five years, of which we would own 6.5%.

If IBM were to earn, say, $20 billion in the fifth year, our share of those earnings would be a full $100 million greater under the disappointing scenario of a lower stock price than they would have been at the higher price. At some later point our shares would be worth perhaps $1-1/2 billion more than if the high-price repurchase scenario had taken place.

The logic is simple: If you are going to be a net buyer of stocks in the future, either directly with your own money or indirectly (through your ownership of a company that is repurchasing shares), you are hurt when stocks rise. You benefit when stocks swoon.

Buffett acknowledged that his line of thinking won’t win many investors over. Behavioral scientists are documenting how hard it is for humans to pass on a certain, but smaller, reward now for a potentially bigger, but uncertain reward in the future. Yet, the math shows that the potential is there for Buffett’s approach to work.

Even if you don’t agree with Buffett’s logic, cast a critical eye toward announcements of stock repurchase programs. Question whether they are the best use of the company’s cash. Ask whether the company is trading at a discount to its intrinsic value. Ask why insiders aren’t also buying the stock. Finally, consider that there may be better uses of the corporation’s cash, including instituting or boosting the dividend payment.

The Week Ahead

Just three S&P 500 companies will report earnings next week. Brown-Forman (BF.B), H&R Block (HRB) and Pall (PLL) are all scheduled for Wednesday.

The week’s first economic reports will be the February ISM non-manufacturing (“services”) index and January factor orders on Monday. Wednesday will feature the February ADP Employment Report and revised fourth-quarter productivity. February employment data—including the unemployment rate and the change in nonfarm payrolls—and January international trade will be released on Friday.

No Federal Reserve officials are currently scheduled to speak.

About The Author - Charles Rotblut, CFA is the VP for American Association of Individual Investors Editor. Charles is also the author of Better Good than Lucky. EconMatters author archive here

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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Eurozone Unemployment and Inflation at Record Highs

2012-03-03T14:00:00.001-06:00

By Economy Watch

Unemployment in the euro zone has risen to its highest level since the introduction of the common currency even as inflation climbed, underlining the challenges facing European leaders as they gather in Brussels for a summit.

Eurostat, the statistics board of the European union, reported that unemployment rate rose to 10.7 percent in January across the 17 union states, the highest level since the introduction of the euro in 1999.

For all 27 European Union countries, the jobless rate ticked up to 10.1 percent in January from 10.0 percent in December, with a total of 24.3 million men and women out of work.

The highest unemployment rates were found in Spain (23.3%), Greece (19.9%), Ireland and Portugal (both at 14.8%).

Additionally, the highest increases were registered in Greece (14.1% to 19.9%), Cyprus (6.3% to 9.6%) and Spain (20.6% to 23.3%).

Across the 27 member states, 5.507 million young persons under the age of 25 were unemployed, with 3.314 million of them from the euro zone.

In contrast, unemployment rate was 8.3 percent in the United States, and only 4.6 percent in Japan.

The job woes were compounded by an unexpected increase in eurozone inflation, with the consumer price index edging up to 2.7 per cent in February – a result of high oil prices brought on by a cold winter.

Related Story: Europe’s Fate Rests In The Hands Of The ECB: Mario Blejer & Eduardo Levy Yeyati

Howard Archer, an economist with IHS Global Insights called the reports a ‘double whammy’, adding:

This is particularly bad news for consumers as they are not only facing high and rising unemployment but also still squeezed purchasing power. The data reinforce our belief that the eurozone is headed for further gross domestic product contraction in the first quarter of 2012 at least.

Since last November, the European Central Bank has lent out over 1 trillion euros ($1.3 trillion) at low 1-percent interest rates, renewing fears that the growing money supply could lead to high inflation in the next quarters.

However, with the threat of bank and sovereign debt defaults, monetary policy makers say that loans are necessary to prevent a full-blown crisis, arguing instead that deflationary pressure from declining real estate prices and deleveraging by households and financial institutions is the greater danger.

Courtesy EW News Desk Team at Economy Watch, (EconMatters author archive here)

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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Stop Bugging Me About Gold

2012-03-03T12:00:00.000-06:00

By Michael Hewson, Senior Market Analyst, CMC Markets

CMC Markets: No single asset has the capacity to polarise investor opinion other than the yellow metal. This has certainly been the case in the past four years since the global central banks turned on the monetary taps. Well respected analysts have been known to start frothing at the mouth when gold is mentioned as a haven for wealth preservation.

Some have even likened gold to to spam, dismissing as a useless lump of metal with no intrinsic value. Gold bugs, on the other hand, trumpet its qualities as a hedge against inflation and monetary debasement.

Analysts argue that gold has no yield and has no purchasing power. Even central bankers have had their say with the Fed chairman, Ben Bernanke, last year in answer to a question announcing that gold is not money.

Certainly if you look at gold since the peaks of 1980 it has indeed underperformed relative to inflation, but you could also make the same argument about stock markets, relative to the amount of money now in circulation.

The criticism that gold offers no yield is certainly valid, yet one could make the same argument for currencies, with the US dollar, sterling, Japanese yen and Swiss franc all having negative interest rates. A lot of equities also offer no yield apart from the hope that the value of the stock will increase in value in line with management expectations.

As such the key reason gold is becoming an attractive investment is that it can't be printed, manipulated or adjusted to the whims of governments and central bankers. This suggests that the potential for a rise to $2,500 over the next few months continues to look ever more likely.

The recent actions of the Bank of England, Bank of Japan and the European Central Bank to add to the overall money supply through additional liquidity injections reinforces this perception.

Far from being a useless lump of metal, Gold has many uses in industry and has also been used throughout history as a means of monetary exchange with the main attraction for investors being its scarcity. This is one of the main reasons it is kept in coins or bars as a hedge against inflation caused by irresponsible monetary policy.

Demand looks likely to remain fairly strong from emerging markets such as India and China from an emerging middle class as well as central banks, looking to rebalance their portfolios after spending most of the last decade being net sellers of it.

The one way to settle the argument with respect to gold’s value, relative to other assets, is to compare the performance of the various assets over a five or 10 year period.

This is where gold bears start losing the argument; however as with any asset the return is always determined on the entry level price for any investor.

Since the beginning of this century the price of gold has risen over 600% against the US dollar, while also rising 480% against the euro and 630% against the pound.

Stock markets on the other hand have gone sideways at best, while currencies have lost value.

The bottom line is that gold may not be to everyone’s taste but that doesn’t mean that sceptics have to decry its properties as a store of value throughout the recent turmoil in financial markets.

Courtesy Michael Hewson, Senior Market Analyst, CMC Markets via Commodites Now (EconMatters author archive here)