Commodity Trade Mantra

World Bank Sounds Inflation Alarm on Rising Global Food Prices

World Bank Sounds Inflation Alarm on Rising Global Food Prices

World Bank Sounds Inflation Alarm on Rising Global Food Prices

World food prices rose in the first quarter of the year for the first time since their all-time high in August 2012, driven by rising demand in China, drought in the United States and unrest in Ukraine.

According to the World Bank, internationally traded food prices increased by a sharp 4.0 percent. The leap was led by wheat and maize, up 18 percent and 12 percent, respectively.

As a result, international food prices in April were only 2.0 percent lower than a year ago and 16 percent below their record level in August 2012, the bank’s quarterly food price report said.

“Increasing weather concerns and import demand — and, arguably, to a lesser extent, uncertainty associated with the Ukraine situation — explain most of the price increases,” the report said.

World Bank economists said prices increased despite bumper crops in 2013 and continued projections of record grain harvests and stronger stocks expected for 2014.

Persistently dry conditions in the United States and strong global demand, particularly from China, partly explained the price rises.

– Ukraine has role –

But Ukraine, the breadbasket of eastern Europe, played a part, posting the largest domestic price increases for wheat and maize.

Ukraine, the world’s sixth-largest wheat exporter, saw domestic wheat prices jump by 37 percent, driven in part by currency depreciation.

Overall, international wheat prices soared by 18 percent quarter-over-quarter.

“Such a steep price increase had not occurred since the months leading to the historical peak in the summer of 2012,” the report said.

International maize prices rose by 12 percent, with Ukraine, the third-largest exporter of maize, experiencing a 73 percent rise in domestic prices because of delayed plantings and increasing costs.

“Geopolitical tensions in Ukraine have not disrupted exports so far, but might have effects on future production and trade if uncertainty increases,” the report said.

Other countries in the grip of political and economic stresses also saw prices shoot higher. In Argentina, for example, wheat prices were up 70 percent from a year ago.

Sugar prices rose 13 percent and soybean oil prices gained 6.0 percent quarter-over-quarter.

The first-quarter price increases were offset by a 12 percent decline in rice prices and a 7.0 percent drop in fertilizer prices.

The average price of crude oil rose 3.0 percent to $104 a barrel.

The United Nations reported last month that world food prices reached their highest level for 10 months in March due to poor weather in major producing countries and the crisis in Ukraine.

The UN Food and Agriculture Organization said its monthly food price index in March rose by 2.3 percent from February to the highest level since May last year.

Experts are concerned that rising prices will hurt the world’s most vulnerable and could foment food riots and other social unrest.

“Over the next few months, we must watch these prices carefully, making sure that any further increases do not put additional pressure on the least well-off around the world,” senior World Bank official Ana Revenga said.

In 2007 and 2008, soaring food prices had sparked dozens of riots across the globe, including in Haiti, Cameroon and India.

According to the lender, 51 food riots have occurred in 37 countries since 2007, most of them linked to a jump in food prices and aimed at local authorities.

This was the case in the crises in Tunisia in 2011 and in South Africa in 2012, the bank said.

“Food price shocks can both spark and exacerbate conflict and political instability, and it is vital to promote policies that work to mitigate these effects,” the report warned.

 

Courtesy: Jeremy Tordjman via uk.news.yahoo

Is Silver The World’s Most Undervalued Asset?

Is Silver The World’s Most Undervalued Asset?

Is Silver The World’s Most Undervalued Asset?

Today’s AM fix was USD 1,289.75, EUR 930.02 and GBP 767.07 per ounce.
Yesterday’s AM fix was USD 1,302.00, EUR 938.45 and GBP 772.79 per ounce.

Gold fell $6.10 or 0.47% yesterday to $1,296.60/oz. Silver slipped $0.12 or 0.61% yesterday to $19.59/oz.

Gold and silver fell for a second straight session today despite escalating tensions between Russia and the West.


Silver in U.S. Dollars, 5 Years – (Thomson Reuters)

Markets await this week’s U.S. jobs report and a Federal Reserve policy meeting for further hints regarding the fragile U.S. economy and the extent to which ultra loose monetary policies will continue.

Tensions between the West and Russia over Ukraine remained very high after the United States imposed new sanctions on key Russian business figures. This prompted Moscow to denounce “Cold War” tactics.

President Obama announced the U.S. would impose a new round of sanctions on individuals and companies in Russia. Obama said the sanctions will focus on “some areas of high-tech defense exports” to Russia.

Violence continues in eastern Ukraine and risks deteriorating. The Cold War rhetoric and geopolitical risk is being overlooked for now.

In the physical markets, data showed China’s gold purchases via main conduit Hong Kong fell to a four-month low in March. Net gold imports totaled 80.6 metric tons in March, compared with 111.4 tons in February.

Imports remained very high in the first quarter and are on track to equal the record level of demand seen in 2013 (see chart).

Shanghai gold prices have now recovered to a premium of about $1 an ounce indicating a slight uptick in demand. An increase in physical demand across Asia appears to be providing a strong floor for gold.

Silver – The World’s Most Undervalued Asset?

Silver dipped to $19.10/oz overnight and remains under pressure this morning . With the gold: silver ratio at just over 66 ($1,290/$19.38/oz), silver remains a compelling buy at these levels.

The stealth phenomenon that is silver stackers or long term store of value buyers of silver coins and bars continues and is seen in the record levels of demand for silver eagles from the U.S. Mint.

The US Mint sold 13,879,000 ounces of me in Q1, 2014. This is just over 2% less than the 14,223,000 sold in the first quarter last year. March sales were the fourth-biggest month ever and the US Mint is now on pace to exceed 2013 totals.

Silver stackers remain the smart, informed buyers. They realize that silver is undervalued versus gold with the gold silver ratio at 66:1. This is particularly the case on a long term historical basis. The long term historical average, gold to silver ratio is 15:1.

This is because it is estimated that geologically there are some 15 parts of silver in the ground for every 1 part of gold. In 1980 the ratio nearly reached 15 ($850oz/$50oz=17) and the average in the 20th century has been around 40:1.

Silver is unique in terms of being both a monetary and an industrial metal. Silver’s industrial uses should mean that the gold silver ratio will likely gradually regress to the average in the last 100 hundred years. If the tiny silver market was to see significant investment funds enter it than the ratio could return closer to the historical average of 15:1 as it did as recently as 1980.

Silver is undervalued when compared with gold, platinum, palladium, base metals including copper, oil, stocks and the DJIA and Nasdaq, bonds and the U.S. dollar. Ted Butler has an excellent research note on this today with some excellent charts showing silver’s relative value to these benchmarks.

Silver at below $20/oz, remains less than half of its nominal record price in 1980 and very undervalued from a historical basis. The average nominal price of silver in 1979 and 1980 was $21.80/oz and $16.39/oz respectively.

There are very few, if any assets that remain at the same price levels as they were more than 30 years ago.

In today’s dollars and adjusted for inflation that would equate to an inflation adjusted average price of some $60/oz and $44/oz in 1979 and 1980. It is for this reason that we believe silver will be valued at well over $50/oz in the coming years and silver remains an incredible opportunity.

A picture or a chart truly is worth a thousand words and the chart above showing silver prices adjusted for inflation shows how undervalued silver remains.

Silver industrial and investment demand is increasing very significantly and meanwhile supply is falling. The fact that the huge majority of the investment public and financial services industry remains unaware of the fundamentals in silver means that the bull market in silver likely remains in its intermediate stage.

Silver, like gold, has been and is increasingly again being regarded by many investment managers as a great financial hedge against terrorism, war, fiat currency crises, deflation, inflation, stagflation and even the worst case scenario of hyperinflation.

Today, people in Iceland, Cyprus, Iran and Ukraine can attest to the value of silver as a store of value against currency devaluation.

 

Courtesy: Goldcore

Central Bank Manipulation In Gold And Silver Or Chinese Accommodation?

Central Bank Manipulation In Gold And Silver Or Chinese Accommodation? Seems Both

Central Bank Manipulation In Gold And Silver Or Chinese Accommodation? Seems Both

It certainly started out as central bank manipulation, doing everything possible to cover their theft and resulting deficiency of replaceable physical gold. Almost all of their unauthorized reselling or hypothecating went unnoticed or without any ability to stop the activity.   China had a lot of its gold stored in the United States that was stolen in the 1990s.  She has since become the world-leading economic powerhouse and is now in a position to force the Rothschild elites to make good  on the theft, which they are doing.

China wants to see the price of gold at the current low levels as she continues to buy up as much of the [not so readily] available supply. The central bank manipulation continues as a means of protecting the last vestiges of the soon-to-fail petro-dollar, and soon-to-fail as the world’s reserve currency upon which almost global trade is based. The Chinese are willing to see gold stagnate at current levels as a better bargain during the final stages of their accumulation. It works for both sides for totally different reasons.

For how long can these low prices continue…the ever pressing question on the minds of the gold and silver community and topic of so many articles written by the experts? While many have striven to provide an answer, and 2013 failed to match the “predictions” as to the “When?” issue, the best answer is: For as long as it takes.

Back in January and February, it become more apparent that the highly anticipated huge rally for PMs was going to take longer than most expected. In April, we wrote an article that 2014 Could Be Yawner. There is no reason not to carry that notion further into 2015 before gold and silver begin to challenge their 1900 and 50 respective high price levels.

The one thing certain is that no one, absolutely no one can provide an accurate time-table for when PMs will trade at much higher levels. 2013 should be a reminder of the many who endeavored to fix a date and all of whom failed. It is utter nonsense to think anyone can accurately divine the future. The good news is that we do not need to actually know the “When?” All that matters is to be prepared for the eventuality.

If you are prepared, then you will have accomplished one of the most important responsibilities for wealth protection/preservation/growth as a means for survival. Instead of watching the Precious Metals Rally clock, an exercise in exasperation, so far, better to be secure in the knowledge that you have done what you need to do, and instead, start to relax and learn to enjoy more out of life.

If events are triggered that propel PMs higher, or even substantially higher next month, next Quarter, or next year, if you are prepared, you will be a winning participant! Once and as it happens, you will feel a sense of relief for having waited so long, and a sense of accomplishment for having prepared. If you have not fully prepared, you have a tenuous gift in both time and price in which to act as quickly as possible.  The time to act and be better prepared is now, and at prices you and your children, and your children’s children will not likely ever see again.

Those who are disheartened because events have not occurred in the time sequence that was hoped for are missing the point. This is not a get-rich-quick scenario confronting almost all of us. This is a matter of survival. All anyone can do is prepare. One does not eat well and exercise to live longer, one does both to be in the best possible health to live each new day. As it happens, those who watch their intake and take care of their physical health to enjoy daily living also tend to live longer, as an added reward.

Consider: Physical PM shortages, depleted physical for delivery on exchanges, record buying by the public, world-wide, record buying by China, corrupt central banker price manipulation, government theft or confiscation, unlimited derivative exposure, existing demand for the physical that far outstrips available known supply, unlimited printing of fiat that can only result in currency destruction, civil unrest in many countries, any one of which could lead to a wider war, plus a litany of unknowns that can be important.

They have already been factored into the current prices for gold and silver, and any one of these events, or a more potent combination of them acting in unison can drive up the price of PMs but have not, to date. This is what you need to know. Whatever it is that will launch gold and silver higher has not yet occurred. Many of the “Whatever it is” are already known factors, but their influence/effect has not yet been unleashed.

Yes, if the manipulation stopped, PMs would rally immediately, but the event that puts a halt to the manipulation has not happened, so that part of the suppression of gold and silver remains in play. For how long can it continue? Again, for as long as it takes. Does anyone have a better answer? [Not that better answers cannot be had.] For those who do not know the answer, the solution, or at least one good solution, is being prepared.

There is another issue not talked about and that is the seeming failure of the elites who “appear” to be forced to sell their gold. The very foundation of the Rothschild formula is the acquisition of [mostly] gold, and also silver, in exchange for debt-based currency. There has not been a smarter collection of individuals, [or more devious and destructive], that comprise the Rothschild-founded central banking system.

It would seem odd that such an astute and all-powerful-behind-the-scenes-force as the elites would find themselves in such a compromised situation to no longer have any, or very little gold and silver left. It seems equally unimaginable that the elites could be so stupid if they have put themselves in such a weakened state. It is a possibility, and one of such incredible and fitting irony, if true.

What keeps them in power is the built-in structure they have accumulated in every major Western government under their control, which also includes the potent military, and the media to keep the masses dumbed down. The perverted transition of the United States from a sovereign Republic, with an organic Constitution that limits government, to an elite central banker-controlled, bankrupt corporation, known as the federal UNITED STATES, with its substituted federal statutory constitution that replaced the original, is the premier example of how the elites work through stealth, and over decades as their time frame, to accomplish their vile ends.

Whatever one chooses to believe, one still has to deal with the known facts, and what is factually known to date is that gold is at 1,300, [not 1,500, not 2,000, and certainly not 5,000 or 10,000 the ounce], and silver at 19, [not 26, not 50, and for sure, not 100 or 300 the ounce]. However corrupt or not reflective of the “real price” for PMs, the charts continue to be the most commonly accepted measure, at least for now.

Regardless of what one chooses to be the most accurate or reliable measure, there can be no dispute that preparation for what is to come is the best way to deal with “When?”

Weekly gold has been in a broad TR since last June ’13, and a TR within a TR since Dec ’13. There is no sense of urgency to leave the range-bound structure, so one can only exercise patience until something clearer develops, which will eventually happen.

GC W 24 May 14

The 1280 area is an axis line, acting as resistance from November ’13 through February ’14, and it now acts as a support area for the past 2 months. The farther price moves along the RHS, [Right Hand Side] of the TR, the closer is gets to a resolve. Sentiment favors a move higher, but reality is that one need not know the breakout direction beforehand. All one needs do is to be prepared for a move in either direction, and follow the market’s lead.

GC D 24 May 14

Little can be said of the silver market, from the expectation of a move higher. Buyers have been AWOL, [a military term: Absent With Out Leave], and nothing will change until there is evidence of strong upside moves accompanied by increased volume.

SI W 24 May 14

The problem with pointing out a small possibility of what could be positive activity is that it preconditions the mind to look for more supportive evidence at the expense of missing what could be a subtle negative development. Just wait for confirmation that buyers are starting to create wide range rallies with strong closes on increased volume.

If silver is to move higher, what we just described will make its presence obvious. Until it does, caution is advised. There could be another new recent low, and the odds for that event are greater than 50%. It may be a buying opportunity. How a new low develops, if at all, will make that assessment worth acting on, or not.

SI D 24 May 14

Submitted by: Edgetraderplus

Has The Next Recession Already Begun For America’s Middle Class?

Has The Next Recession Already Begun For America’s Middle Class?

Has The Next Recession Already Begun For America’s Middle Class?

Has the next major economic downturn already started?  The way that you would answer that question would probably depend on where you live.  If you live in New York City, or the suburbs of Washington D.C., or you work for one of the big tech firms in the San Francisco area, you would probably respond to such a question by saying of course not.  In those areas, the economy is doing great and prices for high end homes are still booming.  But in most of the rest of the nation, evidence continues to mount that the next recession has already begun for the poor and the middle class.  As you will read about below, major retailers had an absolutely dreadful start to 2014 and home sales are declining just as they did back in 2007 before the last financial crisis.  Meanwhile, the U.S. economy continues to lose more good jobs and 20 percent of all U.S. families do not have a single member that is employed at this point.  2014 is turning out to be eerily similar to 2007 in so many ways, but most people are not paying attention.

During the first quarter of 2014, earnings by major U.S. retailers missed estimates by the biggest margin in 13 years.  The “retail apocalypse” continues to escalate, and the biggest reason for this is the fact that middle class consumers in the U.S. are tapped out.  And this is not just happening to a few retailers – this is something that is happening across the board.  The following is a summary of how major U.S. retailers performed in the first quarter of 2014 that was put together by Jim Quinn

Wal-Mart Profit Plunges By $220 Million as US Store Traffic Declines by 1.4%

Target Profit Plunges by $80 Million, 16% Lower Than 2013, as Store Traffic Declines by 2.3%

Sears Loses $358 Million in First Quarter as Comparable Store Sales at Sears Plunge by 7.8% and Sales at Kmart Plunge by 5.1%

JC Penney Thrilled With Loss of Only $358 Million For the Quarter

Kohl’s Operating Income Plunges by 17% as Comparable Sales Decline by 3.4%

Costco Profit Declines by $84 Million as Comp Store Sales Only Increase by 2%

Staples Profit Plunges by 44% as Sales Collapse and Closing Hundreds of Stores

Gap Income Drops 22% as Same Store Sales Fall

American Eagle Profits Tumble 86%, Will Close 150 Stores

Aeropostale Losses $77 Million as Sales Collapse by 12%

Best Buy Sales Decline by $300 Million as Margins Decline and Comparable Store Sales Decline by 1.3%

Macy’s Profit Flat as Comparable Store Sales decline by 1.4%

Dollar General Profit Plummets by 40% as Comp Store Sales Decline by 3.8%

Urban Outfitters Earnings Collapse by 20% as Sales Stagnate

McDonalds Earnings Fall by $66 Million as US Comp Sales Fall by 1.7%

Darden Profit Collapses by 30% as Same Restaurant Sales Plunge by 5.6% and Company Selling Red Lobster

TJX Misses Earnings Expectations as Sales & Earnings Flat

Dick’s Misses Earnings Expectations as Golf Store Sales Plummet

Home Depot Misses Earnings Expectations as Customer Traffic Only Rises by 2.2%

Lowes Misses Earnings Expectations as Customer Traffic was Flat

That is quite a startling list.

But plummeting retail sales are not the only sign that the U.S. middle class is really struggling right now.  Home sales have also been extremely disappointing for quite a few months.  This is how Wolf Richter described what we have been witnessing…

This is precisely what shouldn’t have happened but was destined to happen: Sales of existing homes have gotten clobbered since last fall. At first, the Fiscal Cliff and the threat of a US government default – remember those zany times? – were blamed, then polar vortices were blamed even while home sales in California, where the weather had been gorgeous all winter, plunged more than elsewhere.

Then it spread to new-home sales: in April, they dropped 4.7% from a year ago, after March’s year-over-year decline of 4.9%, and February’s 2.8%. Not a good sign: the April hit was worse than February’s, when it was the weather’s fault. Yet April should be the busiest month of the year (excellent brief video by Lee Adler on this debacle).

We have already seen that in some markets, in California for example, sales have collapsed at the lower two-thirds of the price range, with the upper third thriving. People who earn median incomes are increasingly priced out of the market, and many potential first-time buyers have little chance of getting in. In San Diego, for example, sales of homes below $200,000 plunged 46% while the upper end is doing just fine.

As Richter noted, sales of upper end homes are still doing fine in many areas.

But how long will that be able to continue if things continue to get even worse for the poor and the middle class?  Traditionally, the U.S. economy has greatly depended upon consumer spending by the middle class.  If that continues to dry up, how long can we avoid falling into a recession?  For even more numbers that seem to indicate economic trouble for the middle class, please see my previous article entitled “27 Huge Red Flags For The U.S. Economy“.

Other analysts are expressing similar concerns.  For example, check out what John Williams of shadowstats.com had to say during one recent interview

We’re turning down anew. The first quarter should revise into negative territory… and I believe the second quarter will report negative as well.

That will all happen by July 30 when you have the annual revisions to the GDP. In reality the economy is much weaker than that. Economic growth is overstated with the GDP because they understate inflation, which is used in deflating the number…

What we’re seeing now is just… we’ve been barely stagnant and bottomed out… but we’re turning down again.

The reason for this is that the consumer is strapped… doesn’t have the liquidity to fuel the growth in consumption.

Income… the median household income, net of inflation, is as low as it was in 1967. The average guy is not staying ahead of inflation…

This has been a problem now for decades… You were able to buy consumption from the future by borrowing more money, expanding your debt. Greenspan saw the problem was income, so he encouraged debt expansion.

That all blew apart in 2007/2008… the income problems have continued, but now you don’t have the ability to borrow money the way you used to. Without that and the income problems remaining, there’s no way that consumption can grow faster than inflation if income isn’t.

As a result – personal consumption is more than two thirds of the economy – there’s no way you can have positive sustainable growth in the U.S. economy without the consumer being healthy.

The key to the health of the middle class is having plenty of good jobs.

But the U.S. economy continues to lose more good paying jobs.

For example, Hewlett-Packard has just announced that it plans to eliminate 16,000 more jobs in addition to the 34,000 job cuts that have already been announced.

Today, there are 27 million more working age Americans that do not have a job, than there were in 2000, and the quality of our jobs continues to decline.

This is absolutely destroying the middle class.  Unless the employment situation in this country starts to turn around, there does not seem to be much hope that the middle class will recover any time soon.

Meanwhile, there are emerging signs of trouble for the wealthy as well.

For instance, just like we witnessed back in 2007, things are starting to look a bit shaky at the “too big to fail” banks.  The following is an excerpt from a recent CNBC report

Citigroup has joined the ranks of those with trading troubles, as a high-ranking official told the Deutsche Bank 2014 Global Financial Services Investor Conference Tuesday that adjusted trading revenue probably will decline 20 percent to 25 percent in the second quarter on an annualized basis.

“People are uncertain,” Chief Financial Officer John Gerspach said of investor behavior, according to an account from the Wall Street Journal. “There just isn’t a lot of movement.”

In recent weeks, officials at JPMorgan Chase and Barclays also both reported likely drops in trading revenue. JPMorgan said it expected a decline of 20 percent of the quarter, while Barclays anticipates a 41 percent drop, prompting it to announce mass layoffs that will pare 19,000 jobs by the end of 2016.

Remember, very few people expected a recession the last time around either.  In fact, Federal Reserve Chairman Ben Bernanke repeatedly promised us that we would not have a recession and then we went on to experience the worst economic downturn since the Great Depression.

It will be the same this time as well.  Just like in 2007, we will continue to get an endless supply of “hopetimism” from our politicians and the mainstream media, and they will continue to fill our heads with visions of rainbows, unicorns and economic prosperity for as far as the eyes can see.

But then the next recession will strike and most Americans will be completely blindsided by it.

 

Courtesy: Michael Snyder

Shanghai Gold Exchange International Board Another Blow To US Dollar

 Shanghai Gold Exchange International Board Another Blow To US Dollar

Shanghai Gold Exchange International Board Another Blow To US Dollar

As we can see power shifting from West to East on a daily basis at the current time of writing, in the fourth quarter of this year the Shanghai Gold Exchange (SGE) will launch an international board in the Shanghai Free Trade Zone (FTZ) for investors worldwide to trade gold spot contracts denominated in renminbi. The purpose being is becoming not only the world’s primary physical gold market but also increase pricing power and internationalize the renminbi.

Shortlist of recent developments regarding the rising powers in the East:

Russia’s central bank bought 28 metric tonnes of gold in April

Russia is setting up a joint currency with Belarus and Kazakhstan

Russia dumps record amounts of US treasuries

Russia closes an energy deal with China worth $400 billion (amongst 40 other business contracts)

Putin says Russia and China need to secure their gold and currency reserves

China openly calls for de-Americanization of the world

China, Russia, Iran and 21 other countries bolster cooperation to promote peace, security and stability in Asia

China is buying assets all over the globe and investing in infrastructure in Africa and West Asia

China is importing unprecedented amounts of physical gold

The SGE international board will be another blow to the US dollar hegemony, as more people around the world will hold renminbi, use the renminbi for trading gold and China wil have more power in pricing gold, though the international board’s pricing power can only be wholly exploited when the renminbi is fully convertible.

A Provisional Introduction To The Shanghai Gold Exchange International Board

Currently I don’t have any official documentation on the launch of the SGE international board, but by reading media (onetwothreefour) and from a source in the mainland, this is what I understand of it at this point: China’s central bank, the Peoples Bank Of China, has given approval to the SGE to set up a subsidiary company called the Shanghai International Gold Trading Center to operate the international board. The SGE is currently working on member recruiting, including commercial banks, gold producing companies and investment funds. Allegedly HSBC, ANZ, Standard Bank, Standard Chartered and Bank of Nova Scotia are to take part in the global trading platform.

Imported gold into the FTZ can be deposited in a brand new 1000 tonnes vault, after contracts are settled the gold can be delivered in this vault and withdrawn to be re-exported. Shanghai to become an international warehouse center. At first only spot contracts will be traded on the SGE international board, down the line derivatives will be launched. From Chinese state TV network CCTV:

The Shanghai FTZ can be considered as a Customs Specially Supervised Area, which I have written about extensively on these pages. Gold imported into the FTZ is not allowed to enter the Chinese marketplace without a PBOC permit. A Chinese trader in the mainland can not sell its physical gold to an international trader, for which it would be exported out of the mainland. To export gold out of the mainland there is a PBOC permit required. From what I’ve read, The structure of the Chinese domestic physical gold market will remain in tact after the launch of the SGE international board. Source:

A free trade zone (FTZ), also called foreign-trade zone, formerly free port is an area within which goods may be landed, handled, manufactured or reconfigured, and re-exported without the intervention of the customs authorities. Only when the goods are moved to consumers within the country in which the zone is located do they become subject to the prevailing customs duties.

SGE Chairman to Lead The Way

The chairman of the SGE is Xu Luode, who is former President of China Unionpay, a bankcard association established under the approval of the State Council and the People’s Bank of China. Xu already gained experience at Unionpay to lead a financial institution overseas. In 2010 Xu delivered a speech on how Chinese financial institutions can go global at the Lujiazui Forum, an important Chinese forum for policy makers on the rapid expansion of China’s financial market and China’s growing influence on the global economy. Now Xu will use his experience to open up the SGE to the world. From China Unionpay in 2010:

On June 26, Xu Luode, President of China Unionpay, was invited to attend the “Lujiazui Forum 2010,” …President Xu Luode delivered a speech on How Chinese Financial Institutions Can Go Global during the Post-crisis Era. New changes in the international economic pattern, especially the financial pattern, provided significant opportunities for Chinese financial institutions to go global, while the challenges were also formidable. Chinese institutions need strategy and holistic knowledge to promote globalization strategy prudently and steadily and successfully grow to be international corporations, expressed President Xu Luode in his speech.

President Xu Luode emphasized in his speech that the internationalization of an enterprise was not only the business behaviour of the enterprise itself, but should be also closely linked with national strategy and strategies of relevant enterprises. Since 2004, CUP’s internationalization has closely coordinated with the “reaching out” strategy of the country, and at the same time cooperates and interacts with the expanding of Chinese financial institutions and the internationalization of the Chinese Renminbi, thus achieving relatively rapid development.

Was Xu appointed as SGE chairman in October 2013 to launch the SGE international board? Who knows

Heraeus Precious Metals Sales Director Kevin Crisp visits SGE Chairman Xu Luode, 2014

One of the largest gold refineries Heraeus Precious Metals’ sales director Kevin Crisp visits SGE Chairman Xu Luode, February 18, 2014

On may 15, 2014, Xu attended the fourth Commercial Bank Gold Investment Forum in Hangzhou. Based on three sources mentioned above (translated by Soh Tiong Hum) he made the following statements:

The Chinese gold market is an important force, a positive energy in the international gold market but its influence does not correspond to its mass and scale. Last year China’s domestic gold mines produced 428 tonnes; at the same time China imported 1540 tonnes of gold, adding up to nearly 2000 tonnes. China’s import volume is significant but China’s influence on the price of gold is very small. Real influence still lies in the West. Data such as Non-farm payroll, or even a speech could impact the gold market in a big way. In this sense, the mass and scale of China’s gold market and its influence in the international gold market does not match. Through the SGE international board Chinese pricing power will increase.

Foreign investors can directly use offshore yuan to trade gold on the SGE international board, which is promoting the internationalization of the renminbi. The international board will form a yuan-denominated gold price index system named “Shanghai Gold”. Shanghai Gold will change the current gold market “consumption in the East priced in the West” situation. When China will have a right to speak in the international gold market, pricing will get revealed. New York prices gold through bidding whereas the gold price is fixed by five banks in London. However the London gold fixing price is now being questioned since these five banks are price-fixers while at the same time they are also the market’s most important participants.

The development of China’s gold market is not limited to an increase in scale but a series of moves including market development, product improvement, system development and risk prevention. Marketing, pricing mechanisms and international standards are all very important building blocks so every aspect of China’s gold market should join forces to speed up development.

 

The Shanghai Gold Exchange has nearly 8,000 institutional investors and nearly 5 million individual investors.

The International board will be a platform with global investors. This will raise the standard of product assortment, ability to prevent risk, information technology and support, market promotion and regulation. China is fully qualified and may become the world gold market’s very important first class player.

Regional commercial banks should seize the trends and opportunities in the development of China’s gold market, and become actively involved in the market.

As you may remember Malca-Amit opened a 2000 tonnes gold vault, their biggest vault on the planet, in the Shanghai Free Trade Zone in November 2013. Of course they knew Shanghai was to become to center of the global gold market (why else build such a big vault?). I think Malca-Amit has a lot of market intelligence as many bullion banks and other market participants are their clients. If a part of the Malca-Amit vault in Shanghai is designated to the SGE I don’t know at this moment. The following video is from November 2013:

Though we’ll have to wait for the details on how the SGE international board will exactly operate in a few months, it’s influence on the global gold market will be significant and this will further deteriorate the status of the US dollar hegemony.

 

Courtesy: Koos Jansen via In Gold we Trust

Canadian Maple Leaf Silver Coin Sales Up A Hefty 24% in Q1

Canadian Maple Leaf Silver Coin Sales Up A Hefty 24% in Q1

Canadian Maple Leaf Silver Coin Sales Up A Hefty 24% in Q1

With the release of the Royal Canadian Mint’s first quarter 2014 report, sales of silver maples increased substantially compared to the same period last year.  While Silver Eagles sales in Q1 declined slightly year-over-year due to a backup at the U.S. Mint, Canadian Maple Leaf sales reported a 24% increase.

In 2013, there were 6.6 million Maple Leaf sales during the first quarter.  However, this year sales jumped an additional 1.6 million for a total of 8.2 million for the period.

Canadian Maple Leaf Sales Q1 2014

Furthermore, total sales last year reached 28.2 million and if the trend continues, we could see a new annual record between 30-32 million Silver Maples.

On the other hand, Gold Maple Leaf sales declined 35% from 269,000 oz during the first quarter of 2013 to 176,000 oz this year.   While Canadian Gold Maple sales are off compared to last year, the percentage decline in Gold Eagles was even greater.

Sales of Gold Eagles fell from 292,500 oz in Q1 2013 to 143,500 oz during the first quarter of 2014.  This is a staggering 51% decline y-o-y.

The reason for the decrease in Official Gold coins sales has everything to do with the Fed and Central Banks continued manipulation of the financial and precious metal markets.  The public has this notion that everything is fine once again in the financial markets and institutions.

Unfortunately, the opposite is the case as the Fed now has to resort to propping up the U.S. Treasury Market by covertly buying its own bonds through foreign intermediaries.  If there isn’t enough demand, well by gosh, the FED can print money… send it to a foreign Central Bank and force them to by the paper garbage.

Have we gone totally INSANE here?  I recommend watching the USA WatchDog interview between Greg Hunter and Jim Rickards.  Jim discusses this and other events in great detail.

The U.S. Dollar and economic system continues to disintegrate behind the scenes as the majority of Americans remain oblivious.  Even worse, it seems as if the precious metal investors are becoming bearish believing in the nonsense coming from MSM.  I got a kick today reading that Dennis Gartman says that “Gold is breaking down — it looks horrible.”

Whenever I need a good laugh… I put on CNBC and listen to Dennis Gartman’s gold forecast.  Just like the weather, if you wait around a while, Gartman’s predictions will change direction rather quickly.

The world is heading down the toilet and I am simply amazed at the lack of demand in the official gold coin market.  However, this was the Fed and Western Central Banks plan all along.  By destroying the paper price, they killed retail investment demand which allows China to purchase gold at a nice discount.

I believe Jim Rickards is correct.  The Gold (and Silver) price manipulation will end one day OUT OF THE BLUE.  There will be no warning.  And of course it will be too late to purchase gold or silver.

I have said it before and I will say it again….

GOD HATH A SENSE OF HUMOR.

 

Courtesy: SRSroccoreport

Why Are Food Prices so High? Because We’re Eating Oil

Why Are Food Prices so High? Because We're Eating Oil

Why Are Food Prices so High? Because We’re Eating Oil

Regardless of what we eat, we’re actually eating oil.

Anyone who buys their own groceries (as opposed to having a full-time cook handle such mundane chores) knows that the cost of basic foods keeps rising, despite the official claims that inflation is essentially near-zero.

Common-sense causes include severe weather and droughts than reduce crop yields, rising demand from the increasingly wealthy global middle class and money printing, which devalues the purchasing power of income.

While these factors undoubtedly influence the cost of food, it turns out that food moves in virtual lockstep with the one master commodity in an industrialized global economy: oil. Courtesy of our friends at Market Daily Briefing, here is a chart of a basket of basic foodstuffs and Brent Crude Oil:

In other words, regardless of what we eat, we’re actually eating oil. Not directly, of course, but indirectly, as the global production of tradable foods relies on mechanized farming, fertilizers derived from fossil fuel feedstocks, transport of the harvest to processing plants and from there, to final customers.

Even more indirectly, it took enormous quantities of fossil-fuel energy to construct the aircraft that fly delicacies halfway around the world, the ships that carry cacao beans and grain, the trucks that transport produce and the roads that enable fast, reliable delivery of perishables.

Though many observers see money-printing as the master narrative of the global economy, we don’t see much correlation between the Fed’s ballooning balance sheet and food/oil. If money-printing alone controlled oil (and thus food), prices of oil/food should have soared as the flood of QE3 (and other central bank orgies of credit-money creation) washed into the global economy from late 2012.

Instead, oil/food have traced out a wedge: prices have remained in a relatively narrow trading range during the orgy of money-printing.

While money creation is one influence on commodity prices, supply and demand matter, too; in that sense, money printing only matters if it pushes demand higher while constricting supply.

Other observers use gold as the “you can’t print this” metric of price. In other words, rather than price grain in dollars, yuan, yen or euros, we calculate the cost of grain in ounces of gold.

The gold/food ratio is around the level it reached in 2009 after spiking in 2008.

This tells us food is cheap when priced in gold compared to 2002, but it’s more expensive (priced in gold) than it was at gold’s peak in 2012.

In effect, the influences of monetary inflation and supply/demand show up in food via the price of oil. Until we stop eating oil (10 calories of fossil fuels are consumed to put one calorie of food on the table), oil is the master commodity in the cost of food.

 

Courtesy: Charles Hugh Smith via Oftwominds

It turns out you can have BOTH – Inflation and Deflation

It turns out you can have BOTH - Inflation and Deflation

It turns out you can have BOTH – Inflation and Deflation

In 113 BC, a major scandal erupted across the Roman Republic as three sacred vestal virgins stood accused of incestum– violations of their sexual purity.

The special prosecutor brought out of retirement to try the case was Lucius Cassius Longinus Ravilla, a famous judge and former consul whose principle form of investigation was asking the question– cui bono? Who benefits?

It remains a great standard to apply today, especially with respect to one of the most spirited debates in modern economics.

Granted, economists typically aren’t a colorful bunch. It’s a dismal pseudo-science, after all, supposedly driven by data and not by passion.

But the inflation vs. deflation argument is something special… it is the ‘tastes great / less filling’ argument of our time that sparks all sorts of controversy and heated discussion.

A lot of folks hold an almost fanatical view of their side.

Economists led by Nobel Prize laureate Paul Krugman tell us that falling prices (led by a contraction in money and credit) make people “less willing to spend, and in particular less willing to borrow.”

And with a steep drop in consumer spending, severe economic stagnation results, including declining wages and a rise in joblessness.

Many in this camp conclude that central banks are warding off deflation by expanding the money supply, and hence doing the right thing.

‘Inflationists,’ on the other hand, hold the view that money printing is inherently dangerous because it drives retail and asset prices much higher.

This results in a vast erosion in most people’s standards of living.

Now, monetary policy really isn’t such a difficult thing to understand, especially when applying Cassius’ standard. Cui bono?

People who are severely in debt benefit substantially from inflation. Inflation erodes the principle value of a loan until eventually the entire debt simply inflates away.

Imagine taking out a bank loan in Zimbabwe right before hyperinflation struck. Within a few months, you’d be able to pay off the balance with your pocket change.

So who benefits the most these days from having their debts inflated away? Governments.

They hold the most debt, and being able to borrow money at interest rates which are below the rate of inflation is of tremendous benefit.

Banks also stand to gain from inflation. When the money supply is expanding and interest rates are low, bank profits increase dramatically.

Neither of these players wants to see deflation. They hold the keys to the castle, and they’ll do everything they can to ensure that inflation wins out.

But here’s the thing that I think a lot of folks fail to understand– it’s not necessarily a binary choice between inflation and deflation. It’s possible to have BOTH. And it ain’t pretty.

This is precisely what happened across Asia during their financial crisis in the late 1990s. And here in Chile, it’s starting to unfold right now.

On one hand, price inflation in Chile is on the rise. Data released earlier this month showed that Chile’s retail price inflation surged in April to a five-year high.

You can see it on the ground. Fuel prices are much higher. Food prices are much higher (it’s a great time to own a farm…). Etc.

But at the same time, many asset prices are falling.

Farmland is quickly coming off its highs, and my phone is ringing off the hook now with distressed property owners looking to sell. We’re seeing more properties go to auction than ever before.

In the residential market, prices are also getting much softer.

Meanwhile businesses that sell heavy equipment and capital goods are struggling amid the slowing economy.

The symptoms are mild right now, but Chile is in the very early stages of this phenomenon. I expect I’ll see even more signs in the coming months.

This real world example that effectively settles the argument: it’s possible to have elements of inflation and deflation simultaneously.

And with the right mindset, this can be a golden opportunity for investors. More on that in a future letter.

 

Courtesy: Simon Black via Sovereignman

Silver to Gold Ratio Now Favors Silver Investment

Silver to Gold Ratio Now Favors Silver Investment

Silver to Gold Ratio: 27 Years of Data

Statistically, gold and silver prices closely follow each other. But what is more important is the ratio between silver and gold and the trend of that ratio.

Examine the following chart.

Click on image to enlarge.

We can see that:

    1. For the past 27 years (after the 1980 bubble and subsequent correction) the ratio has been in a slow up-trend.
    2. The silver peak near $50 in April 2011 clearly stands out as an anomaly.
    3. The silver lows in 2008 and 2013 were at or below the trend lines, as I have drawn them. Silver rallied considerably after the 2003 and 2008 ratio lows. I expect the same will occur after the recent lows in the ratio.
    4. The ratio can explode higher in a few months or languish for years.

 

My conclusions from this graph are that the silver-to-gold ratio is currently priced at the low end of the range, long-term silver prices are gradually increasing relative to gold, and a price explosion could occur at any time, or perhaps not for several years.

Is there more we can learn from the ratio?

Take the weekly prices for silver and the weekly silver-to-gold ratio and smooth them with a 7 week centered simple moving average. This merely removes some of the “noise” in the graphs. Plot that weekly data since 2002, roughly the beginning of the silver and gold bull markets. Examine that graph.

Click on image to enlarge.
    1. You can see that silver prices generally follow the ratio. This merely tells us that silver prices move both up and down more rapidly than gold prices but that they generally move together.
    2. The ratio has fallen hard in the past 3 years – back to levels seen in 2009 and 2003, before large rallies in the price of silver.
    3. The silver-to-gold ratio is currently low – about 0.015, the inverse of gold-to-silver ratio of about 66, which is quite high.

Statistics

    • From January 2002 to May 2014 (12+ years) the statistical correlation between the weekly smoothed silver price and the weekly smoothed ratio was 0.67.
    • From May 2008 to May 2014 (6 years since the start of the crash) the statistical correlation between the weekly smoothed silver price and the weekly smoothed ratio was 0.87 – quite high.
    • The mean of the weekly data on the smoothed 100 x silver-to-gold ratio for the past 12 years is 1.71 with a standard deviation of 0.28.
    • The mean of the weekly data on the smoothed 100 x silver-to-gold ratio since the 2008 start of the crash is 1.75 with a standard deviation of 0.31.
    • Based on the past 12 years, the ratio is currently 0.78 standard deviations below the mean. Similarly, based on the nearly 6 years since the crash, the ratio is 0.84 standard deviations below the mean.

Based on the ratio data and the statistics, we can conclude that:

    1. The ratio is low and in the zone of the 27 year trend-line where we can reasonably expect the ratio to turn up.
    2. Silver prices increase and decrease with both the silver-to-gold ratio and gold prices, only more rapidly than gold.
    3. The ratio is well below (about 0.8 std. dev.) the last 6 and 12 year means and is likely to turn up. Hence the price of silver is very likely to rally in the next few months or so.

Fundamentals

Gold demand is strong – ask China, Russia and India. Western central banks have “leased” some, or perhaps most, of their gold. The German gold stored at the NY Fed was not returned – possibly because it is no longer in the vaults. See Julian Phillips’ analysis on that topic. If most of the central banks’ gold is gone (“leased” into the market), demand will soon overwhelm the supply of real, physical gold. The High-Frequency Traders can suppress the paper market, but not forever.

It is a reasonable bet that gold, about 40% below its 2011 high and facing large demand and dwindling supply, will rally in price over the next few years. Silver prices will follow gold prices but rally farther and faster from their currently low and oversold condition.

Was the above analysis a conclusive proof that gold and silver prices must rally? Obviously not!

But it strongly suggests:

    • Silver has been correcting for over three years. It could rally at any time.
    • Silver prices are currently LOW compared to gold prices – the ratio is at the low end of its 27 year trend channel and likely to rise.
    • Silver prices fall faster and rally more rapidly than gold prices. When the price of silver finally takes off it will push the ratio much higher – perhaps to 0.03 or 0.04 – the equivalent of a gold-to-silver ratio of 33 to 25.
    • Many other indications (not shown here) also suggest silver is too low, over-sold, and ready to rally. The same is true for gold.

Investor demand for silver and gold bars and coins is strong and increasing. I think silver and gold prices will be higher by the end of 2014 and much higher by the next US presidential election.

The pieces of paper we mistakenly call money will become less valuable in the years ahead. Take this opportunity to convert some paper currency to physical silver while the High Frequency Traders and central bankers are gifting us with artificially low silver and gold prices.

 

Courtesy: GE Christenson aka Deviant Investor

How Gold Helped Iran Avoid Defeat by the U.S.

How Gold Helped Iran Avoid Defeat by the U.S.

How Gold Helped Iran Avoid Defeat by the U.S.

Throughout much of 2012-13, the United States and Iran fought a financial war. With the benefit of hindsight, our friend Jim Rickards calls it a draw.

We documented this war in these pages as it was happening. Now Rickards helps fill in the rest of the story during a brief passage in his new book The Death of Money: The Coming Collapse of the International Monetary System.

First, let’s backtrack. In March 2012, the United States and European Union beefed up their economic sanctions on Iran, shutting Iran out of the global payments network called SWIFT. Also in March 2012, Turkey’s gold exports to Iran doubled from the month before — and exploded 37 times over the March 2011 figure.

“It wasn’t hard to connect the dots,” we wrote in a special email alert to our paid-up Apogee Advisory readers: “Natural gas is the source of almost all electricity in Turkey. More than 90% of Iran’s gas exports go to Turkey. Iran furnishes 18% of Turkey’s natural gas. Without Iran, Turkey would depend almost entirely on a single gas supplier to keep the lights on — Russia. Under the sanctions, Turkey can’t pay for Iranian gas with dollars or euros. So it pays with gold.”

India likewise paid with gold for Iranian oil. Iran could then use the gold to buy food or manufactured goods from Russia and China.

“The United States,” Rickards writes,” had inflicted a currency collapse, hyperinflation, and a bank run and had caused a scarcity of food, gasoline and consumer goods, through the expedient of cutting Iran out of the global payments system.” Gold had become Iran’s lifeline.

By July 2013, the U.S. Treasury had figured that out… and so began stepping up enforcement of a ban on gold sales to Iran — “a tacit recognition by the United States that gold is money,” Rickards adds dryly.

With the gold avenue closed off, Iran amped up its transactions in local currencies with banks not subject to the embargo. “Iran could ship oil to India and receive Indian rupees deposited for its account in Indian banks,” Rickards explains by way of example. Inconvenient, to be sure, but it gets the job done.

“Iran also uses Chinese and Russian banks to act as front operations for illegal payments through sanctioned channels,” Rickards writes. “It arranged large hard-currency deposits in Chinese and Russian banks before the sanctions were in place. Those banks then conducted normal hard currency wire transfers through SWIFT for Iran, without disclosing that Iran was the beneficial owner, as required by SWIFT rules.”

“Iran,” Rickards writes, “also demonstrated how financial warfare and cyberwarfare could be combined in a hybrid asymmetric attack.”

In May of last year, experts believe Iranian hackers broke into the software systems that control oil and natural gas pipelines crisscrossing the globe. “By manipulating this software,” Rickards writes, “Iran could wreak havoc not only on physical supply chains but also on energy derivatives markets that depended on physical supply and demand for price discovery.” Accidental market panic, anyone?

By late last year, Iran and the United States agreed to resume negotiations over Iran’s nuclear program. As part of that tentative agreement, President Obama removed the sanctions on gold purchases by Iran — one of the few ways he could ease Iranian sanctions without the say-so of Congress.

“For the time being,” Rickards concludes, “Iran had fought the United States to a standstill in its financial war, despite enormous disruption to the Iranian economy. The U.S.-Iranian financial war of 2012–13 illustrates how nations that could not stand up to the United States militarily could prove a tough match when the battlefield is financial or electronic.”

Indeed. We’d go a step further. When Iran agreed to resume nuclear talks, a conceit took hold in Washington that “the sanctions worked” — the Iranians had been more or less starved to the negotiating table.

Not so, says former Ambassador William Miller, who was stationed in Iran during the 1960s and is in contact with the current regime. “Sanctions only made them more defiant,” he tells the Los Angeles Times.

Want proof? Iran put the same offer on the table in 2003 — only to be spurned by the United States. Actually, it was a better offer from Washington’s perspective. Back then, Iran had only 164 nuclear centrifuges; by 2013, it had 19,000. That’s a heck of a lot more bargaining chips to hold once negotiations begin in earnest.

 

Courtesy: Addison Wiggin

Hot Inflation Reports to Dominate Next Fed Meeting

Hot Inflation Reports to Dominate Next Fed Meeting

Hot Inflation Reports to Dominate Next Fed Meeting

Important Econ-Inflation Events

The Federal Reserve meeting begins Tuesday June 17th with the FOMC meeting announcement the following day Wednesday June 18th which will be followed by their forecasts and the Fed Chair press conference.

In the last Fed meeting a weak housing concern cropped up on the Fed`s agenda, but all the housing data has rebounded in the latest economic reports with the spring weather, and the new concern at next month`s Fed meeting will be inflation.

With two much hotter CPI & PPI reports the last two months and another hot set coming right before the Fed meeting with the PPI coming on Friday June 13th, and CPI coming out on Tuesday June 17th. We anticipate these reports to be on the high side of estimates with higher food, energy and rising wage cost pressures; and that the Fed will probably have to address these new inflation pressures in their statement and the following press conference by Janet Yellen.

We also think the Employment Report which comes out next week will show some rising wage pressures which are the real push through on the inflation numbers. We think the Fed and the market at large is way behind this inflation curve, the market is still trading and making decisions on numbers that came out three months ago, all the latest economic inflation data has been very hot, and well above expectations, with the consensus just thinking these are temporary data blips. However, a third hot round of CPI and PPI reports right before the Fed meets is going to raise some eyebrows and establish the inflationary trend that we anticipate will be with us for the next 5 to 10 years.

Bond Market: Mispriced Asset Class

The fallout from this is obvious the Bond Market in the United States is the most mispriced asset class right now and this time they are wrong, and equities are telling you that inflation is full bore upon us. Look for the S&P 500 to hit 2200 much sooner than most realize with the 2500 area pinging on the radar as investors run out of bonds and into equities as inflation heats up and the Fed starts raising rates much faster than the market has currently built into their models.

The Trade

Valuations can be a concern regarding equities, and who knows what type of volatility hits that market once Bond Yields spike so the best place to be from a risk reward perspective is long 10-year yields. Bond Investors are dangerously asleep at the wheel with the chasing yield fervor reminiscent of a Gold Rush that the best play is in the Bond Market. Start building short positions in the 10-Year Bond exposure area either through Futures or Treasuries, and do it now while yield is so low relative to where we believe it is headed over the next six months and beyond. If playing Futures just build a position and have enough liquidity to stay in the trade for the long haul, and keep rolling over your short Futures Price and Long Yield trade over the next six months.

This is one of the few times I am going to say this so pay attention, investors cannot lose on this trade if they get involved at these low yield levels in the 10-Year over the next six to nine moths time frame, this is essentially as free money as Wall Street ever gives investors, take advantage of it while it lasts.

The Fed will continue tightening based upon the good manufacturing and housing economic data of last week, and with the upcoming hot Employment and CPI/PPI Inflation Reports, this is really going to push the Fed into a stronger tightening mode. However, the Fed is going to raise rates regardless as they normalize monetary policy over the next six to nine months, Don`t fight the Fed, make money being on the right side of this trade, which is long yield and short price from where we are right now relative to 10-year treasury yields.

Positive EV & Risk Reward Profile

This is the best Risk Reward Trade on Wall Street right now but you have to get in while yields are mismatched with where the Federal Reserve is eventually going to be forced to go, so that your risk profile is better managed by having such an excellent relative entry price.

Investors will start jumping on the trade when 10-Year Bond yields reach 2.8% and we break out of the recent range from 2.47% to 2.70%. But the beauty of getting in when the market is “sleepy” is that an investor has much more room to manage the trade to the upside, and really let the trade breath, i.e., let the trend develop by getting in early, and let your winners run.

This isn`t a short-term trade, and an investor isn`t looking for a quick profit, i.e., nobody is concerned about inflation right now, hold the trade through when everybody is worried about inflation – this is how you really get paid as an investor for taking on the risk of the unknown.

And as ‘Unknowns’ go this is one of the surest or knowable ‘unknowns’ the Fed is going to raise rates, inflation is going to rise and be a problem in the future, and 10-year bond yields are going to be higher in the future, and as an investor find a way to play this market and monetary normalization process.

Inflation, Inflation, Inflation

But mark my words the topic de jure three weeks from now will all be about inflation and how the Fed needs to start raising rates much sooner than is currently priced in the market. Mark your calendar for the Employment Report next week, CPI & PPI Reports 13th and 17th, and the Fed Meeting Announcement on the 18th of June. Inflation pressures will be more than an economic blip, and these reports will reinforce this recent trend, and markets will have to adjust to this new paradigm.

We have now entered the Inflation Paradigm of the Fed`s loose monetary experiment, it is time to pay the piper for all this excessively lax money printing complacency. We all knew this day would eventually come, ‘the boy cried wolf too many times’ we then let our guard down, and boom inflation smacks us and the Federal Reserve in the face, and nobody is prepared for the absolute carnage in the Bond Market!

 

Courtesy: EconMatters

4 Reasons Why America’s Economic Challenges Outweigh Opportunities

4 Reasons Why America’s Economic Challenges Outweigh Opportunities

4 Reasons Why America’s Economic Challenges Outweigh Opportunities

All government-directed economic activity grows at the expense of the private sector. And the election suggests that government coercion will drive even more U.S. economic activity in the future. This is a shame, because freely adjusting prices, competition, and innovation elevate living standards. Mandates, price controls, and subsidies — coercive actions — depress living standards. Quality falls. Shortages develop and persist.

Americans are in the midst of a destructive, self-reinforcing political cycle — a cycle that might conclude in a nightmare scenario. A sloppy diagnosis of the financial crisis lies at the root of the destructive cycle.

The free market did not cause the financial crisis; political meddling with interest rates and credit allocation caused it. Without a proper diagnosis, the medicine can be worse than the disease. In this destructive cycle, the popular response to a financial crisis caused by too much government and central bank influence is “Give us more government and crazier central banks!”

President Obama’s health care law provides an example of how government dipping its toe into a market can start a destructive cycle that ends in even more government control: Years after its passage, many of Obamacare’s details remain unknown. But we know it will demand insurance companies not charge premiums that vary too much for people with different health risks. The insurance companies will receive millions of new (but unprofitable) customers.

It’s easy to imagine price controls and mandates bankrupting many health insurance companies. All the while, politicians would blame the insurers for poor customer service and putting “profits over people.” Before you know it, the political door for a single-payer health care system would be pushed wide open — all because politicians are not interested in honestly discussing the impact of price controls and mandates on markets.

This is not meant to be a political screed. After a year or two of political theater and propaganda, you must be exhausted. But whether we like it or not, politics are an important part of the investing equation. And it is clearer than ever that the economy will continue getting mauled in a self-reinforcing cycle of more government leading to market failures leading to even more government.

Some of you are disappointed with the results of the last election, some are happy, and some (including those with libertarian views) wonder why any individual or political party would want to preside over a country whose challenges dwarf its opportunities.

Call me a grumpy cynic, but it helps to be a realist when examining this situation. Here’s why: You can’t argue, after thinking about the following four points, that America’s challenges (ignoring individual families or companies) do not outweigh America’s opportunities:

First, the “nondiscretionary” federal budget is set on autopilot, driven by demographics. Political inertia will not allow meaningful reforms. We don’t “have the votes,” as they say in Congress, to reform insolvent entitlement programs.

Second, a critical mass of voters demand government services, including health care — health care that remains waiting for bureaucrats to define. Here is a guess, based on government intrusion into markets: The health care system will become as popular as your local Department of Motor Vehicles within five years. Tuesday’s exit polls revealed that the popular American characteristic of self-reliance is not so popular anymore. Many voters see a European-style welfare state not as a bankrupting failure, but as a model for the U.S. They’re trading their freedom for the illusion of economic security.

Why is government-provided economic security an illusion? Simple: There is no way to pay for these benefits without raising tax rates to a degree that would destroy both the economy and the financial markets or annihilate the value of the dollar. Confiscating the income and assets of the “rich” (ignoring the fact that this would put countless people out of work) would make an unnoticeable dent in the budget deficit. This is a fact, not an opinion. Unfortunately, rather than start a factual conversation about the deficit, politicians choose to inflame the toxic emotion of envy.

Third, the next recession — and we are due for one in the not-too-distant future — would push the federal deficit well beyond expectations. Tax receipts would fall, along with incomes, capital gains, and economic activity. Spending on unemployment programs would rise again. The Obama administration’s predictable response to a recession would be another stimulus plan in which Democrats get more spending and Republicans get more tax cuts.

So in the end, a recession leads to wider deficits, which in turn lead to policies that widen deficits yet again. Paul Krugman and most other economics professors would love it. Krugman would consider this a worthwhile effort to fill some mythical, immeasurable “output gap,” while people with common sense would consider this going down the road to hyperinflation.

Fourth and finally, the Federal Reserve has boxed itself into a corner. Quantitative easing (QE) is a one-way proposition; there is no practical reversal from QE, as newly printed money has boosted the price level above where it otherwise would have been. Reversing QE would bring about dreaded “deflation.” Any exit strategy from QE exists purely in academic models. In reality, reversing QE (selling bonds and draining cash from the financial system) would crash all of today’s manipulated financial markets simultaneously.

The Fed’s goals early on in the crisis focused on supporting the banking system at the expense of savers. Now the Fed will be pressured, threatened, and eventually forced to monetize ever more U.S. government debt — all to finance a government budget that the private sector cannot afford.

As a proponent of small, affordable, sustainable — there is a nice buzzword — government, I lament that voters have chosen a government stuck in a destructive, self-reinforcing cycle. Time will tell if this cycle (more government, market failure, more government, market failure…) can be stopped.

 

Courtesy: Dan Amoss via Daily Reckoning

Is The Economic Recovery Based Only On Statistical Data?

Is The Economic Recovery Based Only On Statistical Data?

Is The Economic Recovery Only Statistical?

Like the annual migratory patterns of snowbirds, each year brings the “hope” of a surge in economic activity.  According to the most recent National Association Of Business Economics(NABE) survey:

“Real GDP grew 1.7% in 2012. Panelists anticipate real GDP growth to accelerate steadily from a 1.8% annual rate in the fourth quarter of 2013 to 3% in the fourth quarter of 2014. The medians of the five lowest and five highest individual forecasts for 2014 are 1.9% and 4.0%, respectively.”

Unfortunately, each year has been a disappointment to economic forecasts with current annual real economic growth averaging only 1.2% since 2009.  With the first quarter of 2014 already in the negative column, it will take quite a surge in economic activity in the remaining three quarters to meet expectations.

However, there is no arguing that there has indeed been economic recovery in the U.S.  My good friend and colleague Doug Short tracks the “Big Four” economic indicators each month(his site is a daily must-read) as shown in the chart below:

Dshort-Big-Four-Indicators-052114

There are two important points to take away from his analysis.  First, the primary economic data that feeds into the economic calculation have been expanding. Secondly, the current economic expansion is now 59 months in length which makes it the 5th longest recovery in U.S. history.  While the current economic cycle could certainly last longer, (post WWII expansions have averaged 63 months) the economic and business cycles have not been repealed. Notice the “flattening” of economic growth in the chart above.

Economic-Recovery-Cycles-052114

However, as I look at a variety of economic data, a question emerges. Since economic recoveries should be a function of economic prosperity across the national spectrum, is the current economic recovery achieving that goal?  In other words, while Wall Street and the top 20% of the population in terms of wealth have certainly enjoyed the surge in asset prices due to Federal Reserve interventions, has the other 80% of the population likewise seen an increase in prosperity?

In order for someone to be “better off” they need a job and wage growth that exceeds the rate of inflation, taxes, and cost of living. As I discussed this past Monday, since the beginning of 2009 there has been little increase in the number of full-time jobs relative to the working age population in the country.

 Employment-FullTime-JoblessClaims-2007-Present-051914

Furthermore, real disposable personal income growth has continued to wane even as the official unemployment rate declines.

Personal-Incomes-Employment-052114

The problem that this presents for hopes of a stronger economic recovery is that nearly 70% of economic growth is driven by personal consumption. With households still heavily leveraged It should be no surprise that economic growth has primarily “muddled through” in recent years.

The real story lies hidden below the headlines. Despite signs of economic recovery on the surface, the underbelly of the economy remains vastly weak. As I stated above, an organic economic recovery should be one that provides a lift in prosperity across a wide swath of the population. However, the current economic recovery has not done that.

The rise of the “welfare state” over the past six years has been unprecedented.  Social benefits as a percentage of real disposable income is at record levels as wages remain pressured due to a large and available labor competing for limited job openings. While incomes did uptick in the most recent quarter, it was not due to a significant rise in actual wages but rather increased social benefits.

Social-Benefits-PercentOfDPI-041514

There is an old adage that warns to“never count the consumer out.” Consumers are creative in finding alternative sources of income in order to sustain their current standard of living but does not bode well for long term economic prosperity.

Student loans from the government have more than quadrupled as unemployment insurance has run out. Once private student loans are included the total amount of student loan debt has surged to more than $1 Trillion.I stated in August of 2012 that:

“The problem with the current levels of student loan debt which has likely been used for consumption rather than education is that eventually a large chunk of these loans will default.  However, the difference now, as opposed to the ‘sub-prime’ housing loan debacle, it that there is no asset sitting behind the loan – just a promise to repay.  If you thought sub-prime loans turned out badly – just wait.”

At that time, the statement was readily dismissed. It was clearly evident that everyone was simply going back to school to gain further education.  However, this past March the WSJ made a shocking revelation:

“Some Americans caught in the weak job market are lining up for federal student aid, not for education that boosts their employment prospects but for the chance to take out low-cost loans, sometimes with little intention of getting a degree.”

Disability-StudentLoan-Claims-052114

Either the workplace has become extremely unsafe and reminiscent of Sinclair’s classic novel“The Jungle,” or there are a lot of people lying about being disabled.

While almost 2.6 million net new jobs have added since the beginnig of 2009, there have been more than 16.3 million individuals that are now getting support from food stamps and/or disability. Of course, with effectively 1 out of 3 individuals no longer counted as part of the work force this should not be surprising.

 Food-Stamp-Disability-Employment-052114

 As I stated earlier, I am NOT disputing the “quantity” of economic recovery that has occurred over recent years.  What I am questioning is the “quality” of the recovery.

It is clear that for the majority of Americans there has been little increase in economic prosperity. This is why recent polls find the approval rating for the current Administration near their lows.  Furthermore, while claims of economic recovery abound in the financial press, the attitudes of small business owners surveyed nationwide remain at levels normally associated with recessions.

NFIB-Survey-052114

Bill Dunkelberg, NFIB Chief Economist, summed this up well when he stated recently:

“Small business confidence rising is always a good thing, but it’s tough to be excited by meager growth in an otherwise tepid economy. Washington remains in a state of policy paralysis. From the small business perspective there continues to be no progress on their top problems:  cost of health insurance, uncertainty about economic conditions, energy costs, uncertainty about government actions, unreasonable regulation and red tape, and the tax code.

Has there been an economic recovery?

The statistical data clearly shows that this has been the case. However, the 100 million Americans that currently depend on some sort of social assistance to “make ends meet” are likely to disagree with that view.

 

Courtesy: Streettalklive

How The Fed Is Driving The Next Bust

How The Fed Is Driving The Next Bust

Financial Storm Chasing With Blinders On: How The Fed Is Driving The Next Bust

The latest iteration of the Fed’s meeting minutes is surreal. Its another economic weather report consisting of trivial, random observations about the quarter just ended that are as superficial as CNBC sound bites. Along with that prattle comes guesses and hopes about the next 30-90 days—including the expectation that the weather will “seasonally normalize” and that auto production schedules, for instance, which were down in March, will stabilize at that level “in the months ahead”.

Likewise, after noting that consumption spending moved “roughly sideways” during January and February, it detected that “recent information on factors that influence household spending were positive”—-a guess that turned out to be wrong based on data we already know from April retail sales. The data on new and existing home sales had indicated the continuation of a 5-month trend of sharp drops from prior year, but the minutes could muster only an on-the-one-hand-and-on-the-other-hand whitewash, accented with hopeful indicators on single-family permits and pending home sales.

Business investment was treated the same way—that is, it was down in the first quarter but “modest gains” are expected soon based on sentiment surveys. And as you read further the noise just keeps getting more foolish, including the hope that the negative net export performance in Q1 would be off-set by improving global developments. That fond hope included this doozy: “In Japan, industrial production rose robustly, and consumer demand was boosted by anticipation of the April increase in the consumption tax.”

That particular phrase actually translates into big speed bumps ahead, but that’s beside the point. What this item and all of the rest of the commentary amounts to is bus driver chatter about road conditions at the moment. Stated differently, the monetary politburo does indeed believe that it can steer our $17 trillion economy on a month-to-month basis, and attempts to do so with primitive “in-coming” data from the Washington statistical mills that is so tentative, imputed, guesstimated, seasonally maladjusted and subsequently revised as to be no better than anecdotal sound bites.

Worse still, it pretends to be executing its monetary central planning model without any of the “gosplan” tools that would really be needed to drive the thousands of variables and millions of actors which comprise an open $17 trillion economy that is deeply intertwined in the trade, capital and financial flows of the world’s $75 trillion GDP. Alas, its one size fits all control panel includes only interest rate pegging, risk asset propping and periodic open mouth blabbing by Fed heads.

But these are no longer efficacious tools for driving the real Main Street economy because to boost the latter above its natural capitalist path of productivity and labor hours based growth requires artificial credit expansion—that is, a persistent leveraging up of balance sheets so that credit bloated spending rises faster than production and income.

As should be evident after six continuous years of frantic money pumping that old secret sauce doesn’t work any more because the American economy has reached a condition of peak debt.  During the Keynesian heyday between 1970 and 2007 the nation’s total leverage ratio—that is, total public and private credit market debt relative to national income—soared right off the historic charts, rising from a 100-year ratio of +/- 150% of national income to a 350% leverage ratio by 2007.

Since the financial crisis, the components of national leverage have been shuffled from the household sector to the public sector, but the ratio has remained dead in the water at 3.5X. That means that contrary to all the ballyhoo about deleveraging, it has not happened in the aggregate, but where it has happened at the sector level actually proves that the Fed’s credit transmission channel is over and done.

Total non-financial business debt has risen from $11 trillion to $13.6 trillion since the financial crisis, but virtually all of that gain has gone into shrinkage of business equity capital—that is, LBOs, stock buybacks and cash M&A deals which levitate the price of shares in the secondary market, but do not fund productive assets and the wherewithal of future growth. In fact, as of Q1 business investment in plant and equipment was still nearly $70 billion or 5% below its late 2007 peak.

In the case of the household sector, the 40-year sprint into higher and higher leverage ratios has reversed and is now significantly below its peak at 220% of wage and salary income in 2007. At 180% today household leverage is off the mountain top—but it is still far above historically healthy levels, especially for an economy with rapidly aging demographics and soaring ratios of dependency on government benefits that requires tax extraction from debt-burdened households or debt levies on unborn taxpayers.

Household Leverage Ratio - Click to enlarge

Household Leverage Ratio – Click to enlarge

So the traditional credit expansion channel of Fed policy is busted, but the monetary politburo is like an old dog that is incapable of learning new tricks. It plans to keep money market rates at zero for seven years running through 2015 on the misbegotten notion that it can restart America’s unfortunate 40-year climb into the nosebleed section of the debt stadium.

That isn’t happening, of course, but the $3.5 trillion of new liquidity that it has poured through the coffers of the primary bonds dealers since September 2008 has not functioned like the proverbial tree falling in an empty forest. Just the opposite. It has been a roaring siren on Wall Street—guaranteeing free short-term money to fund the carry trades, while providing a transparent “put” under the price of debt and risk assets. In short, it has fueled the Wall Street gambling channel like never before in recorded history.

Do the Fed minutes evince a clue that six years into this frantic money printing cycle that speculation, financial leverage strategies and momentum chasing gamblers are setting up for the next bursting bubble.  Well no. Aside from pro forma caveats about possible future financial risks, the minutes claimed that all is well in the casino:

“In their discussion of financial stability, participants generally did not see imbalances that posed significant near-term risks to the financial system or the broader economy….

Perhaps they did not review the two charts that follow. Both  are ringing the bell loudly to the effect that we are reaching the same bubble asymptote—or curve that has reached its limit— as was recorded right before the crashes of 2000-2001 and 2007-2008.

The margin debt explosion is especially significant because it had reached a higher ratio to GDP (2.73%) than either of the two pervious bubble cycles. Back in the day of William  McChesney Martin, the Fed watched margin debt like a hawk because it was comprised of veterans of the 1929 crash. Accordingly, they did not hesitate to take preemptive tightening actions when speculation began to get out of line, such as in the summer of 1958. But this month’s meeting minutes did not even take note of the margin data.

To be sure, it is always possible to claim that the broad market is trading at “only” 15X the forward earnings of the S&P 500 at $123/share.  But that’s ex-items and from analyst hockey sticks which always get sharply reduced as the future actually materializes. In that respect it is notable that at this very point in the bubble cycle during October 2007, S&P forward earnings were projected at $118/ share for 2008 or 15X; they actually came in at $55/share on an ex-items basis, and a scant $15/share after a half decade of phony profits were written of by banks and non-financial business alike.

In any event, the landscape is riddled with froth and unsustainable speculation everywhere, but most especially in the world of junk credit where the final blow-off has occurred in each of the last three bubble cycles. All the usual suspects are there including record junk bond issuance, soaring expansion of the debt-on-debt-on-debt Wall Street vehicles known as CLOs—along with “cov lite” loans and leveraged recaps whereby the LBO kings pile more loans on portfolio companies already groaning under massive debt in order to pay themselves a fat dividend.

And then the tentacles of junk credit expand far and wide. Sub-prime auto debt is at nearly 2007 peak levels, and now another flavor has emerged: Subprime business debt whereby struggling shopkeepers and home-gamers are invited to pay up to 100% annualized interest to keep the doors open a few more months.

Finally, there is the ultimate in sub-prime—-student debt that has now reached $1.1 trillion, and which already sports default rates in excess of 30% among borrowers who are actually in repayment status.

Monetary central planning at the zero bound embodies a destructive internal contradiction. It inherently generates rampant speculation in real estate and financial assets because ZIRP massively subsidizes the cost of carry. At the same time, its practitioners are institutionally disposed to bubble denial because they falsely believe that their policies are what is keeping the real economy advancing–even if currently it is at a sub-normal pace by historical standards.

Without fail, therefore, monetary central planners keep their feet on the accelerator to the very end, boasting that the “in-coming data” shows the macro-economy approaching the nirvana of full-employment. What they are actually doing, however, is driving the financial system to unsustainable extremes of valuation and speculation— and eventually to a crash landing. We have had two of these processions of the lemmings—that is, Fed driven cycles of bubble inflation and bust—- already in this century. Now we are at the asymptote of the third.

nIt

Courtesy: 

The New “Water Barons”: Wall Street Mega-Banks Buying up the World’s Water

The New “Water Barons”: Wall Street Mega-Banks Buying up the World’s Water

The New “Water Barons”: Wall Street Mega-Banks Buying up the World’s Water

A disturbing trend in the water sector is accelerating worldwide. The new “water barons” — the Wall Street banks and elitist multibillionaires — are buying up water all over the world at unprecedented pace.

Familiar mega-banks and investing powerhouses such as Goldman Sachs, JP Morgan Chase, Citigroup, UBS, Deutsche Bank, Credit Suisse, Macquarie Bank, Barclays Bank, the Blackstone Group, Allianz, and HSBC Bank, among others, are consolidating their control over water. Wealthy tycoons such as T. Boone Pickens, former President George H.W. Bush and his family, Hong Kong’s Li Ka-shing, Philippines’ Manuel V. Pangilinan and other Filipino billionaires, and others are also buying thousands of acres of land with aquifers, lakes, water rights, water utilities, and shares in water engineering and technology companies all over the world.

The second disturbing trend is that while the new water barons are buying up water all over the world, governments are moving fast to limit citizens’ ability to become water self-sufficient (as evidenced by the well-publicized Gary Harrington’s case in Oregon, in which the state criminalized the collection of rainwater in three ponds located on his private land, by convicting him on nine counts and sentencing him for 30 days in jail). Let’s put this criminalization in perspective:

Billionaire T. Boone Pickens owned more water rights than any other individuals in America, with rights over enough of the Ogallala Aquifer to drain approximately 200,000 acre-feet (or 65 billion gallons of water) a year. But ordinary citizen Gary Harrington cannot collect rainwater runoff on 170 acres of his private land.

It’s a strange New World Order in which multibillionaires and elitist banks can own aquifers and lakes, but ordinary citizens cannot even collect rainwater and snow runoff in their own backyards and private lands.

“Water is the oil of the 21st century.” Andrew Liveris, CEO of DOW Chemical Company (quoted in The Economist magazine, August 21, 2008)

In 2008, I wrote an article,

“Why Big Banks May Be Buying up Your Public Water System,” in which I detailed how both mainstream and alternative media coverage on water has tended to focus on individual corporations and super-investors seeking to control water by buying up water rights and water utilities. But paradoxically the hidden story is a far more complicated one. I argued that the real story of the global water sector is a convoluted one involving “interlocking globalized capital”: Wall Street and global investment firms, banks, and other elite private-equity firms — often transcending national boundaries to partner with each other, with banks and hedge funds, with technology corporations and insurance giants, with regional public-sector pension funds, and with sovereign wealth funds — are moving rapidly into the water sector to buy up not only water rights and water-treatment technologies, but also to privatize public water utilities and infrastructure.

Now, in 2012, we are seeing this trend of global consolidation of water by elite banks and tycoons accelerating. In a JP Morgan equity research document, it states clearly that “Wall Street appears well aware of the investment opportunities in water supply infrastructure, wastewater treatment, and demand management technologies.” Indeed, Wall Street is preparing to cash in on the global water grab in the coming decades. For example, Goldman Sachs has amassed more than $10 billion since 2006 for infrastructure investments, which include water. A 2008 New York Times article mentioned Goldman Sachs, Morgan Stanley, Credit Suisse, Kohlberg Kravis Roberts, and the Carlyle Group, to have “amassed an estimated an estimated $250 billion war chest — must of it raised in the last two years — to finance a tidal wave of infrastructure projects in the United States and overseas.”

By “water,” I mean that it includes water rights (i.e., the right to tap groundwater, aquifers, and rivers), land with bodies of water on it or under it (i.e., lakes, ponds, and natural springs on the surface, or groundwater underneath), desalination projects, water-purification and treatment technologies (e.g., desalination, treatment chemicals and equipment), irrigation and well-drilling technologies, water and sanitation services and utilities, water infrastructure maintenance and construction (from pipes and distribution to all scales of treatment plants for residential, commercial, industrial, and municipal uses), water engineering services (e.g., those involved in the design and construction of water-related facilities), and retail water sector (such as those involved in the production, operation, and sales of bottled water, water vending machines, bottled water subscription and delivery services, water trucks, and water tankers).

Update of My 2008 Article: Mega-Banks See Water as a Critical Commodity

Since 2008, many giant banks and super-investors are capturing more market share in the water sector and identifying water as a critical commodity, much hotter than petroleum.

Goldman Sachs: Water Is Still the Next Petroleum

In 2008, Goldman Sachs called water “the petroleum for the next century” and those investors who know how to play the infrastructure boom will reap huge rewards, during its annual “Top Five Risks” conference. Water is a U.S.$425 billion industry, and a calamitous water shortage could be a more serious threat to humanity in the 21st century than food and energy shortages, according to Goldman Sachs’s conference panel. Goldman Sachs has convened numerous conferences and also published lengthy, insightful analyses of water and other critical sectors (food, energy).

Goldman Sachs is positioning itself to gobble up water utilities, water engineering companies, and water resources worldwide. Since 2006, Goldman Sachs has become one of the largest infrastructure investment fund managers and has amassed a $10 billion capital for infrastructure, including water.

In March 2012, Goldman Sachs was eyeing Veolia’s UK water utility business, estimated at £1.2 billion, and in July it successfully bought Veolia Water, which serves 3.5 million people in southeastern England.

Previously, in September 2003, Goldman Sachs partnered with one of the world’s largest private-equity firm Blackstone Group and Apollo Management to acquire Ondeo Nalco (a leading company in providing water-treatment and process chemicals and services, with more than 10,000 employees and operations in 130 countries) from French water corporation Suez S.A. for U.S.$4.2 billion.

In October 2007, Goldman Sachs teamed up with Deutsche Bank and several partners to bid, unsuccessfully, for U.K.’s Southern Water. In November 2007, Goldman Sachs was also unsuccessful in bidding for U.K. water utility Kelda. But Goldman Sachs is still looking to buy other water utilities.

In January 2008, Goldman Sachs led a team of funds (including Liberty Harbor Master Fund and the Pinnacle Fund) to buy U.S.$50 million of convertible notes in China Water and Drinks Inc., which supplies purified water to name-brand vendors like Coca-Cola and Taiwan’s top beverage company Uni-President. China Water and Drinks is also a leading producer and distributor of bottled water in China and also makes private-labeled bottled water (e.g., for Sands Casino, Macau). Since China has one of the worse water problems in Asia and a large emerging middle class, its bottled-water sector is the fastest-growing in the world and it’s seeing enormous profits. Additionally, China’s acute water shortages and serious pollution could “buoy demand for clean water for years to come, with China’s $14.2 billion water industry a long-term investment destination” (Reuters, January 28, 2008).

The City of Reno, Nevada, was approached by Goldman Sachs for “a long-term asset leasing that could potentially generate significant cash for the three TMWA [Truckee Meadows Water Authority] entities. The program would allow TMWA to lease its assets for 50 years and receive an up-front cash payment” (Reno News & Review, August 28, 2008). Essentially, Goldman Sachs wants to privatize Reno’s water utility for 50 years. Given Reno’s revenue shortfall, this proposal was financially attractive. But the water board eventually rejected the proposal due to strong public opposition and outcry.

Citigroup: The Water Market Will Soon Eclipse Oil, Agriculture, and Precious Metals

Citigroup’s top economist Willem Buitler said in 2011 that the water market will soon be hotter the oil market (for example, see this and this):

“Water as an asset class will, in my view, become eventually the single most important physical-commodity based asset class, dwarfing oil, copper, agricultural commodities and precious metals.”

In its recent 2012 Water Investment Conference, Citigroup has identified top 10 trends in the water sector, as follows:

1. Desalination systems
2. Water reuse technologies
3. Produced water / water utilities
4. Membranes for filtration
5. Ultraviolet (UV) disinfection
6. Ballast-water treatment technologies
7. Forward osmosis used in desalination
8. Water-efficiency technologies and products
9. Point-of-use treatment systems
10. Chinese competitors in water

Specifically, a lucrative opportunity in water is in hydraulic fracturing (or fracking), as it generates massive demand for water and water services. Each oil well developed requires 3 to 5 million gallons of water, and 80% of this water cannot be reused because it’s three to 10 times saltier than seawater. Citigroup recommends water-rights owners sell water to fracking companies instead of to farmers because water for fracking can be sold for as much as $3,000 per acre-foot instead of only $50 per acre/foot to farmers.

The ballast-water treatment sector, currently at $1.35 billion annually, is estimated to reach $30 to $50 billion soon. The water-filtration market is expected to outgrow the water-equipment market: Dow estimates it to be a $5 billion market annually instead of only $1 billion now.

Citigroup is aggressively raising funds for its war chest to participate in the coming tidal wave of infrastructure privatization: in 2007 it established a new unit called Citi Infrastructure Investors through its Citi Alternative Investments unit. According to Reuters, Citigroup “assembled some of the biggest names in the infrastructure business at the same time it is building a $3 billion fund, including $500 million of its own capital. The fund, according to a person familiar with the situation, will have only a handful of outside investors and will be focused on assets in developed markets” (May 16, 2007). Citigroup initially sought only U.S.$3 billion for its first infrastructure fund but was seeking U.S.$5 billion in April 2008 (Bloomberg, April 7, 2008).

Citigroup partnered with HSBC Bank, Prudential, and other minor partners to acquire U.K.’s water utility Kelda (Yorkshire Water) in November 2007. This week, Citigroup signed a 99-year lease with the City of Chicago for Chicago’s Midway Airport (it partnered with John Hancock Life Insurance Company and a Canadian private airport operator). Insiders said that Citigroup is among those bidding for the state-owned company Letiste Praha which operates the Prague Airport in the Czech Republic (Bloomberg, February 7, 2008).

As the five U.K. water utility deals illustrate, typically no one single investment bank or private-equity fund owns the entire infrastructure project — they partner with many others. The Citigroup is now entering India’s massive infrastructure market by partnering the Blackstone Group and two Indian private finance companies; they have launched a U.S.$5 billion fund in February 2007, with three entities (Citi, Blackstone, and IDFC) jointly investing U.S.$250 million. India requires about U.S.$320 billion in infrastructure investments in the next five years (The Financial Express, February 16, 2007).

UBS: Water Scarcity Is the Defining Crisis of the 21st Century

In 2006, UBS Investment Research, a division of Switzerland-based UBS AG, Europe’s largest bank by assets, entitled its 40-page research report, “Q-Series®:Water”—“Water scarcity: The defining crisis of the 21st century?” (October 10, 2006) In 2007, UBS, along with JP Morgan and Australia’s Challenger Fund, bought UK’s Southern Water for £4.2biillion.

Credit Suisse: Water Is the “Paramount Megatrend of Our Time”

Credit Suisse published its report about Credit Suisse Water Index (January 21, 2008) urged investors that “One way to take advantage of this trend is to invest in companies geared to water generation, preservation, infrastructure treatment and desalination. The Index enables investors to participate in the performance of the most attractive companies….” The trend in question, according to Credit Suisse, is the “depletion of freshwater reserves” attributable to “pollution, disappearance of glaciers (the main source of freshwater reserves), and population growth, water is likely to become a scarce resource.”

Credit Suisse recognizes water to be the “paramount megatrend of our time” because of a water-supply crisis might cause “severe societal risk” in the next 10 years and that two-thirds of the world’s population are likely to live under water-stressed conditions by 2025. To address water shortages, it has identified desalination and wastewater treatment as the two most important technologies. Three sectors for good investments include the following:

§ Membranes for desalination and wastewater treatment
§ Water infrastructure — corrosion resistance, pipes, valves, and pumps
§ Chemicals for water treatment

It also created the Credit Suisse Water Index which has the equally weighed index of 30 stocks out of 128 global water stocks. For investors, it offered “Credit Suisse PL100 World Water Trust (PL100 World Water),” launched in June 2007, with $112.9 million.

Credit Suisse partnered with General Electric (GE Infrastructure) in May 2006 to establish a U.S.$1 billion joint venture to profit from privatization and investments in global infrastructure assets. Each partner will commit U.S.$500 million to target electricity generation and transmission, gas storage and pipelines, water facilities, airports, air traffic control, ports, railroads, and toll roads worldwide. This joint venture has estimated that the developed market’s infrastructure opportunities are at U.S.$500 billion, and emerging world’s infrastructure market is U.S.$1 trillion in the next five years (Credit Suisse’s press release, May 31, 2006).

In October 2007, Credit Suisse partnered with Cleantech Group (a Michigan-based market-research, consulting, media, and executive-search firm that operates cleantech forums) and Consensus Business Group (a London-based equity firm owned by U.K. billionaire Vincent Tchenguiz) to invest in clean technologies worldwide. The technologies will also clean water technologies.

During its Asian Investment Conference, it said that “Water is a focus for those in the know about global strategic commodities. As with oil, the supply is finite but demand is growing by leaps and unlike oil there is no alternative.” (Credit Suisse, February 4, 2008). Credit Suisse sees the global water market with U.S.$190 billion in revenue in 2005 and was expected to grow to U.S.$342 billion by 2010. It sees most significant growth opportunities in China.

JPMorgan Chase: Build Infrastructure War Chests to Buy Water, Utilities, and Public Infrastructure Worldwide

One of the world’s largest banks, JPMorgan Chase has aggressively pursued water and infrastructure worldwide. In October 2007, it beat out rivals Morgan Stanley and Goldman Sachs to buy U.K.’s water utility Southern Water with partners Swiss-based UBS and Australia’s Challenger Infrastructure Fund. This banking empire is controlled by the Rockefeller family; the family patriarch David Rockefeller is a member of the elite and secretive Bilderberg Group, Council on Foreign Relations, and Trilateral Commission.

JPMorgan sees infrastructure finance as a global phenomenon, and it is joined by its global peers in investment and banking institution in their rush to cash in on water and infrastructure. JPMorgan’s own analysts estimate that the emerging markets’ infrastructure is approximately U.S.$21.7 trillion over the next decade.

JPMorgan created a U.S.$2 billion infrastructure fund to go after India’s infrastructure projects in October 2007. The targeted projects are transportation (roads, bridges, railroads) and utilities (gas, electricity, water). India’s finance minister has been estimated that India requires about U.S.$500 billion in infrastructure investments by 2012. In this regard, JPMorgan is joined by Citigroup, the Blackstone Group, 3i Group (Europe’s second-largest private-equity firm), and ICICI Bank (India’s second-largest bank) (International Herald Tribune, October 31, 2007). Its JPMorgan Asset Management has also established an Asian Infrastructure & Related Resources Opportunity Fund which held a first close on U.S.$500 million (€333 million) and will focus on China, India, and other Southern Asian countries, with the first two investments in China and India (Private Equity Online, August 11, 2008). The fund’s target is U.S.$1.5 billion.

JPMorgan’s Global Equity Research division also published a 60-page report called “Watch water: A guide to evaluating corporate risks in a thirsty world” (April 1, 2008).

In 2010, J.P. Morgan Asset Management and Water Asset Management led a $275 million buyout bid for SouthWest Water.

Allianz Group: Water Is Underpriced and Undervalued

Founded in 1890, Germany’s Allianz Group is one of the leading global services providers in insurance, banking, and asset management in about 70 countries. In April 2008, Allianz SE launched the Allianz RCM Global Water Fund which invests in equity securities of water-related companies worldwide, emphasizing long-term capital appreciation. Alliance launched its Global EcoTrends Fund in February 2007 (Business Wire, February 7, 2007).

Allianz SE’s Dresdner Bank AG told its investors that “Investments in water offer opportunities: Rising oil prices obscure our view of an even more serious scarcity: water. The global water economy is faced with a multi-billion dollar need for capital expenditure and modernization. Dresdner Bank sees this as offering attractive opportunities for returns for investors with a long-term investment horizon.” (Frankfurt, August 14, 2008)

Like Goldman Sachs, Allianz has the philosophy that water is underpriced. A co-manager of the Water Fund in Frankfurt, said, “A key issue of water is that the true value of water is not recognized. …Water tends to be undervalued around the world. …Perhaps that is one of the reasons why there are so many places with a lack of supply due to a lack of investment. With that in mind, it makes sense to invest in companies that are engaged in improving water quality and infrastructure.” Allianz sees two key investment drivers in water: (1) upgrading the aging infrastructure in the developed world; and (2) new urbanization and industrialization in developing countries such as China and India.

Barclays PLC: Water Index Funds and Exchange-Traded Funds

Barclays PLC is a U.K.-based major global financial services provider operating in all over the world with roots in London since 1690; it operates through its subsidiary Barclays Bank PLC and its investment bank called Barclays Capital.

Barclays Bank’s unit Barclays Global Investors manages an exchange-traded fund (ETF) called iShares S&P Global Water, which is listed on the London Stock Exchanges and can be purchased like any ordinary share through a broker. Touting the iShares S&P Global Water as offering “a broad based exposure to shares of the world’s largest water companies, including water utilities and water equipment stocks” of water companies around the world, this fund as of March 31, 2007 was valued at U.S.$33.8 million.

Barclays also have a climate index fund: launched on January 16, 2008, SAM Indexes GmbH licensed its Dow Jones Sustainability Index to Barclays Capital for investors in Germany and Switzerland. Many other banks also have a climate index or sustainability index.

In October 2007, Barclays Capital also partnered with Protected Distribution Limited (PDL) to launch a new water investment fund (with expected annual returns of 9% to 11%) called Protected Water Fund. This new fund, listed in the Isle of Man, requires a minimum of £10,000 and is structured as a 10-year investment with Barclays Bank providing 100% of capital protection until maturity on October 11, 2017. The Protected Water Fund will be invested in some of the world’s largest water companies; its investment decisions will be made based on an index created by Barclays Capital, the Barclays World Water Strategy, which charts the performance of some of the world’s largest water-related stocks (Investment Week and Reuters, October 11, 2007; Business Week, October 15, 2007).

Deutsche Bank’s €2 Billion Investment in European Infrastructure: “Megatrend” in Water, Climate, Infrastructure, and Agribusiness Investments

Deutsche Bank is one of the major players in the water sector worldwide. Its Deutsche Bank Advisors have identified water as a part of the climate investment strategies. In its presentation, “Global Warming: Implications for Investors,” they have identified the four following major areas for water investment:

§ Distribution and management: (1) Supply and recycling, (2) water distribution and sewage, (3) water management and engineering.
§ Water purification: (1) Sewage purification, (2) disinfection, (3) desalination, (4) monitoring.
§ Water efficiency (demand): (1) Home installation, (2) gray-water recycling, (3) water meters.
§ Water and nutrition: (1) Irrigation, (2) bottled water.

In addition to water, the other two new resources identified were agribusiness (e.g., pesticides, genetically modified seeds, mineral fertilizers, agricultural machinery) and renewable energies (e.g., solar, wind, hydrothermal, biomass, hydroelectricity).

The Deutsche Bank has established an investment fund of up to €2 billion in European infrastructure assets using its Structured Capital Markets Group (SCM), part of the bank’s Global Markets division. The bank already has several “highly attractive infrastructure assets,” including East Surrey Holdings, the owner of U.K.’s water utility Sutton & East Surrey Water (Deutsche Bank press release, September 22, 2006).

Moreover, Deutsche Bank has channeled €6 billion (U.S.$8.55 billion) into climate change funds, which will target companies with products that cut greenhouse gases or help people adapt to a warmer world, in sectors from agriculture to power and construction (Reuters, October 18, 2007).

In addition to SCM, Deutsche Bank also has the RREEF Infrastructure, part of RREEF Alternative Investments, headquartered in New York with main hubs in Sydney, Singapore, and London. RREEF Infrastructure has more than €6.7 billion in assets under management. One of its main targets is utilities, including electricity networks, water-treatment or distribution operations, and natural-gas networks. In October 2007, RREEF partnered with Goldman Sachs, GE, Prudential, and Babcok & Brown Ltd. to bid unsuccessfully for U.K.’s water utility Southern Water.

§ Crediting the boom in European infrastructure investment, the RREEF fund by August 2007 had raised €2 billion (U.S.$2.8 billion); Europe’s infrastructure market is valued at between U.S.$4 trillion to U.S.$6 trillion (DowJones Financial News Online, August 7, 2007).

§ Bulgaria — Deutsche Bank Bulgaria is planning to participate in large infrastructure projects, including public-private partnership projects in water and sewage worth up to €1 billion (Sofia Echo Media, February 26, 2008).

§ Middle East — Along with Ithmaar Bank B.S.C. (an private-equity investment bank in Bahrain), Deutsche Bank co-managed a U.S.$2 billion Shari’a-compliant Infrastructure and Growth Capital Fund and plans to target U.S.$630 billion in regional infrastructure.

Deutsche Bank AG is co-owner of Aqueduct Capital (UK) Limited which in 2006 offered to buy U.K.’s sixth-largest water utility Sutton and East Surrey Water plc from British tycoon Guy Hand. According to an OFWAT consultation paper (May 2007), Deutsche Bank formed this new entity, Aqueduct Capital (short for ACUK), in October 2005, with two public pension funds in Canada, Singapore’s life insurance giant, and a Canadian province’s investment fund, among others. This case, again, is an illustration of the complex nature of ownership of water utilities today, with various types of institutions crossing national boundaries to partner with each other to hold a stake in the water sector. With its impressive war chest dedicated to water, food, and infrastructure, Deutsche Bank is expected to become a major player in the global water sector.

Other Mega-Banks Eyeing Water as Hot Investment

Merrill Lynch (before being bought by Bank of America) issued a 24-page research report titled “Water scarcity; a bigger problem than assumed” (December 6, 2007). ML said that water scarcity is “not limited to arid climates.”

Morgan Stanley in its publication, “Emerging Markets Infrastructure: Just Getting Started” (April 2008) recommends three areas of investment opportunities in water: water utilities, global operators (such as Veolia Environment), and technology companies (such as those that manufacture membranes and chemicals used in water treatment to the water industry).

Mutual Funds and Hedge Funds Join the Action in Water

Water investment funds are on the rise, such as these four well-known water-focused mutual funds:

1. Calvert Global Water Fund (CFWAX) — $42 million in assets as of 2010, which holds 30% of its assets in water utilities, 40% in infrastructure companies, and 30% in water technologies. Also between 65% to 70% of the water stocks derived more than 50% of their revenue from water-related activities.
2. Allianz RCM Global Water Fund (AWTAX) — $54 million assets as of 2010, most of it invested in water utilities.
3. PFW Water Fund (PFWAX) — $17 million in assets as of 2010, with a minimum investment of $2,500, with 80% invested in water-related companies….
4. Kinetics Water Infrastructure Advantaged Fund (KWIAX) — $26 million in assets as of 2010, with a minimum investment of $2,500.

This is a brief list of water-centered hedge funds:

§ Master Water Equity Fund — Summit Global AM (United States)
§ Water Partners Fund — Aqua Terra AM (United States)
§ The Water Fund — Terrapin AM (United States)
§ The Reservoir Fund — Water AM (United States)
§ The Oasis Fund — Perella Weinberg AM (United States)
§ Signina Water Fund — Signina Capital AG (Switzerland)
§ MFS Water Fund of Funds — MFS Aqua AM (Australia)
§ Triton Water Fund of Funds — FourWinds CM (United States)
§ Water Edge Fund of Funds — Parker Global Strategies LLC (United States)

Other banks have launched water-targeted investment funds. Several well-known specialized water funds include Pictet Water Fund, SAM Sustainable Water Fund, Sarasin Sustainable Water Fund, Swisscanto Equity Fund Water, and Tareno Waterfund. Several structured water products offered by major investment banks include ABN Amro Water Stocks Index Certificate, BKB Water Basket, ZKB Sustainable Basket Water, Wagelin Water Shares Certificate, UBS Water Strategy Certificate, and Certificate on Vontobel Water Index. There are also several water indexes and index funds, as follows:

Credit Suisse Water Index
HSBC Water, Waste, and Pollution Control Index
Merrill Lynch China Water Index
S&P Global Water Index
First Trust ISE Water Index Fund (FIW)
International Securities Exchange’s ISE-B&S Water Index

The following is a small sample of other water funds and certificates (not exhaustive of the current range of diverse water products available):

Allianz RCM Global EcoTrends Fund
Allianz RCM Global Water Fund
UBS Water Strategy Certificate—it has a managed basket of 25 international stocks
Summit Water Equity Fund
Maxxwater Global Water Fund
Claymore S&P Global Water ETF (CGW)
Barclays Global Investors’ iShares S&P Global Water
Barclays and PDL’s Protected Water Fund based on Barclays World Water Strategy
Invesco’s PowerShares Water Resources Portfolio ETF (PHO)
Invesco’s PowerShares Global Water (PIO)
Pictet Asset Management’s Pictet Water Fund and Pictet Water Opportunities Fund
Canadian Imperial Bank of Commerce’s Water Growth Deposit Notes
Criterion Investments Limited’s Criterion Water Infrastructure Fund

One often-heard reason for the investment banks’ rush to control of water is that “Utilities are viewed as relatively safe assets in an economic downturn so [they] are more isolated than most from the global credit crunch, initially sparked by concerns over U.S. subprime mortgages” (Reuters, October 9, 2007). A London-based analyst at HSBC Securities told Bloomberg News that water is a good investment because “You’re buying something that’s inflation proof and there’s no threat to earnings really. It’s very stable and you can sell it any time you want” (Bloomberg, October 8, 2007).

More Pension Funds Investing in Water

Many pension funds have entered the water sector as a relatively safe sector for investment. For example, BT Pension Scheme (of British Telecom plc) has bought stakes in Thames Water in 2012, while Canadian pension funds CDPQ (Caisse de dépôt et placement du Québec, which manages public pension funds in Québec) and CPPIB (Canada Pension Plan Investment Board) have acquired England’s South East Water and Anglian Water, respectively, as reported by Reuters this year.

Sovereign Wealth Investment Funds Jumping into Water

In January 2012, China Investment Corporation has bought 8.68% stakes in Thames Water, the largest water utility in England, which serves parts of the Greater London area, Thames Valley, and Surrey, among other areas.

In November 2012, One of the world’s largest sovereign wealth funds, the Abu Dhabi Investment Authority (ADIA), also purchased 9.9% stake in Thames Water.

Billionaires Sucking up Water Globally: George H.W. Bush and Family, Li Ka-shing, the Filipino Billionaires, and Others

Not only are the mega-banks investing heavily in water, the multibillionaire tycoons are also buying water.

Update on Hong Kong Multibillionaire Li Ka-shing’s Water Acquisition

In summer 2011, the Hong Kong multibillionaire tycoon Li Ka-shing who owns Cheung Kong Infrastructure (CKI), bought Northumbrian Water, which serves 2.6 million people in northeastern England, for $3.9 billion (see this and this).

CKI also sold Cambridge Water for £74 million to HSBC in 2011. Not satisfied with controlling the water sector, in 2010, CKI with a consortium bought EDF’s power networks in UK for £5.8 billion.

Li is now also collaborating with Samsung on investing in water treatment.

Warren Buffet Buys Nalco, a Chemical Maker and Water Process Technology Company

Through his Berkshire Hathaway, Warren Buffet is the largest institutional investor of Nalco Holding Co. (NLC), a subsidiary of Ecolab, with 9 million shares. Nalco was named 2012 Water Technology Company of the Year. Nalco manufactures treatment chemicals and water treatment process technologies.

But the company Nalco is not just a membrane manufacturer; it also produced the infamous toxic chemical dispersant Corexit which was used to disperse crude oil in the aftermath of BP’s oil spill in the Gulf of Mexico in 2010. Before being sold to Ecolab, Nalco’s parent company was Blackstone……

Former President George H.W. Bush’s Family Bought 300,000 Acres on South America’s and World’s Largest Aquifer, Acuifero Guaraní

In my 2008 article, I overlooked the astonishingly large land purchases (298,840 acres, to be exact) by the Bush family in 2005 and 2006. In 2006, while on a trip to Paraguay for the United Nation’s children’s group UNICEF, Jenna Bush (daughter of former President George W. Bush and granddaughter of former President George H.W. Bush) reportedly bought 98,840 acres of land in Chaco, Paraguay, near the Triple Frontier (Bolivia, Brazil, and Paraguay). This land is said to be near the 200,000 acres purchased by her grandfather, George H.W. Bush, in 2005.

The lands purchased by the Bush family sit over not only South America’s largest aquifer — but the world’s as well — Acuifero Guaraní, which runs beneath Argentina, Brazil, Paraguay, and Uruguay. This aquifer is larger than Texas and California combined.

Online political magazine Counterpunch quoted Argentinean pacifist Adolfo Perez Esquivel, the winner of 1981 Nobel Peace Prize, who “warned that the real war will be fought not for oil, but for water, and recalled that Acuifero Guaraní is one of the largest underground water reserves in South America….”

According to Wikipedia, this aquifer covers 1,200,000 km², with a volume of about 40,000 km³, a thickness of between 50 m and 800 m and a maximum depth of about 1,800 m. It is estimated to contain about 37,000 km³ of water (arguably the largest single body of groundwater in the world, although the overall volume of the constituent parts of the Great Artesian Basin is much larger), with a total recharge rate of about 166 km³/year from precipitation. It is said that this vast underground reservoir could supply fresh drinking water to the world for 200 years.

Filipino Tycoon Manuel V. Pangilinan and Others Buy Water Services in Vietnam

In October 2012, Filipino businessman Manuel V. Pangilinan went to Vietnam to scout for investment opportunities, particularly on toll road and water services. Mr. Pangilinan and other Filipino billionaires, such as the owners of the Ayala Corp. and subsidiary Manila Water Co. earlier announced a deal to buy a 10-per cent stake in Ho Chi Minh City Infrastructure Investment Joint Stock Co. (CII) and a 49-per cent stake in Kenh Dong Water Supply Joint Stock Co. (Kenh Dong).

The Ayala group has also entered the Vietnamese market by buying significant minority interest in a leading infrastructure company and a bulk water supply company both based in Ho Chi Minh City.

Water Grabbing Is Unstoppable

Unfortunately, the global water and infrastructure-privatization fever is unstoppable: many local and state governments are suffering from revenue shortfalls and are under financial and budgetary strains. These local and state governments can longer shoulder the responsibilities of maintaining and upgrading their own utilities. Facing offers of millions of cash from Goldman Sachs, JPMorgan Chase, Citigroup, UBS, and other elite banks for their utilities and other infrastructure and municipal services, cities and states will find it extremely difficult to refuse these privatization offers.

The elite multinational and Wall Street banks and investment banks have been preparing and waiting for this golden moment for years. Over the past few years, they have amassed war chests of infrastructure funds to privatize water, municipal services, and utilities all over the world. It will be extremely difficult to reverse this privatization trend in water.

 

Courtesy: Jo-Shing Yang via Global Research

2013 Results: Top Primary Miners Real Cost To Produce Silver

2013 Results: Top Primary Miners Real Cost To Produce Silver

2013 Results: Top Primary Miners Real Cost To Produce Silver

Due to the Fed’s QE policy of propping up the stock and bond markets while monkey-hammering the precious metals, the top primary miners gave away their silver at a loss in 2013.  While some of the top 12 primary miners stated adjusted income gains for the year, all the companies suffered net income losses — a staggering $1.7 billion loss for the group.

With these huge losses, you would think the top silver institutions would report this in their annual publications.  Unfortunately, the opposite is the case.  According to CPM Group’s 2014 Silver Yearbook and Thomson Reuters GFMS most recent World Silver Survey, the top primary miners produced silver at a Cash Cost below $10 an ounce.

This low Cash Cost figure gives the impression to the unsophisticated precious metal investor, that silver is very inexpensive to produce.  Now, when I say unsophisticated, I mean lacking the detailed knowledge of the silver market and mining industry.

CPM Group announced that the average cash cost to mine silver in 2013 fell to $9.68 an ounce from $10.01 in 2012.  GFMS in their 2014 World Silver Survey stated the primary silver miner’s cash cost increased from $9.16 in 2012 to $9.27 in 2013.  If we average the figures from both of these institutions, the top primary miners produced silver in 2013 at an average cash cost of $9.47.

Top 12 Primary Silver Miners Suffered A Loss Of $1.00 An Ounce In 2013

According to Kitco.com, the average price of silver in 2013 was $23.79.  Using simple arithmetic, the top primary miners should have made a cash profit of $14.32 an ounce ($23.79 – $9.47 = $14.32).  However, this was not the case.  My top 12 primary silver miners as a group suffered an adjusted income loss of nearly $1.00 an ounce in 2013.

Here are the FULL YEAR financial results for the top primary silver miners in 2013:

Top 12 Primary Silver Miners 2013 FULL YEAR Metrics

Last year, the top 12 primary silver miners stated total revenues of $3.1 billion while suffering a net income loss of $1.7 billion (largely due to impairment write-downs) and $139.9 million adjusted loss for the group.

When I calculate my estimated break-even, I use adjusted income.  Adjusted income removes items that are not associated with the actual day-to-day operations of the mine.  So where’s all the profits?  How did the top primary miners lose nearly $140 million in adjusted income if their Cash Cost was an average of $9.47 an ounce in 2013?

I did a weighted cash cost average for my group which netted $9.76 an ounce… not too far off from the figures put out by CPM Group and GFMS.  I imagine they included Fresnillo in their calculation as the company produced nearly 39 million oz of silver in 2013…. at a low cash cost.

I excluded Fresnillo in my group due to the fact that they do not release quarterly financial statements and they now enjoy higher gold revenues than silver.  Regardless, Fresnillo doesn’t impact the overall cash cost figure all that much.

Looking at the table above, we can see that these primary miners produced 92.7 million ounces of silver and sold 92 million at an average realized price of $23.09 in 2013.  Using my formula, break-even for the group was $24.05.  Basically, the group gave away their silver at a net adjusted loss of $0.97 an ounce. 

Let me tell you why the Cash Cost metric is so insane.  When a mining company calculates its cash cost, it takes total production costs and subtracts various items including what they call, “By-product credits.”  All silver mining companies produce additional metals (included in the ore) such as copper, lead, zinc and gold.

For example, Endeavour Silver recorded a $7.92 cash cost an ounce in 2013.  To get this low cash cost figure, Endeavour subtracted $111.5 million of by-product credits.  This is a big amount when we consider that its total revenue for the year was $276.7 million.  Thus, their by-product credits accounted for 40% of their total revenues.

The mining industry would like the investors to believe that by-product credits are a nice BONUS for mining silver…. which is why they only advertise that stupid Cash Cost figure in their publications.

Again, using my formula, Endeavour Silver made an estimated $0.93 adjusted silver profit per ounce in 2013.  Their average realized price for silver was $23.10 resulting in an estimated break-even of $22.17 last year.  If we subtract their cash cost of $7.92 from their average realized price of $23.10, we would arrive at a hefty $15.18 cash profit.

That’s right… $15.18 an ounce cash profit.  Unfortunately, Endeavour Silver only stated a $11.1 million adjusted income gain for the year after selling 7.1 million oz of silver.  If we multiply $15.18 million by 7.1 million oz, Endeavour should have enjoyed a $107.7 million cash profit in 2013….. they’re didn’t.

Why?  Because every primary silver mining company NEEDS ALL OF ITS BY-PRODUCT REVENUE to fortify its balance sheet.  Can you imagine the losses Endeavour Silver would suffer if it excluded its by-product revenue??

Let me be more clear.  I don’t use the term “By-product Credits”, rather I like to label these additional metals as “By-product Revenue.”  Because that is exactly what they are… ADDITIONAL REVENUE.

FOLKS… There’s A Lot Of BS Out There, And It Ain’t Good For You

Looking at the table above once more, we can see that total by-product revenue was a staggering $1.13 billion, or 36% of total revenue for the group.  If the group lost $139.9 million in adjusted income in 2013, can you imagine the hemorrhaging that would occur if we deducted this by-product revenue?

Again, the cash cost metric is not a GAAP – Generally Accepted Accounting Principle and should not be used to determine the PROFITABILITY of a company.  I find it simply amazing that the top professional silver publications continue to advertise this stupid Cash Cost metric as the basis of actual costs.

It is a completely useless accounting method.  Furthermore, the mining companies are now calculating what is known as “All-In Sustaining Cost” per ounce.  Unfortunately, they still deduct by-product credits as a base to get this All-In Sustaining Cost…. which still skews the results to a lower figure.

George Carlin said it wisely in one of his last HBO Comedy Specials, “Folks, there’s a lot of BS out there… and it ain’t good for you.”  Not only does this hold true for the majority of what Americans see and read on MSM everyday, it’s also true in the mining industry.

The top primary silver miners work extremely hard to produce a highly sought after industrial commodity as well as one of the top two precious metals in the world.  It is a shame that the professional analyst community confuses investors with this silly Cash Cost metric.

Cash Costs do not reflect the actual total cost of mining silver.  As we can see, the top 12 primary silver miners as a group lost nearly $1.00 an ounce in 2013.  I’ve received emails from some of my readers stating that these mining companies deduct Depreciation, Depletion and Amortization which allows them to show a lower net or adjusted income.

While this may be true, it’s a deduction for a GOOD REASON… and not just for the sake of stating lower profits to investors or the government.  Furthermore, these top 12 primary silver miners spent a staggering $842 million on capital expenditures (CAPEX) in 2013.  The majority of their CAPEX spending is not reflected in their quarterly financial statement of net income.

Basically, the Depreciation-Depletion-Amortization deductions and CAPEX spending is a net wash… for the most part.  So… it’s a NON ISSUE if you ask my opinion.

After losing money in 2013, the primary silver miners cut costs, exploration and capital spending to become more lean in 2014.  I will be publishing my Q1 2014 results in the next few weeks when the last few mining companies release their financial statements.

The precious metals will become extremely important physical assets to own and hold in the future.  Currently, the Fed and Central Banks continue to manipulate the values of these metals lower discouraging public interest while propping up the stock and bond markets.

This monetary policy has achieved some short-term success, unfortunately it will create an even greater financial and economic collapse in the future.  Precious metals and some of the mining companies will benefit greatly when the world finally wakes up from their 40 year fiat monetary amnesia.

 

Courtesy: SRSroccoreport

Barclays Fined For Manipulating Price Of Gold For A Decade

Barclays Fined For Manipulating Price Of Gold For A Decade

Barclays Fined For Manipulating Price Of Gold For A Decade; Sending “Bursts” Of Sell Orders

It was almost inevitable: a week after we wrote “From Rothschild To Koch Industries: Meet The People Who “Fix” The Price Of Gold” and days after “Barclays’ Head Of Gold Trading, And Gold “Fixer”, Is Leaving The Bank“, earlier today the UK Financial Conduct Authority finally formalized what most in the “tin-foil” hat community had known for years, when it announced that it fined Barclays £26 million for manipulating “the setting of the price of gold in order to avoid paying out on a client order.” Furthermore, the FCA confirmed that those inexplicable gold raids which come as if out of nowhere, and slam gold with a vicious force so strong sometime they halt the entire market, had a very specific source: Barclays, whose trader Daniel James Plunkett, born 1976, “sent out a burst of orders aimed at moving the price of gold.”

This took place for a decade. As the FT reports:

The FCA said Barclays had failed to “adequately manage conflicts of interest between itself and its customers as well as systems and controls failings, in relation to the gold fixing” between 2004 and 2013.

Some further details on Plunkett’s preferred means of manipulating the gold price.

The FCA said Mr Plunkett had manipulated the market by placing, withdrawing and re-placing a large sell order for between 40,000 oz and 60,000 oz of gold bars.

 

He did this in an attempt to pull off a “mini puke”, which the FCA took to mean a sharp fall in the price of gold. As a result, the bank was not obliged to make a $3.9m payment to the customer under an option contract.

Which is precisely what we have shown many times here for example in “Vicious Gold Slamdown Breaks Gold Market For 20 Seconds“, when a sell order so aggressive comes in it not only takes out the entire bid stack with an intent not for “best execution” but solely to reprice the market lower. Recall from September:

There was a time when, if selling a sizable amount of a security, one tried to get the best execution price and not alert the buyers comprising the bid stack that there is (substantial) volume for sale. Of course, there was and always has been a time when one tried to manipulate prices by slamming the bid until it was fully taken out, usually just before close of trading, an illegal practice known as “banging the close.” It appears that when it comes to gold, the former is long gone history, and the latter is perfectly legal. As the two charts below from Nanex demonstrate, overnight just before 3 am Eastern, a block of just 2000 GC gold futures contracts slammed the price of gold, on no news as usual, sending it lower by $10/oz. However, that is not new: such slamdowns happen every day in the gold market, and the CFTC constantly turns a blind eye. What was different about last night’s slam however, is that this time whoever was doing the forced, manipulation selling, just happened to also break the market. Indeed: following the hit, the entire gold market was NASDARKed for 20 seconds after a circuit breaker halted trading!

 

To summarize: a humble block of 2000 gold futs (GC) taking out the bid stack, and slamming the price of gold, managed to halt the gold market: one of the largest “asset” markets in the world in terms of total notional, for 20 seconds.

And Mr. Plunkett in action:

To be sure Barclays was truly sorry, and pinky swears that having been caught manipulating the gold market for ten years it will never do it again:

The news is also a fresh blow to Barclays’ chief executive Antony Jenkins as he tries to overhaul the culture of the London-based lender. Mr Jenkins took over 18 months ago after his predecessor, Bob Diamond, stepped down amid the Libor scandal.

 

Analysts said the fine reflected badly on the industry – as well as the hard-charging, revenue-focused business model that Barclays had previously been operating.

 

Mr Jenkins said in a statement on Friday: “We very much regret the situation that led to this settlement?.?.?.?These situations strengthen our resolve to improve.” The bank discovered the misconduct after the client complained. It then reported the incident to the regulator, for which it received a 30 per cent discount on its fine for co-operation.

 

Ian Gordon, analyst at Investec, said that in pure financial terms, the fine was “utterly inconsequential, both in a group context, and in relation to the quantum of other conduct costs”. He was referring specifically to the bank’s provisions for the mis-selling of payment protection insurance and interest rate hedging products

So a wrist slap, we get that. One wouldn’t expect more – after all the banks run the show.  And yet, one wonders: is this just a case of “Fab Tourre-ing” the scandal, and redirecting all attention to just one (preferably junior) person? To be sure, this one trader made handsome profits from gold manipulation…

Mr Plunkett boosted his trading book by $1.8m at the expense of a customer, who was later compensated. He has now been banned from “performing any function in relation to any regulated activity” and fined £95,600. At the time, Barclays was one of five banks that set the price of the precious metal twice a day. Tracey McDermott, the FCA’s director of enforcement and financial crime, said: “A firm’s lack of controls and a trader’s disregard for a customer’s interests have allowed the financial services industry’s reputation to be sullied again.”

… but is this just an attempt by the FCA to pass this off as the proverbial “only cockroach”, especially when as we reported earlier this week, none other than Barclays head of trading Marc Booker quietly left dodge?

The speculation is further heightened when one considers that Plunkett had left Barclays nearly two years ago in October 2012! According to his FCA record:

Prior to Barclays Plunkett worked as a lowly junior trader at Dresdner and RBC – and this is the a manipulation mastermind? Further, considering the FCA found failures at Barclays starting in 2004 and Plunkett only joined in 2006, can the FCA please disclose who else was the frontman for gold manipulation at Barclays in the 2004-2006 period? 

This is what the FCA had to say on the matter of young master Plunkett:

Plunkett was a Director on the Precious Metals Desk at Barclays and was responsible for pricing products linked to the price of precious metals and managing Barclays’ risk exposure to those products.

 

Plunkett was responsible for pricing and managing Barclays’ risk on a digital exotic options contract (the Digital) that referenced the price of gold during the 3:00 p.m. Gold Fixing on 28 June 2012. If the price fixed above US$1,558.96 (the Barrier) during the 3:00 p.m. Gold Fixing on 28 June 2012, then Barclays would be required to make a payment to its customer. But if the price fixed below the Barrier, Barclays would not have to make that payment.

 

During the 3:00 p.m. Gold Fixing on 28 June 2012, Plunkett placed certain orders with the intent of increasing the likelihood that the price of gold would fix below the Barrier, which it eventually did. As a result, Barclays was not obligated to make the US$3.9m payment to its customer,and Plunkett’s book profited by US$1.75m (excluding hedging), which was in addition to an initial profit that his book had received upon the sale of the Digital.

 

Very shortly after the conclusion of the 3:00 p.m. Gold Fixing on 28 June 2012, the customer became aware that the price had fixed just below the Barrier and sought an explanation from Barclays as to what happened in the Gold Fixing. When Barclays relayed the customer’s concerns to Plunkett on 28 and 29 June 2012, he failed to disclose that he had placed orders and traded during the Gold Fixing. Further, Plunkett misled both Barclays and the FCA by providing an account of events that was untruthful.

 

Plunkett’s misconduct is particularly serious because he preferred his interests over those of a customer and his actions had the potential to have an adverse effect on the Gold Fixing and the UK and international financial markets.

It would appear that Plunkett is indeed nothing more than another instance of “Kerviel” or “Tourre” – an irrelevant mid-level trader thrown at the wolves of public consumption just so the attention can be redirected from the real manipulation elsewhere, and much higher up.

This is hardly surprising, as we noted three days ago when we wrote about the Barclays head gold trader termination:

“Bottom line: just like the Silver Fixing which last week announced its winddown, the days of the 117-year-old Gold fix are numbered. But to preserve continuity of riggedness and manipulation, perhaps they can just outsource their job duties to the biggest manipulators of all: Bank of England, the Fed and, of course, the BIS.”

So yes: it is now a fact that gold is manipulated by various commercial banks, and that those gold “raids” one sees every morning usually around the time of the London fix aren’t accidental at all but are entirely designed to reprice the market, but how deeper does the rabbit hole go?

[FCA Director Tracy] McDermott added: “Firms should be in no doubt that the spotlight will remain on wholesale conduct and we will hold them to account if they fail to meet our standards.”

Alas, this is a lie – by handing Plunkett to the public on a silver platter, it simply means that the far bigger and more important players in the gold manipulation market – stretching all the way to central bank and, of course, bank of central bank level, will simply be allowed to continue business “as usual.”

So for those who want the real people behind the real manipulation before they all scatter into the dust, we urge you to reread “From Rothschild To Koch Industries: Meet The People Who “Fix” The Price Of Gold.” Because the gold manipulation rabbit hole goes far, far deeper than just one single, solitary trader…

Caught Red-Handed: This Is What Zoomed In Gold Manipulation Looks Like

Now that gold manipulation is no longer conspiracy theory and has joined every other “tinfoil” narrative into the realm of conspiracy fact, we urge readers to catch up on both what was the story of the day, namely the UK regulator cracking down on exactly one (1) Barclays trader for manipulating the gold price in a way that prevented him from paying out a substantial fee to his counterparty (and also being the absolutely only person in all of Barclays and every other bank to manipulate gold, of course), as well as reading the full explanation of just how said manipulation was conducted.

Failing that, one can simply observe the following pretty charts catching Daniel James Plunkett smashing the price of gold, which apparently in the UK is called a “mini puke“, red-handed in the act of what is now confirmed gold manipulation.

Courtesy of Nanex, the charts below show the active Gold Futures contract on June 28, 2012 during the London afternoon gold fixing (3pm London time, 10am Eastern Time), which is when we now know the Barclays trader intentionally manipulated the price lower.

1. August 2012 Gold (GC) Futures trades and quote spread over a 5 second period of time (10:00:21 to 10:00:26 Eastern).

The important London gold fix price was $1558.96 which is near the middle of the price on this chart. Approximately 1,100 contracts were traded during the sudden price drop.

2. August 2012 Gold (GC) Futures trades and quote spread – Zoomed out.

3. August 2012 Gold (GC) Futures trades and quote spread – Zoomed out 2.

4. August 2012 Gold (GC) Futures trades and quote spread – Zoomed out 3.

5. August 2012 Gold (GC) Futures trades and quote spread – Zoomed out 4.

 

 

Courtesy: Zerohedge

The US Shale Oil Miracle Disappears

The US Shale Oil Miracle Disappears

The US Shale Oil Miracle Disappears

The US shale oil “miracle” has about as much believability left as Jimmy Swaggart. Just today, we learned that the EIA has placed a hefty downward revision on its estimate of the amount of recoverable oil in the #1 shale reserve in the US, the Monterey in California.

As recently as yesterday, the much-publicized Monterey formation accounted for nearly two-thirds of all technically-recoverable US shale oil resources.

But by this morning? The EIA now estimates these reserves to be 96% lower than it previously claimed.

Yes, you read that right: 96% lower. As in only 4% of the original estimate is now thought to be technically-recoverable at today’s prices:

EIA Cuts Monterey Shale Estimates on Extraction Challenges

May 21, 2014

The Energy Information Administration slashed its estimate of recoverable reserves from California’s Monterey Shale by 96 percent, saying oil from the largest U.S. formation will be harder to extract than previously anticipated.

“Not all reserves are created equal,” EIA Administrator Adam Sieminski told reporters at the Financial Times and Energy Intelligence Oil & Gas Summit in New York today. “It just turned out it’s harder to frack that reserve and get it out of the ground.”

The Monterey Shale is now estimated to hold 600 million barrels of recoverable oil, down from a 2012 projection of 13.7 billion barrels, John Staub, a liquid fuels analyst for the EIA, said in a phone interview. A 2013 study by the University of Southern California’s Global Energy Network, funded in part by industry group Western States Petroleum Association, found that developing the state’s oil resources may add as many as 2.8 million jobs and as much as $24.6 billion in tax revenues.

(Source)

From 13.7 billion barrels down to 600 million.  Using a little math, that means the hoped for 2.8 million jobs become 112k and the $24.6 billion in tax revenues shrink to $984 million.

The reasons why are no surprise to my readers, as over the years we’ve covered the reasons why the Monterey was likely to be a bust compared to other formations. Those reasons are mainly centered on the fact that underground geology is complex, that each shale formation has its own sets of surprises, and that the geologically-molested (from millennia of tectonic folding and grinding) Monterey formation was very unlikely to yield its treasures as willingly as, say, the Bakken or Eagle Ford.

But even I was surprised by the extent of the downgrade.

This takes the Monterey from one of the world’s largest potential fields to a play that, if all 600 million barrels thought to be there were brought to the surface all at once, would supply the US’ oil needs for a mere 33 days.

Yep. 33 days.

And along with that oil come tremendous water demands, environmental, infrastructure and air pollution damages.

So if you do go for it California, the rest of the country will be your best buddy for a little more than 4 weeks. But don’t keep calling us afterwards, as we’ll be off to the next oil party (if there are any other ones to be had). But know that, sure, we still respect you.

Of course I’m being sarcastic here. But if I lived over or near a shale formation, I would be putting up a hell of a fight to prevent the many long-term damages and airborne pollutants that inevitably accompany such short-lived fracking operations.

At this point, you might be wondering just how the EIA got its estimate so badly wrong. The answer is that the EIA relied on a private firm, one now scraping corporate relations and PR egg off its face:

U.S. officials cut estimate of recoverable Monterey Shale oil by 96%

May 20, 2014

Federal energy authorities have slashed by 96% the estimated amount of recoverable oil buried in California’s vast Monterey Shale deposits, deflating its potential as a national “black gold mine” of petroleum.

Just 600 million barrels of oil can be extracted with existing technology, far below the 13.7 billion barrels once thought recoverable from the jumbled layers of subterranean rock spread across much of Central California, the U.S. Energy Information Administration said.

The new estimate, expected to be released publicly next month, is a blow to the nation’s oil future and to projections that an oil boom would bring as many as 2.8 million new jobs to California and boost tax revenue by $24.6 billion annually.

The 2011 estimate was done by the Virginia engineering firm Intek Inc.

Christopher Dean, senior associate at Intek, said Tuesday that the firm’s work “was very broad, giving the federal government its first shot at an estimate of recoverable oil in the Monterey Shale. They got more data over time and refined the estimate.”

(Source)

Wait a minute. The 2011 California shale oil estimate that launched a flotilla of excited “shale miracle” headlines, led the EIA to publish an estimate of the Monterey at 13.7 billion recoverable barrels, and helped to form a national narrative around potential US “energy independence” was done by a Virginia engineering firm?

Okay, well who are they exactly?

Looking at their website, clearly put together using cheesy stock photos, early Internet font formats, and touting the fact that they’ve been a business “since 1998″ doesn’t quite project the hoped-for aura of gravitas and seasoned competency:

(Source)

Seriously? A clock in an arch? Typing fingers? A woman gesturing in a meeting and a guy on a phone?

I mean, does anyone other than me have a “no lame stock photos” requirement of the businesses they use to generate the data used to justify a major geopolitical energy realignment? It’s the closest thing I have to a hard rule.

Okay, just kidding again….sort of.

At any rate, the bottom line here is that the EIA relied on this firm’s back-of-the-envelope calculations which turned out to be — surprise! — unreliable. And now, Occidental Petroleum is scrambling to get its assets out of the Monterey and deployed somewhere more promising.

The lesson to be learned here is: don’t believe every headline you read. Consider the source, and more importantly — stock photos or not — always question the data.

Price, It’s Always About Price

However, I cannot completely write off the entire 96% as ‘gone’ because the media has left off the most important part, as they always do: the role of price.

Without having access (yet) to the latest well data to know exactly what sort of potential disaster we’re dealing with, the correct way to write-down an oil resource is to say: at today’s oil prices, this asset can yield (or is worth) $X.

At higher prices, it is certainly true that more of the resource will be ‘worth’ going after.

But as you and I know, the price mechanism is just a means of obscuring the most important variable: the net energy that will be returned from a given play. Generally speaking, the higher the price (which is often a function of the energy required to extract), then the less net energy will come from that play.

So anytime we hear that a given play is being ‘written down’, as the Monterey is in rather spectacular fashion, what’s really being said is that the net energy from the play is a lot less than prior and/or existing plays, and will not be useful to us until higher oil prices come along. In the case of the Monterey, much higher prices.

Whether we have an intact, functioning and highly complex economy of the sort necessary to develop and deliver the technology required to prosecute such low-yielding plays is another matter entirely. My best guess as of today is, ‘probably not.’

Conclusion

Today’s write down of the Monterey shale asset is a huge blow to Occidental Petroleum specifically, to California’s energy and employment dreams more broadly, and to the US’s energy dreams at a national level.

This is not surprising at all to anybody following the shale story with a critical eye. We always knew that the best plays were being prosecuted first for obvious reasons; it’s human nature to go after the easy stuff first. And this is especially true for the folks in the oil patch.

The best plays were tapped first, not by some accident of technology or lucky holes plunged into the ground, but because they were cheapest to prosecute. The remaining shale deposits are less rich, more costly to explore, and the profitable pockets much harder to find.

Your main take-away is this: the US has a lot less shale reserves on the books today than it did yesterday. Look for future downward revisions as the other remnant shale plays are poked and prodded and found to be wanting.

Investors need to be wary here too. The hype about shale prospects are wedded to a Wall Street cheap capital machine that is showing clear signs of over-heating:

Shale Drillers Feast on Junk Debt to Stay on Treadmill

Apr 30, 2014

Rice Energy Inc. (RICE), a natural gas producer with risky credit, raised $900 million in three days this month, $150 million more than it originally sought.

Not bad for the Canonsburg, Pennsylvania-based company’s first bond issue after going public in January. Especially since it has lost money three years in a row, has drilled fewer than 50 wells — most named after superheroes and monster trucks — and said it will spend $4.09 for every $1 it earns in 2014.

The U.S. drive for energy independence is backed by a surge in junk-rated borrowing that’s been as vital as the technological breakthroughs that enabled the drilling spree. While the high-yield debt market has doubled in size since the end of 2004, the amount issued by exploration and production companies has grown nine-fold, according to Barclays Plc. That’s what keeps the shale revolution going even as companies spend money faster than they make it.

“There’s a lot of Kool-Aid that’s being drunk now by investors,” Tim Gramatovich, who helps manage more than $800 million as chief investment officer of Santa Barbara, California-based Peritus Asset Management LLC. “People lose their discipline. They stop doing the math. They stop doing the accounting. They’re just dreaming the dream, and that’s what’s happening with the shale boom.”

(Source)

I guess there’s a little less dreaming going on in the Monterey shale patch this morning.

Not to pick on RICE here, because they are more typical than not, but when you are spending $4 to earn $1, somebody ought to be asking some hard questions. Especially the investors.

More broadly, I have been clearly concerned by the recent reports indicating that the shale operators have been spending far more in CAPEX than they’ve been generating in operating earnings.

That’s a larger subject that I’ve covered in more detail in recent reports, but the summary is this: over the past four years, free cash flow (FCF) has been negative for most of the major shale players.

Which leads us to the really big question: When will all these shale drilling efforts actually generate positive FCF?

In the case of the Monterey, and at today’s prices, the answer looks to be ‘Never.’

 

Courtesy: Chris Martenson via Peakprosperity

The Fed Sees No Bubbles, No Inflation, No Problems!

The Fed Sees No Bubbles, No Inflation, No Problems!

Peering Into Their Foggy Windshield—The Fed Sees No Bubbles, No Inflation, No Problems!

In this week’s release of the minutes from its April 29-30 meeting, Federal Reserve policymakers made clear that they see little chance of inflation moving past their 2% target for years to come. In order to make such a bold statement, Fed economists not only had to ignore the current data, but discount the likelihood that their current stimulus will put further upward pressure on prices that are already rising.

Even if you believe the highly manipulated government CPI data, April’s year over year inflation rate came in at 1.95%, a statistically insignificant difference from the Fed’s 2% target. If annualized, April’s monthly change would equate to a rate closer to 4%. On the producer side, the numbers are even worse. Last week the Producer Price Index (PPI) came in at .6% for April, after notching up .5% in March. These two months together annualize at 6.6%. So already there is very little wiggle room, if any, before the Fed reaches the point where even its dovish leaders should admit that inflation is a problem.

But like most modern economists, leaders at the Fed deny Milton Friedman’s famous maxim that inflation “is always and everywhere a monetary phenomenon.” Instead they like to think of it as a kind of pesky but necessary byproduct of economic growth. (Recently the theory has gone even further, mixing cause and effect to determine that inflation causes economic growth). If this were so, then the Fed would have a lot to worry about if its economic forecasts can be trusted.

Despite the muted economic statistics over the last few months, the Fed has not backed off Janet Yellen’s 3.0% forecast for 2014 GDP. The near zero growth we saw in Q1 (likely to be revised negative) has not convinced her, or anyone at the Fed, to ratchet down this estimate. So to hit that target, growth for the remainder of the year will have to come in close to 4% per quarter.

If the economy finally picks up to that level, by throwing off the supposedly chilling effect of the past winter, then based on the Fed’s views it should expect significant upward pressure on inflation. Yet nowhere in the minutes released today is that possibility even considered. In fact, they explicitly said that inflation would be well below 2% for the next few years, despite the fact that it’s already at 2% right now…during a period of admitted weakness! So they expect the economy to grow and inflation to subside even while real interest rates stay deep in negative territory? In essence, they are writing a new economic textbook on the fly. In truth, they are simply stringing together words and ideas designed to soothe the market and to keep anyone from detecting the dangerous trap that they have led us into. So just as the Fed saw no risk of housing prices falling in 2006, they see no risk of consumer prices rising now. In fact, they are just as confident that inflation is “contained” as they were about the sub-prime mortgage crisis. Based on their track record, people should fear exactly what the Fed is not worried about.

In the meantime, the truth about inflation is bubbling up in some unexpected places, sometimes from the same government that tells us that it’s not a problem. In order to calculate the payment levels for the SNAP Food Program (aka “Food Stamps”), The U.S. Department of Agriculture is responsible for providing a baseline estimate for the costs needed to feed the typical family that would qualify for the program.

Looking over a twenty-year time frame provides a revealing pattern that we have seen in other places (see Big Mac Index). From 1994 to 2003 the CPI rose by a total of 25% or about 3.2% per year. This is almost exactly the same change that was seen in both the food component of the CPI and the USDA SNAP estimates for their “thrifty” plan to feed a family of four (the “thrifty” plan is the least expensive) over the same period.

But that all began to change in the early part of the current century as the costs began drifting apart from the official CPI. I have made the case many times that this occurred as a result of changes in the way the CPI is calculated, all of which were designed to conceal the true level of inflation.

From 2004 to 2014 the CPI was up 26% or about 2.5% per year. However, the food component of the CPI was up 30% and the USDA estimate for a family of four was up 32% (The higher cost “liberal plan” increased even more, at 35% over that time). When comparing two sets of government data, it’s tough to credit one over the other. But the USDA data is likely much closer to what most of us who shop for food actually experience. If accurate, the USDA numbers mean that over the past decade the costs to actually feed a family increased 23% more than most economists like to tell us.

Rising food prices are a major problem for many Americans struggling to make ends meet in our listless economy. Exactly how much more pain does the Federal Reserve want to inflict on the middle and lower classes before it relents and stops creating even more inflation?

There is a growing belief among economists, highlighted in a recent debate I had with Nouriel Roubini, that higher prices are actually a benefit to consumers. They believe that the growth created by inflation is worth more than the cost imposed at check-out lines. Instead, we are simply getting another dose of 1970s-style stagflation as higher prices simply amplify the pain of a stagnant economy and diminished employment opportunities.

The good news for Roubini and his ilk is that inflation does indeed help some people…the very rich. I have long argued that Fed stimulus and quantitative easing only result in the formation of asset bubbles that unevenly favor the rich, while misdirecting capital away from savings and productive investments that would benefit everyone else. Economists had blamed the recent disappointments from mass-market retailers like Walmart, Target, Best Buy, Staples, Dick’s Sporting Goods, and Pet Smart (to name but a few) on the ravages of winter weather rather than weak fundamentals. But yesterday the upscale vendor Tiffany’s issued a boffo report that showed net income up an astounding 50% over first quarter in 2013. The rich seemed to have little trouble braving the elements to buy baubles on Fifth Avenue, yet average Americans were too thin-skinned to make it to Dick’s Sporting Goods.

While the world talks about the dangers of deflation, which offers no harm to economies or consumers, actual inflation is everywhere to be seen and nowhere acknowledged. Instead, we get a universal agreement that the middle class must continue to suffer so that the Fed and financial speculators can continue to revel in the charade.

 

Courtesy: Peter Schiff

Modi the new hope for Gold, but may disappoint: Clyde Russell

Modi the new hope for Gold, but may disappoint: Clyde Russell

Modi the new hope for Gold, but may disappoint: Clyde Russell

Gold bulls tend to flit from one thing to the next in their search for a reason for the precious metal to rally, with the latest hope being Narendra Modi’s election victory in India.

The reasoning appears solid enough. Modi’s pro-business Bharatiya Janata Party is likely to roll back some of the tough measures taken by the former government to curtail gold imports as part of efforts to lower India’s current account deficit.

Gold is India’s second-biggest import by value behind crude oil and the former government progressively raised the import duty to 10 percent and imposed a rule that 20 percent of gold shipped in must be re-exported as jewellery.

These measures, which gold bulls had largely dismissed as irrelevant to Indian demand, served to crunch imports, which started dropping sharply from the third quarter of last year.

Indian demand fell 26 percent to 190.3 tonnes in the first quarter of 2014 from the same period a year earlier, according to data from the World Gold Council (WGC).

This followed falls of 16 percent in the fourth quarter of 2013 and 32 percent in the third quarter of last year, declines which saw India surrender its status as the world’s top gold consumer to China.

One thing the gold bulls may have correct is that Indian demand is still there, and it has just been hit by government intervention.

The key question is how quickly is Modi’s new government likely to lower the import duty or relax the re-export requirement?

While Modi may well be well disposed to the gold sector, he’s likely to be swamped with other priorities at the start of his administration.

He’s also likely to be reluctant to give a signal that it’s “game on” for gold imports again, as he won’t want the current account deficit to start heading the wrong way once more.

India’s current account deficit was likely about $35 billion in the fiscal year ended March, the former finance minister said on March 31, lower than the $88 billion for the previous year.

At the current spot gold price of about $1,294 an ounce, each additional 100 tonnes of gold imports adds about $4.56 billion to the current account deficit.

If the first quarter demand of 190.3 tonnes was maintained through the year, it would take total demand for the year to about 761.2 tonnes, short of the 900-1,000 tonnes the WGC expects for Indian demand in 2014.

Assuming Modi does relax restrictions on bullion and the WGC forecast is met, the impact of additional Indian demand is likely to be felt in the last quarter of 2014.

Even if India’s demand does recover to around 1,000 tonnes in 2014, will that be enough to spark a rally?

CHINA, CENTRAL BANK DEMAND STEADY

The WGC is expecting demand in top consumer China to be largely steady at about 1,000-1,100 tonnes.

While this level of demand is no doubt supportive for gold prices, it doesn’t imply a rally in prices.

There are also some concerns about Chinese demand in the WGC quarterly report, released on Tuesday.

While jewellery demand in China grew a strong 10 percent in the first quarter from the same period in 2013, investment in bars and coins slumped 55 percent, leaving overall demand down 18 percent.

It was the third straight decline in investment demand in China, which may be a sign that investors there are losing patience with gold’s inability to rally, and may be starting to worry that the yellow metal’s next move is to the downside.

Gold has gained 7.3 percent so far in 2014, reversing some of its 26.4-percent decline in 2013.

But after reaching its high of $1,391.76 an ounce on March 17, it has slipped to a close of $1,293.80 on Tuesday and has traded in a relatively narrow band in the last two months.

Outside of the potential for increased Indian demand, there appear few positive drivers for gold.

The WGC report showed that demand from exchange-traded funds was largely flat in the first quarter, and while this is an improvement from the huge selling seen last year, it’s hardly reason to believe a rally is imminent.

Technology demand, which accounts for about 10 percent of total consumption, dropped in the first quarter from the same period a year earlier, and the WGC pointed to rising use of alternatives in electronics manufacturing.

Central bank purchases were also down in the first quarter, and appear to have settled in a range either side of 100 tonnes a quarter, a level that wouldn’t provide much price impetus in either direction.

The gold market appears largely in a “wait-and-see” mode, lacking sufficient drivers to move the price.

Increased Indian demand, should the new government allow it, will be a positive, but probably not enough to spark a significant price recovery by itself.

 

Source: Reuters

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