[MrBill]

Welcome back, Drew. Long time, no see.


Joe, if the GDP grew by 3.5% annualized, but money supply was in excess of real economic growth, then that extra money supply stimulated the economy. An ecomony stimulated grows faster and therefore requires more energy. But it also increases inflation which can be measured in one of two ways. Either falling purchasing power in the domestic economy. Or the falling external value of the dollar against other currencies. Or both.

A falling US dollar in real terms puts upward pressure on the price of oil because it is produced around the world in dozens of foreign currencies. And if the US dollar is falling then oil priced in US dollars becomes cheaper in euros, yen or yuan. Make any good cheaper and it increases demand.

But real demand from Europe, China and Japan then drives up the real inflation adjusted price of crude oil as well. That means that US consumers that have to use US dollars to buy their oil are worse off due to the effects of inflation eroding their purchasing power.

So the stimulus of low interest rates or increased money supply are ultimately self-defeating. They produce the illusion of growth while ensuring that inflation will eat away at those gains. Real growth only comes from productivity gains. Doing more with the same. Doing the same with less.

Also it depends on how efficient an economy uses oil as an input to produce a unit of output. The example is given that the GDP output per unit of oil input has risen by 100% since the first oil shocks in the 1970s. This means we can produce twice the GDP using the same amount of oil. Some say this insulates us from supply shocks. I disagree. I see it as two jobs dependent on a barrel of oil versus only one job. More not less vulnerable to supply interuptions.

But a country should always look to become more efficient because oil is a cost of production and costs should be optimized regardless whether the price is high or low.

Japan uses two-thirds the energy as the USA per unit of GDP. Germany uses three-quarters. China uses 4X and are 'trying' to reduce that down to just 2X. Who is most hurt by an increase in oil prices? China of course. But all four are major manufacturers and major importers of oil & gas. It is an interesting point to ponder though that the four largest economies in the world are all oil importers. so they must be generating added-value in some other way, not just turning energy into exports or good & services.

[MrBill]

PIMCO inflation-linked debt trader speaks out on inflation dangers of central bank complacency, but warns investors as well.
$this->bbcode_second_pass_quote('', '
')Pimco's Brynjolfsson Says Investors Complacent on Inflation


John Bryjolfsson, who oversees about
$50 billion of inflation-linked debt at Pacific Investment
Management Co. in Newport Beach, California, comments on the
long-term inflation outlook. He spoke on a panel at Bloomberg LP
in New York yesterday.

``Every central banker going back a thousand years has known
that targeting inflation at a low level and maintaining integrity
of the currency is, if not the most important job of a central
banker, it's the second most important job of a central banker,''
after maintaining the power or political structure of the central
bank.
``This whole idea that inflation targeting is something new,
and therefore now inflation breakevens should be fixed at
whatever the central bank sets as their target, is just pure
complacency on the part of investors.
``And the antidote to that is to recognize that inflation
targeting will work until it stops working, and that's going to
be if there's economic pressures, political pressures, rising
unemployment, and it's all the same things that have caused
inflation historically, whether you go back to the U.S. in the
70s, or the Weimar Republic, or even back to the beginning of
paper currency in China around 1000 AD. You've always had bouts
of inflation crop up when the politics and the economics just
didn't jibe with the physical realities of production and supply
and demand.
``I don't see that happening any time in the next week, or
the next month, or maybe even the next three to five years. But
beyond that time frame, it's when the tensions get so much that
the central bank can no longer bear the political fortitude to
maintain their targeting that they will stop targeting. Sometime
around then or maybe even a little before then is when breakevens
will break out of this credibility zone.''

On value in Treasury inflation-protected securities:
``The best trade out there relates to breakevens at the very
long end of the TIPS market.
``Everybody is aware that there's a tremendous supply demand imbalance for very long-dated Treasuries. I would hesitate to buy very long-dated Treasuries because the pick-up in yield in the nominal market is minimal and you're underwriting this huge
inflation risk that exists 10, 20, 30 years out.
``You can do the same trade in the TIPS market, that is buy
30-year TIPS,'' and give up only about 18 basis points more than
with 10-year TIPS. ``To me that 18 basis points is extremely slim
for getting essentially inflation protection on Treasury yields
for a 20-year period starting 10 years from now. For any real
money investor who has real liabilities, real goals, that seems
like a slam dunk.''

[JustWatch]

Thanks for your response MrBIll,

I must admit that I have some trouble wrapping my head around some of the finer details that you and others here explain. But I’m learning!
Your quote:

“Japan uses two-thirds the energy as the USA per unit of GDP. Germany uses three-quarters. China uses 4X and are 'trying' to reduce that down to just 2X. Who is most hurt by an increase in oil prices? China of course. But all four are major manufacturers and major importers of oil & gas. It is an interesting point to ponder though that the four largest economies in the world are all oil importers. so they must be generating added-value in some other way, not just turning energy into exports or good & services.”

I see why China would be most hurt by higher oil prices. But at the same time, it seems as though China or any country that is least efficient in using its oil input per unit of GDP would have more room to improve, and ultimately be in a better position. It may be difficult, but they have that range to work with.
On the other hand, countries that are already using it very efficiently would have much more difficulty adjusting to rising prices for oil, take Japan for an example. Does this make sense?

Another quote:

“So the stimulus of low interest rates or increased money supplies are ultimately self-defeating. They produce the illusion of growth while ensuring that inflation will eat away at those gains. Real growth only comes from productivity gains. Doing more with the same. Doing the same with less.”

I understand what you say about real growth coming from productivity gains and doing more with the same or the same with less. The part about lower interest rates or increased money supply being ultimately self-defeating and the following sentence are still going right over my head! I guess the thing I don’t understand about this is just what is so important about the growth? The illusion of growth that ensures inflation eats away at those gains makes a little sense to me, but why does this matter? The standard of living would fall I would think, but could that mean wage pressure might rise because of this?
"Increasing money supples being ultimately self-defeating," I kinda understand but could this simply continue even though it won't ever make it stable or ever catch up? Kinda like a dog chasing its tail?

Thanks!
Joe

[MrBill]

JustWatch wrote:
$this->bbcode_second_pass_quote('', 'I') see why China would be most hurt by higher oil prices. But at the same time, it seems as though China or any country that is least efficient in using its oil input per unit of GDP would have more room to improve, and ultimately be in a better position. It may be difficult, but they have that range to work with.
On the other hand, countries that are already using it very efficiently would have much more difficulty adjusting to rising prices for oil, take Japan for an example. Does this make sense?

[MrBill]

RE EURJPY

I see three major rallies on the daily, weekly and monthly charts going back to October 31, 2000, when EURJPY was 88.88 ending at a high last week of 159.71. Here are the technical corrections based on those three rallies from that high.

Low 88.88
High 159.71
0.382R = 132.61

Low 123.96
High 159.71
0.382 = 146.11

Low 130.65
High 159.71
0.382R = 148.61

All major corrections that could cause yen carry trades to unwind. Japan's Watanabe (Min Fin) puts the yen carry trade at 20 - 30 trillion yen. Or about $20 - 30 billion. I do not know, that sounds too low to me and he may not want to spark a panic by citing a higher number in any case.

The previous low of the last correction in EURJPY stopped at 153.61 near the 21-week moving average of 154.24. We may see some technical support around that area. On the other hand the 21-month moving average at 145.83 is nearer the fibonacci 0.382R of 148.61 and 146.11.

That would be quite significant. Of course, that is against the large and liquid euro. Against smaller currencies like the NZD the fall-out might be more. However, technically the Kiwi does not look as overbought?

I had a look at the BRL chart. After the Argentine currency crisis the real weakened off to 4.014 against the USD on October 31, 2002, and has since clawed back gains to 2.0485 in May 30, 2006. The timing of the last emerging market shakeout last year. If there is a currency re-alignment then Brazil would be justifiably worried about the real getting too strong vis a vie the yuan and threatening its non-commodity manufacturing exports. Therefore, I could see the BRL weakening off to 2.7934 or its 0.382 fibonacci retracement as well.

With all these re-adjustments happening or threatening to get underway, I think there will be a flight to quality and out of riskier assets. Another factor that I do not see boding well for the stock market.

[JustWatch]

Hi MrBill,

I agree that there won’t be any way China and India or the rest of the developing world can ever catch up in terms of standard of living. It sure looks like they are intent on trying it though. It will just make us all go down sooner rather than later concerning the energy descent. (Last one please turn out the lights.)

Your quote:
“You do not want unsustainable growth that can only be maintained by a subsidy like a monetary or a fiscal stimulus because once you remove that stimulus the growth disappears. Individuals may make bad decisions based on that temporary, but artificial growth, like change jobs or buy a new house. Then when the growth ends there is real economic pain felt by the many.”

A’ la Greenspan? Lol. The backside of Hubbert’s slope will also put a damper on that growth, I would think.

I see the lowering standard of living you mention. Again, the downslide will exacerbate this. I have understood this for some time, and also see how the US is toast because of our debt. I have been telling people that someday soon, we will all be working for the Chinese! Maybe I should get started learning the language? Just kidding.

The only reason that I can think of that China is holding down their living standard is so they can get their economy up and running and put those masses to work. I can’t imagine that they could be so stupid as not to see what’s really happening. I think they will allow the imbalances to level out slowly, and in the end, they will have the manufacturing base to support their own consumption. It’s a lot cheaper to walk away from an abandoned factory than to build a new one! In the meantime, they would be smart to buy more appreciating foreign assets with that money and put us to work for them as well!

How could the Chinese lay the blame on us for them wasting their money on depreciating assets? Let the buyer beware! As a personal example, a couple of years ago I bought a small engine for a log splitter I made. It was made in China and is an exact copy of an engine made by Honda. The price was so LOW that I was stunned that it was possible for them to build it for the cost of the commodities that went into its manufacture, let alone the added value of the labor! Did I take advantage of this offer? Hell yes I did, and the entire world is doing the same. (Sorry Honda!)

If the Chinese cry foul about this, it would be like an investor trying to figure out a way to make the owner of the investment house where he lost his money responsible for his loss! (We’ll gladly refund your money on Tuesday!)

I think it’s in everyone’s best interest to allow the RMB to rise slowly, and let this mess fix itself. Which of course means some of that manufacturing we sent to China will have to come back. It’s bound to do this anyway once peak oil gets a full head of stream. The shifting of manufacturing to developing countries has filled the pockets of the international corporations and allowed residents of developed countries to buy really cheap stuff.

That it all has to make the eventual about face could have been seen by anybody with a brain. Even if all labor and input was exactly level, the shipping kills it. Unless they somehow had the idea that the developing countries would subsidize this forever! But of course most look at the world through a very short time frame pair of spectacles. Quick profits? Heck yeah, count me in! What a waste of natural resources. But not a bit surprising that it happened. This has been yet another way of using up our oil supply as quickly as possible. The human foibles of history are nothing short of comedic.

In the comments section of the article there is a post by someone named “moldbug.” He suggests that if a fixed fiat currency came to pass, that gold would be used as a doorstop. What a joke this is, as the currency is still created by the push of a button on a computer screen onto a piece of toilet paper, whereas the gold will still need to be freed from the ground by some hardworking miner. No one seems to get the very simple idea that paper currency only has value in our minds! Just because “we say so,” doesn’t mean that it’s true! They gotta learn to use the brain that God gave them.
They can deny the truth until hell freezes over, but that doesn’t change the fact that fiat currency is a lie. Those dang bankers are pretty smart.

Sincerely,
Joe

Only government can take perfectly good paper, cover it with perfectly good ink and make the combination worthless.
Milton Friedman

[JustWatch]

MrBill,

I think I get it now about the growth. High growth makes repaying the debt (for the US) much easier! Simple enough even for an idiot like me! If we had a balanced budget, we wouldn’t have so much concern about growth. Low or no growth will only make the interest and debt pile up that much faster. Your thoughts?

After reading that article by Brad Setser I think that the US could pull itself out of this mess if it were intent on doing so. It certainly won’t be easy, but possible. I think if we make any kind of projectionist measure against China that we will be stabbing ourselves in the back. Trying to push the issue could make it happen too fast for all concerned, and might create more problems than it solves. The Chinese seem intent on a very slow approach. I’ve noticed the yuan has been slowly allowed to rise.
The US needs to come up with a way to stop throwing so many dollars at problems.

If you were to compare me with Brad Setser and The Mogambo Guru, I’m a lot closer to the Mogambo! He’s a funny nutcase, and Setser seems pretty smart. I’m going to watch for Setser’s articles and read them.

I’m starting to get the impression that a lot of the commentators on some of the investment advice web sites are more full of brown stuff than I once thought. A person just has to be smart enough to sort the wheat from the chaff. I’m working on it. Having the likes of you around has been a big plus in my efforts. I’ve been having a lot of fun to boot.

Cheers

[mefistofeles]

Living in a key consumption region:the United States(and more specificially the greater Los Angeles metropolitian area) and having visited China I would like to make the following observations about oil demand.

I live close to the 60 freeway and the traffic on the West Bound and the commute starts getting heavy at 5:00 am. (The road is packed filled with vehicles but still traveling at a good pace). At around 6:30-11:00 a.m. heavy traffic in the Westbound direction. At around 1:30 that trafic switches onto the Eastbound side. Then the traffic continues until approximately 8:00 p.m. at night.

In my part of the world its not uncommon for people to drive over a hundred miles to work everyday ,this situation is quite common because real estate is quite expensive in Los Angeles and Orange counties. Some people even commute from the high desert into Los Angeles,spending four hours a day in traffic.

Of course China is crazy too. In Jia Shan the city is packed with cars(from what I have been told this is a relatively new problem). The Chinese government has built many new miles of road but very few light rail systems.

There also seems to be Orange county style suburban building going in China where newer nicer homes are built far away from cities and factories.

Living in the Los Angeles and having seen China its hard to see how consumption will decrease. Personally I know many people who already have a hundred mile round trip commute. They're not going to change that just because the price of gasoline goes up 20% its still cheap enough to justify their long distance driving.

The people who think the price of oil will somehow drop appreciably below $50 need to spend some time in China or Los Angeles. I'm also including a dollar collapse in that scenario because even if the price of oil somehow becomes cheap in Euro or Yen terms after a dollar collapse it will still probably be at least $50 US dollars a barrel.

I think Simmons is right the real price oil should be $300 a barrel(if you consider future supply limiations). The current price is a bargain.

Of course someone might say what if the Chinese or US economies slow down? Wow so China's economy grows at 6% instead of 10%. So the car market grows at 5% per annum instead of 15%, demand growth may slow but it will continue to grow.

Even if the US slowed down we would still see more cars on the road as a result of new auto sales and therefore more oil consumption.

I can't say what tommorow the next month or the next quarter will bring but I do know this. The world needs alot of oil and baring an unforseen megadisaster its hard to see how demand for energy adjusting very quickly or significantly. Oil is what the economists call an inelastic item and no is going to stop shopping or going to work because gas goes up 30-40%. If energy price appreciation is to substantially curb consumption the change must be a drastic one,not these small adjustments that we've had.

I see it in my own life I burn through nearly a sixty gallons a week just driving around and hanging with friends or at my favorite haunts. Why should I change gas is cheap!?!?!

So that is why I am optimistic that prices must increase substantially.

[MrBill]

mefistofeles wrote:
$this->bbcode_second_pass_quote('', 'I') live close to the 60 freeway and the traffic on the West Bound and the commute starts getting heavy at 5:00 am. (The road is packed filled with vehicles but still traveling at a good pace). At around 6:30-11:00 a.m. heavy traffic in the Westbound direction. At around 1:30 that trafic switches onto the Eastbound side. Then the traffic continues until approximately 8:00 p.m. at night.

[MrBill]

JustWatch wrote:
$this->bbcode_second_pass_quote('', 'I')f the Chinese cry foul about this, it would be like an investor trying to figure out a way to make the owner of the investment house where he lost his money responsible for his loss! (We’ll gladly refund your money on Tuesday!)

[JustWatch]

Most people return small favors, acknowledge medium ones and repay greater ones - with ingratitude.
Benjamin Franklin

[MrBill]

$this->bbcode_second_pass_quote('JustWatch', 'M')ost people return small favors, acknowledge medium ones and repay greater ones - with ingratitude.
Benjamin Franklin

[MrBill]

Hmm, what shall I say? The technicals look pretty favorable for a Friday evening, although we have one hour to the official close on the NYMEX.

I am encouraged by the price premium of Brent over WTI. Why? One represents global angst and the other local supply & demand. My opinion. I have zero facts. No data!

My opinion is that the rally extends.

This means that some oil companies have been sold off in this week on the back of weaker equities in general, but the price of crude is still high. Time to buy?

Have a nice weekend. Cheers.

[MOCKBA]

$this->bbcode_second_pass_quote('MrBill', 'H')ere is a contra-opinion which in many ways makes sense. Think about it? Higher prices were supposed to be bad for economies and especially disasterous for emerging markets. However, as producers of base metals, commodities and oil & gas they have actually done quite well out of higher prices, while the developing world has adjusted to higher prices quite easily. This is not to say that no one would notice $120 crude, but very few seem bothered with oil at $60 per barrel.

[cube]

$this->bbcode_second_pass_quote('MrBill', '.')..What I find unforgivable is places like Calgary. They could have and should have learned from LA's mistakes undertaken in the 50s. Now they are suffering traffic congestion from growth of the past 10-years. Every city planner since the 70s has know about the value of public transport. All they had to do was plan intelligently for this windfall they are now experiencing. Ditto for Edmonton. No plan whatsoever. Caught with their pants down.
...

[drew]

Don't feel bad, Cube, about making 35. I sold almost everything at the end of december and haven't been back in yet. Consequently I made diddly. Still, the crystal ball was and is going off pretty good. Basically what happened last week was what I was waiting for in January. Of course if things worsen my trading ability will finally be tested. Only the truly smart can make money during bad times.

Drew

[shady28]

$this->bbcode_second_pass_quote('MrBill', 'W')elcome back, Drew. Long time, no see.

Joe, if the GDP grew by 3.5% annualized, but money supply was in excess of real economic growth, then that extra money supply stimulated the economy. An ecomony stimulated grows faster and therefore requires more energy. But it also increases inflation which can be measured in one of two ways. Either falling purchasing power in the domestic economy. Or the falling external value of the dollar against other currencies. Or both.

[shady28]

Meanwhile in the real world :

http://yahoo.reuters.com/news/articlehy ... ews&rpc=44

" LONDON, March 5 (Reuters) - Major European markets are expected to open down around 2 percent on Monday, financial bookmakers said, after Asian stocks were battered on the back of a surging yen, extending a global sell-off that began last week.

Britain's FTSE 100 .FTSE is expected to open 1.8 percent lower, while Germany's DAX <.GDAXI> and France's CAC 40 <.FCHI> are expected to open down 2 and 2.2 percent, respectively."


Asian markets got slammed hard, and futures for US markets are as low as I've seen them in years ...

[MrBill]

shady28 wrote:
$this->bbcode_second_pass_quote('', 'Y')ou're oversimplifying the effect of new cash vs GDP. There are other factors which the OP was referring to.

By the US $ being a de facto reserve currency for the world, there is an 'artificial' demand for dollars. In other words, since many world markets use dollars for purchases, there is an implied requirement for all traders to have dollars. As the world economy grows, the number of dollars needed to buy ever increasing amounts of goods increases, hence various countries require more reserve dollars.

[MrBill]

Hello All. Please note that all my markets are very busy for me at the moment. Therefore, I do not have time to respond to all personal emails or make detailed explanations. Thank you for your patience. Good luck. MrBill.

Comment from GS.
$this->bbcode_second_pass_quote('', 'I')ndustry cost inflation continues to support long-dated oil prices


Energy market unaffected by the large sell-off in equities While equity markets plunged last week with the S&P500 selling off 3.5% on Tuesday (a seven standard deviation event), the energy markets were remarkably unaffected. In fact, the oil market showed a fairly steady increase in prices driven by the continuing tightening of market fundamentals. Although the proximate cause of the sell-off in the equity markets remains difficult to identify, weak economic activity data in both the housing market and the durable goods sector in the context of an optimistic equity market likely played some role in the correction. The buoyant outlook for growth in the equity markets before Tuesday's sell-off stood in sharp contrast to the energy markets where net speculative long
positions, which tend to increase with the market's growth outlook, remain well below their long-term average.

Industry cost structure inflation and expensive alternative energy sources continue to lend strong support to long-dated oil prices

Long-dated oil prices have proven to be exceptionally resilient during the oil market downturns of the past six months, having largely held above US$60/bbl. This resilience has been rooted in the strong support from the ongoing cost inflation in the energy industry, which continues to raise the cost of bringing energy on-stream and sustains higher oil prices. An analysis of the sustained pace of cost inflation in the oil industry and the consequent pressure on oil companies' balance sheets vis-a-vis lacklustre production expansion and increasing investment uncertainty suggests that high long-dated prices are strongly needed to support the necessary investments in the industry. In addition, expensive alternative energy sources and technologies such as fuel ethanol, oil sands and GTL will increasingly be needed to relieve demand pressure on oil supply, lending further support to
long-dated oil prices.