The Daily Reckoning November 30th


Credit and Credibility

Is it laughable, or lamentable? The market, that is. In the past few years, it has become a joke…a tool of manipulation, an unreliable source of information. Despite the outperformance of the US equity markets this year, ordinary investors (presumably people with savings they would like to invest in productive and attractive businesses) are not interested.

Reuters columnist Felix Salmon recently posted a few charts to highlight this trend. This one, originally appearing at ZeroHedge, shows the decline in trading volumes since the credit bubble bust in 2007/08.


Using the Monday after Thanksgiving as the comparison date (the first day of trade after the 2-day Thanksgiving holiday) trade volumes in 2012 are back to 1997 levels. So while you’re being told a recovery is underway, it’s clearly not a recovery in investor confidence or involvement in the stock market.

Total NYSE Volume on Monday After Thanksgiving

The modern financial system is one based on credit. Credit and confidence go hand in hand. At an individual level, if people have confidence in you — confidence derived from ‘good character’ — they will give you credit. Not necessarily in the monetary sense, but the point is essentially the same. That is, confidence equals credit.

It should be no surprise then, that five years after the credit bubble bust, confidence remains low. That’s because the rebound in markets and recovery in economies is not the result of genuine credit creation. It’s a result of the efforts of governments and central banks to reinflate the bubble. It’s artificial, and not surprisingly, people aren’t buying it.

Which leads to the next chart, via the Financial Times’ Alphaville:

Real US Equity Volumes

This shows the decline in ‘real money’ volumes. Again, we presume real money means the investments of real people (individuals or managed funds) into productive businesses with the hope of generating a decent return.

It also shows the rise of HFT trading, which means ‘high frequency trading’. This is computer-driven, ‘algorithm’ trading. It didn’t even exist in 2005. But now it completely dominates the market and is a major part of the reason why the confidence of the ‘average investor’ continues to deteriorate.

Which brings us to the gold market…this is actually quite funny. Here are a couple of headlines from overnight. From Bloomberg:

Gold Tumbles Most in Three Weeks on Fiscal-Cliff Concerns

‘Gold futures fell the most in three weeks as pessimism on a US budget resolution eroded demand for commodities.’

Then, The Melbourne Age tells us:

Stocks gain on fiscal cliff hopes


‘US stocks rose, erasing early losses, and commodities pared declines as lawmakers said they are optimistic a budget agreement can be reached to avoid automatic spending cuts and tax increases’

What actually happened is that the US stock market tanked at the open on concerns about the ‘fiscal cliff’, but then recovered as Republican House Speaker John Boehner basically told everyone that everything would be ok.

But gold, which began trading well before the equity market opened, was under pressure from the start. If it sold off because of ‘fiscal cliff concerns’, why didn’t it recover with Boehner’s soothing words? This report from Kitco explains things nicely:

‘Just after the Comex gold futures market opened at 8:20 a.m. eastern time Wednesday heavy sell orders flooded in and prices quickly dropped by over $20 an ounce, to extend earlier losses and hit the daily low. Technical selling, including stop-loss orders being triggered, and options-related selling pressure likely exacerbated the steep and rapid downturn in gold prices. Some reports said there were heavy put options purchases seen in the market Tuesday.

Reports also said sell orders of over 7,500 futures contracts (worth 100 ounces each) were executed right at the opening of Comex futures trading Wednesday. There was no major news event which occurred during or near that timeframe to explain the sudden downdraft in prices.’

Why anyone would go anywhere near the precious metals futures market is beyond us. It’s THE place where the big boys play the little guys like a violin. What profit seeking entity would come in at the market open with a 750,000 ounce sell order? An entity looking to shove the price lower and set-off all the punters’ stop losses, only to buy back at a lower price after causing panic amongst the amateurs.

Of course the sell order was not real gold. It’s just paper gold, which is why the game continues and is so easy to play. As long as there is still some physical gold in the banking system, the big bullions banks can play the paper gold game, selling much more ‘gold’ than they actually have. Gold miners didn’t react to the sell-off, with gold indices rising overnight.

So as real credit continues to contract and confidence weakens, your one real insurance asset is physical gold, held in your possession or at least outside the banking system. Because the way this monetary system is headed, you’re going to need an insurance policy.

Are we being extreme?

Not at all. Private sector credit is no longer growing strongly enough to fuel economic growth. More people around the world want to pay down debt rather than increase it. So governments are using their ‘credit’ to fill the void.

So far, it’s all been pretty benign. Developed economy governments have run up huge amounts of debt with little or no consequences. Japan, the US and the UK to name a few. These countries are drawing on ‘credibility’ gained over decades to obtain huge amounts of credit now. But in most cases the private market is not providing the credit…the respective central banks are.

When you look at it this way, the credit (and credibility) of sovereign governments is already gone. They’ve cashed in their goodwill, built up over generations, to prop up a failing system. What’s more, they’ve hit the point of no return. Governments will keep spending, and their central banks will keep monetizing that debt, until all of a sudden the markets turn on them. It will be sudden and violent. That’s when you’ll want that insurance policy.


Greg Canavan
for The Daily Reckoning

Credit and Credibility appeared in the Daily Reckoning. Subscribe to The Daily Reckoning by visiting signup for an Agora Financial newsletter.

2008? That’s Ancient History, Right?

Memories are short, and 2008 is ancient history. Consumers can’t suppress their urge to consume. Lenders can’t suppress their urge to lend. We’ve learned nothing from the last boom-bust. We are repeating it, piling error upon error.

“People will spend more of their equity,” Chris Christopher, an economist at IHS Global Insight in Lexington, Mass., tells Bloomberg. “It won’t be as much as they spent when prices were gaining at a rapid pace in 2005 and 2006, but it should have a positive impact on consumer spending.”

As you may have detected in Mr. Christopher’s statement, bankers (speaking of short memories) are back in the business of making home equity lines of credit — HELOCs — and consumers are ready to ramp up the good life again.

Bloomberg reports:


“After six years of declines, lending for so-called HELOCs will rise 30%, to $79.6 billion, in 2012, the highest level since the start of the financial crisis in 2008, according to the economics research unit of Moody’s Corp. Originations next year will jump another 31%, to $104 billion, it projected.”

This borrowing will spur consumer spending, which, according to Bloomberg, is the largest party of the economy. The Mortgage Bankers Association’s crystal ball predicts home prices will gain 8% this year, and, in turn, Bloomberg reports, “The amount of equity homeowners had in the second quarter rose by $406 billion, to $7.3 trillion, the highest level since 2007.”

Of course, this increase in home prices is a temporary mirage, as empty homes and those occupied by strategic squatters are held off the market by legal kinks in the foreclosure hose. ZeroHedge estimates that an additional 2.5 million homes should be for sale. For now, millions are living in homes mortgage-free “just to perpetuate the illusion that ‘housing has rebounded,’” writes ZeroHedge.

The problem with this consumer debt is that while analysts cheer on the consumer purchases, the debt is what market analyst Robert Prechter calls unproductive. Three years ago, Prechter pointed out in his Elliott Wave Theorist newsletter that banks had been lending to consumers at the expense of businesses.

The nominal numbers are striking. At year-end 1999, according to FDIC figures, commercial and industrial (C&I) loans stood at $971 billion. On June 30 of this year, C&I loan totals stood at $1.4 trillion, an increase of only 44% over more than a dozen years. Again, these numbers are not adjusted for inflation.

Meanwhile, loans secured by real estate totaled $4 trillion on June 30, 2012, a 167% increase from $1.5 trillion on Dec. 31, 1999.

Only business loans are self-liquidating. Healthy businesses generate cash flow that can pay off debt, while consumer loans “have no basis for repayment except the borrower’s prospects for employment and, ultimately, collateral sales,” Prechter wrote.

Lines of credit to businesses are provided with the understanding that the business borrowers will “revolve the debt,” borrow to pay vendors and employees and then pay down the debt as their customers pay them for product. Thus, the debt is directly tied to the business firm’s production. The funds tend to be borrowed only for short periods of time. Credit, in this case, aids a business in potentially earning entrepreneurial profits, which build capital, which ultimately fuels economic expansion.

Conversely, consumer debts are not self-liquidating, but instead stay on the banks’ books for long periods of time, with payments being made only to service the interest and pay down very small portions of the loan principal balance.

Economists think HELOC loans will spur consumer spending and, in turn, GDP. After all, household purchases account for 70% of GDP, according to Bloomberg. However, phony GDP numbers are not a good gauge of the economy’s health. Besides, burying yourself in debt and consumer toys is not the way to individual prosperity.

Austrian economist Hans Sennholz has made a sharp distinction between “productive” and “unproductive” debt:

“A debt incurred for productive purposes, e.g., a commercial or industrial investment designed to earn future incomes, may cover its interest costs and even yield entrepreneurial profits.

“In contrast, new debt in the form of a second mortgage on a home may finance the purchase of a vacation home, new furniture or another automobile, or even a luxury cruise around the world. The debtor may call it ‘productive,’ but it surely does not create capital, i.e., build shops or factories or manufacture tools and dies that enhance the productivity of human labor.”

Capital and wealth are created by saving, not by borrowing and spending.

At the same time, banks are still licking their wounds from the real estate crash. It’s hard to fathom that they would be piling into HELOCs again when they are not ever done writing down these type of loans made in ’06 and ’07. ZeroHedge points out:

“What is shocking is that this is all happening just as the last batch of HELOCs has hit record default rates, and have yet to be cleared off the banks’ nonperforming books. But who cares: Uncle Ben will fix it all.

“That this will all end in another epic housing and credit bubble collapse is by now perfectly clear to everyone. And yet nobody is doing anything to stop it. Surely, once the system collapses for good next time, as at this point the central banks too are all in on rekindling the bubble and there will be nobody left holding the bag, ‘nobody will have been able to foresee any of this happening.’ But for now, the music plays, and one must dance.”

The housing market has not fully corrected, and now banks are looking to kick-start their loan books by lending on collateral that will again plunge in value when the foreclosure tsunami gets under way.

But while bankers must dance and their memories are short, one thing they always remember is that Washington is their friend and its checkbook is big. For HELOC customers, on the other hand, there will be no bailout, just more debt and despair.

Douglas French

Original article posted on Laissez-Faire Today 

2008? That’s Ancient History, Right? appeared in the Daily Reckoning. Subscribe to The Daily Reckoning by visiting signup for an Agora Financial newsletter.

Save The Planet, Invest In Drill Pipe…

So what do we see coming down the line?

One way or another, there’s an industry that, I believe, is destined to do well in our current environment – even in the face of President Obama’s second term (and no, it’s not health care).

I’ll explain more below, but first, let’s look back and lay some foundation…

President Obama made many campaign promises to win his second term. He said that he’d bring new jobs and more economic growth to America. He wants to rebuild the middle class. Indeed, President Obama wants to put his imprint on the country in all manner of ways. How can Obama formulate policy to accomplish some of this?

President Obama can’t accomplish much if he can’t keep the lights on, figuratively speaking. That is, it’s imperative that Obama promote energy development in one form or another. There’s an investable idea in there, too…


Energy Choices, Good and Bad

In his first four years in office, and in the arena of energy development, President Obama presided over a variety of successes and some notable failures.

One example of policy failure came via a series of embarrassments with Obama’s effort to promote “renewable” energy — the Solyndra story and much more. Yes, of course, there were renewable projects that “worked,” often as not due to massive subsidies. But still, overall, with renewable energy efforts, a lot of government grants just plain went to money heaven. Obama took his political knocks over the problems.

There were other things during Obama’s first term that happened independent of any Obama policy, one way or the other. Consider the BP oil well blowout that occurred in 2010 in the Gulf of Mexico (GOM). A complex energy system failed and a superwell blew out, spilling tens of thousands of barrels per day into the GOM.

Subsequent to the BP blowout, we lived for several months through media frenzy, with images of a blown-out well spewing oil on the Internet 24/7 and crude washing up on the beaches. In an industry-government effort worthy of a wartime emergency program, the Obama administration oversaw the oil spill containment and cleanup, the offshore drilling moratorium and then a so-called “permitorium.”

The BP blowout was a huge problem — with many arguable policy calls, to be sure. But it was Obama’s problem to handle, and his administration dealt with it.

Meanwhile, onshore, during President Obama’s first term, we had a U.S. drilling boom. All across the country, things went like gangbusters for “tight” oil and shale gas. Even “blue” political states like Ohio, Pennsylvania and New York are now part of the revolution in U.S. domestic energy production. The money and jobs are there for the asking, and don’t think for a minute that the politicians aren’t eyeballing that money and those jobs.

It’s ironic, actually, that by the end of his first term, President Obama traveled across the country saying good things about the U.S. oil and natural gas industries. Indeed, one constant drumbeat of Obama’s campaign stump speech was to brag about how much more oil and gas were coming out of the ground on his watch.

The point is that despite his evident willingness to bash oil companies while saving the environment, President Obama has taken credit for a big part of the oil patch boom of recent years. And that brings us to an industrial sector that has to do well in the future if President Obama plans to do well in his second term.

Drill He Must!

No more suspense. There’s one part of the drilling industry that should have good years ahead. It’s drill pipe.

Huh? Drill pipe? During the second term of the Obama administration? Well, yes. And no, I’m not crazy. Look, I know that the Obama administration is hard over in the “environmentalist” direction. I know that the Obama administration wants to bring hydraulic fracturing — “fracking” — under more federal control, using the Environmental Protection Agency as the brass knuckles. That and much more.

Still, the people who work with President Obama know that they have to deliver results to the voters. Obama needs jobs for the economy. He needs energy, economic growth and tax revenues. Obama’s policymakers need something that works, and works fast. No more Solyndras — or at least not too many more.

Thus, a second Obama term has to include healthy respect for shale gas drilling and other oil drilling. The “shale gale” will continue and the Obama administration will not just live with it, but help things along.

At the end of the day, the Obama administration has to support drilling and fracking, because that’s where the energy is. In other words, oil and gas energy resources will help President Obama grow the economy, create jobs, rebuild the middle class and more.

Mark my words. Without continuing supplies of clean energy (OK, relatively clean energy, for all the purists), Obama’s second term will crash and burn.

Save The Planet, Invest In Drill Pipe…

It may seem odd to recommend a drill pipe maker in connection with Pres. Obama’s reelection – but that’s exactly what I suggested my paid-up readers do in the latest issue of Outstanding Investments.

It’s true, our president has never really expressed a lot of love towards the fossil fuel industry. But still, I believe that drill pipe manufacturers (one in particular) will do well in the months and years to come. Here’s why.

Rest assured that the global energy industry IS growing. Despite obvious economic problems across the world, people continue to want their hydrocarbon-powered cars, trucks, airplanes, space-heat, plastics, mechanized agriculture, fertilized crops and more.

Indeed, if you want to see what life looks like without access to oil, natural gas, refined products and more, look no further than parts of New York and New Jersey, post-Hurricane Sandy. You want a “low carbon” footprint? There you go.

Here in the U.S., we’re talking about the directional drilling and the “fracking” industry. This industrial capability is foundational to U.S. energy security, not to mention the gale of shale gas that’s blowing across the landscape.

The key thing to understand, in all of this, is that the Obama administration has a strong environmentalist policy direction. Look no further than the Environmental Protection Agency, or the Department of Energy, over the past couple years.

Indeed, Pres. Obama has made no secret of his belief that “man-caused” environmental change is happening, and that U.S. policy can and must do something about it. Indeed, at a news conference this week, Pres. Obama mentioned “climate change” in connection with a question about Hurricane Sandy.

On my end, I’m a trained geologist — or a “Harvard-trained geologist,” as the Agora Financial marketing guys always likes to note. Pres. Obama attended the Harvard Law School. I attended the Harvard Geology Department.

On my end, in one way or another, I’ve been studying earth history and earth science since 1973. I’ve read countless scholarly books and technical papers on all manner of “change” to the earth and its features. I’ve worked in and around geological matters and issues for a long, long time. I’m more than competent to understand the debate about climate change.

Still, I’m NOT going to argue over climate change, here. I’m NOT going to go there, OK?

What I can say, with complete assurance, however, is that if Pres. Obama wants to “do something” about climate change, then he had better do something about using natural gas. Because natural gas is much less of a carbon-emitter than oil or coal.

If the Obama administration is serious about climate change, then it had also better be serious about natural gas. And that means fracking. And that means drilling. And that means drill pipe. It also means one company that I’ve tipped my readers about is way over-sold, in my view.

One way or another drill bits are going to be spinning in America. And yes, it’ll happen under Obama’s second term.

Want to get on board? Want to save the planet? …Invest in drill pipe.

That’s all for now. Thanks for reading.

Byron King

Original article posted on Daily Resource Hunter 

Save The Planet, Invest In Drill Pipe… appeared in the Daily Reckoning. Subscribe to The Daily Reckoning by visiting signup for an Agora Financial newsletter.


avatarThe Daily Reckoning - The Daily Reckoning posted Friday, November 30th, 2012.

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