Romney or Obama Win Means No Escape From Fiscal Crisis of Debt - This is an interesting column by Rich Miller for Bloomberg. Here is a brief section:
Low Yields Yields on Treasury securities are hovering near record lows as the U.S. benefits from its status as a safe haven for investors during a period of financial turmoil in Europe.
Politicians will be tempted to delay needed efforts to deal with the debt because borrowing costs are low, says Robert Litan, director of research for Bloomberg Government in Washington. "We have a lot more freedom to be irresponsible," he says.
That's a risky path, says MacGuineas, who has former politicians and policy officials from both the Republican and Democratic parties on her group's board. "Playing chicken with the credit markets is a dangerous game," she says.
A surge in borrowing costs is the likely scenario when debt gets out of hand. Rogoff, Reinhart and her husband, Vincent Reinhart, a former Fed official who's now chief U.S. economist for , authored a paper earlier this year that examined 26 separate episodes in 22 countries in which central government obligations rose above the 90-percent-of-GDP mark.
Growth Hit In the most common scenario, debt above that threshold led to higher interest rates that in turn created a drag on growth, the researchers found. In other instances, the economy slowed because of the need to raise taxes and cut spending, particularly on public investment. Either way, the hit to growth was inescapable.
"The long-term risks of high debt are real," the economists wrote in their paper, published in April on the website of the National Bureau of Economic Research.
Advanced economies with debts above the 90 percent threshold grew on average 2.3 percent a year, compared with 3.5 percent growth in lower-debt periods, the research showed. The periods of elevated debt lasted an average of 23 years. In spite of the dangers, the economists said, they're not advocating rapid reductions in government debt during times of extremely weak growth and high unemployment.
My view - It is a reasonable guess that nothing will happen regarding deficit reduction this side of the Presidential Election. Thereafter, the lame duck Congress with have the rest of the year to agree on a plan for avoiding the fiscal cliff. This should be in place before the inauguration in January. The historic evidence, not surprisingly, shows that huge budget deficits are a recipe for slow GDP growth.
David Greenberg on how electronic and high-frequency trading is driving up oil prices - My thanks to a subscriber for this interesting 2-part interview with David Greenberg on high-frequency trading (HFT), regulation and derivatives, from Capital Account on RT.
My comment - For over two years subscribers have been reading and also contributing articles on HFT - a frequent cause of these dramatic, intraday momentum moves, first in stock markets and increasingly in futures. David Greenberg discusses the situation as both an oil trader and former NNMEX board member.
Email of the day (1) - On trading versus investing:
"I am semi-retired and live in a country far away from the action. Consequently I tend to take long term positions, especially in the precious metals. However, seeing the trades that you do from time to time I can't help wondering if you have done some analysis as to how your trades over say a 1, 3 and 5 year period have panned out compared with what the result would have been had you held similar positions throughout the period on a long term basis. Look forward to your reply. Keep up the good work!"
My comment - And thriving on all that spectacular South African scenery, fine weather, good food and wine, I trust.
The first point on this subject is that I never encourage people to take up trading if they have no prior experience of it, preferably developed at a young and therefore resilient age. The reason for this is that trading in futures contracts is much more difficult than long-term investing, in my opinion, primarily due to the double-edged sword of leverage.
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Interesting comment on China's politics - My thanks to a subscriber for this item, posted in the Subscriber's Area.
Email of the day (2) - On inflation expectations:
"As someone who lived through 1970's I find it hard not to see Inflation returning. It would solve Government's debt problem - & now that the Government is going to link benefits to earnings rather than inflation the former is bound to overtake the latter (Goodharts law?). Looking at the chart of an inflation proxy eg INXG where would you see an entry point?"
My comment - I also remember that period and Fullermoney has long felt that governments, by hook or by crook, would inflate away as much of their debt as they can get away with.
The question concerns how to protect ourselves against this.
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Quote of the week - On an educated man: "It is the mark of an educated man to be able to entertain thought without accepting it." Aristotle
Additional commentary by Eoin Treacy
Musings from the Oil Patch Thanks to a subscriber for this edition of Allen Brooks' always educative report for PPHB. The full report is posted in the Subscriber's Area but here is a section:
The greatest change in the United States has been the role of natural gas in generating electricity. Between 1990 and 2010, the share of electricity generated from natural gas nearly doubled from 12.3% to 23.8%. The real impact from gas shale production, however, came during the past several years as gas' share of electricity generation reached 34.7% in July 2012. The impact of gas shale production cannot be understated. In 2000, shale gas accounted for about 2% of total U.S. gas output. That share has now risen to about 40%. This increase has been the principle cause of the decline in gas prices. As the mix of fuels used to generate electricity shifted, utility executives would say, the market made me do it rather than the mandate made me do it as has been the case with increased electricity generated from renewable fuels. As the various state mandates for increased use of renewable energy supplies in generating electricity gained traction, between 2008 and last July, the share of power from these green energy resources has expanded from 3.2% to 4.2%. This calculation excludes hydro power, which the Obama administration has not backed as a renewable resource. Including hydro power, the share of renewable energy has grown from 9.4% in 2008 to 10.8% in July.
As an example of how America's energy thinking has been turned upside down, we only have to note that under the old thinking the country would have had dozens of terminals in operation by now to import and re-gasify liquefied natural gas (LNG) from overseas. Instead, the government recently has approved the construction of liquefaction facilities at one import terminal to allow its owner to export domestic gas to foreign markets. Some 13 additional facility applications have been filed seeking approval to export natural gas. Completion of a study commissioned by the Energy Information Administration (EIA) to assist the Obama administration in deciding whether to approve any additional export facilities has been delayed for a second time this year and will not be ready until after the November election. This appears to be shades of President Obama's handling of the Keystone pipeline decision.
My view The simplest rule of economics is that when the price of a commodity decreases demand increases. Natural gas offers an excellent example of this process at work as the economics of low absolute and relative prices encouraged substitution among utilities and transportation fleets. The other side of the equation is that lower prices contributed to uneconomic production and led to a change of emphasis from dry wells to natural gas liquids.
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Macro Morsels Thanks to a subscriber for this note by R. Harding at Maybank. The full report is posted in the Subscriber's Area but here is a section:
Countries who wanted the ECB to intervene must first sign up to a formal aid programme. IMF involvement would be sought and bond purchases restricted to maturities of up to 3 years. The ECB could choose to sell as well as buy bonds - a veiled warning to countries that it might pull the plug if they failed to deliver on their promises.
The conditionality is a big problem because, for example, it could deter countries like Spain where leaders already face voter angst over unpopular austerity measures to sign up for the ECB's rescue plan, rendering it useless. rates strategist Laurence Mutkin said the plan was "quite likely" to deepen Europe's recession because it was like asking countries like Spain and Italy "to sign up for a plan that mandates a 'fiscal cliff'."
Nomura economist Jacques Cailloux said that "tough negotiations around the conditionality are likely to destabilise markets further." And, pointing to the biggest negative of the plan, BofA economist Laurence Boone wrote that "emphasis on conditionality [is] even stronger than we had expected (as a minimum, ECCL only way to access ECB buying, IMF involvement desired, both significantly lowering the probability that a country will apply for EFSF/ESM support)."
My view It has been my view for some time that Spain will need to request an additional bailout. (Also see Comment of the Day on September 11 th) . The last time round it was allowed to bypass the conditionality that had previously been attached to the Greek, Irish and Portuguese programs. On the next occasion, Spain will probably be forced to sign up to more stringent controls on how it taxes its people and spends the proceeds.
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Gold: Adjusting For Zero Thanks to a subscriber for this report by Daniel Brebner and Xiao Fu for Deutsche Bank which may be of interest to subscribers. The full report is posted in the Subscriber's Area but here is a section:
Zero for growth, yield, velocity and confidence: We believe there are nearly zero real options available to global policy-makers. The world needs growth and is willing to go to extraordinary lengths to get it. This is creating distortions where old rules don't seem to apply and where investors face a number of paradoxes.
Golden prospects: We believe the macro-economic environment for gold is once again turning more positive and forecast prices to exceed USD2,000/oz in the first half of 2013. We believe the growth in supply of fiat currencies such as the USD will remain an important driver.
Gold as Money: We describe the gold vs. fiat currency debate from the perspective of Gresham's Law. To describe it in the simplest of terms, gold's value depends in large part on the degree of badness' of bad money. This lends a certain art to the science of forecasting gold prices.
My view A decade ago when we spoke of gold being remonetised in the eyes of investors, it was viewed as a wildcat idea. My how times have changed! Investment demand for gold continues to hit new highs as the wholesale debasement of fiat currency continues unabated. The popularity of ETFs as vehicles to reflect this view continues to grow and the allure of the metal for the newly wealthy in Asia is an additional spur to demand. Concurrently, miners have spent a great deal of money attempting to increase supply but have not kept pace with the bullion market.
This section continues in the Subscriber's Area. Email of the day on additions to the Chart Library:
Please add Orezone Gold (TSE - ORE) to the library. Thank you.
Is it possible to add the Citi Macro Risk Index to the chart library? Thanks!
Would you add Yoma Strategic Holdings listed in Singapore to the chart library? And
Could you please help me add Sunshine Oil to the chart library? 2012 HK. Thank you.
My comment Thank you for these suggestions which have been added to the Chart Library.
Speaking engagements Mrs Treacy and I are greatly looking forward to attending the 50th Contrary Opinion Forum in Basin Harbor Vermont between October 3rd and 5th. My presentation will be on the Thursday morning.
I will be in Boston for two days ahead of the conference and have agreed to deliver a talk to the local chapter of the MTA on October 2nd . This will be at Janney Montgomery , 60 State Street, 35th Floor Boston from 5pm.
I have also agreed to teach a three-hour course on global strategy investing at the World Money Show in London on November 2nd. Here is a link to the details
The Chart Seminar in 2012 - Our remaining confirmed venue for 2012 will be in London on November 22nd & 23rd at the Radisson Edwardian Hampshire on Leicester Square. The full rate is £950 + VAT. (Please note US and Australian delegates, as non EU residents are not liable for VAT). The early booking rate of £875 for non-subscribers expires on September 30th. Paid-up Fullermoney subscribers are offered a discounted rate of £850. Anyone booking more than one place can also avail of the £850 rate for the second and subsequent delegates.
Please note - I will be away next week attending the Contrary Opinion forum in Vermont and will return on Monday October 8th.