Wednesday, August 26, 2009

Homeowners Can't Catch Up; Puru Saxena With a Look at Peak Oil

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The Daily Reckoning
Wednesday, August 26, 2009

Bernanke set for another term at the helm of the Fed... Home sales figures are still miserable... Dan Amoss' call makes national news...what bank is set to collapse? Puru Saxena with a look at Peak Oil...and more!

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Homeowners Can't Catch Up
by Bill Bonner
Ouzilly, France

Now the summer days are dwindling down to a precious few. This morning, it is overcast and chilly here in central France. The leaves on the aspen and linden trees have turned yellow already and whenever the wind blows, they flutter to the ground as if they were trying to get away from something.

This afternoon, we have been invited for a private tour of a grotto not far away. According to our information, hundreds of years ago, the grotto was sealed off by falling rock. Thus it was protected and preserved remains of human habitation from 30,000 years ago.

"Yes, there is a span of about 10,000 years in which there is little evidence of human habitation in Europe," said the owner. "Maybe humans almost died out during that period; we don't know what happened. But when this cave was opened, we found some remains that were dated from that era. It's a remarkable find. A group of 20 scientists has been working there all summer. They told me they found 1,000 artifacts a day. Of course, we're not talking about statues and battle axes. Most of these discoveries are bone fragments...maybe even grains of cereal..."

We'll find out more this afternoon...

Meanwhile, we turn our attention to the world of money. And we begin by asking:

Just what are we trying to figure out?

Well, we want to understand what is going on...don't we?

And we want to try to guess about what is likely to happen next, don't we?

We'd like to know, for example, whether stocks were going up or down...and whether this is a good time to buy property...or gold...or Treasury bonds. We'd like to know, wouldn't we?

Of course we would. Unfortunately, 'it is not given to man to know his fate,' as the ancients put it. All we know is what happened in the past...and the fate of men who came before us... Even that we known only in a wispy, uncertain kind way. All we have are stories...

Back to that in a moment...

Here are the facts from yesterday:

The Dow rose 30 points. Oil closed down - to $72. Gold remained where it was.

Ben Bernanke was put up for another term as head of the Federal Reserve. And the Obama administration said the downturn was a little worse than it had thought, so it's estimate for the 2010 budget deficit had to be updated - increased by 19% - to $1.5 trillion. The Congressional Budget Office did its own count and came up with $1.4 trillion. Either way, it's a lot of money.

We have wondered where the money would come from. Yesterday, Goldman's top economist, Jan Hatzius, said he thought much of it would be 'monetized' by the Fed...with the Fed's balance sheet increasing as much as $2 trillion.

The Fed's balance sheet is the monetary ballast for the whole economy. As it increases, so does the amount of sail the economy can put up. In theory, the potential for inflation increases geometrically; one dollar on the Fed's balance sheet could be multiplied into $10 in the economy. Bernanke has already doubled the Fed's balance sheet - buying up and additional $1 trillion worth of Wall Street's failures and the feds' debt. He might have to buy another $2 trillion worth - bringing the total to $4 trillion - before this crisis is behind us, said the Goldman fellow.

Home prices are still going down, says the latest report, but 'less than forecast.' Is that good news? Well, it could be worse.

The latest sales figures show an uptick. But careful analysis shows that homes sales figures are still terrible. People are buying $250,000 houses...but they're the houses that sold for $500,000 in 2005. And the poor folks with $500,000 houses...and jumbo mortgages...are sinking. Almost half of them will be underwater by 2011, according to one estimate.

The feds now say that 10% unemployment is unavoidable. Naturally, when people lose their jobs they have a hard time keeping up with mortgage payments.

"Bay Area Delinquency Rates Soar," says a headline.

Two years ago, when a homeowner was late on his mortgage payments, there was a 45% chance that he'd catch up. This is known as the "cure rate." Well, now the cure rate is down to 6.6%. Homeowners never catch up...they fall further and further behind until the house is foreclosed.

Want some more news? In past recessions, the United States emerged first and pulled the rest of the world out of its funk. This time, the United States is still on its way analysts look to China. The Peoples' Republic says it is growing fast. It also says it will have an inflation rate of 2% this year. Currently, prices are falling at a 1.8% rate. China is in deflation, not inflation. What's up in China? We won't know for a while...but don't count on it to pull the world out of a correction. China needs a correction as much as anyone.

[The US consumer isn't going to be able to pull the global economy out of this mess - because who is lending them a hand? Certainly not the US government. Don't wait for them to bail you out - take charge of your fate and use a completely legal 'loophole' to receive your first "bailout" income check. See how here.]

And now...for more news:

"So what has stocks soaring now, during this great deleveraging - this credit crunch - this historic pullback in household balance sheets?" writes Ian Mathias in today's issue of The 5 Min. Forecast.

"Consumer confidence, of course.

"We recently vowed to stop calling our national brethren 'consumers' in favor of less degrading words - like Americans, citizens or just plain old people. Thus we report the Conference Board printed a surprisingly optimistic gauge of American consumption attitudes (doesn't that sound better?) yesterday. After two months of decline, the index kicked back up to 54.1, just shy of a 2009 high.

"Coupled with the latest printing of the home price index, that was enough to keep this mega-bounce alive and kicking. The news shot the S&P 500 to a 1% gain within moments of yesterday's opening bell, which eventually faded into a 0.25% advance. The index is up almost 4% in the last five trading days. The Dow hasn't fallen for six days in a row.

"We accept that improving consumption attitudes could bump stocks higher, especially retail. But we wonder... Do consumption attitudes lead markets, or the other way around?

Consumer Confidence

"Seems like Joe Six-pack is routinely late to the party, no? We blew the post Lehman crash, stayed gloomy during the best of the stock rebound, got bullish in June when stocks went nowhere and lost confidence last month when the market shot up again.

"So what does a big improvement in consumption attitudes tell us now? If anything, that the stock rally is about to cool off."

Ian writes every day for The 5 Min Forecast, an executive series e- letter that provides a quick and dirty analysis of daily economic and financial developments - in five minutes or less. It's a free service available only to subscribers of Agora Financial's paid publications, such as Resource Trader Alert. RTA's latest report details a trading strategy that will help you rake in some nice gains in a short period of time...without having to touch stocks. Get the full report here.

And back to Bill's ruminations:

We've been alerting readers to a special announcement that Strategic Short Report's Dan Amoss was set to make this past Monday: the next major bank headed for collapse.

Not only did this report create a major buzz at the Agora Financial headquarters in Baltimore, but on Monday, national media outlets began digging around for more details on Dan's financial short play.

Out of respect for those who took us up on the Strategic Short Report offer, we aren't going to release the name of the bank - yet. But we can tell you this: this bank not only didn't reduce their dividend, they dropped their loan provisions.

Day traders may be cheering, but for the long haul, this spells disaster. Says Dan: "I still expect a big surge in provision expenses, likely as soon as the quarter ending in October. If you don't believe that the Canadian and US economies are going to come roaring back, which I don't, this is still an attractive short sale."

Stay tuned for more on this story - and if you haven't already, check out Strategic Short Report by clicking here.

For 40,000 years - maybe longer - our ancestors have walked the very earth where your editor puts his feet. They lived. They died. What did they know? Scientists say they were as smart as we are. What did they talk about? What did they think about?

"Every time something is given, something is taken away," we suggested over dinner last night.

"No, that's not right. You're saying that life is a zero-sum game...that it can never get better...that it can never really improve...that there can be no real progress..." Elizabeth replied.

"Well, not exactly...I'm saying that there are no free lunches in nature. That if a man is smarter, he is not likely to be faster too. But I'm not saying anything particular...or scientific...I'm just announcing a general principle...more like a vague intuition about the way things work. According to one theory, for example, mankind migrated from Africa to Europe. In Europe, during the Ice Age, he encountered a great challenge: cold weather. Most humans and pre-humans probably couldn't survive it. But some did. And they did by evolving into maybe smarter...maybe slower...people with bigger heads. According to the latest thinking on the subject, the bigger brains were a disadvantage in warmer climates...because they got too hot. I guess they took up too much energy too.

"But they were an evolutionary necessity in colder climates...where the cold weather not only made possible a hotter head, but also made it a necessity. People needed bigger brains to anticipate the change of seasons and save winter, for example. They had to see what was coming. They had to look at what was coming...and prepare for it. They had to work together hunt large game...and to fight off competitors. Those who couldn't do so died out. Well...that's the theory."

Every day, here at The Daily Reckoning, we give you information on the latest trends and events in financial markets. But everybody has access to the same information. And what is information, anyway? What is it worth? What does it mean?

For thousands of years, people exchanged information. Then, it must have been a different kind of information...things we can barely imagine...about where animals were getting their water...about where to find seeds and how to avoid to prepare for winter...and how to fend off wild animals. Then, the dominion of the human species was not so sure. There were saber-toothed tigers, lions, wolves, even mastodons...giant sloths... Early man was probably as often prey as hunter. He had to be on his toes to survive.

Information was one thing. But there was more. He needed wisdom...and technology... as well as facts. He had to learn to store food for winter as well as beat back attacks by wild beasts. He had to know how to make cloaks out of animal skins...and how to stock firewood for a rainy, snowy winter...and how to find shelter.

We imagine tribes sat around the campfire and told stories. The stories reported victories and defeats...disasters and triumphs...heroes and enemies. But the stories were more than just information: they carried lessons...moral lessons...about what to do and what not to do.

That is the tradition to which we are heirs here at The Daily Reckoning. We pass along information: but without a story, the information is just noise.

Our story is the story of the seasons. It's the story of heroes and villains...of fatal flaws and inevitable disasters.

The common flaw is an old one. The Greeks couldn't seem to tell a story without mentioning it. 'Hubris'...the kind of pride that goeth before a fall...the arrogance that leads people to think they can get away with something... that they not only can know their fates...but that they can control them.

Today, Ben Bernanke is our tragic hero. His flaw is as obvious as his challenge. He thinks he can stop the world from turning.... stop the seasons...avoid the hard, correcting winter by tempting the sun with bailouts, stimulus and cheap credit. His arrogance is an affront to the gods.

The old tales tell us what will happen. He will fail. But That is a different story. It is the story future generations must tell. We must live it.

Until tomorrow,

Bill Bonner
The Daily Reckoning

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The Daily Reckoning PRESENTS: After the epic crash last year, the price of oil is stabilizing and it should rise exponentially over the following years. Over the past year, global consumption has stayed weak, however once the economy recovers, says Puru Saxena, crude oil should resume its secular bull-market. Read on...

Peak Oil: Supply Data Doesn't Lie
by Puru Saxena
Hong Kong, China

Despite the 'demand destruction' hype, it is interesting to note that during this severe global recession, worldwide oil usage has dropped by a minuscule 2.7%. So, what will happen when the world comes out of this recession? Who will rise up to the challenge and meet our insatiable thirst for energy? These are critical questions not many are willing to ask.

According to the US Department of Energy, liquid fuel demand in the developed nations peaked in August 2005 at 41.89 million barrels per day. Since then, it has plunged by 3.6 million barrels per day to 38.27 million barrels per day. However, you may want to note that despite these tough economic conditions, consumption has been extremely resilient in the emerging world. For instance, demand in the developing countries peaked in October 2008 at 46.33 million barrels per day and it is down by only 0.36 million barrels per day! I am amazed that the worst global recession in decades has barely managed to shrink energy demand in the developing world. Whilst this is wonderful news for the energy investor, it is a terrible sign for society.

At present, our world is using up roughly 84 million barrels of liquid fuels per day and for the moment at least, there is sufficient supply to meet demand (Figure 1). However, when economic activity picks up, it won't take much for demand to zip right past supply. Remember, it is much easier to increase usage, but it takes a long time to ramp up production. So, unless this is a permanent global recession (which I doubt), it is inevitable that the price of oil will go up significantly over the medium to long-term.

Figure 1: Supply and demand - balanced for now
Crude Oil Demand and Supply

On the supply side of the equation, let me be clear. If I was asked to pick the biggest threat to a sustainable economic recovery, Peak Oil would top that list. Remember, Peak Oil doesn't mean that we are running out of oil reserves, crude will be around for decades. However, 'Peak Oil' does imply that we are dangerously close to peak global oil production. 'Peak Oil' also means that rather than experiencing a burst in oil supplies as many expect, from here onwards, we will witness sharp declines in global flow rates. In a nutshell, the era of cheap energy is over and the price of crude oil will rocket higher over the coming decade.
" is much easier to increase usage, but it takes a long time to ramp up production. So, unless this is a permanent global recession, it is inevitable that the price of oil will go up significantly over the medium to long-term."

Now, many skeptics will argue that if Peak Oil was real, the price of oil wouldn't have dropped to roughly US$30 per barrel in last autumn's stunning crash. Valid point; but let us not forget that the spectacular plunge occurred at a time when global economic activity virtually came to a standstill. Let us also keep in mind that last autumn's crash in asset prices was caused by a total freeze in credit and the associated asset liquidation. Whilst I agree that the final action in crude oil's parabolic blow-off last July smacked of speculation, I can assure you that speculation alone couldn't have created a multi-year boom whereby the price of crude oil went up by almost 1500%! As you can see from Figure 1 above, supply clearly fell short of demand between 2005 and 2008, and this is why we had a magnificent bull-market in crude oil.

Make no mistake, global demand for liquid fuels will rise again - and if my homework is correct, supply won't be able to keep up. If you ignore the noise and review hard data, you will observe that the vast majority of the world's most prolific oil provinces are now past peak production and in a state of permanent depletion. According to the BP Statistical Review of World Energy, out of the 54 oil producing nations and regions in the world, only 14 are still increasing production. Alarmingly, 30 oil producing nations and regions are definitely past their peak output and the remaining 10 appear to have modestly declining production rates. Put another way, when weighted by production, Peak Oil is already a grim reality in 61% of the oil producing world!

Still not convinced about Peak Oil? Then review Figure 2, which charts the expected combined flow rates for crude oil, lease condensates and Canadian Oil Sands. As you can see from the grey shaded area, production is about to decline by roughly 5 million barrels per day by 2012.

Figure 2: Has crude oil production peaked?

Peak Crude Oil Production
Source: The Oil Drum

Ironically, Figure 2 also plots the optimistic (almost laughable) forecast made by the International Energy Agency (IEA) in its "World Energy Outlook 2008". Interestingly, in last year's "World Energy Outlook", the IEA stated that in order to fulfill its optimistic projections, the world had to install 64 million barrels per day of new supply by 2030 or the equivalent of six times the Saudi Arabian output! Furthermore, the IEA declared that the energy industry had to invest hundreds of billions of dollars every year to achieve this favorable outcome.

Now, I can understand that the IEA is a government-funded agency so it has to paint a rosy picture, but it is ominous that the energy watchdog failed to mention where this surplus oil would come from!

Well, I guess you get the idea. Global crude oil production has probably peaked, new discoveries have dried up and there is a shortage of capital for investment purposes. Apart from these factors, if you believe the energy optimists, all is well in the energy industry and the price of oil is about to drop to zero!

After years of extensive research, I have no doubt in my mind that unless global demand stays weak forever, we will see supply shortages in the not too distant future. And before that occurs, the price of crude oil will stage an explosive rally. Accordingly, I suggest that all my readers allocate a large proportion of their investment portfolio to upstream energy companies and to businesses in the energy services sector.

Finally, in the energy complex, the price of natural gas is still scraping along its recent crash low and this is a fantastic long-term investment opportunity. As we approach winter in the Northern Hemisphere and heating demand picks up, we are likely to see a big rally in the price of natural gas. So, investors may want to allocate capital to this unbelievably inexpensive commodity.


Puru Saxena
for The Daily Reckoning

Editor's Note: Learn how you can make as much as 668% on the 12 stocks set to rocket as this next new round of "petro-chaos" unfolds. See here.

Puru Saxena is the founder of Puru Saxena Wealth Management, his Hong Kong based firm which manages investment portfolios for individuals and corporate clients. He is a highly showcased investment manager and a regular guest on CNN, BBC World, CNBC, Bloomberg, NDTV and various radio programs.

Puru publishes Money Matters, a monthly economic report, which highlights extraordinary investment opportunities in all major markets. In addition to the monthly report, subscribers also receive "Weekly Updates" covering the recent market action. Money Matters is available by subscription here.

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