Generational Dynamics Forum - New Site

It's interesting to try to figure up the unencumbered capital of the US, but by the numbers we all went bankrupt ages ago. I believe the "invisible market" or if you prefer black or grey markets are actually propping up the economy to a greater extent than is generally realized.

As I've said before, the issue with gold or silver is that people tend to hold them past the date when they could make a profit. In the 70's, quite a few people held silver certificates after the date when you could turn them in for silver. They passed on a chance to make 4x the face value just to hold worn paper, which made no sense. Reluctance to release an item perceived as being of worth is the most common mistake and the deadly enemy of profit. I remember the gold run up of the 70's, and it took no time after interest rates went up for the price of gold to drop like a brick. When interest rates go up and the govt bites the bullet and cuts the deficit, gold prices will drop. And that day may very well come before anyone expects it. I don't think it matters who is elected President, this is going to happen, probably just as soon as Greece defaults. Much is waiting for a political excuse that can be used to point to a "crisis" that requires "sacrifice". From everyone except the top backers and bankers of couse.

The irrational season of political talk is upon us with a vengance. I've gotten so irritated at the WSJ for printing editorials that fly in the face of basic economics or common sense or fact just to get in a dig at Obama that I'm apt to get banned over there for gnawing on the editorialists bones. And I don't even like Obama, he seems dreadfully ineffectual to me. But some of those editorials are just mind bogglingly inaccurate. Honestly, I'm so disinterested in this election that I've not yet bothered to apply for an absentee ballot, and I've got to do that or just not vote.

Oil prices have to have a huge speculation component in them, this is a fact. I strongly suspect most of the money for this speculation is coming from the various FED easing programs, the banks aren't lending, and I doubt many are directly investing, they are probably buying into funds that speculate on commodities but hedge their bets strongly. I'd suppose that's the result of getting burned by AIG, we won't insure the bets we make, we'll make them through a third party and let them insure the bets. How this is supposed to protect you if that third party has practices similar to MF Global is beyond my understanding, I think the banks have not yet reached that point of mistrust wherein they no longer assume everyone but themselves is acting in an ethical manner. This seems to be the basic assumption of optimism about the economy, "everyone but me is ethical, so I can make money by being the only unethical person in the crowd". That's a pickpocket mentality.

I've never believed that speculators have been driving oil prices.
Oil is fundamentally different from, say, gold, because it's easy
to store a lot of gold, but almost impossible to store a lot
of oil.

Let's suppose you're a speculator, and you and other speculators
bid up the price of oil for July delivery up to $150 per barrel.
When July comes, someone calls you up and says, OK, pull your
tanker into port, because you have to take delivery of your oil.

You then go to some refiner to sell the oil, and he tells you that the
current price for oil is $100 per barrel. You say, "B-b-b-b-b-but I
paid $150 per barrel for oil!!"

He says, "No, you paid $150 per barrel for a piece of paper. A tanker
of oil is very different from a piece of paper. The price of both is
determined by supply and demand, but the price of the piece of paper
and the price of a tanker of oil are otherwise completely unrelated."
In other words, speculating in oil futures is completely unrelated
to speculating in oil. One is a paper contract, the other is
real oil.

Now, I said that I don't believe that speculators have been driving
oil prices. There's one recent example that I know of.

Early in 2009, when oil prices had crashed, speculators were
purchasing some 80 million gallons of oil and storing it in
supertankers, but not delivering it anywhere, hoping to sell it later
when prices rose.

** Speculators around the world are storing oil in supertankers
** http://www.generationaldynamics.com/cgi ... 23#e090123

That was real speculation in oil (as opposed to speculation in
oil futures). But what happened in 2008 was not caused by
oil speculators. It was caused by demand from China.

The above argument about oil does not apply to gold or silver,
because it's possible to take delivery of gold and silver and
easily store it in a warehouse somewhere.

Aedens posted this the other day, which I found quite interesting
because we didn't know this in 2008.

http://www.mcclatchydc.com/2011/05/25/1 ... rylink=cpy

WASHINGTON — When oil prices hit a record $147 a barrel in
July 2008, the Bush administration leaned on Saudi Arabia to pump
more crude in hopes that a flood of new crude would drive the
price down. The Saudis complied, but not before warning that oil
already was plentiful and that Wall Street speculation, not a
shortage of oil, was driving up prices.

Having watched the machinations in the markets, it was my guess at
the time that about $50 of the premium in oil was due to
speculators.

This does not change my conclusion. Who are these speculators?
It was believed in 2008 that the Chinese were speculating in
oil and WERE STORING THE OIL somewhere within China itself.

The same article says that the Saudis can't sell any more oil. Well,
or course not. The only speculators were Chinese, and they were
already sucking up all they could, and were running out of places to
store another billion barrels of oil. That's when the price of oil
collapsed.

Just because politicians (in Riyadh or Washington) blame the price of
oil on speculators doesn't mean that they're telling the truth,
inasmuch as they don't tell the truth about anything else.

John

Wed Jun 01, 2011
I do not share all of economics is predicated on the notion that resources are inexhaustible. Price as "Utility" is the funtion of the market. I do have regard as we ruthlessly must pursue GD as a means to and end to settle these misnomers of agenda, or to be polite the abilty to see dimly through percieved policy followed to its design such return's for Government List Investors.
Here we are as Hayek warned: Experience suggests that, once this phase has been reached, it is merely a question of time until the views now held by the intellectuals become the governing force of politics. Going into Hayek as we know, It is the intellectuals in this sense who decide what views and opinions are to reach us, which facts are important enough to be told to us, and in what form and from what angle they are to be presented. Whether we shall ever learn of the results of the work of the expert and the original thinker depends mainly on their decision.

What is fact is a reversal of the end user. It was roughly 70 percent end user and 30 percent speculation as John noted back in his arcticle some time ago.
"perhaps a structural limit in the markets that can't be cured in the short run."
Now the ratio is inverted. The whole sector's are driving this. Funds are the driver. Underlying problem is too many dollars chasing unproductive returns. Leakage, as in the classicals believed that as interest rates increased, savings would increase, and that as interest rates declined, savings would decline. Keynes agreed that this was true at “a given income,” but that a change in the interest rate would also affect the amount investment and therefore the level of income. With cheap dollars leakage we are just again seeing hedge, etf, contracts in another bubble from risk metrics. Fear enables greed or chasing phantom returns when it pops. I agree with the notion of observation as many here also that as John conveyed.
"But we're unlucky because there's a far worse financial problem on the horizon."

John wrote:Oil is fundamentally different from, say, gold, because it's easy
to store a lot of gold, but almost impossible to store a lot
of oil.

All commodity markets need futures as they play a very helpful role for the producer. They give the producer a known price and reduce the need for capital. In some agricultural sitautions the farmer sells his crop before the seed is even in the ground and thus all his working capital is financed by futures. The duration of the futures varies enormously, some quite short such as on fresh chickens some much longer such as wheat. (Converting fresh chicken into frozen chicken is not undertaken lightly because of the extra cost involved - if prices fall its usually better just to take a loss)

The minute that futues are present there will be speculators. Its almost unheard of for a speculator to take delivery; they just keep buying and selling bits of paper sometimes at a profit, sometimes at a loss. My understanding of speculators storing oil in tankers in 2008 was an abnormal position.

The oil market is very complicated compared to most other commodities, and there are quite a large number of drivers to the oil price, but there will always be at least some futures and some speculation. A flat uneventful market is not attractive to speculators but they get involved in thier droves the instant there is volatility. How much is due to speculators and how much is due to other factors is very difficult to estimate. What about market expectations when the producer is saying "prices are going up and if you want this shipment its another $ 10 a barrel" - its impossible to see if the increase is the producer or the buyer of the futures.
Richard

The speculators just roll the paper to the next delivery date.

Same thing they do with gold and silver (mostly) - roll the paper to the next delivery date. If you take delivery on gold and silver, you lose your leverage and that's no fun when prices are going up. So it's all pretty much the same (in terms of how the specs play the game) - whether it's gold, silver, or oil - or tulip bulbs.

At the end of a bubble in oil, the speculators have an advantage over the end user. They can drive prices for futures to the moon like they did last week before the end user even has a chance to prove that the demand just isn't there. When that gasoline gets delivered some days hence, it WILL be at astronomical prices whether real supply and demand says it should be or not because paper supply and demand said so.

But this topic is a somewhat of a side show at this time - is it possible this paper demand we are seeing NOW might be of a different nature and foreshadowing hyperinflation? If Vince is correct, and he may very well be correct, as the economy tanks and the demand isn't there in future weeks and months, my supposition is that IF hyperinflation is closer than it was last year, the futures markets will begin to behave differently, and this paper demand will not abate (or will not abate as much) and prices for hard goods (and particularly those hard goods for future delivery months as reflected in the prices of forward futures) will not come down like they "should" because the markets will not be so much about supply and demand, but about a brewing monetary catastrophe that is forthcoming. True or not? I think the silver market will be important to look at in this regard as it doesn't have the variety of influences that oil does, and to compare the behavior of oil and silver, and other hard asset markets, housing as an example. I saw recently out of the corner of my eye, so maybe not definitive, that the Phoenix real estate market is up 15% in the past few months.

Oil futures prices through 2020:
http://barchart.com/commodityfutures/Cr ... tures/CLJ2

Silver futures prices through 2016:
http://barchart.com/commodityfutures/Si ... ?search=SI*

Contract Last Change Open High Low Previous Volume

CLJ12 (Apr '12) 109.77s +1.94 108.66 109.95 107.95 107.83 252,985
CLZ13 (Dec '13) 103.98s +0.08 104.27 104.27 103.49 103.90 27,105

SIH12 (Mar '12) 35.338s -0.218 35.435 35.720 35.190 35.556 55,106
SIZ13 (Dec '13) 35.572s -0.209 35.800 35.805 35.560 35.781 118

Personally, I watch a market nobody tries to influence, and that's the precious gem (not diamond) market. I can safely say that prices haven't moved much at all on the direct market from miner/cutter level. As a matter of fact, I just bought a 4 carat natural ruby (fracture filled -though find one that isn't now and you deserve a medal) decent clarity and nice red with a touch of purple for 125$. All the price pressure in that market, commercial jewelers stones, has been downwards. I've made other purchases too at rock bottom prices. There are some very high quality stones still demanding high dollar, but the usual run of what you find at the ordinary jewelers shop is dirt cheap at the supplier end. I do believe the miners/cutters/wholesalers are feeling a very hard pinch now.

As far as I can tell, the wholesale diamond market is seeing some hard pressure downwards, but of course De Beers is fighting that. They've been introducing colored diamonds to fight the colored gemstone trade, but I am not certain how much effect that's actually having. Given some of the moves in the diamond trade over the last five years, we may have finally seen the end of the great diamond cartel. The reason I don't track diamonds is simply that I'm not fond of them, they are simply overpriced very common stones with little to recommend them from my perspective. (How many people do you know that own a nice diamond, and how many that own nice emeralds or rubies or even citrine or amethyst? Yes, diamonds are common stones, and are listed as "precious" by tradition, not logic.)

Gemstones are a pretty good test case for inflation, they have fairly standard grades of measurement and quality, and they maintain value reasonably well, plus they are always in limited supply and provide a lightweight store of value. I'd expect to see inflation fears represented in this market, and I really don't at this time. Colored gems, apart from a few exceptions that aren't good test cases (diamonds, canadian ammolite, parabia tourmaline) are dropping in price or holding steady.

I think that currently we are in an exceptional period with respect to oil speculation. We have speculators with more money in that market than we have money from consumers or producers. This is the result of multiple rounds of QE as that money didn't go out into loans, it went to commodities. This situation can't last.

OLD1953 wrote:Gemstones are a pretty good test case for inflation, they have fairly standard grades of measurement and quality, and they maintain value reasonably well, plus they are always in limited supply and provide a lightweight store of value.

Very few humans can really tell the difference between a man made diamond and one found in the ground. The man made diamonds are cheap. With time the ones found in the ground will also be cheap. Other gemstones are now being manufactured as well. Gemstones are a horrible store of value, the "limited supply" is coming to an end.

U.S. Growth at 21-Month Low
The hard data which officially define recession show that U.S. economic growth has been slowing, not reviving.

http://www.businesscycle.com/#

Besides the video overall being fact based and not based on the bubble mentality presently prevailing, there are a couple discussion points in this video that we've covered here. One, he mentions several times the decline in real disposible personal income that's been brought up in these pages, saying that it leads other data and has been declining for 5 months. He tries to make the point that real disposible personal income doesn't decline for 5 months without a recession following before being interrupted, so the comment is barely audible. Two, he makes an offhand comment about the 2008 $147 oil spike.

vincecate wrote:

OLD1953 wrote:Gemstones are a pretty good test case for inflation, they have fairly standard grades of measurement and quality, and they maintain value reasonably well, plus they are always in limited supply and provide a lightweight store of value.

Very few humans can really tell the difference between a man made diamond and one found in the ground. The man made diamonds are cheap. With time the ones found in the ground will also be cheap. Other gemstones are now being manufactured as well. Gemstones are a horrible store of value, the "limited supply" is coming to an end.

I'm trying to think about what can be looked at in lieu of some of the items previously mentioned. The CRB has a spot index which is comprised of some items that are exchange traded and some items that are not. After reading OLD's post, my thought was to look through that list and maybe we can find individual price indexes of the non exchange traded items on that list as being good indicators of inflation pressure in the economy.

Last year, I had mentioned that in the grocery store the exchange traded items had increased in price whereas the non exchange traded items had not. This year, I don't find that to be so universally true, which indicates that inflation is bleeding into the overall economy, albeit slowly, but that is the trend. As Lakshman sort of implies, that trend could come to an abrupt end with the end of this so-called expansion.

Anyway, here are the non exchange traded items on the CRB spot index. I cut out all the items that I know are exchange traded (including butter - can you believe butter is exchange traded?)

Commodity Specifications Market
Burlap (01) 10 oz., 40", ex-dock or ex-warehouse, duty paid, per yd. New York
*Hides (30) Heavy native steers, packer 30/53 lbs., fleshed, packer to tanner, dealer, or exporter per lb., f.o.b. shipping point. Chicago
*Lard (09) Prime Steam, in tanks, per lb. Chicago
*Print cloth (11) 48", 78*78 count, 4 yds./lb., per yd. New York
Rosin (12) Gum, window glass grade, car lots, per 100 lb. New York
Rubber (13) Crude, natural, No. 1 ribbed smoked sheets, per lb. New York
*Tallow (18) Packers' prime, inedible, per lb. Chicago
Wool tops (22) Certified spot price, domestic 64's, nominal, per lb. Boston

* = Possibly related to an item that is exchange traded.

Doesn't leave much that can't be tainted by the speculators.

How many economic theories treat resources as if they are finite? The O.E.C.D say “none” – that no such theory exists.
That is why no knows what is going on. Those that do are many, many years ahead. Welcome to today. Do not want to upset the conservative masses. The world has changed. What we do know is why the DJIA is 13K, it is entirely due to the nearly $7 trillion pumped by global central banks into the world stock markets just in the past 4 years. As Sean Corrigan from Diapason notes, the aggregate global central bank balance sheet has doubled in four years, after doubling in the 5 years before that. This debased currency is to destroy the rentiers. Not by choice but of ideological pragmatic necessity to survive. Why would congress take away the seperation of banks and investment firms by repealing glass-steagal?
The banks own the majority share percentages of the oil company stocks (remember Kissinger stating control oil to control the economy of a country) and when oil prices are high the banks that own oil companies benefit. You might hear an argument that they have the same % of profit and OPEC nations benefit (true), however if oil is $35 a barrel or $150 a barrel changes oil co. profit dramatically. So the banks have a huge benefit to run up the price of oil with rumors. Since the USD is backed by oil it also helps fund deficits due to the recycling of the $ into treasuries. In addition to the oil company ownership, the financial intermediaries take positions based upon inside information on planned kinetic actions / capturing regulators / exchanges through HFT and drive up the price of oil and other commodities with your bailout money.