Sunday, March 8, 2009

Dollar Dump To Ignite Commodity Rebound

" ...the more the government tries to pump up the ball, the flatter it seems to get."
-Bill Bonner, The Daily Reckoning

In an excellent essay posted at today by Clive Maund, Copper and Oil Provide Early Warning of an End to the Global Economic Crisis…, Mr. Maund suggests that recent breakouts in Copper and Oil from "bottom basing" chart patterns portends and end to the Global Economic Crisis. Historically, and viewed through "coventional wisdom", this suggestion might be plausible. I would like to suggest that these breakouts in two of the World's most economically sensitive commodities is less about an end to an economic crisis, and more about an end to the US Dollar as the World's Reserve Currency.

Posted above [please click to enlarge] is a chart of the US Dollar beside a chart of the price of Oil. We have heard repeatedly over the past seven months that the price of Oil has plummeted because of "demand destruction" brought on by the Global Economic Crisis. While it would be futile to argue otherwise as there has been a substantial reduction in demand, would it not be prudent to consider the rise in the US Dollar over the past seven months as a major contributor to the "collapse" of Oil prices?

The World burns through about 1000 barrels of Oil every second. That's a LOT of Oil. "Demand destruction" seems to focus on "fewer miles driven" in the US. And while fewer miles are being driven by Americans today, we and the rest of the World, are still driving everyday. Airplanes are still flying, ships are still sailing, buildings are still heated in the winter and cooled in the summer. The lights still go on when it's dark. Whether the World uses 86 Billion barrels of Oil EVERY DAY, or just 82 Billion barrels, it still uses a lot of Oil EVERY DAY.

Global Oil production was falling BEFORE the Global Economic Crisis, and is falling ever faster because of it. What if the price of Oil is telling us that supply is beginning to fall faster than demand? Before the economic crisis price was being driven by rising demand, and stagnant or falling supply. As the economic crisis began to unfold, demand and supply were forced into balance, and prices began to fall. And now, as the economic crisis deepens, and falling production is coupled with new production cuts, supply is rapidly falling below demand once again.

The glut of Oil in world markets the past seven months is now beginning to 1000 barrels a second. OPEC production cuts have finally worked their way through the distribution system. Moving forward, it will be interesting to monitor the weekly EIA crude Oil statistics. I suspect that Oil supply will be static briefly, and then begin to fall as summer approaches...regardless of "demand". I believe that the "demand destruction" story is a ruse.

Here is an interesting statistic: In the last week of February 1990, the EIA reported US crude Oil stocks at 1,633,707. In the last week of February 2009, the EIA reported US crude Oil stocks at 1,741,497. In the last week of February 2008 [with Oil prices at $100 a barrel], the EIA reported US crude Oil stocks at 1,679,162. Obviously "demand destruction has hardly created a "glut" of Oil in the US stocks. There were ONLY 62,335 more barrels of crude Oil in US stocks at the end of February 2009 vs. February 2008. Relative to 1990, there is ONLY 107,790 more barrels of crude Oil in stock today. Where is the glut I ask?

Absent a glut in Oil supplies, we must now turn our eye on the relationship between Oil and the US Dollar. Just a glance at the two charts above, and a novice could figure out that a rise in the Dollar has caused the fall in the price of Oil. It really is that simple. The reasons for the rise in the Dollar the past seven months are countless. But above all the reasons for the rise in the Dollar is the consensus view that the rise in the Dollar is not justified "fundamentally", and that that rise is about to come to an abrupt end.

Suffice it to say then, I believe that the breakouts in copper and Oil are less about an end to the Global Economic Crisis, and more about the end of the US Dollar. You could put just about any commodity chart beside that Dollar chart above and see the same "destruction". A fall in the Dollar is going to ring the breakout bell for the entire commodity sector. The demand destruction we have heard so much about the past seven months will then soon be referred to for what it really is...the cause of a global commodity shortage. And a commodity shortage coupled with a falling Dollar is going to send the prices of commodities on a rocket ride to levels that will make last Spring and Summer highs in commodity prices look tame by comparison. And Gold and Silver are going to piloting that commodity rocket...that's the safest investment idea I can offer anybody today.

CNBC Makes Daily Show's Shit List
So Rick Santelli was slated to appear on The Daily Show last night, to discuss the "riot" he incited last week. Unfortunately, Rickles chose to "bail" on the interview, which did not please Jon Stewart. Above, Stewie lets us know how he feels about the cancellation, which sort of snowballs into his thoughts on the biz "news" network in general. Didn't see the Carl Quintanilla hit coming (especially when there are so many who are more deserving) but what can you do.

If you haven't seen this Comedy Central clip with Jon Stewart yet, go check it out right now. It is hilarious. Be careful, that cup of coffee might come out of your nose...LOOOOOOOOOOOL!

US Lawmakers Clash With Fed Over AIG Rescue Strategy
WASHINGTON -(Dow Jones)- U.S. lawmakers sharply criticized the Federal Reserve for failing to share information about the government's rescue of American International Group Inc. (AIG), calling the firm a "lost cause" and warning that future rescue funds could depend on the Fed's cooperation.

"You will get the biggest 'no' you ever got. I will hold the bill, I will do anything possible to stop you from wasting the taxpayers' money on a lost cause, " Sen. Jim Bunning, R-Ky., said in a Senate Banking Committee hearing Thursday.

Bunning's comments came in a series of increasingly fiery exchanges between lawmakers and Federal Reserve Vice Chairman Donald Kohn. Despite repeated requests from senators for the Fed to disclose the counterparties who have benefited from the government's bailout of AIG, Kohn said the Fed wouldn't share the information.

"My judgment would be that giving the names would undermine the stability of the company," Kohn said.

That response didn't sit well with lawmakers, especially since Kohn acknowledged the need for greater transparency about the Fed and Treasury Department's actions to salvage the embattled firm.

"Public confidence in what we're doing is at stake, it's their money that is being poured into these institutions," Senate Banking Chairman Christopher Dodd, D-Conn., told Kohn. "That kind of an answer undermines that very significantly."

Speaking after the hearing, Dodd said he or some other lawmaker would likely compel the information from the Fed.

"If we have to go that way, we'll see," Dodd said.

Sen. Richard Shelby, R-Ala., called Kohn's response "very disturbing," and warned Kohn that the Fed and Treasury can stonewall Congress for only so long.
Undermine the stability of the company? LOOOOOOOOOOOOL !!! AIG, a penny stock, lost $62 BILLION in ONE QUARTER and Fed Vice-Chairman Kohn is worried about undermining the company's stability? Do they have drug testing at the Fed?

A.I.G., Where Taxpayers’ Dollars Go to Die [must read]
A.I.G. nearly barreled off the cliff last September, when it couldn’t meet its obligations to customers who had bought a version of derivatives called credit default swaps. Such swaps are like insurance policies; bondholders buy them to protect themselves from default on various forms of debt.

When A.I.G. couldn’t meet the wave of obligations it owed on the swaps last fall as Wall Street went into a tailspin, the Federal Reserve stepped in with an $85 billion loan to keep the hobbled insurer from going bankrupt; over all, the government has pledged a total of $160 billion to A.I.G. to help it meet its obligations and restructure operations.

So is A.I.G. the taxpayer gift that keeps on taking? Sure looks that way. And while no one can say with certainty whether more money will be needed, the sheer volume of derivatives engineered by a small London unit of A.I.G. suggests that taxpayers haven’t seen the bottom of this money pit.

Some $440 billion in credit default swaps sat on the company’s books before it collapsed. Its biggest customers, European banks and United States investment banks, bought the swaps to insure against defaults on a variety of debt holdings, including pools of mortgages and corporate loans.

Because of the way A.I.G. wrote its swaps, and because the company had a double-A credit rating at the time, it did not have to put up collateral to assure its customers that it would be able to pay on the insurance if necessary. Collateral would be required only if A.I.G.’s credit rating were cut or if the debt underlying the swaps declined.

Both of these “unthinkable” events occurred in 2008. Suddenly, A.I.G. had to cough up collateral it didn’t have.

SO, you see, the rescue of A.I.G. also involved a bailout of its many customers, none of whom the insurer or the government is willing to identify.

Top U.S., European Banks Got $50 Billion in AIG Aid
The beneficiaries of the government's bailout of American International Group Inc. include at least two dozen U.S. and foreign financial institutions that have been paid roughly $50 billion since the Federal Reserve first extended aid to the insurance giant.

Among those institutions are Goldman Sachs Group Inc. and Germany's Deutsche Bank AG, each of which received roughly $6 billion in payments between mid-September and December 2008, according to a confidential document and people familiar with the matter.

Other banks that received large payouts from AIG late last year include Merrill Lynch, now part of Bank of America Corp., and French bank Societe Generale SA.

More than a dozen firms with smaller exposures to AIG also received payouts, including Morgan Stanley, Royal Bank of Scotland Group PLC and HSBC Holdings PLC, according to the confidential document.

The names of all of AIG's derivative counterparties and the money they have received from taxpayers still isn't known, but The Wall Street Journal has identified some of them and is publishing others for the first time.

Silver will outshine gold in 2009
Silver prices are poised to outperform gold while moving dramatically higher later this year due to increasing investment demand, attendees of the world’s largest mining conference in Toronto were told earlier this week.

Speaking at the Prospectors and Developers of Canada Association (PDAC) annual convention, German investment fund manager Oliver Frank told a packed room at the “Accessing European Capital” forum that silver will likely end the year in the $25 range. This bold projection is almost double current silver prices.

A late 2009 surge in pent-up buying demand, particularly among Europeans, will prove to be the catalyst to silver reaching historic new highs, added the CEO of the Butzbach-based investment fund, Silver Capital AG.

He also believes that heightened global investment demand will also help gold to breach the hallowed $1,500 mark by year’s end – an appreciation of about 60% over its March ‘05 spot price close.

Both scenarios should stem from investors continuing to flock to gold and silver as “safe haven investments” in response to the onset of a hyper-inflation in the U.S. economy, Frank added.
Yet, he believes silver should enjoy a bigger percentage boost in value because physical demand has been consistently outstripping supply in recent years.

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