 | | The Daily Reckoning | Monday, November 8, 2010 |
- China attacks America for reverting back to a "planned economy,"
- Could this resource be the next bull runner in the resource market?
- Plus, Bill Bonner on the Fed's Magic Kingdom and the gold standard debate...
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Economic Devolution
| China Calls Out the US for Reverting to a “Planned Economy”
| |  | | Joel Bowman |
Reporting from Buenos Aires, Argentina...
You knew the day would come, Fellow Reckoner ...but did you think you'd see it so soon?
"China tees up G20 showdown with US" reads a headline in The Financial Times.
Apparently the Chinese aren't too thrilled over Chairman Bernanke's plan to destroy the value of the US currency. And why would they be? Next to retiring Americans - who remain, for the most part, vaguely hopeful they'll see some of their Social Security confiscations paid back in kind - China is the largest holder of dollar-denominated debt in the world.
"Many countries are worried about the impact of the policy on their economies," commented the Middle Kingdom's Vice Foreign Minister Cui Tiankai on Friday, before going on to say that the US "owes us some explanation on their decision on quantitative easing."
Mr. Tiankai, who will be one of China's lead negotiators at next week's G20 meeting, also remarked that the US plan for limiting nations' current account surpluses and deficits to 4% of gross domestic product harked back "to the days of planned economies."
Ha! Did you read that? The Chinese are accusing the Americans of economic devolution, of reverting to "planned economies." And it's not as if the Chinese don't know what a planned economy looks like, having, along with her Ruskie comrades to the north, suffered the disastrous experiment for the better part of last century. By some estimates, Mao's reds starved, killed, purged or otherwise "lost" 70 million citizens during such unmitigated disasters as the Great Leap Forward and the Cultural Revolution. And still his all-seeing portrait festoons the gates of Tiananmen Square.
The truth, of course, is that all world economies suffer, to some extent, under the blunt hand and dead wait of their own central planners...including "Chi-merica." A pot here, a kettle there, in other words. Once upon a time, Americans would look with disdain at those "pinkos" overseas. Their ludicrous economic policies and matching grey jumpsuits were the fodder of spy movies and Get Smart episodes. Once, Americans laughed at them. Now, if she is honest with herself, the best she can muster is a half-hearted, "It takes one to know one."
Behind the bread and circuses in the political arena, the markets are on the march...the march away from dollars and toward "tangible" assets - things like precious and non-precious metals, energy and agricultural products. Gold looks poised to crack $1,400 per ounce any day now. Meanwhile, silver is tickling $27 and, last Friday, copper rallied to a 27-month high. Some analysts are calling for $12,000 per tonne, based on strong demand from emerging markets and, no doubt, further dollar devaluation. And, as if they needed another reason to rally, China is betting on "stuff" over "paper."
Reports Barron's: "This year, for the first time ever, China has been investing more overseas in assets like iron, oil and copper than it puts into US government bonds.
"China in this year's first half spent $31 billion on hard assets," the journal continues, "compared with $23 billion on Treasuries and other US government bonds. Experts say China's investments in each of these asset classes will total about $55 billion for the full year. But even a tie marks a major turnaround from China's previous practices. For many years, the mainland spent next to nothing on hard assets abroad, while its purchases of US government debt ranged as high as $100 billion a year."
One commodity conspicuously absent from the resource bull market, at least thus far, is natural gas. But, as Chris Mayer, editor of Mayer's Special Situations, notes, that might not be the case for much longer. Chris provides the details in today's guest essay, below...
| The Daily Reckoning Presents
| Big Oil Bets On Natural Gas
| |  | | Chris Mayer |
Royal Dutch Shell said that by 2012 it expects more than half of its output will be natural gas - not oil. That is as if Starbucks said it expects to sell more tea than coffee.
Yet this prediction is not unusual for Big Oil these days. In fact, most of the big boys are making big bets on natural gas.
Exxon Mobil completed eight projects last year. Seven of them were for natural gas projects - not oil. Of the three scheduled this year, two of them are gas. ConocoPhillips paid $5 billion for Origen, an Australian gas company.
Meanwhile, Chevron hammers away at its mammoth liquefied natural gas plant off the coast of Australia, at a total cost of more than $40 billion. (Liquefied natural gas, or LNG, is easier to transport.) Most of the oil giants are also slamming billion-dollar fistfuls on the table to pick up shale gas acreage in places such as the Marcellus in Appalachia.
This shift creates new opportunities for investors. But before we get to those, let's try to understand what's happening.
There are several things at work here. One is that new oil deposits, like pitchers who can hit, are becoming harder to find. They are also costlier. The Kashagan oil field, which was supposed to be a great find in the Caspian Sea, is seven years behind schedule and billions of dollars over budget. Another factor at work is that 90% of the world's oil reserves are in the hands of national oil companies. They are off- limits for the likes of Exxon and others.
By contrast, natural gas deposits are more plentiful. They are also getting cheaper to develop. The cost to build an offshore LNG terminal is about half of what it was only two years ago. The big LNG plants can be just as expensive as anything in the oil world, but - unlike oil - these projects don't usually go forward unless there are long-term contracts in hand to support them. Some of these contracts go for 20- year terms. This makes the business more appealing to the majors, who don't have to sweat the huge ups and downs they endure in the oil markets.
With contracts in hand, the gas business is just one of putting together an Erector Set. AsThe Economist notes, "The gas business is really an infrastructure business: drill wells, build gas plants, install pipelines and accrue profits."
But there is more. The world's use of natural gas is growing faster than its use of oil. The IEA's guess is that oil consumption grows half a percent a year. Natural gas consumption, by contrast, should rise more than 50% in the next 20 years. Total, the big French oil company, is even more bullish. It estimates that China will use much more natural gas than is commonly assumed. Only a lack of infrastructure keeps China's appetite for natural gas under wraps. But China is in the process of building that infrastructure today. It is only a matter of time before the nat gas markets feel its impact.
Finally, natural gas is cleaner burning. There is a lot of talk of carbon taxes of one kind or another, not only in the US, but abroad. I believe it is a matter of when, not if, governments punish dirtier fuels. Natural gas will benefit.
However, I don't expect the price of natural gas to rise in a big way anytime soon. There is simply too much of it. Natural gas producers are all expanding production. Most are spending more to expand production than their cash flow supports. This is happening even though most look like they don't make any money at $4 nat gas. (A recent survey put the industry average at $5.74.) This doesn't bode well for the price of natural gas in the short term. As beaten up as it is, it could stay here for a while, or even go lower.
One of my favorite plays in the natural gas sector remains Contango Oil & Gas (AMEX:MCF). This is because it is a low-cost producer with no debt, so it can still create shareholder value in a low-price environment. Contango's all-in costs are under $2 for nat gas.
Longer term, the current low nat gas price is not sustainable, as most of the industry seems to lose money at these prices. As old contracts (made when natural gas prices were higher) roll off, these producers will start to shut down production.
At a recent conference, Ken Peak - CEO of Contango and the largest stockholder, with 19% of the shares - shared the following chart, which makes the point. It shows the cost curve for the lower 48 states in the US. This chart shows that these producers need $7 gas to make money. "If this is right," Peak said, "I believe we will make a lot of money."
He says this because logic dictates that we should expect the price of nat gas to gravitate toward the cost of the marginal producers. And since Contango's costs are under $2, it stands to make a lot of money when gas turns around. I know it's been almost two years and no dice on Contango's stock price, but I'm content to wait it out (and buy more).
Even at today's depressed gas prices, Contango's SEC PV-10 value - think of it as a rough net asset value - is over a billion dollars. With 15.7 million shares out, Contango is worth at least $63 per share. And that's why it is still a buy.
But let's get back to natural gas in broad terms. Even though pricing looks unexciting in the near term, demand looks healthy long term. The world will burn more natural gas in cars and buses of the future than it does today. It will burn more natural gas to heat and cool homes than it does today. It will rely more on natural gas to provide electricity.
Long-term investors should treat these things as inevitable. Big Oil certainly is.
Regards,
Chris Mayer,
for The Daily Reckoning
Joel's Note: Readers of Chris' investment research letter, Capital & Crisis, are well positioned for another run up in resource prices. In fact, they're sitting pretty across the board right now, with only three of Chris' 19 open portfolio positions nursing a loss...for an average of about -4%. Meanwhile, 16 of his picks are up, including 10 double-digit gainers and 6 that are up triple digits. Learn more about getting yourself on the Capital & Crisis member list today,right here.
| | | | The New OIL WAR and Why Iran Threatens Your Money... |
According to Byron King's new presentation Hezbollah terrorists, militant Muslims and Iran's crackpot leader could be planning the deadliest surprise threat to your money and livelihood this coming year.
Yet nobody in the Pentagon will talk about it, and no one in the White House has a clue.
Thankfully Byron's taking action and is sharing several ways for you to take to protect yourself against the epic financial crisis ahead...
Click here to watch Byron's value-packed presentation now.
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| | | Bill Bonner
| Watching Fed Counterfeiters Print Money in
the Magic Kingdom
| |  | | Bill Bonner |
Reckoning from Baltimore, Maryland...
Do you believe like I believe,
Do you believe in magic
- The Lovin' Spoonful
Whew! What fun we had last week! It's the Magic Kingdom for sure.
The Fed pulled a white rabbit out of its hat on Wednesday - a $600 billion mad hare. Stocks soared on Thursday. Commodities soared. Everything soared. Except the dollar. People dropped the buck.
Then, on Friday there wasn't much follow through. The Dow rose only a few points. Gold continued going up - $14.
What's ahead for this week? Heck, anything could happen. This is the Magic Kingdom.
What do we mean? Of course, counterfeiting is against the law.
The counterfeiter creates money that looks just like the real stuff, but it has no gold or other backing behind it.
The Fed creates money that looks just like the real stuff. It has no gold or other backing behind it either.
What's the difference? You go to jail for counterfeiting. But by some magic, it's okay when the Fed does it.
We have a suggestion. The Fed could save some money by giving up its monopoly on counterfeiting. Allow the private sector to create new money. There are probably plenty of people in jail today who could make useful contributions to our economy. These guys know how to print money. Let them out! They would create money - lots of it. At no cost to the taxpayer.
But wait, the feds want to control the counterfeiting process. They don't want too much or too little. But just the right amount of new money.
How much is the right amount? Who knows? Between now and June '11, the Fed will add another $600 billion to the $1.7 trillion it already put into the system. Is that enough?
Darned if we know.
We got a message from debt-tracker prof. Laurence Kotlikoff at Boston University. He told us that the money supply would be multiplied 4 times since 2007. Is that enough?
The whole thing would boggle our mind. But our mind was already boggled by the Fed's last trick.
The Fed increased the world's wealth by $1.7 trillion last year. That's a lot of money. What did it mean? Presto, the world was richer. Right? If the world wasn't richer, the extra money was a hoax, a fraud, and a scam, right?
But if it really did create $1.7 trillion worth of money...representing real wealth...well, it was...like magic!
We live in the Magic Kingdom. What a wonderful place to live in. We have a leader who is almost magical himself - Barack Obama. And we have a Congress that is expert at creating smoke and mirrors.
And the public? A bunch of yokels and rubes who will believe anything.
We can't wait to see what happens today. Anything is possible!
And more thoughts...
Hey... What's wrong with the foreigners? They don't seem to appreciate America's magic tricks.
"US feels backlash over Fed initiative" says Friday's Financial Times.
It may be our dollar...but it's THEIR problem. The Fed's new money doesn't really do anything for the US economy. The banks take it. They hold it. If it goes anywhere at all it goes into the hedge funds and the banks' own trading departments. Then, what are they going to do with it? US businesses don't want to borrow. Consumers are reluctant to spend. Who wants to build a new shopping mall? Who wants to hire a new employee? The Fed is printing money like there was no tomorrow...who's going to invest for the long term...when even tomorrow is in doubt?
The speculators borrow dollars at the lowest rates in three generations. What do they do with them? They invest them where they see growth - in the emerging markets.
Bloomberg explains:
Emerging-Market Stocks Advance on "Super-Goldilocks"
Nov. 5 (Bloomberg) - Emerging-market stocks climbed for a seventh day as Citigroup Inc. predicted a "super-Goldilocks" economy will send shares to record highs next year and investor Mark Mobius said the rally faces no risks any time soon.
The MSCI Emerging Markets Index will jump 30 percent to an all-time high in 2011, Citigroup strategist Geoffrey Dennis wrote in a Nov. 4 report. The Federal Reserve's bond-purchase plan will fuel a global stock rally and emerging markets are the "bright spot," Mobius, who oversees about $34 billion at Templeton Asset Management Ltd., said in an interview.
The MSCI emerging-markets index increased 0.5 percent to 1,156.32 at 8:50 a.m. in New York, bringing its gain this week to 4.6 percent. The 21-country benchmark gauge has advanced 17 percent this year, extending a record 75 percent rally in 2009. This is not exactly good news. Consumer prices in these emerging economies go up...their currencies go up...their stock and other asset prices go up.
This has several effects that the emerging economies don't like. It creates bubble-like conditions, raising their costs and making their products less competitive. Plus, it risks causing sell-offs and crashes when the foreign money leaves suddenly or over-capacity becomes a problem.
"China, Brazil and Germany criticized the Fed's action," reports the FT, "and a string of East Asian central banks said they were preparing measures to defend their economies..."
Then...in this morning's Financial Times:
"Zoellick [head of the World Bank] seeks gold standard debate."
It's coming, dear reader...
Regards,
Bill Bonner,
for The Daily Reckoning
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Here at The Daily Reckoning, we value your questions and comments. If you would like to send us a few thoughts of your own, please address them to your managing editor atjoel@dailyreckoning.com
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| |  |  |  | The Absurdity of Central Planning
That’s the great beauty of a real economy! It rarely takes you where you want to go...especially if you’re an activist central planner or an interventionist finance minister. But no matter how much you struggle with it...no matter how badly you manipulate it...no matter how much you try to stitch it up with rules and regulations...it ALWAYS takes you where you deserve to go.
Plumbers Crack
Why the Price of Gold Soared After the QE2 Announcement | An Economic Certainty: Gold to Rise as Fiat Currencies Fall
dly, I was chewing a rather tasty bite of burrito and thinking to myself, “This is undoubtedly true!” as precious metals are nowadays priced in fiat currencies, and it has certainly been true for every paper currency that has ever, ever existed, including a list of 600-odd fiat currencies compiled by Addison Wiggin of Agora Financial in a research project a few years ago, undertaken to list all known fiat currencies, past and present, and their fate.
Profiting As the Fed Creates More Money
When the Price of Silver Doubles in a Month | What’s Holding Americans Back?
What had happened to that rebellious Yankee spirit and the American mind? Could it have been the food that overstuffed and immobilized them? The Pop-Tarts® and Egg McMuffins® washed down with Coke® for breakfast? The Baconator® Triple, The Whoppers®, The Big Macs®, the $5 Foot-Long Subs, the bucket-of-chicken and 32oz. Big Gulp®? Too many trips o the All-You-Can-Eat-Buffet or The Never Ending Pasta Bowl®? Or was it the Slurpees, tubs of ice cream, or boxes of donuts grabbed at the convenience store?
Largest 15 US States are Spending Over 220% of Their Tax Revenue
From Stagnation to Stagflation | |
| | The Daily Reckoning: Now in its 11th year, The Daily Reckoning is the flagship e-letter of Baltimore-based financial research firm and publishing group Agora Financial, a subsidiary of Agora Inc. The Daily Reckoning provides over half a million subscribers with literary economic perspective, global market analysis, and contrarian investment ideas. Published daily in six countries and three languages, each issue delivers a feature-length article by a senior member of our team and a guest essay from one of many leading thinkers and nationally acclaimed columnists. |  |
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