 | | The Daily Reckoning | Thursday, June 16, 2011 |
- Greek debt goes boom!...and Hope remains trapped in Pandora's box,
- The "El Dorado" of American oil and gas production,
- Plus, Bill Bonner on why what the world needs now are more disasters, and plenty more...
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|  | | | Blame It On the Greeks | | Why Hope Still Exists...In Greece as Well as Your Portfolio | |  | | Eric Fry |
Reporting from Laguna Beach, California...
The Dow Jones Industrial Average tumbled 179 points yesterday - continuing a weeks-long trend of dismal performance. The Dow still clings to a slim gain for the year, but the NASDAQ has slipped into the red. Curiously, the XAU Index of gold stocks has also slipped into the red, even though gold, itself, is up nearly 10% on the year.
So why did stocks tumble on Wall Street yesterday?
The most likely answer is "just because." But that does not sound very intelligent. So, for fear of looking foolish to you, dear reader, we will hazard a foolish guess about what caused yesterday's selloff... We blame the Greeks.
They spend too much, save too little, promise social benefits they can't afford and refuse to cut spending to levels that would make a legitimate difference. Thankfully, we don't have problems like that here in the States! But even if, someday, fate were to frown on us and we found ourselves racking up trillion-dollar deficits every year - I know it sounds crazy - we would have a printing press to rescue us. The Greeks do not.
The Greeks have handouts. But handouts are like a mule - they can carry a load for a while, but they are infertile. They can't produce the capitalistic offspring that would help cure insolvency over the long- term.
Therefore, it is becoming increasingly apparent - especially to bond investors - that the Greek government will default in some way, shape or form. The chart below is already out of date. When The Daily Reckoning art department produced this beauty yesterday afternoon, the Greek 2-year bond was yielding a hefty 28.03%. But as of this writing, the 2-year yield has jumped to 29.69%.
The yields on Greek government bond are soaring along the entire yield curve, as many bond prices are tumbling to less than fifty cents on the dollar (on the euro, actually). Greece's ruinous financial condition has not escaped the attention of stock investors either. The Athens Composite Index hit a new 14-year low today. Clearly, the "default trade" is on.
In a small bit of poetic irony, Pandora Media launched its IPO yesterday - the same day that all the world seemed to agree that Greece's financial condition is hopeless.
Pandora, as most readers may be aware, is the company that enables folks to customize virtual radio stations around a particular artist or genre of music. But Pandora was a mythological Greek female before she became a virtual radio station. It was she who had the sinister little box that released a multitude of evils into the world. But do you remember the virtue that remained trapped inside the box? It was Hope...
And hope is still trapped on the Hellenic Peninsula. It might finally spring lose from Pandora's box after the Greek government defaults and resumes printing drachma.
The next and final section of today's warm-up act is a little feature we call, "Cut and paste." We cut three observations from yesterday's 5- Minute Forecast and are pasting them below, just because we thought they were interesting and deserved a second mention. All three of the observations present a bullish outlook for some facet of agriculture, which is a theme we have been exploring frequently here in The Daily Reckoning:
"Good investment ideas are not thick underfoot these days," says our friend Doug Casey, "The next few years will be marvelous from the point of view of a speculator, but horrible for the average guy," he tells interviewers from Yahoo Finance, reiterating a theme he's shared with us on several occasions. Aside from gold, he figures your best bet is cattle.
"I recommend building herds, both dairy and beef." It's the cheapest major market he can think of...
"Barbecue season is in high gear and meat is on sale right now," chimes in Resource Trader Alert's Alan Knuckman. Live cattle prices reached an intermediate-term high of $1.26 a pound in April. From there, they've fallen back to $1.06 today. Thus, "a trading range has been established," says Alan, "with the first upside breakout target at $1.16."
Alan recently recommended a live cattle trade that could turn that modest price move into what he calls "unlimited profit potential"... and using his methods, you don't risk anything more than the money you put up front.
"Pulses are crops harvested for the dry seed," says Chris Mayer, turning our attention to another opportunity down on the farm. "They include lentils, chickpeas, peas and a variety of beans. They are an efficient source of protein by weight, giving you almost as much protein as chicken and more than beef."
And you get that protein punch with a lot less water. "It takes only about 40 gallons of water to produce one pound of pulses," Chris says, "compared to nearly 2,000 gallons of water to produce one pound of beef."
That's a big deal, when you consider agriculture is the single-biggest user of water on the planet, "accounting for about three-quarters of all water drawn from rivers, lakes and aquifers."
"As farmers tap into more and more aquifers, food production rises. But the rate of water extraction exceeds the aquifers' ability to recharge. So you have a water-based 'food bubble' - meaning, production is unsustainable and will collapse at some point as water supplies run out."
Pulses address that need... and demand for them is growing, especially in the developing world.
China is about to become a net importer of pulses. "We know what happens when China becomes a net importer of something," Chris continues. "See iron ore, coal, oil, etc. It really juices the market. We're only in the beginning of that wave for pulses."
Chris recently recommended a pulse producer he sees doubling from current prices. Some of his previous ag-themed picks have generated gains of 109%... 137%... even 232%.
Alan, meanwhile, has delivered gains of ... 94% on sugar... 217% on wheat... and 273% on corn - all in a time frame of four months or less.
A handful of readers had the chance to benefit from all of these plays. They belong to the Agora Financial Reserve. They have access to the full spectrum of everything we publish - from blue chips, to microcaps, to options. They also have access to privileges none of our other readers do - like free admission to our annual Symposium in Vancouver, and opportunities to visit Rancho Santana on Nicaragua's stunning Pacific coast.
"I see that you are promoting membership to the Reserve," says a member who wrote in just yesterday. "Having been a member for 6 years now, I can confidently say that it is the best investment I have ever made.
"The range of services it gives me access to are 'top shelf' and the personal and economic development insights you provide are some of the most powerful (and valuable) sources of ideas I have.
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"Your analysts," another satisfied member writes, "have made me lots of money by bringing me out of my investment comfort zone.
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"If you read and understand and execute the recommended trades... you make money. The Reserve price is more than fair when you consider the lifetime of benefits."
Yep. You pay a one-time fee - and a modest annual maintenance fee of $149 - to secure these benefits. And as the reader points out, it's for life. You can even pass it on to your heirs.
We open the doors to the Reserve every now and then. Now is one of those times, but tomorrow they will close - at midnight. While you have this rare chance, we recommend you take the opportunity and review everything a new membership can deliver for you. It's fast, easy and it's right here. | | | | Israel Gives Money-Grubbing OPEC the Middle Finger |
Israel just discovered what could be the 2nd largest oil basin in the world today. This could spell the beginning of the end for OPEC - and huge gains for you. Details here.
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| | The Daily Reckoning Presents | | Hidden Profits from These Forgotten Treasures | |  | | Chris Mayer |
In the 1850s, hardy Russian explorers and fur trappers traipsing about mountain ranges and sea passages noted oil seeps around what we call Cook Inlet today. These are the earliest historical references to the oil in Alaska.
Over the next hundred years, a variety of fortune-seekers - lone prospectors, private wildcatters and big oil companies - took shots looking for commercial oil here. While there was some success, there were mostly setbacks and a trail of abandoned wells.
It wasn't until 1961 (two years after Alaska became a state) that Swanson River - a joint venture between Richfield and Standard Oil - became a commercially successful oil field.
The rest, as they say, is history.
More than a billion barrels of oil, along with 5 trillion cubic feet of natural gas, has been pumped out of the Cook Inlet area. Oil and gas development in Alaska as a whole has been huge. About one-fifth of the domestically produced oil in the U.S. comes from Alaska.
But these assets have been in long decline. Production of crude oil is down more 70% from its high in the 1980s:
Cook Inlet is now an old horse with oilmen trying to coax whatever they can get out of it. But here's where things get interesting.
Chevron, one of the largest Cook Inlet producers, decided recently to sell all of its assets here. This includes offshore and land-based oil and gas fields, 10 offshore rigs and two gas tank farms. Chevron will also part with its interests in two regional pipelines.
"The decision comes as production from Cook Inlet oil and gas fields is declining,"Anchorage Daily News reports, "typically, a period when big energy companies lose interest in their investments and smaller operators jump in."
Here, then, is the opportunity. There is still a lot of oil and gas left in Cook Inlet. It's just too small for big guys like Chevron to spend time and money on. For a smaller outfit, it could mean a fortune.
The state of Alaska is bending over backward to keep investment in oil and gas flowing. The state leans greatly on this industry. Some 80% of state revenues depend on oil and gas extraction. It employs thousands of people. Those people in turn support shops, restaurants and the whole wheel that is a community.
So the government created some sweetheart deals for oil and gas companies to spend money here. Among these goodies is a 40% state refund on money spent for drilling and exploration costs - paid in cash to the operator. There are other laws in place that could refund as much as 20% of other costs and 25% of net losses incurred.
Again, for a small operator looking to get a sweet return on a moderate-sized pot of money, Alaska is like the El Dorado of oil and gas.
And there is actually a natural gas shortage in the region. Current proved reserves may well fall behind demand by 2012. Yet the inlet has an estimated 13-15 trillion cubic feet of gas, as well as more 200 million barrels of oil - mostly overlooked by the big majors.
As a result of the shortage, prices for natural gas here are about $3 more per million cubic feet (mcf) than they are in the lower 48. While gas wallows around $4, Alaskan natural gas goes for $6.50 and as much as $10 per mcf in the winter.
This is the fascinating thing about natural gas that many investors don't understand. Location is very important. As with real estate, where you are makes all the difference.
I could see a kind of echo boom to Alaska's oil and gas, where it becomes a very profitable region for smaller companies. Cook Inlet may well enjoy a revival.
In fact, the seeds are already starting to germinate. One group is bringing the first new drilling jack-up rig to come to Alaska in 16 years. Another group is bringing back shut-in wells. There is actually a fairly long list of companies squeezing life from old assets and/or exploring new prospects, spurred on by generous state incentives.
It's the beginning of a good old-fashioned Alaskan oil and gas boom. In a world where foreign sources of oil are more frowned upon and uncertain than ever, my guess is that investors will look warmly on the efforts of those in "the last frontier."
Sincerely,
Chris Mayer
for The Daily Reckoning
P.S.: Recently I added a company to my Mayer's Special Situations model portfolio that could see growth from Cook Inlet's treasures.
Right now there is a special offer to access this play and many more... But the offer expires at midnight tonight, so you must hurry. Details Here.
| | | | Chris Mayer's Special Situations Presents... |
Did You See The Video About The American Nuke Bomb LOST Under Ancient Ice Fields?
Way back in 1968, an American B-52 crashed in northwest Greenland...
Unfortunately, the nuclear bombs on board got forever swallowed by an ancient ice sheet...
But there's an unknown stock set to soar from this sorry situation.
Sound unbelievable? Watch this presentation for proof...
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| | | | Bill Bonner | | Slow Economic Growth and Other Costs of Avoiding Disaster | |  | | Bill Bonner |
Reckoning from Baltimore, Maryland...
More Disasters, Please!
Whoa. Tuesday's gains had disappeared before traders' coffee had gone cold, yesterday morning. The Dow ended the day down 173 points...signaling what looks like a 7th straight week of losses. Stay tuned.
Oil ended the down at $95. The dollar went up.
The trouble with the financial catastrophe of '07-'09 was that there wasn't enough of it.
"What recovery?" asks TIME Magazine this week.
There is no recovery. Of course, you knew that, dear reader.
But what no one seems to know is 'why'. So we'd like to make a small contribution to the intellectual life of the economics profession and the popular understanding of the events before, during and after the crisis of '07-'09. That is, we'd like to explain.
How come the economy is so listless? How come there are so few jobs? How come house prices are falling?
We'll tell you. Because the dopes running economic policy didn't give catastrophe a chance! Instead of letting disaster wipe out all the bad investments, bad investors, bad bankers, and bad businesses, the feds pumped in money to keep them going. Well, guess what. They're still going!
Four years after the crack up in the US subprime debt market, there is still no sign that things are getting back to 'normal.' Growth rates are low or negative - 1.8%, 0.5% and minus 3.5% in the US, Britain and Japan, respectively. Decent jobs are hard to find. Household earnings and balance sheets are sinking.
The only positive thing that can be said is that we dodged a worse disaster. In Japan, for instance, economist Richard Koo credits financial officials. Through 20 years of on-again, off-again deflation, they avoided a big loss in GDP and kept everyone working. Yes, stocks and real estate fell 80%...but by bailing out big business and the banks, catastrophe was averted.
Then, in '08-'09, it was the West's turn to duck. Says former US Treasury Secretary Laurence Summers: "We averted Depression in 2008/2009 by acting decisively." In America, Ben Bernanke, Barack Obama, Tim Geithner and everybody else rushed to save the economy, just as the Japanese had done before them. Bernanke warned Congress that if they didn't pass the TARP legislation immediately, "we might not have an economy on Monday."
He should have shut up.
Then, he levered the Fed's balance sheet so that it acted like a dike. The floodwaters passed; the US economy was spared.
In Europe, Britain bailed out its banks. Europe rushed money to Ireland, Spain and Portugal. And Ireland guaranteed every Mick and Paddy's savings.
These efforts too were successful. Every economy in Europe is still afloat. Barely.
"Traditionally, the US economy has recovered robustly from recession," continues Mr. Summers in The Financial Times on Monday, "...within a couple of years after the only two deep recessions of the post first world war period, the economy grew in the range of 6% or more - that seems inconceivable today."
We're not even close. Since the crisis, growth in the US has averaged less than 1% a year. Properly adjusted for inflation and population growth, per capita GDP has declined and is now almost certainly negative by more than 2%. This explains why millions of people remain jobless 2 years after the recession supposedly ended. Ten million fewer people have jobs now than 5 years ago. The official unemployment rate is back over 9%, with 25 million who lack full time work.
And while Americans' earnings slip, so do their balance sheets. The Fed's latest dose of QE medicine revived the stock market, but not the housing market, which is where most people have most of their money. The latest figures show house prices off by 40% in real terms, and still falling.
In Britain, according to one estimate published in The Financial Times this week, the typical middle-class working household will be 720 pounds worse off in real terms in 2012 than in 2009.
Japan, meanwhile, is in such a funk it looks like it may never get out. And Europe is still bailing out the bankers whose loans hurt everyone but themselves.
In all four economies, the rescue strategy is basically the same. Look at the European situation, for example. Greece has just been downgraded; default (as predicted here atThe Daily Reckoning) now appears unavoidable. But here's the good news: default also could be catastrophic.
Who's the Greeks' major creditor? The European Central Bank. As of the end of the first quarter, Greece had borrowed 90 billion euros from the ECB. Against this, the ECB has all of 5.3 billion euros in capital. In other words, if the Greek debt loses just 6% of its value, Europe's central bank is underwater.
But wait, it gets worse. The Europeans have used the ECB as a small town uses a landfill. Everything gets dumped there. In addition to the Greek debt, the ECB holds dubious paper from 17 member central banks, totaling some $1.9 trillion of assets. Against these assets, the ECB lends to Ireland, Portugal, Spain and other needy states, taking their paper in return. If the debtors don't make their payments, the ECB's 'assets' lose their value and the ECB will go broke. The next critical challenge comes in July, when Greece will need more money. Commentators, economists, and meddlers have already warned that if the Greeks aren't taken care of, there will be a disaster.
Great! Avoiding disaster didn't work. Let's try another approach.
"The contagious impact on the rest of South Europe and Ireland would, as [Mr. Trichet] has said, be all too similar to the aftermath of the Lehman collapse," writes John Plender.
So, the ECB will lend in order to keep Greece, and itself, in business. But by lending more, it doesn't improve the quality of its credits; au contraire, it makes them even worse.
The Japanese are in the same general predicament. There, the government must borrow to meet its expenses. At 210% of GDP, it no longer has a hope of 'growing its way out of debt.' Instead, the best it can hope for is to grow its way deeper into debt for as long as possible.
Likewise, in America the critical moment comes in August. That is when the statutory debt limit will be breached. Ben Bernanke has already issued another warning. If members of Congress don't get their act together and allow the federal government to borrow more, all hell could break loose.
Based on these facts, we have a modest insight: perhaps its time to let the calamity happen. There are several brick walls approaching. Let's aim for one of them and see what happens.
And more thoughts...
The Greeks are demonstrating. The Chinese are rioting. And now the Brits are organizing a big kvetch too. The English press reports:
More than a million public sector workers will take strike action in the autumn unless the ministers pull back from its proposed pension changes, it was claimed.
The leader of the country's largest public sector union said 1.2 million local authority and health service workers were "on the road to industrial action". *** Talk about disasters! The Pentagon continues its efforts to bankrupt the country. Judicial Watch reports:
Bundled in chunks of $100 bills, the cash was sent from the US to Iraq in turboprop military cargo planes known as C-130 Hercules. About $2.4 billion fit in each aircraft and 21 flights made trips, transporting a total of $12 billion in American currency to Iraq by 2004.
For years federal audits have determined that more than half the money cannot be accounted for but there seemed to be some hope that some of the funds could be retrieved. However, this week the Special Inspector General for Iraq Reconstruction (Stuart Bowen) essentially confirmed that $6.6 billion in cash was likely stolen and may never be recovered.
Bowen referred to it as "the largest theft of funds in national history," in a newspaper report that points out the missing money is enough to run a major public school district for an entire year. The story also says that the mystery is a growing embarrassment to the Pentagon, which has long asserted that it could track the cash if given the time to do it.
This is simply the latest of many reports documenting the pervasive fraud and waste in Iraq reconstruction efforts, which have received more than $100 billion from US taxpayers. In the last few years Inspector General audits have exposed the sordid details of costly projects that never got completed or are rife with excessive delays and shoddy work. *** Don't get us wrong. Here at The Daily Reckoning we're not opposed to paying people to kill other people. We just like to get our money's worth. We like to be sure that the people we're paying to kill are worth the outlay. Otherwise, we feel like chumps. Or worse. Murderous chumps.
As near as we can tell, the last time we got a decent return on our money was in WWII.
"US military operations in Libya hit spending rate of $2 million a day," reports the FT.
What do we get for that? Beats us. But then, what do we get from any of the pseudo-wars we're now fighting? Leon Panetta says there are 1,000 al-Qaeda in Iraq. What? US troops out-number them 50 to 1. In Afghanistan, intelligence reports put the number of al-Qaeda at "no more than 100." What? We outnumber them 1,000 to one. These wars must be the biggest losers in military history!
Regards,
Bill Bonner
for The Daily Reckoning |
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