Reality Check - Oil and Energy Shortages Behind Global Finance Woes, & More

What Greece, Cyprus, and Puerto Rico Have in Common

We all know one thing that Greece, Cyprus, and Puerto Rico have in common–severe financial problems. There is something else that they have in common–a high proportion of their energy use is from oil. Figure 1 shows the ratio of oil use to energy use for selected European countries in 2006.

Greece and Cyprus are at the bottom of this chart. The other “PIIGS” countries (Ireland, Spain, Italy, and Portugal) are immediately above Greece. Puerto Rico is not European so is not on Figure 1, but it if were shown on this chart, it would appear between Greece and Cyprus–its oil as a percentage of its energy consumption was 98.4% in 2006. The year 2006 was chosen because it was before the big crash of 2008. The percentages are bit lower now, but the relationship is very similar now.

Why The 'Smart Money' Was Right About Crude Oil Again

In my last several crude oil updates, I showed that the “smart money” was betting against crude oil’s rebound that started in March, while the “dumb money” was the main driving force behind it. I have been skeptical of oil’s rebound due to persistently high inventories and the still-sizable long position held by speculators even after last year’s oil crash. Light sweet crude oil sank 7.6 percent during last week’s China-induced commodities rout and because active oil rigs rose for a second straight week after months of declines.

West Texas Intermediate (WTI) crude oil broke down from its wedge patternthat I showed in late-June, and is now sitting just above its key $50 per barrel support level. If WTI crude breaks decisively below its $50 support level, a resumption of the 2014 oil bear market is quite possible. WTI crude may be forming a flag pattern that could indicate further declines if broken to the downside.

Oil Imports Have Energy Poor Greece In A Stranglehold

After several years, several months, several weeks and several days of crisis, it looks like things are about to come to a head for Greece and its banks. It becomes easier to understand exactly what GREXIT may mean for the Greek people. What happens when the banks and the government completely run out of money?

Greece has some indigenous coal production (lignite) but no oil or gas to speak of which means that all oil and gas are imported (Figure 1). This is linked to a structural trade deficit that contributes to the country’s dependency on debt. If Greece runs out of Euros, will it be able to buy oil and gas on the international markets? Greece held 90 days of oil stocks in 2010 [2]. Once that is gone then the tourist industry may collapse?

Carl Icahn Believes “There Really Is A Bubble Brewing”

Billionaire investor Carl Icahn spoke with FOX Business Network’s (FBN) Neil Cavuto and Trish Regan about the economy, saying “I believe that there really is a bubble brewing.” He went on to say that we are in “unchartered territory,” with historically low interest rates, and “a market that’s going up artificially,” which “could be very destructive to our markets and our economy.” When asked about what the Federal Reserve should do, Icahn said, “stop worrying what the markets will do,” and “start raising rates right now.” He went on to say that the “Fed is really pandering to a lot of these guys on Wall Street that they really shouldn’t be pandering to.” Regarding whether he’d take the role of Treasury Secretary, as Donald Trump suggested,” Icahn said, “I guess I would not. I sleep too late.”

Greek crisis: surrender fiscal sovereignty in return 
for bailout, Merkel tells Tsipras 

Two days of high-stakes negotiations between the finance ministers of the currency bloc resulted in a four-page document that included controversial German elements leaked on Saturday. Those measures included Greece leaving the euro temporarily by taking a “time-out” from the currency bloc if it refuses terms for talks on the new bailout or, in the event of agreement, that Greece sets aside €50bn worth of assets as collateral for new loans and for eventual privatisation. Both passages, however, did not enjoy a consensus among eurozone leaders.

Policy Extremes Maintain Illusion of Stability: Charles Hugh Smith 

What is not an illusion is the extreme trouble many EU countries are in. Besides Greece, Spain and Italy are deep in debt. Smith contends, “Spain’s debt is a trillion euros. Italy is over a trillion euros in debt. We are talking fairly serious money here.”

China’s Incendiary Market Is Fanned by Borrowers and Manipulation 

China’s market is also shaped by the heavy hand of the government, which makes decisions about what companies can list shares, when to promote stock rallies and, now, how to intervene when prices plummet. The government, in other words, views the market as a policy instrument, a mechanism to fulfill its political and economic goals. The result can be a volatile market that swings from boom to bust.

WHY ECONOMICS FAILS?

WHY

Economics Fails?

The question of why economics failed came up in a recent economic forum "Unlearning Economics" wherein the following response was provided. This is obviously a short version of a much more in depth complex answer but should serve to drive the fundamental point across "Economics ignores the macro-physical rules of reality at great peril" It is a peril, that in the end, exponentially advances the last chapters of the human condition. 


"Economics simply fails because it ignores the laws of physics, exponential mathematics and the concept of eternity. It falsely believes its abstractions and theories, which create a make-believe positive-sum-game world, will, by sheer hope and dreams, overcome and defeat the negative-sum game constraints that define existential reality. It AIN'T going to happen - Entropy and Eternity will win the day - being absolutes that you cannot convince, negotiate or legislate in any way.

When Einstein said he was not sure about eternity, but certain there was no end to human stupidity - there is little doubt he was thinking specifically about economics with its beliefs, gurus and sheep...

So the writing is on the wall, as economies all over the world are beginning to look more like Nauru or Easter Island with every passing day. From Cyprus and Iceland, to PIIGS, to Egypt and Syria and now to even Venezuela or possibly Japan - what is perfectly clear is that when you run out of inputs (i.e. resources) it is utterly impossible to produce outputs, such as food, regardless of how much Keynesian currency and debt you print and create, to feed your hungry civilians. "Again, it just AIN'T going to happen.”

Now you try explaining that to an Economist. Good Luck!"

T A McNeil
CEO and Founder

First Financial Insights Inc.
October 14, 2013

"We cannot solve our problems with the same thinking we used when we created them"

Why Care? - Humanity's Final Hours...

Why Care?

Humanity’s Final Hours...

Good Evening,

Recently, in an open forum of scientists, economists, academics and other professionals, most of whom are pretty much resigned to the idea that the outlook for the human species is not that good, an important question was raised. Some strongly  believe that extinction is just around the corner; there is about a 50-50 chance; at best, that only a few of us will be remaining by the turn of this century. 

For certain. it is hard to combat their arguments, as we face climate change, peak oil, mineral scarcity, financial and biodiversity collapse and many other threats. One "Black Swan" could be lurking anywhere in our midst. Furthermore, as you should know by now, Stephen Hawking sits on a recently formed study group, charged with planning for end-of-days-events. So given the apparent certainty of matters, it is almost a natural outcome as we struggle against seemingly impossible odds that this question comes to bear - WHY CARE?

Below is a copy of my answer to this question. Looking back on it a few days later, it is a sort of a fuller version of Yogi Berra's famous quote "it ain't over, ' til its over". However, this is no game - the consequences of what may lie ahead defies any and all imaginations. We would also be happy to hear your thoughts in this regard, either by way of email or comments to this post. 

Either way, we will share these responses with readers for the  sake of the unyielding responsibilities that we share to the future generations of our kind. 


Of Kind Regards
Terry
September 29, 2013


Comments of September 27, 2013

Personally, I just look into the eyes of children. That is all the poetry of reasons one needs. Power may corrupt, but poetry does cleanse. (JFK)

Otherwise, clinically for the most part I would concur with Steve, save that nothing or anything is assured, but many unknowns are possible. If we know so much, how come we didn't know how to avoid our current predicament?  Hence, what do we really know?

I would also subscribe to the thrust of Paul Chefurka's views in his recent article, "Paradise Lost" , insofar as we are tied in action and thought to the laws of the universe; as we understand them, and most particularly, the Second Law of Thermodynamics; that in turn creates our energy-seeking hunger. However, there are are even issues regarding the Laws of Thermodynamics that remain unresolved, as we do not know what laws and conditions gave rise to their existence in the first place. An then even those conditions undoubtedly would also being following a set of instructions that are embedded in existence, yet so far, remain beyond our knowledge, devices and discovery. Perhaps ole Socrates had a little insight into quantum physics, as well? 

Referring back to Paradise Lost, my closing thoughts with regard  to all this are recorded as follows:

"Hence in our last analysis, it as certain as it gets that we cannot defeat eternity, but that in itself should not dissuade us from seeking to optimize our entropic relationship with the universe in pursuit of a longer path. Too many things could happen along the way"

So...

"Attitude is  a little thing.

But it makes a big difference"  - W Churchill

T.A.McNeil 

CEO and Founder

First Financial Insights

September 27, 2013 

So many reasons...

CREDIT BUBBLE BIGGER THAN 2008

CREDIT BUBBLE BIGGER THAN 2008

(Read The Telegraph Article) 

How could credit circumstances be worse than 2008? Did we not learn from our mistakes? Was the system not fixed? Apparently not according to this former BIS, Bank of International Settlements veteran, things are 30% worse than they were back then. This is perhaps the most authoritative voice in the international markets, as prior to the 2008 meltdown it had forewarned of the need for policy-changes when all the rest were basking in the euphoria of those times. No one listened.

We too also began shifting client assets to cash and contrary assets classes back in August, 2007. Our analysis and conclusions, documented in our 2007 "Eye of the Storm" presentation to clients, presented troubling credit markets calling for, in our last analysis, "The Mother of All Credit Crunches." And that is exactly what occurred a bit more than a year after our report was filed with clients. So here we are again!   

The chart at the bottom shows a frightening 45% increase in leveraged loans with weaker borrowers  - and this rush to riskier credits should not be unexpected given the high profile sovereign credit problems throughout Europe over the past year. And add to it growing concerns about China's credit bubble,making lenders desperate for ways to make a buck. 

Where can lenders go? Certainly not Japan as its economic and credit system have been teetering for nearly two decades. The US? Look at this Federal Reserve chart below and it is apparent that the US economy has been financed by a major credit expansion since 2008.     

The world's top three economies are facing problematic symptoms associated with excessive credit expansion. The picture grows dimmer when the EU's recent troubles in Cyprus, Spain and Portugal are considered  Even Canada is looking dicey, as its Banks' liberal lending practises have sparked an overheated Condo boom, in the Toronto market. Many emerging nations are also experiencing the pains of the boom and bust credit cycle.

All this is putting tremendous pressure on long rates that Central Bankers are trying to talk down with rhetoric. Don't expect investors to buy into their sales pitches for much longer. The Fed, meanwhile, should continue with its tapering program for some time to keep US domestic rates in check, but that may not be much help for Europe, China. Japan, Canada and emerging markets. If rates do climb sharply elsewhere, no amount of Humpty-Dumpty tapering may be able to keep these financial flood waters from hitting US shores. Overbought equity markets could get trashed while gold bugs are redeemed for the time being, as markets seek safety.

Around the world we are seeing marginalized countries collapse under financial pressures caused by real physical issues associated with constraints of their populations over shooting the physical resource base of the country. Exponential mathematics then playing a hand in exacerbating their demise. Social and political unrest continues to grow and populate the international headlines. These troubles ultimately find their way back to developed nations as the deep global interconnections cannot be avoided - there is nowhere to run, nowhere to hide.

We have long said that classical economic theory is facing a day of reckoning with existential economic science; that the story of the theory's positive sum game contradicts existential science's negative sum game reality. Their collision will bring about a rock-bottom crash of unprecedented proportions to an abstract system . The fact that even Stephen Hawking included economic concerns, on his committee's end-game agenda, corroborates our position. More people see the writing on the wall.

From the above, we can only conclude that when the day of reckoning between classical and existential economics comes, its effects will be deep and widespread, globally. And again, there will be nowhere to run - and nowhere to hide.


First Financial Insights      
September 19, 2013

The Exponential Credit Trap???

 

INVESTORS' INSIGHTS - Bloomberg, #JAPAN, Jim Rogers, New Taxes

INVESTORS' INSIGHTS:

Week Ended August 11, 2013

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"Investors' Insights"

 

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BLOOMBERG  - Oops! - #Japan's Economy Grows Less Than Forecast

(More)

Investment Drops - 

Annualised Growth 2.6% 

Recently folks were applauding the turn around in profits for some of JAPAN INC's biggest exporters, as short-term delusional benefits of its managed currency devaluation jumped earnings in the second quarter, leading some to even proclaim that the two decades of economic decay had finally come to an end. That celebration was short lived, as overall GDP growth for the period, did not meet expectations.

Moreover, business confidence, as measured by capital investment, drifts hesitantly despite improved profits. Consumers can look forward to a possible increase in sales taxes, that certainly cannot add to their feel good levels. Plus, as import costs increase, they can expect their pocket books to be squeezed much more in the months ahead. 

In all, the deflationary overhang is still there as low interest rates cause both consumers and businesses to act cautiously. It is still hard for commercial banks to lend too, because lenders " collateral values" can disappear in an overnight whisper of a rate increase. These internal structural weaknesses play into foreign competitions' hands as they can invest capital more effectively. That's not good for the export business.

At some point, Japan's deflation should disappear with the import of hyper-inflation on materials from other countries, at the same time, so should exports. Then what?  Growing global populations and shrinking resources will not work to save this economy from the fix it entered after its financial bubble burst and the finite constraints of a shrinking planet set  in.

INVESTORS' INSIGHTS

First Financial Insights

August 9, 2013

U.S. Population Distribution by Age (1900 -2060) - Calculated Risk

Looking at this moving graph gives you that sinking dizzy feeling after a while, but nonetheless it is interesting from a general point of view. The baby boom and subsequent bust are obvious as well as the general flattening of the distribution over time as medical health care improves. By 2060, the vast majority are over 21 years old - that should shape into different consumption patterns.

Moreover, more breakdowns would be useful such as income, education, origin, gender, geography, and occupation, amoung other attributes. Calculated Risk provides its own observations.

But lets not forget the most important factors are the growing population numbers and diminishing resources (wealth dilution), that makes immigration of any sort economically illogical. What corporate entity gives away its shares for free and dilutes its current stakeholders' wealth? None! Down the road, as this issue becomes more apparent, then the levying of hefty "Immigration  Taxes" of say a $100,000 per applicant or higher, starts to.make a whole lot of sense as a way earn revenues to balance fiscal budgets, sustain taxes and keep the dilution of real national wealth in check

This form of tax recognizes that the ideals of three hundred years ago no longer apply in a shrinking world, where key resources grow scarcer by the moment. To do otherwise, exposes nations to the greater possibilities of social unrest and political upheaval as austerities unfold  - when the planet's capacity to deliver the essentials of living is curtailed.

INVESTORS' INSIGHTS

First Financial Insights

August 8, 2013

Growing sentiment for taxation fairness

The Jim Rogers Blog: Shale Oil not enough to solve Americas Debt Problems

(more video)



Shale's Big Shoes to Fill

No kidding? In fact, we have done this analysis once before using Bill Gross's (PIMCO) numbers that puts US total debt closer to $100 trillion once all contingencies, guarantees  and other unfunded future liabilities are thrown into the pot. And that's present valuing related assets using today's long-term treasury rates. What happens when they double?

So what would it take to pay off the US debt - you would  think that one trillion barrels in  world -wide oil reserves would do it?  Under strict assumptions it does, but then how do you run the future economy? To be fair, this assumes too, that all US debt is owed to foreigners. It isn't. The vast majority is owed to other citizens that Keynesian economists believe we should  not fret about under the theory  - it is just money you owe  to yourself. That could be a hard one to explain to pensioners if one day that debt is cancelled for whatever reasons.

Still. we are on-side with Mr Rogers, as it is going to take a lot more than shale oil to pay the debt and keep the "physical economy" running for a few more decades. Think about it!

INVESTORS' INSIGHTS

First Financial Insights 

August 6,2013 

Another set of NUMBERS