Marc Faber's July 2011 Outlook

Marc Faber is out with the latest issue of his famous Gloom, Boom, and Doom Report which is always a must read for serious investors. Unlike most of the other talking heads, Faber has an excellent track record. He correctly predicted the top in the equity markets in Nov 2007 and caught the bottom in March 2009, making his subscribers a lot of money. Here is a summary of his July 2011 report:

1. Stocks--The stock market is going to rally in the short-term (July-August), but equities will not surpass their previous highs reached back on May 2. After this bounce, Faber believes the market will decline sharply to around 1100 on the SP 500 (during the September-October period). This is when the Fed will likely consider implementing QE 3 to stimulate asset prices.

2. Bonds---The rally in US Treasuries is over and investors should take profits.

3. Commodities--- Even though Dr. Copper bounced off its 200 day moving average, Faber would stay away from any commodity which is dependent on Chinese growth. The probabilities of a significant slowdown or crash in China have increased recently.

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4. Dollar--Everyone and his brother loves to hate the US dollar and expects it to decline further. While Faber despises the dollar long-term, he thinks it is attractive compared to the Euro. In fact, Faber recommends investors short EUR/USD as the situation in Europe is likely to deteriorate. The recent bounce in EUR/USD provides a good entry to initiate a short position.

5. Gold---As Faber mentioned last month, gold is undergoing a short-term correction, which is natural during a bull market. The correction could take gold to as low as $1400. This would represent an excellent buying opportunity for investors. To counter the anti-gold crowd, Faber emphatically states that gold has not reached a major top and is likely to trend higher later this year.

6. Money Market Funds----Faber is increasingly concerned about holding money market funds because of their exposure to European banks (estimated at around $800 billion). This is why the 1 month T-Bill recently went negative. Faber says that he plans to reduce his exposure to money market funds.

7. Australian Real Estate--If you have been lucky enough to have owned Australian real estate over the last few years, you may want to take profits. The Australian housing market is in a bubble and is very susceptible to a housing crash. The likely catalyst for the sharp decline would be a major slowdown in China, which would depress demand for commodities.

Black Swan Insights


Guest Post: Weekly Monetary Wrap June 25th

From our new partners at Central Bank News------

The past week in monetary policy saw interest rate decisions from 9 central banks around the world. Of those reviewing policy settings, only Uruguay adjusted its interest rate, +50bps to 8.00%. The other 8 banks held their interest rates unchanged, those were: Hungary 6.00%, the US 0.25%, Namibia 6.00%, Norway 2.25%, Hong Kong 0.50%, Turkey 6.25%, Czech Republic 0.75%, and Sierra Leone 23.00%. Also of note was the US FOMC statement which referred to the completion of QEII (the second round of quantitative easing), and an intention to keep reinvesting principal payments. Meanwhile the Bank of Uganda said it would start inflation targeting, and would shift focus to using interest rates rather than money supply to influence inflation.

So it was very much a week of policy inaction, as central banks continued to monitor their respective unfolding growth and inflation mixes. Most of the banks that released statements on monetary policy pointed to future action, and noted upside risks to inflation and downside risks to growth e.g. in the form of external shocks such as sovereign debt crises.

Following is some of the key soundbites from central banks that reviewed monetary policy settings over the past week:

  • Hungary central bank (held interest rate at 6.00%): "Inflation is likely to be above target in the short term, due to cost-push pressures stemming from the rise in commodity prices. However, owing to the disciplining effect on price and wage-setting of the persistent weakness in domestic demand and high unemployment, the 3% inflation target can be achieved at the end of 2012 by maintaining interest rates at their current level over a sustained period."

  • The US FOMC (held interest rate at 0-0.25%): "The Committee continues to anticipate that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate for an extended period."

  • Bank of Namibia (held interest rate at 6.00%): "It is the view of the EC [Executive Committee] that the observed growth momentum at the beginning of the year that created an impression that [the] recovery was consolidating, was not firmly entrenched,"... "The EC also observed that inflation has increased, but still remains in tolerable levels, especially the underlying inflation,"

  • Norway (held interest rate at 2.25%): "Overall, the Executive Board is of the view that the key policy rate should gradually be raised through the latter half of 2011, against the background of the current outlook and balance of risks."

  • Czech National Bank (held interest rate at 0.75%): "Headline and monetary-policy relevant inflation will be close to the inflation target over the monetary policy horizon. Consistent with the forecast is broad stability of market interest rates in the near future and a gradual rise in rates starting in 2011 Q4. Risks to the forecast are balanced for monetary-policy relevant inflation."

  • Sierra Leone (held interest rate at 23.00%): "The underlying challenges remain containing the increase in consumer price inflation recently driven by food and fuel price increases,"... "recent improvements in the fiscal position underscore the need to maintain a neutral monetary policy stance."

Next week is set to be a relatively quiet week on the monetary policy front. The Bank of Israel meets on the 27th of June (expected to increase 25bps to 3.25%), The National Bank of Romania meets on the 29th of June (expected to hold at 6.25%), and the Central Bank of the Republic of China (Taiwan) meets on the 30th of June (expected to increase 12.5bps to 1.875%).

Article source: Central Bank News


Quick Reads

To pass the time. Enjoy.

1. John Paulson Also Is Taking a Bath on Gold Mining Stocks (WSJ)--can you say redemptions
2. The Great Australian Housing Bubble is Coming to an END (IBT)
3. Millionaires invested more in art, luxury in 2010: report (Reuters)
4. Harrisburg Mayor Calls For Three Days of Fasting to Help end Financial Crisis (PennLive)--better than QE 3
5. Colo. police say man hid in portable toilet tank-- (MSNBC)
6. Citigroup Economic Surprise Index (Trader's Narrative)---it is signaling a buy sign
7. The Real Ghandi? (The Atlantic)
8. HSBC’s £10bn of ring-fence fears for UK banks (FT Alphaville)
9. About that strong demand for Commodities By China (Ft Alphaville)
10. Welcome to China's 'Snake Village': A slideshow (The Week)



Peak Uranium By 2015?

A new research report says yes. The report goes on to say that short of a complete nuclear phase-out, the world will run out of uranium by the end of the decade. Here are the major conclusions:

• A production decline from essentially all mines operating on particular deposits is unavoidable during the present decade.

• This decline can only be partially compensated by the planned new mines.

• Assuming that all new uranium mines can be opened as planned, annual mining will be increased from the 2010 level of 54 ktons to about 58 ± 4 ktons in 2015.

• After 2015 uranium mining will decline by about 0.5 ktons/year up to 2025 and much faster thereafter. The resulting maximal annual production is predicted as 56 ± 5 ktons (2020), 54 ± 5 ktons (2025) and 41 ± 5 ktons (2030).

Assuming that the demand side will be increased by 1% annually, we predict both shortages of uranium and (inflation-adjusted) price hikes within the next five years.
Therefore, assuming that a global slow phase-out scenario will not be chosen on a voluntary basis, we predict that the end of the cheap uranium supply will result in a chaotic phase-out scenario with price explosions, supply shortages and blackouts in many countries.

To read the full report: click here

The report contends that the only way for supply to keep up with demand would be if the US and Russia recycle their nuclear weapons into low enriched uranium fuel. The Russians have been doing this since 1993 under the Megatons to Megawatts program, but the program is expected to end in 2013. The Russians have indicated that they do not expect to renew the program.

This is bullish for uranium and the uranium stocks. And after the Fukushima disaster, the stocks need all the help they can get. Most of them have now fallen 70-85% from their 2011 peaks

Black Swan Insights


QE Has Failed, What's Next For the Federal Reserve?

QE has failed to "stimulate" the real economy. Sure, it has juiced the stock market, but it has done nothing for the real economy. Unemployment remains sky-high, economic growth is sluggish, and commodity inflation is surging . Some commentators say the Federal Reserve is out of bullets. Let's assume for a moment that the Fed will not initit ate QE 3. What else can the Fed do?

1. Dramatically Change Price Expectations---Recent Fed announcements indicate that they want a 2-3% inflation rate compared to the current 1% rate. One idea is for the Fed to increase its inflation target upward to between 4-6%. To support this new policy the Fed could openly announce that they are monetizing debt rather than calling their money printing--credit easing. The Fed could also buy new kinds of assets such as stocks, corporate bonds, land, etc. This could have the effect of stimulating spending as consumers and businesses fear the loss of purchasing power. It would make it clear that the Fed is serious and will do everything in its power to create inflation.

2. Cap Treasury Rates (Aka. Operation Twist)--Under this policy option the Fed would agree to cap treasury rates at unreasonably low rates (e.g 10 year at 2.0% and 30 year at 3.5%). They would openly announce the target to the market and state that they will print as much money as necessary to achieve the goal. This would have the effect of lowering the real inflation adjusted yield of the 10 year to below zero. It would reduce the incentive for financial institutions to hold Treasuries and force them to do something with their money. Perhaps lend the money to struggling small businesses.

3. Taxing Currency---- Under this option the government would tax the currency, meaning that the dollar would automatically lose value over a period of time (say 3% every 6 months). This would create a cost to holding currency, giving people and institutions an incentive to spend it quickly, which would increase the velocity of money throughout the financial system. An extreme example of this policy would be the introduction of a new currency, which would lose a certain amount of value over a fixed period of time. The Japanese government considered this option in 1999, but never implemented it.

4. Negative Interest Rates--Like taxing currency, this option imposes a cost to hold money and theoretically forces people and corporations to spend money, which would increase aggregate demand. However, this is a hard policy to implement from a political perspective. It could lead to a flight of capital from the US as savers abandon the dollar for foreign assets. Under this policy option you may have to implement capital controls. What could work is for the Fed to impose negative interest rates on bank deposits held at the Federal Reserve. They could also prevent banks from passing along negative interest rates to consumers. Banks would be forced to do something with all of the money they are hoarding. This policy option would give banks an incentive to lend to the economy.

5. Reduce the Interest Paid on Excess Reserves---One reason QE failed was because banks simply held onto all of the excess reserves created by the Fed. All of this money is simply sitting around doing nothing for the economy. The Fed could reduce the rate it pays on these excess reserves, thereby creating an incentive for the banks to lend the money. While this appears to be a logical policy option, it is not practical because the major banks are largely insolvent. They need the capital to cushion themselves from future credit losses. Even if the Fed was to reduce the rate paid on reserves to 0%, it would not be enough to encourage the banks to lend out the money.

6. Helicopter Drop Money--The easiest way to stimulate aggregate demand is to print money and hand it out to the general population. Imagine everyone in the US getting a check for $25,000. This would automatically create inflation and increase spending. It would also increase inflation expectations, which the Fed considers important. The major drawback is that nobody knows how much inflation this would cause and it might lead to hyperinflation.

As you can see the Fed is not out of bullets. Zimbabwe Ben and his fellow counterfeiters will stop at nothing to create inflation and destroy the value of the dollar, all in the name of saving the economy.

Black Swan Insights



I Can't Take it Anymore: Windows 7 2012 Security and the Rise of For-Profit Viruses

It happened again this morning. I get up, make myself some coffee and cereal and log on to the Internet. I go to 4 sites :, Zerohedge, TechCrunch, and Google News. Then my worst nightmare appears--I start to see a series of non-stop pop ups from the notorious Windows 7 2012 security virus. This malignant piece of filth hijacks my computer, preventing me from opening my anti-virus program or any other program. This must be the 20th time I have come across this terrible virus and it is getting intolerable. It has gotten so bad that I no longer surf the Internet freely. Instead I restrict my web-surfing to about 20 sites.

What really makes me fume is that there seems to be no way of avoiding this virus. I don't got to questionable websites, view porn, or download unknown files or email attachments. I have Mcafee anti-virus software downloaded and installed on my computer. It does not prevent or even recognize the virus. I literally had Mcafee telling me my computer was secure and virus free while the virus is controlling my computer. So much for having an anti-virus program! I also have Malwarebytes Anti-Malware installed as well. This program will not prevent Windows 7 2012 security virus either--it only removes it once your computer has been infected. The virus tries to prevent you from opening Malwarebytes.

The problem is that once the virus starts, it is almost impossible to get rid of it. Since the virus completely disables your system, you cannot even search google to find information on getting rid of the virus. Instead, you need to use another computer, which has not been infected. Once you search google you find, which allegedly offers a program to help disable the threat. You are told to download a program called iexplore.exe,which disables the virus and allows you to open and close programs on your computer. I did this. When the download was completed, I received a notice from Mcafee stating that they detected and deleted a trojan virus. Then I started Malwarebytes. After waiting 55 minutes for the scan to be completed, the virus was found and deleted. Thank God!

What was interesting was that Malwarebytes deleted iexplore.exe along with the Windows 7 2012 Security virus as well. Apparently, Malwarebytes decided that iexplore.exe was a virus. What the hell is going on here? Is iexplore.exe a virus as well? Sure seems to be the case.

What really concerns me about the rise of malicious viruses like Windows 7 2012 Security virus (and its various mutations) is that they have been created solely for money! The whole goal of this program is to steal money and credit card information from unsuspecting people. The virus pretends to be an anti-virus program and tells you that your computer has been infected and needs to be cleaned. When you click on the scan icon, the virus says that you have to pay money in order to clean your system. Even if you are foolish enough to give these criminals your credit card information, it will do nothing to help your computer. And to make matters worse, these cyber criminals now have your credit card, so be prepared for fraudulent charges.

It was not too long ago when computer viruses were created by 13 year old kids in their mom's basement. While annoying, these viruses were largely harmless. However, over the last 5-10 years we have seen an explosion in for-profit viruses. The goal is to make money by tricking people. I always like to ask the question: who profits from this trend? It is obvious that Norton and Mcafee--the anti-virus companies stand to profit the most from these viruses.

Is it too conspiratorial to say that these companies directly or indirectly create these viruses in order to sell more ant-virus programs? It is pretty simple: problem, reaction, solution. These companies (and or independent contractors) create and spread nefarious viruses. These viruses have become so prevalent that everyone I know has been forced to pay $50-$100 annually to these companies for protection. It is a great racket which would make the mafia jealous. It is like victims paying their abusers not to beat them!

Someone has to stop this scam. Is there any way to prevent these kinds of viruses from infecting my computer? I don't normally allow comments on this blog because of numerous spam problems, but I will open the comments section because I am desperate for some advice at this point. I am afraid to surf the Internet because I do not want to risk having my computer infected again. Thanks

Black Swan Insights



Greek PM Narrowly Survives Confidence Vote, Austerity Bill Still Looms

Greece survives to default another day. Greek Prime Minister Papandreou can breathe a slight sense of relief. Today he found just enough votes to make it through a very close confidence vote. The final tally for the vote was 155-143 in favor of the government. If the vote had gone the other way, it would have likely set in motion a chain reaction leading to a Greek debt default. For now, the imminent Greek default has simply been postponed to a later date.

While the EU elite may be pleased by today's vote, the situation still remains grim as the Greek economy continues to struggle with high unemployment, negative economic growth, and harsh austerity measures.

It should be noted that the Greek parliament still needs to approve more austerity measures to qualify for EU/IMF bailout money.

Black Swan Insights


Europe's Liquidity Crunch Intensifies

The drama regarding Greece's imminent default is already having wide ranging consequences for Europe's insolvent banking system. Fears of massive disruptions in the European inter-bank funding market has all of the major banks scrambling for as much liquidity as they can get while it is still available.

The ECB reported allotted EUR186.942 billion worth of seven-day funds in its main weekly refinancing operation---about EUR 51 billion more than in last week's MRO, when it allotted EUR135.585 billion. The demand for liquidity was so high that it exceeded the ECB's own estimate of EUR 102.5 billion. Can you say liquidity crunch?

More importantly, the number of bidders at the weekly operation surged to 353 from 235 one week earlier. I bet this was due to PIIG banks who cannot get financing anywhere, outside of the ECB.

This type of action shows how desperate the EU banking system is for cash as banks reduce their lending to each other on Greek contagion risk fears. Earlier this week, it was reported that major banks like Barclays were dramatically reducing their exposure to other European banks. So with the inter-bank funding market drying up, the weakest banks are becoming heavily reliant on free ECB money to finance operations.

Black Swan Insights 


Update on Allana Potash: Closing Position

As some of you will remember, I bought stock in a little potash company back in late 2010. Today Allana Potash released its NI 43 101 report which is official resource estimate of the company's Danakhil Potash Project. The news was below expectations to say the least and the stock acted accordingly.

The company reported:



This is, of course a major increase for Allana's resource estimate, but a far cry from the rumored 1 billion tons. Another major disappointment was the KCI (the potash) grade of only 18.65% in the measured and indicated classification. Again--this was much lower than the expectations of around 25% and even a tad lower than past historical drilling on the site indicated. 

The major analyst covering the stock (Dundee research) seems to be quite optimistic regarding the company. They think the report means the company could increase potash production from an estimated 1 million tons per year. This is hard to see happening, considering the CEO of the company mentioned that production would be capped at 1 million tons per year because of poor infrastructure in Ethiopia. Granted, if infrastructure improved, then the company could increase production, but this is a long way out (2016+).
Overall, this was a slightly underwhelming report. I am selling my position for the short-term and will reevaluate matters latter. I picked up this stock back at .41 and sold today at 2.04. This resulted in a 400% return in just over 9 months. Still I was hoping for more.
I will keep an eye on Allana Potash. At some point it may fall back to a bargain level.
Black Swan Insights


Quick Reads

If you have time--check out these stories

1.  Option Traders Most Bearish Since 2009 Bear Market Bottom--Trader's Narrative
2.  Ron Paul's Stock Portfolio Revealed----Economic Policy Journal
3.  Deutsche Bank Predicts New LBO Up cycle-- Institutional Investor
4.  U.S. Invasion of Libya Set for October?--Infowars
5.  LinkedIn Highlights Market Inefficiency ----FalkenBlog---so much for the efficient market hypothesis
6.  The War on Drugs Turns 40---The Atlantic
7.  The Economic Recovery in Historical Context (Charts)---CFR PDF 
8. Would You Eat Genetically Modified Foods?---Wired---hint hint you already are
9. Obama Bloopers--YouTube---he has trouble without his beloved teleprompter



Best Sectors Year to Date: Boring is King

With the year halfway over I think it is a good time to review the best sectors. Below is a chart of the year to date performance of various market sectors. While basic materials, energy, and tech may be the most popular trades, it has been the boring and unloved health care and utilities sectors, which have performed the best so far this year.

click chart for larger image

Below is a chart of the best performing assets YTD. Leading the list is heating oil, corn, hogs, and silver. The laggards are lumber, sugar, wheat, and copper. And if you want to see a proxy for the real inflation rate-- look no further than gold's 7.3% rise for a confirmation of stagflation.

Black Swan Insights


Regarding the Alleged Kitco Tax Fraud

The news is pretty bad for Kitco Metals. The well-known (and highly respected) gold dealer has been accused by the Canadian province of Quebec of participating in an illegal scheme to avoid taxes. To make matters worse, Quebec authorities raided Kitco offices.

Naturally, the company denies all charges and issued the boilerplate "we will rigorously defend ourselves" press release. All companies, when accused of wrongdoing say the same thing. This statement will not convince gold buyers and customers of Kitco. Kind of like Lehman Brother's CEO Dick Fuld claiming that the firm was solvent and liquid just weeks before the company filed for bankruptcy.

The whole Kitco saga is important to me because until today I had an unallocated gold account with them. After hearing the shocking news on Friday, I immediately closed my account and arranged for Kitco to wire my money back into my account. I just checked my bank account and the wire from Kitco went through with no problems. So at least they are honoring their obligations. This action may seem alarmist, but I am not willing to take any chances regarding fraud, etc. It should be noted that Kitco has not been accused of running a ponzi-scheme or anything like that (which would affect unallocated metal account holders).

However, it is my experience that once a firm is found guilty of one type of misconduct, there is usually more to follow. At this point, I really don't know what to think about Kitco and the safety of doing business with. Kitco announced Friday that they have appointed a receiver to help the company continue normal operations. I am not a bankruptcy expert by any means, but when I hear the word receiver, I get very nervous. I am one of those people who sells first and asks questions later.

Black Swan Insights   


Negative Sentiment Suggests A Near-Term Bottom

It seems odd that market sentiment should fall so precipitously, considering the market is only down around 6% from its highs. But then again, QE 2 is winding down, which is making the bulls a little glittery. Below is a chart of one very good indicator I follow, which is flashing a contrarian buy signal. It is known as the Nasdaq Sentiment Index courtesy of Market Harmonics. Yes, sentiment surveys have been largely useless in response to the Fed's money printing POMOs, but this indicator has a relatively good track record of calling market bottoms. A reading below -150 usually indicates a bounce. We are currently at -194.

While this indicator looks good, I am going to wait for the latest AAII sentiment poll on Thursday for confirmation. I would like to see some real capitulation on the part of the retail crowd. That would give further evidence that the market is nearing a bottom--at least for the intermediate period.

click chart for larger image

Black Swan Insights


Hedge Fund Manager John Paulson Fooled By Chinese Stock Fraud?

John Paulson may have seen the housing crash, but he sure didn't see this coming. Muddy Waters (a firm which specializes in exposing Chinese stock frauds) announced coverage on Sino-Forest (TRE.TO), a Chinese timber company, with a strong sell and $1.00 price target--citing massive fraud.

While normally the news of the latest Chinese stock fraud would not merit any comment, the mere fact that one of the most famous hedge fund managers owns shares makes this quite newsworthy. As of the latest 13-F Paulson and Co owns 34.7 million shares which were until today valued at $624 million. At the close of trading today, the stake is only worth $501 million. UPDATE: Sino-Forest is now down to $6. Wow!

The second largest owner of Sino-Forest is Davis Selected Advisers LP, the mutual-fund firm run by Chris Davis that owned 27.3 million shares. I wonder how they are going to break the news to fundholders. Something like "sorry we really fucked up on this one...please don't redeem."

Here are some of the highlights from Muddy Waters' research report:

•Like Madoff, TRE is one of the rare frauds that is committed by an established institution. In TRE’s case, its early start as an RTO fraud, luck, and deft navigation enabled it to grow into an institution whose “quality management” consistently delivered on earnings growth.

•TRE, which was probably conceived as another short-lived Canadian-listed resources pump and dump, was aggressively committing fraud since its RTO in 1995.

•The foundation of TRE’s fraud is its convoluted structure whereby it runs most of its revenues through “authorized intermediaries” (“AI”). AIs supposedly process TRE’s tax payments, which ensures that TRE leaves its auditors far less of a paper trail.

•On the other side of its books, TRE massively exaggerates its assets. We present smoking gun evidence that TRE overstated its Yunnan timber investments by approximately $900 million.

•TRE relies on Jakko Poyry to produce reports that give it legitimacy. TRE provides fraudulent data to Poyry, which produces reports that do nothing to ensure that TRE is legitimate.

•TRE’s capital raising is a multi-billion dollar ponzi scheme, and accompanied by substantial theft.

The full report is available here
You really have to wonder if there any legitimate Chinese stock companies left. They all seem to be frauds/ponzi schemes. I would not touch these stocks with a 10 foot pole. It seems that in the case of Sino-Forest quite a few big institutions were fooled, not just retail investors.  

Black Swan Insights


Groupon Files IPO: Insiders Want to Unload Their Overpriced Shares to You

It is official: the NTY is reporting that the social networking powerhouse Groupon is looking to IPO. The company no doubt wants to replicate LinkedIn's ponzi-like valuation. Recent financings have suggested an implied value for Groupon of around $25 billion (according to the Idiot's Guide to Dot Com Bubble Valuation Handbook--where no profit is no problem). Here are a few highlights of Groupon's financial data:

  • Q1 Revenue of $644 million
  • Q1 Cash Flow of $7 million
  • $450 million loss for 2010
  • CEO statement regarding future profitability: 1) "We cannot be certain that we will be able to attain or increase profitability on a quarterly or annual basis.” 2) “In the past, we’ve made investments in growth that turned a healthy forecasted quarterly profit into a sizable loss.” 3)“When we see opportunities to invest in long-term growth, expect that we will pursue them regardless of certain short-term consequences.”-----Wall Street speak for we expect more losses.

The winners---CEO Andrew Mason, co-founder and board member Eric P. Lefkofsky, and venture capital firm Accel Partners.

The losers---Anyone who buys the stock on the first day of trading. You have to wonder how many fools are willing to stick their neck out and buy into the IPO after what happened to LinkedIn?

Black Swan Insights


The Great Oil Scam: You are paying $100 a barrel for oil despite record high inventories

It is shenanigans like this which makes rational observers want to jump off buildings. The EIA today reported that oil inventories increased last week to a 21 year high for the month of May. Crude inventories now stand at 373.8 million barrels and are 10.78 million barrels higher than last year. This must be a negative for crude right, after all supply/demand fundamentals would suggest as much. Silly rabbit, we no longer have a real functioning market, but instead a HFT captive market fueled with unlimited liquidity courtesy of the Federal Reserve. The only person who gets stiffed with the bill is the American consumer.

But don't worry--money itself is not lost or made, it is simply transferred from perception to another as Gordon Gekko reminded us. Every dollar stolen from American consumers flows directly to a Wall Street trading desk. JP Morgan, according to sources is having a record year in their commodities division and on track to achieve their internal target of $1.2 billion, up from under $500 million last year. Just another back door bailout for the banks to help them pay record bonuses to their "top talent." Ironically, this irreplaceable top talent almost destroyed the US financial system in 2008, but then again everyone makes mistakes. However, when Wall Street makes a mistake, they get to tap the American taxpayers never ending wallet.

When discussing oil manipulation, one can not forgot the role played by the Federal Reserve, who acts as part enabler/part accessory to the crime. By reducing interest rates to 0%, the Fed acts as the crack dealer to Wall Street addicts, desperate for more free money. When real interest rates are negative adjusted for inflation, it gives the banks and speculators the incentive to bid up the price of hard assets. If you earn zero interest, why would you keep money in a bank account? Instead, you are practically forced to speculate in either the equity markets or in commodities.

To further the great oil manipulation, speculators need a good narrative in order to justify oil at $100, despite abundant oil supplies and a clear slowdown in the global economy. This is where Wall Street research comes in handy. Hundreds of analysts produce 1000's of research reports, which engineer bogus reasons for high oil prices. Furthermore, these research reports have to give readers a catalyst for even higher prices, regardless of true fundamentals. Here is an excerpt from Scotia which represents the typical Wall Street line to fuel more oil manipulation:
The price of crude oil is likely to remain elevated this year, and potentially next as well, in the $100-105/bbl range, a reflection of the continuing underlying strength of demand in the emerging market economies, in addition to the seemingly never-ending geopolitical tensions in the Middle East and North Africa.We estimate that this large and probably sustained cost increase has lowered global growth by about half a percentage point this year and next, though substitution effects and competitive pressures will limit the extent of the weakness in discretionary spending. Nevertheless, the risk lies on the side of even slower growth, and more so if a larger-than-expected inflationary pass-through triggers earlier and more central bank tightening than anticipated.
You see how this analysis makes absolutely no logical sense. One one hand prices should remain high or go slightly higher based on increased demand, while on the other hand global growth (e.g. China) is slowing. But logic is not necessary in order to continue the great oil price scam. All that is needed is a good narrative, which can be easily parroted by sheepish fund managers who will repeat the narrative over and over on CNBC and Bloomberg.

And what happens when the public starts to question the reason behind high oil prices? The US Congress, a subsidiary of the major Wall street banks, will subpoena the oil companies and criticize them for not  producing enough oil. Meanwhile, Wall Street's prop desks continue their manipulation with complete impunity. Only in America.

Related Articles:
Will High Oil Prices Derail the Global Economy

Black Swan Insights 


Marc Faber's June Outlook: Deflationary Collapse or Inflationary Bust

Marc Faber is out with the latest issue of his famous Gloom, Boom, and Doom Report which is always a must read for serious investors. Unlike most of the other talking heads, Faber has an excellent track record. He predicted the top in the equity markets in Nov 2007 and caught the bottom in March 2009, making his subscribers a lot of money. Let's see what he is up to in June 2011:

1. Stocks--Faber is still cautious on equities, believing that a more significant market correction is around the corner. However, shorts should beware because they are fighting the Federal Reserve. If you have to be in the market, stick to consumer staples like MO, JNJ, KO, PG, etc. For the ultimate contrarian investor, take a look at some select housing stocks (TOL,LEN, KBH), but only if you have a high risk tolerance.

2. Bonds--Likes Treasuries for a trade. Says 10 year yields could fall to 2.5% during a stock market correction. Longer-term Faber hates Treasuries and dismisses Albert Edwards call for sub 2% yields for the 10 year.

3. Commodities--Stay away from industrial commodities. Global growth is slowing, which means weaker demand and lower prices.

4. Gold--Still likes gold and recommends a gradual accumulation despite market fluctuations. Says that longer-term gold can only go higher because of negative real interest rates. Even a deflationary collapse is unlikely to hurt gold because the Fed will simply debase the dollar to get nominal prices higher. If the Fed gets it right and successfully re-inflates asset prices, then inflation will be in the double-digits, which would be bullish for gold.

5. Dollar--Any temporary bounce in the dollar (say 10-20%) would be met with more money printing by Bernanke and Co. This factor limits any sustainable gains for the dollar. In fact, the only scenario where you could see a much higher dollar would be nothing short of a worldwide financial collapse.

5. Macro--Faber says it is very hard in this environment to predict what will happen in the markets. The Fed's manipulation of asset prices has caused large distortions. However, one thing is clear: the Fed will not let the markets fall too much. This is why Faber thinks the stock market will trend higher (in nominal terms) or at least trade sideways for the forseeable future. 

Black Swan Insights   


Weak Job Growth + Housing Depression = QE 3

Stop denying it, just consider the facts--QE 3 is an inevitability.

Look at these troubling statistics:

  • Case-Shiller Home Price Index finally confirms double-dip in housing  
  • ISM Manufacturing at lowest level since Sept 2009
  • ADP Payroll Report Comes in at 38K vs. expectations of 175K--Foreshadows weak Non-Farm Payroll tomorrow
  • US economy has to create 100,000 jobs per month to keep the unemployment rate steady
  • To meaningfully lower the unemployment rate requires 200,000 new jobs per month (CBO report) 
  • Chicago PMI (for May) Collapses--Drops to 56.6 from 67.6--largest decline since Oct 2008 (worldwide financial collapse)
  • US 1st Quarter GDP came in at 1.8%, way below expectations of 3%
  • Greece, Ireland, Portugal, and Spain on verge of collapse--any debt restructuring will implode the German and French banking systems, ushering in Lehman 2.0.
  • China PMI (proxy for global growth) fell to 52.1--a 10 month low
  • Most importantly for the Fed--the stock market is not rising at the Fed's mandated 0.1-0.2% rate per day. According the Fed this must be a sign of deflation, which requires them to trash the dollar and print more money.
 No wonder gold is up today when everything else is down significantly.

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HSBC Still Betting on Treasuries

With the 10 year breaking below 3%, HSBC's Steven Major is out with a research note arguing that the bond rally still has more room to run, even without QE 3. The bet is that this recent rally in Treasuries, has caught many fund managers (like Bill Gross of PIMCO) on the wrong side of the trade. These treasury bears are scrambling to cover their short positions, sending Treasuries higher. His short term price target for the 10 year is 2.6-2.7%. Major notes:
"The factors driving yields lower are still unraveling," said Major in a phone interview with Dow Jones Newswires. "We are still getting evidence of a weak economy, still seeing stress in [the] euro zone and still seeing short covering."

Major said there are still large amounts of shorts in the market, adding that the bond rally will end when those shorts "capitulate."

But Major said that a third round of quantitative easing from the Fed is unlikely even as the economy is slowing.

"I think the Fed will save it for a more serious deflation risk, not lower-than-expected growth," he said.
The only thing I disagree with is the suggestion that QE 3 is unlikely. In fact. the recent bond rally could be the market pricing in QE 3,4,10,20,etc. The truth is that we are a 10-15% correction away from QE 3. The Fed has made a higher stock market a top priority to "increase the wealth effect." To bad the average American has less than 50k in their retirement accounts, so a rising market does little to counter the ruinous impact of rising food and energy prices. But then again the Fed's single goal is to sacrifice the American middle class to save the major banks through a back door bailout known as ZIRP.

Black Swan Insights