Financial Skeptic Bulletin, October 2012

Note: Despite doom and gloom stock market went from 1260 to 1460 in one year. This new stock and bonds bubble (if it is bubble) was created and supported by Fed.

As  Mark Twain quipped:

 "October: This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February."

NEWS CONTENTS

• 20121024 : Peeking at Peak Oil ( Amazon.com )
• 20121024 : The Resistible Rise of Market Fundamentalism Rethinking Development Policy in an Unbalanced World by Richard Kozul-Wright,Paul Rayment 9781842776360 ( Amazon.com )
• 20121024 : S&500 500 looks overheated. In 200 days or less it probably will cool down to 1300 or less. ( ETRADE FINANCIAL )
• 20121014 : IMF warns recovery could be derailed by Claire Jones ( October 13, 2012 , FT.com )
• 20121008 : IMF Slashes Forecasts for Global Economic Growth by Justin Menza ( Oct 08, 2012 , CNBC )
• 20121002 : PIMCO: America could resemble Greece before 2020 ( Telegraph )

Old News ;-)

[Oct 24, 2012] Peeking at Peak Oil

Today, there are over 250,000,000 cars and light trucks in the USA and growing. Oil might be abundant, but easily extractable oil is not. The key here is "energy return on energy invested" (EROEI).

Amazon.com

Charles M. Savage

Required Reading for RIO+20?

"Peak Oil," what's that? It's nearly invisible at RIO+20. The same seems to be true for the latest meeting of the IPCC in Geneva (6th to 9th of June, 2012) as they prepare AR5 for 2014. Was M. King Hubbert wrong in a very brief 1976 YouTube video when he said:

"If we go back 5,000 years and ahead 5,000 years, we see this Washington Monument like spike, the episode of oil, gas and coal. It is the most disturbing thing in human history. It is responsible for our technological society and in terms of human history it is a very brief period." Source: [...]

Prof. Kjell Aleklett of the Uppsala Global Energy Systems Group and President of the Association for Study of Peak Oil (ASOP) has just explained in wonderful detail the important and meaning of Hubbert's quotation. It's real and it's here! Yet our collective denial is profound and truly scary.

In this very readable and well illustrated book, "Peeking at Peak Oil" we learn that both the industrial and governmental agencies are not giving us a clear idea of where we really are, that Peak Oil us upon us and Peak Coal and Peak Gas (not to mention Peak Water and Peak Phosphorus) are not far behind.

Even if these peak in the next 50 or 150, that's literally no time at all when we realize humans could live on this planet for the next 500 to 800 million years, or perhaps a little longer, before the increasing heat of the sun does away with our water.

Therefore, if we truly care about our great grandchildren and theirs, we need to begin immediately to rebuild an extremely low-carbon our global economy which substitutes "consumptionism" with a vibrant cultural life that's more than just "entertainment." For all the wonderful insights in Prof. Aleklett's book, I'd wished he'd have had a clearer section on CO2 levels and had given a little more attention to the rapidly developing fracking efforts to reach shale gas. These aside, were Aleklett's book to be required reading for RIO, its chances of success would be greatly improved!

keith renick

Very Important Work September 1, 2012

This book, Peeking at Peak Oil is a very important work. This work is based on science. It's sound in it's findings. Again, it's science that's based on very sound research methods. It's not pie-in-the sky or doomsday is here. It's sound scientific research that can't be overlooked. Looking at the facts, readers can draw their own conclusions as to how peak oil will play out. Peak Oil is real and it has arrived. Peak Oil is most often misunderstood by economists and the general public.

Modern economics is flawed because it never had a reason it include net energy in it's economic models of growth. Economist are obsessed with total labor productivity. The world is consuming more and more energy and getting less and less growth, less bang for their buck. Along with "Peak Oil" we will have water problems as many places that produce oil will require huge amounts of water for water injection to get the remaining oil out of the ground.

What's never addressed is the growing car and light truck population of the earth. When my granddaddy Crump was born in 1889 there were maybe 3 cars in the USA. When I was born there was less than 70 million cars in the USA. Today, there are over 250,000,000 cars and light trucks in the USA and growing. Today the global car and light truck population more than 800 million and racing to a billion worldwide. At some point, it doesn't matter how much oil is in the ground or how many miles per gallon your car gets. What matters will be the total number of cars and light trucks in the world, all of them, more than a billion, wanting their gas tanks topped off.

But the average person doesn't want to hear that there are limits. Tap water and gasoline will always be there in abundance and will always be affordable. Many believe everyone who can afford a car should have one and the earth can support one billion cars, one and a half billion cars, 2 billion cars or more. The total number of cars and light trucks in the world has never crossed their minds. How can it be expected that China and India will stop making cars? They won't and the demand for oil will overtake production forever.

At some point, the question might not be how much oil is left in the world but rather how are we going to use the oil that is left? Only about 2 thirds of a barrel of oil is used to make gasoline, diesel and jet fuel. This is the term "peak oil" refers to most often is that it's a liquid fuel transportation problem. This statement is true. However, I am very concerned about the remaining one third that's used in manufacturing thousands of products that we use everyday. Now we call everything oil. Heavy sour, tar and NGL.

I was very honored several years ago when Dr. Colin Campbell emailed me some of his field-by-field estimates for Saudi Arabia. I believe the author of this book and Dr. Colin Campbell are the 2 most informed experts on the subject of "peak oil." The quality of their research is unquestionable.

While I do not share the authors belief that we can feed a future world of 9 billion people, the authors knowledge and effort that went into "Peeking at Peak OIl," is truly remarkable. Keith Renick, Saudi Aramco Oil Retired

[Oct 24, 2012] The Resistible Rise of Market Fundamentalism Rethinking Development Policy in an Unbalanced World by Richard Kozul-Wright,Paul Rayment 9781842776360

Amazon.com

Richard Kozul-Wright, an economist at the United Nations Conference on Trade and Development, and Paul Rayment, an economist at the UN's Economic Commission for Europe, have written a useful book opposing what they call the `neo-liberal idolisation of market forces'.

Chapter 1 defines market fundamentalism; chapter 2 looks at globalisation in historical perspective, chapter 3 at trade and financial flows, and chapter 4 at corporations. Chapter 5 revisits globalisation, chapter 6 studies national development strategies, chapter 7 criticises market fundamentalism and chapter 8 examines the conditions for a sustainable global order.

The 1980s liberalisers promised that liberalising capital, finance and trade would bring more growth, investment, industry, equality and stability. But instead it brought less of all these.

95 out of the 124 developing countries grew faster in the period 1960-78 than in 1978-98. Yet the capitalist states of the developed world forced the developing countries to pay out more than $700 billion net between 1997 and 2002.

This exploitation and bullying continues today. As the authors note, the EU's trade agreements with developing countries often contain even more stringent demands than those made by the WTO [World Trade Organisation]'. And again, just as in the 1920s, the capitalist states' imposition of welfare cuts, labour market flexibility and monetarism have led to a crash.

The Labour Party has embraced market fundamentalism, and represents only the City of London, whose interests are opposed to the interests of the majority here in Britain and to the interests of the developing countries.

To defeat the slump, every country, Britain included, needs the pro-industry policies that enabled the developed nations to develop their economies originally. Every country needs to produce goods to meet domestic demand, not a `lop-sided reliance on external demand as the basis of sustained growth'.

Especially, every country needs to control capital flows. This is necessary to development and also to democracy As the authors write, "In a democracy, these restraints [on property rights] reflect the legitimate preferences of the population, and for an international institution or a developed country to insist that they be altered to reflect another set of preferences is a gross interference in the democratic process."

[Oct 24, 2012] S&500 500 looks overheated. In 200 days or less it probably will cool down to 1300 or less.

The Shiller P/E, which is the current price of the Standard & Poor's 500 Index divided by the past 10 years' earnings of the constituents of the index, is at around 23 -- almost 50% above the long-term average of 16.

ETRADE FINANCIAL

Cash is king over stocks, bonds and REITs

By John Coumarianos
Oct 5, 2012 06:01:40 (ET)

NORTHVALE, N.J. (MarketWatch) -- Investors: It's time to raise some cash.

If the current quarter brings more gains, you'll miss out, but that's better than being exposed to expensive asset classes.

Of course, you're losing money to inflation sitting in cash, which pays nothing, but you're reserving the opportunity to buy stocks, bonds, REITs and other investments at potentially cheaper prices later this year. To paraphrase value investor Howard Marks, we can't predict what will happen -- certainly not in one quarter -- but we can prepare.

Let's go through some asset class valuations and expected returns starting with bonds to see why raising cash is a good idea over the next few months.

First, the 10-year Treasury is yielding around 1.67%. Investors won't generate a return over inflation with a yield of less than 2%; you will erode your purchasing power sitting in Treasurys.

How about investment grade (above BBB-rated) corporate bonds? The iShares iBoxx $ InvesTop Investment Grade Corporate Bond Fund has a yield of under 3% and an average weighted maturity of 12 years. So higher-quality corporate bonds may help investors eke out victory over inflation at its current rate, but a surge of inflation will crush you.

What about riskier corporate bonds? "High yield" or "junk" bonds are yielding less than 6%, if one invests in them through the low-cost iShares iBoxx $ High Yield Corporate Bond Fund . We're getting closer to 8%, a decent margin over expected inflation, but we're already contemplating investing a significant slug of money in junk bonds. That can't be a prudent move after the run they've had.

Now let's look at real estate investment trusts. The Vanguard REIT Index Fund is sporting a 12-month yield of around 3.4%. It's possible, but unlikely, that with rental and dividend growth, this asset class can maintain purchasing power.

The problem is that REITs are trading at 20x cash flow or "funds from operations," a historically high number. A starting dividend yield of 3% in this asset class has generally not been the ticket to future 10-year double-digit or even high-single-digit returns. And if Treasury yields should rise, and investors can capture the same 3% yield on safer assets, look for REITs to plummet. Finally, with median income stagnant, it's questionable how much landlords can raise rents.

How about stocks? The Shiller P/E, which is the current price of the Standard & Poor's 500 Index divided by the past 10 years' earnings of the constituents of the index, is at around 23 -- almost 50% above the long-term average of 16.

This metric has a good record of predicting future 7-10-year returns, and with the metric so high, expected returns are low. Some people say Robert Shiller's data before 1950 is inaccurate, and that the average after 1950, when more accurate data is available, is 18. Even accounting for this, stocks are overpriced.

And with a dividend yield of around 2% and profit margins at record highs, savvy investors such as GMO's Jeremy Grantham, who think margins will revert to their longer-term mean, view domestic stocks as poised to deliver almost no return above inflation over the next seven years.

In fact, the stock markets poised to deliver returns close to 5%-6% over inflation or somewhere around 8% nominally are overseas markets, including emerging markets, according to Grantham.

No guarantees here, of course. As good as Grantham has been regarding asset class returns, his estimates are based on past averages. And we're again talking about little diversification to other asset classes.

Finally, we derive some confidence in thinking that cash is the "least worst" option by looking at managers we admire including Grantham. Steve Romick's FPA Crescent Fund is holding 32% cash and Jeffrey Gundlach's DoubleLine Total Return Fund is holding nearly 20% cash, according the most recent portfolios published by investment researcher Morningstar Inc.

Romick was a finalist for the Morningstar Manager of the Decade Award in 2010, as was Gundlach. It appears the smart money is getting defensive.

[Oct 14, 2012] IMF warns recovery could be derailed by Claire Jones

October 13, 2012 | FT.com

The communiqué also called on the United States to resolve the Congressional dispute over the fiscal cliff and urged Japan to make further progress towards fiscal consolidation in the medium term. The communiqué signaled that emerging markets and developing economies must step up their policy response if global growth deteriorated.

The tone of cautious optimism in the communiqué jars with the conclusions of the fund's World Economic Outlook and Global Financial Stability Report.

The WEO downgraded forecasts for global growth and the GFSR warned of a dramatic contraction in European banks' balance sheets, especially those of lenders in peripheral Europe.

[Oct 08, 2012] IMF Slashes Forecasts for Global Economic Growth By Justin Menza

Oct 08, 2012 | CNBC

... "A key issue is whether the global economy is just hitting another bout of turbulence in what was always expected to be a slow and bumpy recovery or whether the slowdown has a more lasting component," the IMF wrote in its latest World Economic Outlook.

...The IMF now expects the world economy to grow 3.3 percent this year, down from the 3.5 percent growth it predicted in July. It projects growth of just 3.6 percent in 2013, down from its prior estimate of 3.9 percent.

At 2.2 percent growth, the U.S. is expected to be among the fastest growing developed markets in 2012. The euro zone is forecast to contract 0.4 percent. Emerging markets are projected to grow at 5.3 percent, but the IMF did significantly lower forecasts for both Brazil and India. Brazil is now expected to grow by just 1.5 percent in 2012.

These forecasts assume that some of the policy uncertainty in the U.S. and Europe is reduced. The IMF expects European policymakers to take additional action to save the euro zone and the euro, while the U.S. policymakers will manage to avoid the "fiscal cliff" while making progress toward restoring fiscal sustainability. If either two assumptions fail to hold, "global activity could deteriorate very sharply," the report warned.

[Oct 02, 2012] PIMCO: America could 'resemble Greece' before 2020

the United States must cut spending or raise taxes by 11% of gross domestic product (GDP) over the next five to ten years in order to preserve its role as a financial safe haven.

Telegraph

PIMCO chief Mr Gross said that the United States must cut spending or raise taxes by 11pc of gross domestic product (GDP) over the next five to ten years in order to preserve its role as a financial safe haven.

"If we continue to close our eyes to existing 8pc of GDP deficits, which when including Social Security, Medicaid and Medicare liabilities compose an average estimated 11pc annual 'fiscal gap,' then we will begin to resemble Greece before the turn of the next decade," Mr Gross wrote in his monthly note.

Mr Gross, who has referred in past outlooks to the unsustainable debt pile the United States continues to accumulate, added that stocks will be "singed" and bonds will be "burned to a crisp" if the United States does not handle its debt, and that "only gold and real assets will thrive."

walentina

The US will never become like Greece because it controls its own currency. It can pay off its debts by printing money. However, if it fails to get its balance of payments and budget deficit under control it will steadily lose world influence.

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