Why $100 Oil Will Tank The Economy

by Josh Saunders, Great Pacific Trading Company

Oil continues to mirror the run up in the stock market. The financial cheerleaders continue to talk the markets higher all the while failing to mention that oil has snuck back to nearly $100 a barrel. To make matters worse, Brent Crude is trading at $112 a barrel. As America enters the holiday season the pressure is going to be felt not only at the pump, but will also impact the kiddo’s present pile under the Christmas tree.

Driving to get grandma in Omaha may be a little expensive. Some families may choose to have Grandma attend the Christmas morning gift opening via Skype. Instead of paying those high gas prices and airline fuel surcharges, grandma can see the excitement on her grand kids faces on the webcam. Nothing really says family closeness and Merry Christmas like a cyber hug. At least it will be easier to hide the disappointment of receiving another pair of hand knitted socks instead of a new iPhone 4S.

The fundamentals for a bull case in oil continue to show an up trend. As the world population continues to grow, more citizens are moving up the social ladder and using items that require oil or its by-products. In China and India alone the increase in the net population will be nearly 20 million people this year. As these two economies continue to grow into affluence they will buy and use more and more oil.

Last year the people of China purchased 13.8 million cars. Between India and China they add approximately 95,000 new cars a day to the worlds roads. This is an ever increasing amount of oil consuming vehicles battling for a finite supply of oil. The world pumps 88 million barrels a day and some would say this figure has peaked.

Simple supply and demand would dictate that a finite supply with rapidly increasing demand should only increase the price of oil. While we may see some trading volatility, the trend for oil is going to be up. The only headline that could stop this rising trend would be some magic source of renewable energy and a way to effectively store it.

Well, GM has sold 5,000 Chevy Volts, but I think you get idea. As the holidays roll around, high oil prices will put a clamp on shoppers wallets. For an economy that derives nearly 70% of its GDP from consumer spending, this does not bode well going forward. Rising oil prices will slash any hope of the consumer lifting the stagnate economy.

There could potential be a small bump in holiday sales, but it will come only with a jump in consumer credit. We are talking about black Friday and cyber Monday deals here!

Fellow commodity junkie and personal friend Josh Saunders is VP of Northern California Operations at Great Pacific Wealth Management.

Twitter- @saundezj

Email- Josh@gptc.com

Bullish News for Corn Futures Heading into 2012

The bumper US corn crop of 2011 has turned into a disappointment, leaving global corn stockpiles at a three-year low.  Courtesy of Bloomberg via The Daily Crux:

The U.S. is reaping its smallest corn harvest in three years after a drought damaged what was a record crop as recently as July, driving annual prices to an all-time high and curbing an expansion in global food supplies.

The government will forecast production of 314.7 million metric tons tomorrow, 27.4 million tons less than four months ago, the average estimate of 30 analysts surveyed by Bloomberg showed. The cut is equal to output in Argentina, the second-biggest exporter. The U.S. Department of Agriculture already expected a third annual drop in global corn stockpiles and the first in soybean inventories in three years, offset by an expansion in wheat reserves to the largest in a decade.

Corn, used mostly to make livestock feed and ethanol, is the only one of eight members of the Standard & Poor's GSCI Agriculture Index to gain this year.

Corn prices tanked in September, but have since stabilized on these supply concerns:

Corn futures have recovered from a rough September, as support again held around the 580 mark. (Source: Barchart.com)

The futures markets are pricing in a modest increase in corn prices through next July (remember the old saying that corn always rallies by July 4th if it's going to rally at all).  But check out the lack of action at the long end of the futures curve!

Source: Barchart.com

2014 corn is a very interesting call option on Chinese consumption.  There have been reports that the Chinese are quite concerned about the availability of corn over the next five years (see: Corn Supply an Ongoing Concern for China).

We'll keep an eye on the corn market moving forward.  Futures are not a buy-and-hold asset class, especially the grains - I prefer to look for breakouts to the upside, especially those with favorable supply/demand setups (as we have here).

Further reading: Corn's furious rally from summer 2010

Why the Fed's Out of Options - Thanks to Crude, Food, and You

The markets presented quite the twist on Thursday, when the much anticipated relief rally got whacked in the face.  Despite the hysterics and fear, though, US stocks did not break through their previous near term lows.  If I were a betting/trading man (ha) - I may be tempted to take a short term flyer on the long side:

The S&P 500 appears to have some support around 1120 - for now. (Source: StockCharts.com)

Investors who rushed to get long a couple of weeks ago - even if they had timed the bottom successfully - were early, if they held their positions longer than 3 days.

Where have we seen this movie before?  How about the "flash crash" from the spring of 2010.  At the time, it was touted as a tremendous buying opportunity, thanks to some insane computers.  In reality, those "freak lows" were not only tested, but exceeded, within the next few months:

May "flash crash" buying opp?  There was no hurry to pile back in - a lower low was on the way. (Source: Google Finance)

With Jackson Hole just around the corner, Bernanke is in quite the pickle...he's out of bullets!  He can't reduce rates, because they are already at zero (and pledged to be there through 2013!).  Contrary Investing favorite Jon Lederer pointed out to me last night (over a few beers of course) the stark contrast from the early 1980's recession, when the fed has 15 whole points at their disposal.

QE has been tried - twice - and if not backfired, then at least failed.  While WTI crude has backed off, Brent (the goo that powers the rest of the world) is still over $100:

After all the carnage we've seen in the markets lately, Brent Crude still sits above $100. (Source: Barchart.com)

The most disconcerting charts, though - especially to leaders and policy makers - should be the prices of food.  If QE2 did anything, it sure lit a fuse under the price of food - check out the rocket shots put in my corn and soybeans:

Corn, 'Beans have been rip roaring to higher prices since Crazy Ben starting printing a second time. (Source: Barchart.com)

There's not much room for yet higher prices here, before we see some serious social unrest.  To paraphrase DailyWealth's Brian Hunt - people will put up with a lot of crap, but once they are faced with high food prices, they will take to the streets.

Exhibit 3 why QE3 would be a challenging call - the dollar.  I had thought that a return to these deflationary conditions would trigger a corresponding rally in the dollar - thus far, I've thought wrong:

Although the whole world seems to be short the dollar, it's not acting too well, given the deflationary carnage around us right now. (Source: StockCharts.com)

As Marc Faber said a few weeks back - we're going to find out if Mr. Bernanke is a true money printer, or just an amateur money printer.

Finally your parting moment of zen - the gold chart.  It's rising for all the right reasons, I know...fiat currencies are getting flushed down their respective sovereign toilets, there is a madman running the Federal Reserve, etc.  Still - the parabolic move on this chart is a tough one to buy into:

Gold gets parabolic. (Source: StockCharts.com)

The short term is setup for some potentially gnarly action.  The only thing I can think to do is to remain focused on our longer term strategies:

• Hold a lot of cash (for buying opps),
• Some gold (which though scary now, should trend higher over time until the sovereign debt crises are resolved and currencies get some respect again)
• Invest in agriculture (because people aren't going to stop eating, and the world has some serious supply problems)
• Diversify yourself internationally (in case your government gets a little too crazy)
• Reduce or eliminate your dependence on a W2 (with 20+% unemployment, and climbing, it's becoming increasingly risky to rely on a salary as your sole source of income)

This piece was originally published on our sister site, The Contrary Investing Report.

The (Second) Best Jim Rogers Interview of the Year

Of course I'm biased - by vote for #2 of the year is a lengthy Rogers interview with Frank Curzio, which is excellent, thanks to the length and depth that Curzio allows for Rogers.  Here's the link.

You can hear that Jim is quite cautious right now - citing very little enthusiasm for anything, except for North Korea, agriculture, and his trusty exercise bike.

This WSJ video is more entertaining and insightful, as Jim gets pretty worked up at the know-nothing girl who appears to be doing her best to infuriate him:



And I had the opportunity to sit down with Jim Rogers this April while in Singapore - here's my writeup of our discussion.

Recommended related viewing: Check out Porter Stansberry's End of America video

Why the Norwegian Krone is Set to Rally as a Safe Haven Currency

Why is the Norwegian krone the forgotten safe haven?

Big hat tip to Dr. Evil, who sent over this idea, pointing out that while investors are flocking to gold and the Swiss franc as safe havens, the Norwegian krone is not getting much love from European currency traders:

The NOK, while up against the dollar YTD, has lagged the CHF, especially of late...and is only even with the EUR.

(Source: Google Finance)

One of our favorite currency analysts, Chuck Butler, concurs with Dr. Evil - last Monday, he wrote:

The Norwegian Krone slumped in early morning trading after the home grown terrorist attacks. Apparently the same sick person was responsible for both the bombing and shooting rampage which rocked the northern European nation. The stories of the survivors of the shooting rampage were chilling, and my thoughts and prayers certainly go out to all of those affected.

The Norwegian krone has long been a favorite of the desk, and I would look at any sell-off as an excellent buying opportunity. These attacks will not have any lasting impact on the government or economy of Norway, both of which are very strong and stable. Norway has excellent fundamentals backing its currency, and should be seen as another ‘safe haven’ in the volatile global markets.

Source: The Daily Pfennig

The Norges Bank currently has rates at 2.25%, and there are expectations that there will be more rate hikes later in the year, and into the future.

Projections for the key policy rate (Source: Norges Bank).

The NOK sure looks like an interesting currency, given Norway's massive oil reserves, their government's responsible finances, and longer term demographic trends that look pretty favorable...especially by European standards.

Without an advanced trading account, the best way for an armchair investor to get exposure to the Norwegian Krone is to open an account with EverBank (as there are no ETFs or futures contracts available, at least that I was able to find, at this time).

Again, hat tip to Dr. Evil for important contributions to this piece.