Economic Analysis from John Mauldin
- Mon, 01 Sep 2014 00:33:00 +0000: Growth - Mauldin Newsletters
“It's said that power corrupts, but actually it's more true that power attracts the corruptible. The sane are usually attracted by other things than power.” – David Brin in The Postman “For every good idea, ten thousand idiotic ones must first be posed, sifted, sniffed, tried, and discarded. A mind that's afraid to toy with the ridiculous will never come up with the brilliantly original." – David Brin, Orbit interview
- Wed, 27 Aug 2014 16:20:00 +0000: Employers Aren’t Just Whining – the “Skills Gap” Is Real - Mauldin Newsletters
Paul Krugman and other notables dismiss the notion of a skills gap, though employers continue to claim they’re having trouble finding workers with the skills they need. And if you look at the evidence one way, Krugman et al. are right. But this week an interesting post on the Harvard Business Review Blog Network by guest columnist James Bessen suggests that employers may not just be whining, they may really have a problem filling some kinds of jobs. Unsurprisingly, the problem is with new...
- Mon, 25 Aug 2014 19:45:00 +0000: A Nation of Shopkeepers - Mauldin Newsletters
“To found a great empire for the sole purpose of raising up a people of customers may at first sight appear a project fit only for a nation of shopkeepers. It is, however, a project altogether unfit for a nation of shopkeepers; but extremely fit for a nation whose government is influenced by shopkeepers.” – Adam Smith, The Wealth of Nations
- Tue, 19 Aug 2014 21:28:00 +0000: AI, Robotics, and the Future of Jobs - Mauldin Newsletters
This past week several reports came across my desk highlighting both the good news and the bad news about the future of automation and robotics. There are those who think that automation and robotics are going to be a massive destroyer of jobs and others who think that in general humans respond to shifts in employment opportunities by creating new opportunities. As I’ve noted more than once, in the 1970s (as it seemed that our jobs were disappearing, never to return), the correct answer to...
- Sat, 16 Aug 2014 02:21:00 +0000: Bubbles, Bubbles Everywhere - Mauldin Newsletters
The difference between genius and stupidity is that genius has its limits. – Albert Einstein Genius is a rising stock market. – John Kenneth Galbraith Any plan conceived in moderation must fail when circumstances are set in extremes. – Prince Metternich I'm forever blowing bubbles, Pretty bubbles in the air They fly so high, nearly reach the sky, Then like my dreams they fade and die Fortune's always hiding, I've looked everywhere I'm forever blowing bubbles, Pretty bubbles in the...
Economic Analysis from Casey Research
- Fri, 29 Aug 2014 06:29:00 +0000: Whether You Love It or Hate It, You’re Missing What Really Matters About Bitcoin - Casey Research - Research & Analysis
For the past year or so, the word “Bitcoin” has worked like a Jedi mind trick. Speak it to a small group of people, and their emotional shields fall right off. The ones that like it, love it with ardor. Those that don’t, hate it with an existential revulsion. It’s a special sight to behold. But the real importance of Bitcoin has eluded all of these people.
We’ll discuss this below, but here’s a hint: What matters about Bitcoin is not the price. In fact, the price in dollars is one of the least important things about it. Actually, Bitcoin is far more important than any of the attributes that have been held up as either blessings or curses.
Also this week, Doug French will examine Uncle Sam’s schizophrenic relationship with Bitcoin. It’s an interesting and damning piece.
A note on the Casey Summit in San Antonio: The discount ends Tuesday, September 2. So, if you’re planning on coming, you have only a few more days for the better price.
Okay, with all that said, let’s get to it.
Whether You Love It or Hate It, You’re Missing What Really Matters About Bitcoin
Uncle Sam, the Bitcoin MogulDoug French, Contributing Editor
The US federal government may be ladling on more regulations to Bitcoin and making disparaging comments about the cyber-currency, but it’s one of the largest holders of the virtual money in the world.
The federal government has trashed Bitcoin by way of an investor alert from the Financial Industry Regulatory Authority (FINRA) entitled “Bitcoin: More than a Bit Risky.” FINRA said it issued the alert to caution investors that buying and using digital currency, such as Bitcoin, carries risks. Speculative trading in bitcoins carries significant risk. There is also the risk of fraud related to companies claiming to offer Bitcoin payment platforms and other Bitcoin-related products and services.
The financial watchdog warned investors that Bitcoin wasn’t legal tender and therefore, “If no one accepts bitcoins, bitcoins will become worthless.” Trading platforms can be hacked, and transactions can involve fraud or theft. Digital wallets don’t guarantee safety like FDIC-insured banks. Property actually transfers in a Bitcoin transaction, so refunds are at the discretion of the seller. Bitcoin has been used in illegal activity because of the anonymity it offers. And finally, speculation in the cyber-currency makes the price volatile.
Uncle Sam: Second Largest Bitcoin Holder
With all that, the government must figure Bitcoin is worthless, right? Well, no. Readers may remember an online marketplace called Silk Road that was seized by the US Marshals Service (USMS). Bitcoin was the coin of the Silk Road realm, and the US government went ahead and auctioned roughly $20 million of the cyber-currency seized from the online marketplace, despite the Silk Road entrepreneurs not yet having had their day in court.
Forty-five bidders registered to buy 29,656 bitcoins. Each ponied up a $200,000 deposit. Reportedly, 63 bids were received by the USMS, with the currency transferred to the winner after the 12-hour auction.
What’s curious is that a single anonymous bidder won the auction, beating out prominent investment firms, including Pantera Capital and SecondMarket. There was even speculation that the auction was a ruse and the government didn’t sell at all.
Either way, the government still holds 110,000 bitcoins, worth $55 million at today’s $500 per coin price, down considerably from $641 when the auction was held at the end of June. However, given that there are only 13 million or so bitcoins outstanding, the US government is the second largest single holder of this unregulated, potentially “worthless” digital currency (in FINRA’s words), that is used, again according to FINRA, in criminal activity.
Government Ignores the Warnings
Federal marshals evidently aren’t listening to Mark T. Williams, former Federal Reserve bank examiner and Boston University finance instructor, who wrote last December for Business Insider, “I predict that Bitcoin will trade for under $10 a share by the first half of 2014.”
The ex-bank examiner called Bitcoin a “wannabe currency” with a “flawed DNA” that is “steep in Libertarian and anti-Fed dogma but weak in understanding of how global economics, central banking policies, and financial markets function.”
Yes, Bitcoin was created by Satoshi Nakamoto (whoever that may be) in response to how badly governments have handled monetary policies. The PHDs running the world’s central banks are creating booms and busts and misery for millions, while destroying the value of their currencies in mere decades. Yet, Professor Williams has the brass to write, “To assume currency can be computer generated, run in a decentralized manner and outside of the central banking system and controls is farcical and economically dangerous.”
The Return of Money to the Marketplace
Bitcoin is merely the return of money to where it came from—the entrepreneurial marketplace. Money wasn’t a creation of government policy; it is an idea that was stolen by government in order to tax people covertly through inflation. What started with kings shaving and clipping coins, has become cruelly efficient, with central bank economists conjuring up money with computer keystrokes. The bother of paper and ink are no longer required.
People use Bitcoin because they want to; they use dollars because they have to. Government hates competition, so it prosecutes counterfeiters aggressively and takes a dim view of cyber money competitors.
Williams takes a swipe at the Winklevoss twins who have predicted Bitcoin will reach $40,000 per coin and who have a Bitcoin exchange traded fund (ETF) in the SEC’s approval process. Nasdaq Vice President of Transaction Services and head of ETF business, David LaValle, says about the proposed Bitcoin ETF:
I think it’s significant that we’re on the precipice of a new investable asset that’s coming to market or becoming available to investors first in the form of an ETF. In some ways, it gives the ETF credibility, and it accentuates many of the benefits of the ETF as an investment wrapper. To that extent, it’s important for the ETF industry.
He went on to say, “I think bringing it in an ETF wrapper gives bitcoins more credibility.”
Once upon a time, buying gold meant breaking the law. From 1933 to 1974, US citizens could only own up to $100 worth of gold. After 1974, buying gold meant searching for coins in out-of-the-way pawn shops and coin shops. Then in November 2004, the gold ETF (GLD) began trading on the New York Stock Exchange. The yellow metal was lifted from the investment shadows and rose in price from the mid-$400 range to $1,900 before falling back to where it is today.
Bitcoin Is Gold 2.0
Approval of the Winklevoss ETF will do the same for Bitcoin, which Chriss Street of the American Thinker calls “Gold 2.0.” Street points out that only 5.6 million troy ounces of gold have been mined, and Satoshi’s protocol allows only 21 million bitcoins to be mined. Street explains:
… by 2040 when the world population reaches 10 billion, there will only be 1 bitcoin for every 500 people on the earth. Gold and bitcoins are similar in lacking intrinsic value unless members of society have confidence they will maintain their value over time.…
The value of bitcoins and gold are rooted in their rarity, ease of handling, and inability of government to destroy its store of wealth…. Welcome to the true full-faith of Gold 2.0.
Recently, online travel agent Expedia began accepting Bitcoin, joining Dell, Overstock, TigerDirect, and other retailers. Flat 128, a retailer that sells British jewelry and accessories in New York’s West Village, just installed a Bitcoin ATM, where patrons can exchange cash for the electronic currency.
Flat 128’s owner says 15 to 20 people a day come into her store to use the ATM. “Merchants around the country say that the Bitcoin A.T.M.s are helping draw would-be customers, too,” writes Sydney Ember for the New York Times. “Some of those are in coffee shops, where the tech crowd and early Bitcoin adopters are coming in for beverages.”
This movement toward the cyber-currency flies in the face of what ex-bank examiner Williams wrote at the end of last year, “This is why in recent weeks, as large price movements have occurred, we have seen more credible retailers saying ‘No’ to Bitcoin.”
The government knows Bitcoin (or something like it) isn’t going away. The government just wants to tax it, or steal it when its functionaries can conjure up a crime.
If you don’t trust the dollar, and you shouldn’t, be like Uncle Sam: keep some money in gold and Gold 2.0.
Since Doug and I both dealt with Bitcoin this week, a few Internet and economic laughs seem fitting.
First, here’s the classic Internet cartoon:
That’s It for This Week
Have a great weekend, and remember to act on what you believe. There is no substitute for action. If you believe it, do it. Enjoy your Labor Day holiday; we'll see you back here on Tuesday.
Editor, A Free-Man’s Take
- Thu, 28 Aug 2014 06:18:00 +0000: Are We in a New Tech Bubble? - Casey Research - Research & Analysis
Dear Fellow Technophiles,
There has been a lot of chatter lately about markets being in the midst of a new technology bubble. Google News is full of stories on the subject. Large publications like the Wall Street Journal, Fortune, Network World, and the Guardian are posting stories about “bubble level” valuations for this or that company or market. The word is out there again in the zeitgeist. But are the whispered rumors true? I decided to dig into the numbers and get to the bottom of the question—you’ll find that below, the first in a series of short articles I plan to do on the subject.
However, if I can be afforded a brief aside for a moment… has anyone else noticed just how pushy Google is getting lately? I use Gmail and Google Calendar for all my email and scheduling—it’s not quite as useful as Outlook on the latter, but I greatly prefer its awesome threaded conversations (no more answering an email only to discover someone else already got to it), so I suffered through the weak calendar.
Then, suddenly, every time I scheduled an appointment in Google Calendar, it added a “Google Hangout” to the meeting invite. I never asked for that, and it just confused the heck out of people I was meeting with. Same for everyone in our company. A few guests each time mistook it for the real location, which is usually Skype, UberConference, or GoToMeeting (all far more useful), waiting on hold for a meeting that never existed to begin with. It was like automatically adding Google’s corporate office address to all my invites.
Where’d this idiotic feature come from? Google pushed it on all its users “to save time and reduce last-minute confusion and delays”. It’s been there for months now, annoying users around the world. This blogger said it best:
This is bullshit.
I’ve been using Google Calendar for almost a decade, and I’ve never forgotten to add a link to a service I’ve never wanted to use, but now Google is pushing Hangouts down our throats in Calendar we’re seeing real confusion.
Hundreds more are voicing similar complaints, and I can only imagine how many other users are quietly suffering the consequences or cannot figure out the source of the problems. The move stinks of desperation. Not changing course after such a backlash stinks worse. And making it so the individual user can’t turn it off (corporations like ours can do so globally, but that we even have to is a waste of time and energy) stinks three times over.
What a change in culture from “Do No Evil”—which has served as the company’s mantra from the beginning.
We discovered this feature shortly after half a dozen of us in the office were laughing at how Google Maps went from great to completely unusable in the last few months. If you think about it, though, the move fits the Google culture. The company oscillates between launching small projects with great fanfare and killing them if they don’t become market leaders (see Orkut and a dozen other projects it’s stamped out). Doing so would engender exactly this kind of behavior from employees—no one wants to see their own pet product as the next on the chopping block.
Nor is it uncommon to see companies making moves like this when feeling threatened, whether justified or not. Even when a company is practically printing money from its mainstay businesses (as Google does), it’s easy to start flailing around when it feels like your attempts to head off new threats or enter new markets seem to fail at every turn.
Sure, Google has found success in mobile with Android. But it did so just when the main function it made that investment to protect—search volume—is taking a back seat in time spent online to newer competitors:
Graphs like the above will keep Fortune 100 executives up at night. It clearly displays what may become a threat to their bread and butter, a really disruptive change that can make you start seeing boogeymen around every corner.
It might well be why Google is pushing Hangouts relentlessly.
It’s probably why the company is forcing users to sign up for Google Plus (“The social network no one uses”™) just to comment on YouTube.
And you can be pretty sure it’s behind the company making more than 25 acquisitions that we know of already this year, at a cost of over $10 billion. Even its acquisitions are making acquisitions. Nest, on which Google spent $3.2 billion in January, gobbled up glorified webcam maker Dropcam for another $550 million just a few months later.
If those numbers sound crazy to you, that’s probably because they are. But they don’t necessarily mean we’re in a tech bubble—that takes far more than one overly aggressive investor. So are we or aren’t we?
Tech Bubble 2.0? Not According to the Stock MarketAlex Daley, Chief Technology Investment Strategist
No, we are not in a tech bubble.
Simple as that.
This is not to say there aren’t some things for investors to take heed of. But as the definition of bubble goes, all the telltale signs are missing.
As investors, our job is to predict the future. Seriously. Each time we make a bet on a particular investment, we’re essentially postulating a thesis about how the future will unfold in that specific instance.
Since we also intensively study our markets, we often cannot help ourselves when it comes to predicting big macroeconomic events. Like bubbles. Just search Google News for the word “bubble” and you’ll find—mixed with the occasional article on the Dodgers’ odd homerun celebration tradition—dozens of articles on market bubbles with one bias or another.
And, thanks to the bull run we’ve seen in the overall stock market and in technology stocks in particular over the past five years, the vast majority of the commentary recounts just how well stocks have performed, followed by a pronouncement that it cannot last.
Most of us were stung by the market run-up from 2002 to 2007, which ended in a downright brutal slap to the face with the credit crisis. So it’s easy to understand why people are worried about any good thing lasting too long. That’s called recency bias—seeing a pattern of what happened last in what’s happening now, regardless of the reality. It’s a natural evolutionary byproduct to fear more of the same danger.
Instead, any good analysis has to start not with a feeling, nor with looking backward at a situation that may not be comparable, but at the here and now. Is this market fairly valued, frothy, or downright bubblicious?
The Public Markets Are Frothy… Sort Of
Defining what exactly it means to be in a bubble is a difficult job, even if you apply advanced metrics. Just how far and how fast does an index have to rise to constitute a bubble? Hard to say. Hundreds of pages of academic journals have been dedicated to the subject, with little or no consensus.
Yet we know a bubble when we see one, at least in retrospect.
Like this one:
The New York Times’ Bill Marsh and Yale’s Robert Shiller showed just how out of whack the housing market got in one simple graph. Pretty easy to spot the bubble there, isn't it? And to see just how far things had to fall to get back to “normal.”
Yet who was drawing this graph in ‘06? Anyone could have. (Okay, shameless plug: Casey Research did.) But back then, according to the mainstream financial media, housing prices were going to rise forever; every American could become a proud homeowner. Had they simply looked at the data though, it could have been clear that that wasn’t true.
The point is: without the benefit of some shared agreement on what is normal, knowing when you’re in a bubble is damn near impossible. You have to have some agreed-upon measure of normal to know if you’re abnormal, after all. Thankfully, investment markets agree on lots of such things.
So, just how does the current valuation of the Nasdaq Composite Index, a widely used barometer for technology stock performance, compare to its previous bubble? Many observers decry the fact that the Nasdaq is edging very close to its bubble peak price once again:
Seems really similar, doesn't it? However, if we look at a different measure—the price/earnings ratio of the Index—we get a very different picture.
While our orange line (the price of the Index) is just about at the bubble’s peak height, the P/E ratio delineated by the blue line is not. The difference between then and now should be obvious—the price paid for profits is many-fold lower now than at the bubble’s peak
The price of the biggest tech stocks in the world have moved up in tandem with increased earnings, one universal measure most investors agree on. In other words, the rise is justified. It’s not some George Gilder-fueled pipe dream of lasers shooting between buildings (tip: they don’t work in the rain) or a pitch book that has every UPS truck carting around thousands of pounds of pet food.
However, we want to err just a bit on the side of caution here. Let’s look a little closer at the tail end of that graph. It does paint a crisper picture of where we are today.
As you can clearly see, even though it is nowhere near the highs of the dot-com bubble, the P/E of the tech market has been steadily rising for three years straight. It’s now far above the long-term average of 17, which it crossed in 2011 on the way back up from the lows of the crash, halfway through this recovery period. This means that a large part of the rise in the Nasdaq is speculation that earnings will increase, but that have so far failed to materialize.
Over 80% of the gains posted in the last year are from this expansion of the P/E multiple. That’s a problem going forward. The trend is simply not sustainable; it must eventually shake out and reverse.
The Nasdaq is more highly valued than it has been in the last few years and is probably in need of a correction. But we’re still not talking the kind of reset required in 2000 in tech stocks, or 2007 in housing. This is not a bubble—but the market is notably frothy. If earnings don’t start catching up to valuations soon, we could be headed for a bit of trouble.
This is the first in a series of articles on the tech bubble topic. Stay tuned to www.caseyresearch.com for the follow-ups.
- Wed, 27 Aug 2014 06:16:00 +0000: Dimes on Black and Dynamite on Red - Casey Research - Research & Analysis
Let’s play a game. Here are the rules: flip a coin. If it comes up heads, I’ll pay you $1.Tails, you pay me $5.
Of course not. No one would play this game. Yet stock market investors are unwittingly playing a game just like it today, according to Hussman Funds Manager John Hussman.
John believes that at today’s lofty prices, the US stock market is worse than overvalued. It’s a speculator’s nightmare: minimal upside with retirement-ruining downside. His advice is to sell your stocks and wait for the stock market to revert to its mean, as it always does.
Below, you’ll find John’s latest analysis—including the clues he’s looking for that will warn when a stock market decline is not just inevitable, but imminent. You can find more of John’s analysis on his Fund's website.
Before I sign off, one quick announcement: time is just about up to register for our Thriving in a Crisis Economy Summit at the discounted rate. The Summit is in San Antonio on September 19-21, and will feature an all-star faculty including Alex Jones, Doug Casey, Charles Biderman, Lacy Hunt, and Mish Shedlock. Click here to see the rest of the faculty and to sign up.
Hope to see you in San Antonio!
Managing Editor of The Casey Report
Dimes on Black and Dynamite on RedJohn Hussman, President, Hussman Investment Trust
The stock market is presently a roulette wheel with dimes on black and dynamite on red. We continue to have extreme concerns about the extent of potential market losses over the completion of the present market cycle.
At the same time, we have very little view with regard to short-term market action. If one reviews market action surrounding major pre-crash peaks such as 1929, 1972, 1987, 2000, and 2007, you’ll observe a sort of “resilience” in the major indices on a day-to-day and week-to-week basis even after market internals had already corroded. In 1987, for example, the break following the August bull market peak was largely recovered over the course of several weeks before failing rapidly in October. In 2000, the market actually experienced a series of 10-12% corrections and recoveries before a final high in September that was followed by a loss of half the market’s value. In 2007, the initial break in mid-summer was fully recovered, with the market registering a fresh nominal high in early October that marked the end of the bull market and the start of a 55% market collapse.
As economic historian J.K. Galbraith wrote about the advance leading up to the 1929 crash, the market’s gains “had an aspect of great reliability… Indeed the temporary breaks in the market which preceded the crash were a serious trial for those who had declined fantasy. Early in 1928, in June, in December, and in February and March of 1929 it seemed that the end had come. On various of these occasions the Times happily reported the return to reality. And then the market took flight again. Only a durable sense of doom could survive such discouragement. The time was coming when the optimists would reap a rich harvest of discredit. But it has long since been forgotten that for many months those who resisted reassurance were similarly, if less permanently, discredited.”
None of this implies that the market will or must collapse in short order. Stocks remain strenuously overvalued, overbought, and overbullish, but those conditions have persisted uncorrected much longer in the present instance than they have historically. That doesn’t encourage us to abandon our concerns, but it does make us less aggressive about investment stances that rely on any immediate unwinding of what we continue to view, along with 1929 and 2000, as one of the three most reckless equity bubbles in the historical record.
Our perspective is straightforward: on the basis of measures that have been reliably correlated with actual subsequent market returns in market cycles across a century of data, we estimate that the S&P 500 Index will be no higher a decade from now than it is today. On the basis of nominal total returns (including dividends), we estimate zero or negative returns for the S&P 500 on every horizon shorter than about eight years. See Ockham’s Razor and the Market Cycle for a review of the total return arithmetic behind these estimates, and Yes, This Is an Equity Bubble for additional background on our present concerns.
At the same time, we don’t have strong views about immediate market prospects. Still, even a run-of-the-mill completion to the present market cycle would wipe out more than half of the market’s gains since the 2009 low, so whatever gains the market experiences in the interim are likely to be transitory, and few investors will retain them by exiting anywhere near the top. Frankly, we doubt that the present cycle will be completed with the S&P 500 even above 1,000 (a level that we would associate with historically normal subsequent total returns of roughly 10% annually). We readily accept that 3-4 more years of zero interest-rate policy would justify market valuations 12-16% above what would otherwise be “fair value” (see Optimism vs. Arithmetic to see why), but we also recognize that the vast majority of bear markets have overshot to the downside. In short, an informed view of market history easily admits the likelihood that the S&P 500 will lose half of its value over the completion of the present cycle.
We could certainly observe very constructive or even aggressive opportunities without that outcome. Those opportunities are most likely to coincide with a material, if less extreme, retreat in valuations, coupled with an early improvement in market internals. But here and now, we don’t observe any investment merit in equities, and with market internals deteriorating, any remaining speculative merit has also receded quickly.
As I emphasized last week, “While we’re already observing cracks in market internals in the form of breakdowns in small-cap stocks, high yield bond prices, market breadth, and other areas, it’s not clear yet whether the risk preferences of investors have shifted durably. As we saw in multiple early selloffs and recoveries near the 2007, 2000, and 1929 bull market peaks (the only peaks that rival the present one), the ‘buy the dip’ mentality can introduce periodic recovery attempts even in markets that are quite precarious from a full cycle perspective. Still, it’s helpful to be aware of how compressed risk premiums unwind. They rarely do so in one fell swoop, but they also rarely do so gradually and diagonally. Compressed risk premiums normalize in spikes.”
Those spikes will make it quite difficult to exit in the nice, orderly manner that speculators seem to imagine will be possible. Nor are readily observable warnings (beyond those we already observe) likely to provide a clear exit signal. Galbraith reminds us that the 1929 market crash did not have observable catalysts. Rather, his description is very much in line with the view that the market crashed first, and the underlying economic strains emerged later: “the crash did not come—as some have suggested—because the market suddenly became aware that a serious depression was in the offing. A depression, serious or otherwise, could not be foreseen when the market fell. There is still the possibility that the downturn in the indexes frightened the speculators, led them to unload their stocks, and so punctured a bubble that had in any case to be punctured one day. This is more plausible.
“Some people who were watching the indexes may have been persuaded by this intelligence to sell, and others may have been encouraged to follow. This is not very important, for it is in the nature of a speculative boom that almost anything can collapse it. Any serious shock to confidence can cause sales by those speculators who have always hoped to get out before the final collapse, but after all possible gains from rising prices have been reaped. Their pessimism will infect those simpler souls who had thought the market might go up forever but who now will change their minds and sell. Soon there will be margin calls, and still others will be forced to sell. So the bubble breaks.”
- Tue, 26 Aug 2014 06:23:00 +0000: Canada Is Back in Black - Casey Research - Research & Analysis
The unconventional technologies that have unlocked the oil and gas within the Western Canadian Sedimentary Basin (WCSB) will bring profits to companies operating there as long as West Texas Intermediate (WTI) oil prices stay above US$85 per barrel and natural gas prices remain above US$4 per million cubic feet (Mcf). We see the best of these companies having a great run for at least the next 12 months.
The WCSB encompasses some 1.4 million km2 from British Columbia and the Northwest Territories in the north to Manitoba in the south of Canada.
Reason 1: The Weak Canadian Dollar
The Canadian dollar continues to weaken against the US dollar; we predict this trend will continue throughout 2014 and 2015. The Bank of Canada is in no rush to increase interest rates. Its latest Monetary Policy Report declared a “lower Canadian dollar should provide additional support” to the economy, which is certainly true for the WCSB. In fact, for every 10 cents the CAD weakens relative to the USD, the cash flows of exploration and production (E&P) companies increase by 15%.
Reason 2: Drop in Oil Price Differential
The heavy oil in western Canada is priced as Western Canadian Select (WCS), comprised of heavy conventional and bitumen crude oils that are blended with diluents. WCS is exported from Alberta south to the United States for refining.
Currently this oil trades for around 15% less than the lighter, sweeter WTI: US$83 per barrel (WCS) versus US$99 (WTI) on May 5, for example. But this differential will narrow if refining capacity of WCS opens up.
There are two ways this can happen: increasing the amount of WCS that can get to refiners; and increasing the amount of product refiners can generate.
Both of these developments are happening. We’re pretty convinced that the Keystone XL pipeline will be approved; but even if it’s not, rail capacity is ramping up rapidly to get WCS to transport heavy crude to refiners. Rail’s current capacity of 150,000 barrels of oil per day (bopd) is expected to reach 800,000 bopd by 2015; companies that can take advantage of this spike could increase netbacks by more than C$10 per barrel.
The sixth new coke drum is lowered into place at the BP Whiting refinery (courtesy nwibq.com).
Second, in the next year, 330,000 bopd of heavy oil refining capacity is expected to come online from the coker expansion underway at BP’s Whiting Refinery on the southern shore of Lake Michigan (see above). There’s also excess refining capacity along the US Gulf Coast due to the decrease of heavy oil production in Mexico and Venezuela.
All these factors mean the price differential between WCS and WTI will narrow, increasing the profit of many Canadian players.
Reason 3: Canada Will Find New Customers for Its Oil
The United States has traditionally depended on Canada for much of its energy needs, and Canada depended on the United States as a friendly export market. However, this relationship is changing. With newfound oil sources in the US and the continued controversy and delays over Keystone XL, Canada is looking to hedge some of its risk by shopping its oil elsewhere.
Suncor (SU.TO) is currently building an offloading terminal on the St. Lawrence River, for instance, looking to follow the lead of Husky Energy (HSE.TO), which now exports to India from offshore eastern Canada. Crescent Point Energy (CPG.TO) is following Husky’s and Suncor’s diversification efforts.
On the West Coast, Imperial Oil (IMO.TO) is selling oil from its Kearl oil sands project to Malaysia. IMO transports it from Alberta southwest to the Vancouver port via the Trans Mountain pipeline. Builder and operator Kinder Morgan (KMP) is looking to increase capacity of the 60-year-old pipeline as much as 12 times, to 600,000 bopd.
Then there’s the proposed Northern Gateway pipeline to also transport heavy oil from Alberta to British Columbia coast, this time more due west to Kitimat for shipping to Asian markets. Like Keystone XL, construction of Northern Gateway is meeting a lot of opposition—and like Keystone XL, we think it will get built anyway.
In short, Canada is finding eager customers for its oil with or without the United States.
Reason 4: Technology Is Bringing Faster Profits
Geologists consider the WCSB mature as far as conventional drilling is concerned—meaning most of the easy oil has already been pumped from the ground. What’s the game-changer now is unconventional technology—everything from horizontal (versus vertical) drilling to multiple wells branching out from a single well pad.
Thanks to drilling achievements like longer horizontal bores, it’s taking less than nine months for many projects in the WCSB to recoup their costs. That’s good for two reasons: production brings in profit sooner, of course; and it also means the typically dramatic decline rate in production is less of an issue.
Newer technologies such as zipper fracs—working two wells alternately from the same pad—are proving to increase initial production as well as speed up the payback period even more.
The net result is lower-cost penetration in the WCSB. That’s bullish for the oil producers with the right acreage in the oil patch. Those are the ones more likely to pass on their profits to shareholders in the form of dividends.
In a global market where investors are chasing yield, the WCSB is turning out to pay respectable yields at current natural gas and oil prices. But buyer beware: not all companies are the same, and many companies we’ve researched will have a difficult time maintaining their high yields.
(If you’re interested in higher-risk/higher-reward mid-tier producers as well as large-cap companies, you may want to consider subscribing to our more in-depth newsletter, the Casey Energy Report. Two of the WCSB recommendations in our CER portfolio have done very well the past six months.)
Reason 5: Natural Gas—WCSB’s Add-On Value
The US bonanza in natural gas supply that resulted from the shale revolution hasn’t stopped the recent rally in North America’s natural gas prices.
A cold winter and late-season snowstorms in the United States has depleted inventories. At 822 bcf (billion cubic feet) at the end of winter, total US inventory was 878 bcf less than last year and 992 bcf (about 55%) less than the five-year average. It’s recovered somewhat—981 bcf as of April 25—but still has a lot of catching up to do.
Obviously, less supply means an increase in price. Canada’s gas benchmark AECO is expected to increase in price as well for the same reason. Storage levels in Canada are 60% below its five-year average.
Putting It All Together
For these reasons, we believe Canadian E&P companies have plenty of room to deliver exceptional shareholder value. As long as oil stays above US$85 and US$4 per Mcf, many companies in the WCSB will remain quite profitable, and their dividends will keep coming.
So here’s the obvious question: What companies will give us the best potential to profit from the upswing in the WCSB? Can we find US-listed companies that operates there?
In several of the preceding points, we’ve noted that existing infrastructure is key. Investors often steer clear of investing in WCSB companies because of past infrastructure restraints— that is, until now. What a pipeline can’t accomplish, rail can; refinery capacity is on the rise, and Canada is expanding its customer base. Put together, it means infrastructure is no longer a bottleneck for the WCSB.
Now for my shameless sales plug. In the Casey Energy Report, we have found companies whose stocks have gained +30% and have been paying industry-leading yields. To access that research and many other profitable opportunities, you can subscribe to the Casey Energy Report at no risk with our full money-back guarantee. If you don’t like the Casey Energy Report or don’t make any money over the first three months, just cancel your subscription and we’ll issue a prompt refund, no questions asked. Even after the initial three months, you can cancel anytime and get a prorated refund on the unused part of your subscription. Get started with the Casey Energy Report now.
- Mon, 25 Aug 2014 11:52:00 +0000: Must-Read Book of 2014 - Casey Research - Research & Analysis
We’re going to take a break this week from our usual fare of industry insight for metals and mining investors, pulling back for a look at the big picture. The biggest picture, in fact: the current human condition, within the context of all of history—and even prehistory.
This is the subject of our friend and fellow contrarian investor Bill Bonner’s new book, Hormegeddon.
The cryptic title, I must admit, is my second greatest disagreement with what I think is clearly one of the best and most important books written in many years.
It’s a clever combination of hormesis (the biological phenomenon of small doses of something being good for an organism while large doses are damaging or fatal) and Armageddon. The meaning being that our civilization suffers from too much of many good things and is headed for a catastrophic correction, if not complete collapse.
Whether one agrees with that conclusion or not, it certainly poses a question every thinking person should consider, and then plan to act accordingly—which dovetails perfectly with our views of gold for prudence and gold stocks for speculative profits.
But there’s an immediate benefit to reading the book as well: despite the rather sobering—if not horrifying—line of reasoning, the text is brilliant and very, very funny. If H. L. Mencken has an heir in our day, it may well be Bill Bonner.
Long ago, a friend suggested that I should start a daily email letter and build a huge mailing list, “like Bill Bonner’s Daily Reckoning.” My reply was that while I might have plenty to say, and have great confidence in my analytical skills and ability to deliver valuable information, I didn’t think I could deliver entertaining copy on a daily basis, as Bill has done for so many years.
In Hormegeddon, Bill continues that amazing track record, delivering page after page of informed, insightful, frequently challenging, and very humorous writing.
Let me share a few of my favorites:
Bonner’s Law: In the hands of economists, the more precise the number, the bigger the lie.
But there are those who believe they can make the right decision more right, or the poet more poetic. And while many of these snake oil salesmen content themselves with a quick buck and the next train out of town, some of them go for the long con. These are the central planners.
Constructing a public policy out of public thinking is like building a skyscraper out of marshmallows. The higher you go, the squishier it gets. Because the information blocks themselves are not solid. Instead, they are combinations of theory, interpretation, guesswork, spin, hunch and prejudice.
The trouble with The Economist, The Financial Times, the US Congress and most mainstream economists is not that they don’t know what is going on, but that they don’t want to know. It would be counterproductive. Nobody gets elected by promising to do nothing. Nobody gets a Nobel Prize for letting the chips fall where they may. Nobody attracts readers or speaking fees by telling the world there is nothing that can be done. Instead, they meddle. They plan. They tinker. Usually, the economy is robust enough to thrive despite their efforts. But not always.
Imagine that Warren Buffett moves to a city with 50,000 starving, penniless beggars. This is what economists would say about that city: “Stop whining...the average person in the city is a millionaire.”
In other words, there was so much fudge in the GDP figures that you could get tooth decay just looking at them.
Enough. I don’t want to spoil your fun.
It’s not all pointed levity, of course; there are charts and tables and many cogent arguments. Among the most striking of these was a chart on page 256, showing Zero Hour—the point beyond which every incremental dollar of US debt has no impact on GDP. That’s due to arrive next year. (Maybe the Mayans just missed it by three years.)
And Bill’s bottom line, while agreeing 100% with Doug Casey’s view, is anything but funny:
A blow-up in the US money will be felt around the globe. It will probably be the biggest public policy disaster of our lifetimes. What exactly will happen, and when it will happen, we will have to wait to find out. But it will be bad, that much is certain. We will hit rock bottom.
What about my other disagreement, besides the inscrutable title? With all due respect, I think Bill misjudges the economic (never mind social) impact of the Internet.
The Internet. A time waster, like television. Not a wealth booster, like the internal combustion engine.
What data supports this conclusion? Lackluster GDP growth since the Internet began its explosive growth. Aside from Bill’s own arguments that GDP numbers are meaningless, I would say that real economic growth, whatever it is, would have been much, much less than it has been since the advent of the Internet, were it not for this technology and the game-changing efficiencies it has, is, and will bring.
Which is not to say that the signal-to-noise ratio is not distressingly high, which I think is his real point.
At any rate, if we do differ on this matter, it is a small thing compared to the long-overdue and necessarily merciless analysis of the current human condition Bill has given us.
It’s a bonus that—at least for independent thinkers—the book is as fun as it is important.
I, at least, found it much more gripping than any novel I’ve read for years. Frankly, I had only intended to glance at it, but it sucked me right in.
So I do highly recommend Hormegeddon to all our readers. Just be sure you’re sitting in a comfortable chair, maybe with a drink and a snack at hand.
And fear not: We’ll be back next week with more coverage and analysis of metals and mining investments today. This week’s message is that Bill Bonner’s book provides ample support for our investment strategies.
Senior Metals Investment Strategist
Editor's Note: Louis James was asked to review Bill Bonner's new book, Hormegeddon, which he did--not realizing that Bill has much more to offer, including several free gifts and access to more of Bill's insightful thinking, going forward. Click here to find out more, or here to cut to the chase.
Rock & Stock StatsLastOne Month AgoOne Year Ago Gold 1,280.87 1,306.30 1,370.70 Silver 19.43 21.01 23.04 Copper 3.22 3.21 3.33 Oil 93.96 102.39 105.03 Gold Producers (GDX) 26.10 26.59 29.37 Gold Junior Stocks (GDXJ) 40.94 42.89 48.62 Silver Stocks (SIL) 13.44 14.16 15.66 TSX (Toronto Stock Exchange) 15,535.55 15,315.13 12,674.35 TSX Venture 1005.58 1,010.88 935.04
Gold and Silver HEADLINES
India Gold Smuggling Explodes YoY (Mineweb)
According to figures released by the Indian government, it intercepted $44 million worth of smuggled gold at the country’s airports between April and June. That compares with $82 million for the entire year ending March 31.
Last year, between April and July, the Mumbai airport customs had seized 61.46 kilograms gold, while this year it seized 403.52 kilograms. Customs officials at the Chennai airport in the South also reported seizing much more gold than last year.
Owing to the high import duty imposed last year on gold by the government to bring down the nation’s fiscal deficit, it’s clear that gold smuggling is rampant across the country. Imagine the endless flows of the yellow metal that do make their way across the border unhindered and your head may spin.
Did the Indian government really think they could stop a thousand-year tradition?
China is said to have allowed three more banks, including a foreign lender, to import gold, sources with direct knowledge of the matter told Reuters. The move comes as the world’s top gold buyer gears up for its strongest effort yet to gain pricing power of the metal.
This brings the number of firms allowed to import gold into China to 15, and comes ahead of the launch in September of a new international bullion exchange in Shanghai, with which China hopes to become a price-discovery center.
China and other Asian gold trading centers such as Singapore are calling for more localized pricing of the precious metal as they seek alternatives to the so-called London fix, the global benchmark for spot gold prices, which is under investigation by regulators on suspicion that it may have been manipulated.
Jeff outlined a couple weeks ago what other steps the Chinese might be undertaking to build up their gold reserves.
Based on World Gold Council statistics as published in its quarterly Gold Demand Trends reports, central banks have been buying at a higher rate this year than last, with a reported 240 tonnes purchased in the first half vs. the 180 tonnes the same period a year ago. One has to bear in mind that these figures exclude any purchases China may have made to boost reserves.
The biggest recent buyer, based on published data, has been the Russian Federation, reported to have increased its holdings by a further 9.33 tonnes, following an 18.6 tonne increase in June. This pushes its total gold holdings above 1,100 tonnes. Russia now has the world’s fourth-largest national official holdings (excluding the IMF), yet it still falls substantially behind the US, Germany, Italy, and France.
We can’t help but wonder… how much gold do the Chinese own now?
Recent News in International Speculator and BIG GOLD—Key Updates for Subscribers
- One of our favorite gold exploration teams reported some early-stage drill results, which are extremely encouraging since they’re in one of several targets located in a major mining area of Quebec.
- This Canadian-based producer just announced some intriguing quarterly results, the importance of which the market has not yet grasped, giving us a clear opportunity. With this company, however, high-margin production takes a backseat to the discovery potential—if just a couple of the company’s 15 exploration targets work out, it should take these shares to a whole new level.
- A number of BG companies have released quarterly reports—stay on top of your stocks by checking the latest important news and our comments.