Fisk this - Jack Straw on oil and Al-Megrahi

In the Telegraph and other papers:

Mr Straw also claims today that Mr Brown had nothing to do with his change of heart over the PTA [Prisoner Transfer Agreement], adding: “I certainly didn’t talk to the PM. There is no paper trail to suggest he was involved at all.”

Even if literally true, the above statement is consistent with the possibilities that:

- Mr Straw communicated via a third party with the PM on oil-for-Lockerbie-bombers (or, the PM raised the matter with others)
- Mr Straw communicated directly with the PM, but not through speech
- There were once paper-based records to show the PM's involvement, but they have been destroyed
- There were, or still are, records held in other form (e.g. email)

A good example of a "non-denial denial"?

Market support

Denninger:

... a handful of banks, most specifically Goldman Sachs, constitute the majority of NYSE trading volume... This "back and forth trade" between a handful of institutions is nothing more than the old "pump and dump" game that has been played in the OTC market forever - and almost always screws the individual investor.

This is no different than you and I selling a house back and forth between us repeatedly, each time at a higher price. We both appear to be geniuses as we're both making a "profit", right?

Well, no. One of us is destined to take a horrifying loss if we do not find a sucker to make the final transaction with.

I wondered what was keeping it all up. And sooner or later...

P.S. Rob Kirby strongly suspects that similar manipulation is going on in oil and gold - one kept up, the other down. (For an update on the latter, click on the goldcam.)

Global monetary inflation and the threat to peace

Last week, I suggested that we could be entering an era of competitive currency devaluation. Now, Mish sees it happening in Russia, Mexico, Indonesia - and hints of intervention in Japan. The Canadian National Post predicts a drop in the US dollar, too (htp: Jesse).

Can the Euro -already strained by member countries moving in different directions - take this pressure? A friend told me recently of an old restaurant incident involving people he knew, where first one "did a runner", then another, so that the last man left at the table was stuck with the whole bill. This is a game that punishes the virtuous.

Gold is supposed to be a haven in such conditions, but is already above its long-term post-1971 trend, as I show here. So the bold investor might buy in now, knowing it's high but hoping it'll go higher (or fearing that other things will go lower still). Others say silver, or oil, or agricultural land. "The best lack all conviction, while the worst / Are full of passionate intensity."

These are tricky times. As in revolutions generally, it's hard to see which faction will be victorious, but loss, injustice and confusion are certain: "we are here as on a darkling plain / Swept with confused alarms of struggle and flight / Where ignorant armies clash by night."

This may seem over-dramatic; but when money ceases to be dependable and deadly dull, everything else becomes much too exciting. If the middle classes suddenly find their savings wiped out by inflation, their assets generally devalued and their businesses and employment under threat, watch out.

Deflation hasn't happened yet; interest rates to rise, eventually

Jesse argues that we're not yet in a deflation, technically speaking; it's "the transfer of wealth from one asset class to another". So the money is merely changing pockets.

But after that, he expects (as I suggested yesterday) gold to rise sharply: "the move in gold will obtain explosive momentum from which a major rally leg will occur as the banks lose control." The euro, too, he thinks; and oil will stay high. So he concludes that when the pent-up liquidity starts to flow in the system, the US will have to raise interest rates to prevent a relative decline in the dollar.

End of the dollar as the world's reserve currency?

See the comment in Brad Setser's blog - Brazil and Argentina are already finding other ways to pay each other, Russia may deal in euros... if no-one wants the dollar after Jesse's predicted devaluation, it may go from devalued to almost worthless.

But what will countries do, that export to the USA? Devalue their own currencies? Or demand payment in euros? Or oil contracts? Even Setser admits to struggling to understand what's going on.

Jesse also comments on a report that the Gulf States may diversify into gold.

Shale oil - are we ready for it?

After the recent oil price rises, is shale oil now economically viable, or not?

The big one is yet to come

Karl Denninger gives his interpretation of recent events: hedge funds have been caught out badly betting against oil and the dollar, and the frantic unwinding hit gold. His prognosis is that sooner or later all the over-borrowing is going to take its toll:

There is a "supercritical" point where all asset values will get hit at once, unless the process runs to exhaustion first, and I don't think there is a snowball's chance in Hell that it will.

Meanwhile, keep your money safe.

Are oil speculators to blame?

Russell Roberts at Cafe Hayek discusses a spam email from United Airlines, which blames speculation for much of the high price of oil. Naturally, he puts on his quizzical econ spectacles and says it's like blaming a thermometer for hot weather; but maybe that's just a bit too sideways.

For isn't it interesting that in 20 years, the proportion of oil contracts purchased by middlemen who don't deliver, has risen from 21% to 66%?

And isn't there a big Space Hopper of excess liquidity squmphing around the world's markets and destabilising them, as Dr Marc Faber claims? Indeed, Faber has spent years making money from predicting the future movement of this excess. In an interview on "Financial Sense" on January 12, Faber said:

... we had during the excessive consumption period 1998-2006, a current account deficit in the US that increased from 2% of GDP to over 7% of GDP, and at the end was supplying the world with $800 billion annually. And this river flows into the world through the American current account deficits, and essentially provided the world with the so-called excess liquidity and created booms in everything from art prices to commodities, stocks, bonds, real estate, what not.
I suggest that now that the Space Hopper has been punctured, the speculators riding it have been squmphing around even faster, trying to visit as many markets as they can before their toy goes totally flat.

Commodities fall needed to rescue share prices

Bill Cara: "the new reality today is that Crude Oil at about $90-$100 and Gold at $820 is required to stave a total collapse of securities prices across the board. If that’s what the authorities want, ultimately that’s what they will get."

Mr Cara is also expecting many banks to fail.

Plodding On

Lead story in The Grumbler today: "Police are forced to cut frontline jobs to save on fuel cost".

Of course, there's always foot patrols. Peter Hitchens has often pointed out the usefulness of walking the beat in preventing crime. It all went wrong in the Sixties. As J. B. Morton wrote in his fantasy-satirical "Beachcomber" column in the Daily Express at that time:

"A Dictionary For Today

...FLYING SQUAD: A special contingent of police whose business is to arrive at the scene of a crime shortly after the departure of all those connected with it."

So much for the pale blue Ford Anglia and the comical attempt to imitate American cops as portrayed in shows like "The Streets of San Francisco."

I had to trawl around to find what I remembered as the origin of the term "bobby on the beat", but here we are at last:

"A standard piece of police equipment from the 1830's to the 1880's was the rattle for raising the alarm, most operated like the standard football rattle, when twirled round it made a distinctive sound. In the 1880's the police began using a whistle in place of the rattle, early versions used the 'pea' type (still used by football referees) but in about 1910 the more familiar tubular 'air whistle' was invented. The whistle was carried inside the front of the tunic or jacket attached to a silver chain which was fastened to a button on the front of the tunic. When breast pockets appeared the whistle moved to the right hand pocket with a silver chain still attached to the jacket button. In practice the whistle was found to have limited range and a bobby calling for assistance would often beat his truncheon on the pavement to alert nearby colleagues. Police personal radios appeared in the 1970's and some forces had lost their whistles by the 1990's but other forces felt it was a part of the uniform and have retained it."

(Source)

And it worked. So instead of moving forward to the world of "1984" or re-creating the secret police of the Austro-Hungarian Empire, why don't we build on the notion of "Police Community Support Officers" (or "The Ankh-Morpork Watch" as my wife calls them) and revive the Watch as it was up until the early nineteenth century? The roots of our police force are in the citizens' right and duty to maintain order in their own communities. As motorised mobility for the peasantry declines, crime, its detection and punishment may well become localised again.

And a reduction in sophistication would be appropriate. The old police recruitment poster said "Can you Read? Can you write? Can you fight?" - not, "Can you gobble the punter's biscuits and swill his tea while expressing sympathy for his unfortunate experience and sharing his frustration at the powerlessness of the criminal justice system?"

Oil: back to the Seventies

Found on InflationData.com

Unbidden, The Time Warp came to me (though I had thought the word "shimmy" appeared in the lyrics). And, of course, as usual, the Brits manage to get themselves into a worse pickle:

Found on Mish's.

What oil hike?

The Mogambo Guru (too long absent from these pages) points out that a major factor in the increase in the price of oil, is simply the decline in the dollar. We here in the UK don't see it, because the pound is staring the dollar in the eye as both go screaming parachuteless towards the ground.

At least Richard Daughty is one who will not go gentle into that good night.

Now, isn't this what happened in the Seventies? Only we were conned into thinking it was down to wicked Arabs, when really the story was increased monetary inflation for some years pre-1974.

Stock up your larder

Reading "The Grumbler" today, I was struck by Rosie Boycott's article on our vulnerability to oil and food shortages, particularly now that so much of our food supply is dependent on the supermarkets' just-in-time logistics.

I believe the Mormons have a rule that members of their church must have 12 months' security set up for their families - I remember an old colour supplement article with a picture of a Mormon sitting on a year's supply of baked beans. Doesn't seem so daft now - and it's worth remembering why landlocked Utah is the Seagull State.

More generally, there is now a feeling that the government has failed to prepare for material and financial shocks. Genesis 41 has been obscurely referenced by George Osborne ("Our competitors used the fat years to prepare for the lean years"), though back in 2002 Treasury Committee member Dr Nick Palmer was using the same analogy, but in Gordon Brown's favour ("in the first years [Gordon Brown] repaid a lot of government debt so as to give us a really strong basis for difficult times as and when they arose").

On the financial front, I think the government cracked in 2003, when extra liquidity (simplified graph here) began to be released into the system, over-hydrating the housing market. Radix malorum est cupiditas, and that applies here if you interpret "cupiditas" in the general sense of over-attachment to worldly things, especially to power and its accompaniments.

The Oil Controversy

Tom Bower pooh-poohs "Peak Oil" claims in the Daily Mail, saying there's several times more to come out of the ground than has ever yet been extracted. His book on the subject is due out soon.

I should like to see what energy commentators like Nick Drew wish to say to this. From what I've read, remaining oil stocks are likely to be of lesser quality and will cost far more to extract than God's gift to the Saudis (which, I understand, is already being exploited at a rate that is damaging the field).

Granted, oil is massively over-taxed. Americans would head for their gun rooms if they had to pay £5 a gallon.

Meanwhile, the FTSE continues to float cheerily above 6,000 and the Dow above 12,000 - for how much longer?

Oil to crack the dollar?

Nathan Lewis reminds us how, when President Nixon cut the dollar's link to gold in 1971, OPEC protected the real value of its oil with price rises (thus earning a reputation for having caused our inflation).

Now that the gold dinar has been introduced in Malaysia, Lewis wonders whether the dirham should link to gold, too, so oil exporters can avoid being robbed by a falling dollar.

Brownouts and lines at the gas station again, perhaps.

Killer greens

Stuart Staniford takes a point I've read recently in Vernon Coleman's "Oil Apocalypse", about biofuels threatening food supplies for the world's poor, and extrapolates frighteningly:

... both oil and cereals are global commodity markets. If it's profitable to make food into fuel in the US, even without a subsidy, then it's profitable elsewhere also - possibly more so given lower labor costs. So the basic growth dynamics are the same. The infection just hasn't got as strong a grip on the whole globe yet, but it's growing at similar rates.

... I expect oil prices to increase in the medium term, though certainly they could go down in the short-term if the credit crunch affects the global economy enough.

... When we have a bidding war between the gas tanks of the roughly one billion middle class people on the planet, and the dinner tables of the poor, where does that reach equilibrium?

... We noted earlier that according to the UN about 800 million people are unable to meet minimal dietary energy requirements. That is 12% of the world population. [...] we can estimate that a doubling in food prices over 2000 levels might bring 30% or so of the global population below the level of minimal dietary energy requirements, and a quadrupling of food prices over 2000 levels might bring 60% or so of the global population into that situation.

Measuring relative value

Fiat currency is elastic - it stetches and contracts according to the demand for, and supply of, credit. So it is an unreliable tool to measure the value of anything.

George Kleinman addresses this problem and suggests a relativistic approach: compare the historical price ratios of different asset types. He admits that you can play this game forever, but it's not his fault that governments have corrupted our traditional yardstick. All you can hope for is some sense of trend, which is what all this rune-reading is for, anyway.

His conclusions: gold looks undervalued against oil, and not overvalued against either the Dow or silver. His trend feeling: a coming economic and stockmarket downturn.

Financial Sense may be run by investment advisers, but I feel their commitment to public education goes well beyond self-interest. It's a sort of University of the Air.

Much to discuss

(Daily Mail story)

"Business was off the agenda" said the Telegraph yesterday, about the Saudis' visit to Britain. I'm not so sure: somewhere in that 22-car convoy there may be a Saudi who had quiet talks with his opposite number about economic matters, while King Abdullah distracted the cameras.

Alex Wallenwein in SafeHaven yesterday reminds us that a month ago, the Saudis refused to cut rates to match the US. He sees the dollar's resistance to collapse as having bought time for European and Eastern economies, and the Euro currency, to strengthen their position. Soon, it may be takeover time, and contrarians who expect the dollar to bounce back may find that the trampoline has been whisked away.

Puplava: this isn't the big one

I'm a bit behind on my listening to Financial Sense Newshour, but as ever, the issues we're talking about aren't momentary. Jim Puplava's view (8 September) is that this crisis isn't the big one: the US will reflate its way out. It can't do that on its own without sacrificing the dollar, so (as has been happening for a long time) there will be cooperation with other nations' central banks. In effect, we are in an international currency inflation cartel, since no trading nation wants a hard currency that leaves its industries high and dry.

But, says Jim, the next recovery will be shorter, and the next fall back much worse. He sees this as happening around 2009/2010, which coincides with the time of Peak Oil, in which he is a big believer. That's when he feels the energy and credit crunches may come together. He sees gold and silver soaring to levels that currently seem fantastic.

For us ordinary people, that may be less interesting than the effects of energy shortage on our daily transportation and domestic heating.

Gold: a shell game without the pea?

If the gold bugs are right, why hasn't gold rocketed already? Maybe this presentation by Frank Veneroso, dated May 2001, explains it. It makes the case that there is more demand for gold than is officially recognised. This demand cannot be fully satisfied from the declining yields of gold mines, or reusing scrap.

Veneroso thinks that central banks have loaned out or sold much more gold than they admit. The World Gold Council states 30,374 tonnes in holdings (June 2007). This is down from the nearly 33,000 in mid-2001 when Veneroso was speaking, and even at that time he estimated 10,000 - 16,000 tonnes out on loan. Much of this will have ended up on ears, fingers and necks.

This theory of market intervention by surreptitious supply, implies that banks must eventually run down their stocks and be unable to continue with this tactic.

Veneroso speculated: "If the official sector is rational, it knows what will happen to the gold price when this large flow that is depressing the price abates and ultimately ends---the price will go up by a lot. Therefore, some rational central banks will not sell and lend down to the last ounce. Instead they will start to buy. So regardless of what has been happening in the gold market, if our data is correct, then, within a couple of years, whatever the official sector is doing, it will terminate and the gold price will rise."

His prediction was correct: gold has doubled in value since 2005. But as demand continues to grow over time, against a more limited supply, we should see further gold appreciation, which is what Marc Faber has predicted.

But some would go much further - Doug Casey, for instance. If we see the emergence of a very strong currency run by a country or cartel that controls a vital commodity like oil, the inflation in all fiat currencies will be cruelly exposed by contrast. Is it not possible that some might seek to use gold, in conjunction with other commodities, as an economic weapon?

And is it not interesting that the world's second largest gold hoarder, Germany, has disposed of hardly any of its stock in the last 7 years, when the average official reduction has been about 9%? Maybe Germany is taking a longer view and rather than buying gold, is being more discreet and simply not selling it. I wonder how much of its own stock Germany has loaned out?

UPDATE

Please see Monday's essay by James Turk, on Financial Sense. He thinks that the market must ultimately win against the official manipulators.