TradePlacer.com Blog - oil tag

9 Market Predictions for 2011

Mon, 10 Jan 2011 19:26:00 GMT

The bear market in bonds will be confirmed globally. While interest rates likely bottomed in 2010, a significant rise in rates during 2011 will confirm a bear market trend for smart money investors. This bear market will continue until the global currency market is restructured.

Precious metals will surprise on the downside in the first half and surprise on the upside in the second half. Gold will top $1650 and silver will top $50. This will confirm the third phase of the bull market in precious metals.

A return to the energy sector in a big way. Energy companies have disappointed since 2009 due to a softening in US demand and the BP disaster. Oil will exceed $100 and capital will start flowing into energy investments as it did in 2007 and 2008. Natural gas and alternative energy will also rebound.

Global stock markets will correct in the first half but end higher for the year. June and July will be a pivot point for stock markets. Capital flows from bonds to equities will accelerate and investors will begin to view the stock market as an inflation hedge rather than value proposition. The S&P 500 will top 1400.

Increase in political rhetoric and class warfare leading up to 2012 elections in the US. Capitalists will continue to increase their wealth while laborers in developed nations will suffer from stagnate wages and rising expenses.

QE3 will be announced at the rate of at least $100 billion per month. This will continue indefinitely in order to finance trillion dollar deficits.

The dollar and US investments will outperform other currencies for the first half of the year lead by a fall in the Euro. However, by the fourth quarter, the dollar will begin a slide to new lows as it becomes evident that the Federal government must bail out state and local governments.

A retirement trend will begin to become mainstream in baby boomers looking to reduce costs. Instead of taking on a second job to live in retirement, some will look to retire in cheaper counties. Mexico, Costa Rica, and Panama will be the primary beneficiaries.

Proposed tax overhaul including legislation for a VAT tax along with an extension in the reduction of social security taxes. There will also be additional capital controls and asset reporting legislation.

Can China and India Save the World?

Thu, 21 Oct 2010 19:59:00 GMT

A pillar in all bullish arguments for the global economy is that China and India will carry the weight of industrialized nations due to their insatiable demand for a better way of life. While they will certainly try, the risk of both nations hitting a wall is increasing as that insatiable demand consumes increasingly more resources.

Ignoring the rest of the world, The US, China and India are expected to increase their daily consumption of oil by almost 10 million barrels per day by 2025. Economic advancement over the last 150 years has been highly correlated with the consumption of oil and other fossil fuels. Without this increase in consumption of oil at low prices, the world will experience no growth. With such large populations, and leverage to energy consumption it is unclear if China and India can live up to their high hopes of leading the world out of the current global economic slump.

Global crude oil production peaked in 2005 and has plateaued at 74 million barrels per day. Global consumption took a small dip in the wake of the 2008 financial crises, however now that economies are recovering consumption levels are back on the rise. The result will be an inevitable rise in oil prices.

A $100 increase in the price of oil would cost an additional $3 trillion in direct consumption expenses globally - effectively reducing global GDP by 5.1 percent. While some of this wealth may be transferred to oil exporting nations, this is not a zero sum game. If oil shale or deep water drilling is used to replace current low cost supplies than oil producers will be spending nearly $100 in additional productions costs and realizing none of the financial gains to offset the losses from consuming nations.

Most developing nations that are driving global economic growth are highly dependent on energy consumption. Although The US, EU, and Japan consume large amounts of energy, these nations have less leverage to the price of oil in relation to their GDP. If the price of oil were to rise by $100, China would suffer from a direct 6 percent hit to their economy, and India would suffer from an 8 percent hit to their economy.

Another important consideration for countries is their foreign dependency on oil. While Russia has a high level of leverage in oil consumption, it is also a net exporter. As a result, Russian oil supplies are relatively secure. The two most vulnerable nations in the world to an oil shock are Japan and South Korea as they import more than 97 and 98 percent of their oil respectively. Both nations are also highly urbanized with very little arable land. These nations would not survive a halt in global oil trade. The EU, China and India are also highly dependent on oil imports.

Argentina and Brazil are in a unique position of being self sufficient in oil production and consumption. They also have vast amounts of arable land. As a result, they would be least affected by an oil shock.

Capacity of arable land is a strong indicator of potential for economic prosperity if energy prices spike because the arable land supports farming and food production.

Conclusion:

Japan is probably the most economically vulnerable nation in the world. Now that the US, and Europe, are also financially insolvent energy consumers, the world is turning to nations such as India and China to drive global growth. However, their large population and leverage to the price of energy create a situation of great risk. If peak oil is realized within the next five years, then growth prospects in India and China will be reduced drastically. The result will be negative global GDP growth and a reduced standard of living for virtually all nations.

South and Central American nations including Brazil and Argentina may have the best chances of coming out ahead as they are energy independent, have lower populations than Asia, and the most unused arable land.

Dow is Flat Since 1999, but Down Against Gold and Real Assets

Thu, 08 Jul 2010 13:02:00 GMT

Dust off your pom poms, the Dow has just crossed the 10,000 level to the upside. Most people aren't partying like its march 1999 though – when the Dow first crossed that level. It has crossed the same level more than 30 times over the last 11 years, and the same exuberance has worn thin.

Perhaps investors are less exuberant because the Dow today buys so much less than it did in 1999. Today's Dow 10,000 is worth less than 7,500 when factoring in the governments CPI index. Compared to the price of oil in 1999, the Dow has fallen to around 2,650, and compared to gold its worth only 2300. The Dow to Gold ratio has fallen from 37 to 8.

Not only has the Dow remained flat since 1999, it has lost anywhere between 25 and 80 percent of its value, depending on the comparison involved. The concept of compounding has remained the same, but now in reverse. Losses in both nominal and real terms compound to create larger losses.

While equities have not provided returns or protection from inflation over the last 11 years, commodities and other real assets managed to gain in value and have acted as a pillar of financial stability. Gold and silver have performed exceptionally well, and proven that it is possible to generate positive inflation adjusted returns in precious metals. In other words, gold and silver not only acted as a store of value, but also provided returns beyond that which can be discounted by a rise is prices or monetary supply. Make no mistake, over the long run precious metals are not expected to rise at a faster rate than inflation. However, buying precious metals at the right time and price can yield outstanding returns just as the Dow did from 1980 to 1999.

Where are we in this investment cycle? Gold and silver were considered too risky at 270 and 3. When they are considered no risk buys, then you can look for similarities to 1999 - and we are far from such sentiment.

BP Oil Disaster- Lies and Statistics

Sat, 12 Jun 2010 16:46:00 GMT

Nearing the 2-month anniversary of the BP Oil disaster, let's evaluate the current situation. BP initially claimed that 5,000 barrels per day were leaking, and recent estimates have been increased to about 40,000 barrels per day - every day for nearly 60 days now.

Every effort that BP has made to stop the flow has failed - proving that they had no viable plan to manage such a scenario. At this point the company's most likely successful solution will be to wait until August before another oil well is drilled which can relieve the pressure of the first.

Rather than create a solution for the problem, BP executives have focused on trying to talk their way out of the problem. BP has guaranteed to clean up the mess - which is clearly a lie. If with all their resources they can't stop an oil leak within a two month period - they will never have the competence or capability to actually clean up a layer of oil covering the bottom of the ocean floor. One of two things will happen first - either BP will enter bankruptcy protection, or they will lawyer they're way with the US government to limit its liability to a nominal amount following the path of Exxon after the Valdez spill in 1989. Unfortunately, in either case the living plants and animals of the Gulf will pay for it with their lives.

Energy expert and peak oil visionary Matt Simmons concurs, and is warning that the disaster is far worse than the media is projecting. He was recently quoted by Fortune in stating "They have about a month before they declare Chapter 11. They're going to run out of cash from lawsuits, cleanup and other expenses. One really smart thing that Obama did was about three weeks ago he forced BP CEO Tony Hayward to put in writing that BP would pay for every dollar of the cleanup. But there isn't enough money in the world to clean up the Gulf of Mexico. Once BP realizes the extent of this my guess is that they'll panic and go into Chapter 11."

The implications of the leak to the environment, economy, and political system are immense. The aftermath will likely be a halt to deep sea drilling in the Gulf of Mexico and potentially globally for the foreseeable future. This couldn't have happened at a worse time and will exacerbate the production decline of oil leading to an even more severe. The next time oil prices reach $150, supply shortages will likely be curbing industrial growth - putting a very real constraint on the global economy.

Because it takes a large amount of energy to produce real assets, the long term effect will an increase in the accumulation of hard assets such as gold, silver, and other collectibles.