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View Full Version : You too can forecast recessions! Secrets revealed! Here’s how! - Eric Janszen



EJ
12-03-08, 04:11 PM
http://www.itulip.com/images/rearview.jpgYou too can forecast recessions! Secrets revealed! Here’s how!

Monday the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER) turned its keen analytical eye on the rear view mirror of the US economy and spotted a year off in the past the start of the recession in Q4 2007 that we spotted through the windshield a year before in October 2006 (see Recession Q4 2007 (http://www.itulip.com/forums/showthread.php?t=743)). What did we know that they didn't?

by Eric Janszen

Over the past few days we've received a pile of email from readers asking, how did you guys do it again? Do you have a time machine? Do you use astrology? Do you see the future as visions after swallowing a fist full of mushrooms with a pint of tequila? Not at all. You can forecast the economy, too, by following these four simple steps.

Step 1: Reject false premises. The major premise to rid yourself of is that you have to be some kind of analytical genius or mystic with a crystal ball to forecast the US economy. We have heard this over and over again, yet somehow since 1998 we have forecast two recessions and numerous stock market turning points accurately.

I wonder, is there a class that all business reporters and editors attend where they are taught to say, “You cannot forecast the economy. No one has a crystal ball” because I hear that exact phrase repeatedly, as if the economy is as inscrutable and mysterious as the Bermuda Triangle, its future as random as a winning lottery ticket and anyone purporting to be able to tell it is no more credible than an astrologist.

The truth is that in macroeconomics, as in many things in life, effects often follow from causes, and events logically from antecedents. The trick is to understand the antecedents and processes involved.

For example, if a household earns $4,000 a month from two incomes, borrows $1,000 a month, spends $5,000 a month, has $2,000 in liquid savings, then suddenly loses access to half the $1,000 in monthly credit, how many months will pass before the household runs out of money if it does not reduce spending or sell jewelry or other property to raise cash? (Answer: Four months.) How about if it loses access to both the total $1,000 of monthly credit and one of the two $2,000 monthly incomes? ? (Answer: Less than a month.) This is not rocket science. Now apply this equation to the 75% of US households that live this way -- without savings because they believed that home and stock price inflation was doing the saving for them and that a fresh source of credit will always be available once the last one dries up -- such as another cash-out refi boom. Now assume that millions of households in this bind in fact cut spending so that they can last longer than a few months, how much does that reduction in spending across all of those millions of households reduce the incomes of other households? Now estimate the timing of the inevitable crash of both housing and stock prices that must happen sooner or later to put all of these households into this hole and -- presto! You too have a “magic” crystal ball. But first you have to admit that these are the facts and that if you use them you can follow them to a logical conclusion.

Step 2: Do not listen to FIRE Economy economists. These are the economists who worked for the extended Wall Street financial products sales and marketing department also known as the Wall Street Journal, Barron’s, New York Times Business, CNBC, and FOX Business News, to name a few, at the time we made these forecasts. They have since reformed considerably, but back in the day when we were making our forecasts the consensus view was, expressed between ads for mutual funds and cash-out refinancings: “Nine out of ten credentialed, professional economists say, there is no housing bubble!” Following from that fallacy, naturally the consensus economists saw no chance of a recession after the collapse of the housing bubble that they claimed didn’t exist. According to the economists who appeared in the media frequently this past year, the housing market and stock market bubbles did go bust -- and of course they knew it was coming all along -- and of course it has bottomed. At last count, according to these guys, housing and stocks have bottomed at least fives times so far this year. Not coincidentally these optimistic economists often work for industry groups, such as the National Association of Realtors. Not that there's anything wrong with that.

If you made a forecast in 2006 that the housing market was going to crash and bring down the economy, you were viewed as outlandishly bearish and not credible. If you suggested then that venerable Wall Street investment banks were going to fail as a result of what we called Credit Risk Pollution, you were a complete nut. If you suggested that GSEs Fannie Mae and Freddie Mac had nationalization in their future, you were handed a tin foil hat. Why? You were not selling product: stocks and mortgages. Bad economist.

Who advertised on these shows and in these publications? Brokerages selling the dream of quick riches made by buying and selling stocks, investment banks pitching wealth management services with a heavy dose of stock mutual fund buy-and-hold religion, and mortgage companies hawking home loans on the premise that housing prices only rise and lead to inevitable wealth creation.

What a racket.

Step 3: Do your own primary research and analysis. The US government has its problems but lack of data on the economy is not one of them. The Bureau of Labor Statistics, Census Bureau, and the Federal Reserve are but three of many excellent resources.

Start from the bottom and work your way up, by industry, age group, state. Ask basic questions: Which industries are generating jobs and income? Where? How sustainable is the demand for the products and services that those industries produce or deliver after the Rube Goldberg credit system keels over?


http://www.itulip.com/images/permitshousingrecessions.gif


January this year, in charts that we use in our analysis to track the progress of the recession we began to draw in our own recession indicator, in pink shading, such as in the chart above from early 2008 generated from BLS data.


http://www.itulip.com/images/housingpermits1960-120308.gif
Chart created Dec. 3, 2008 from Economagic.com from BLS data


As of December 2, 2008, it’s official: the recession started in December 2007. Now the BLS data automatically include the recession information so the graphing software fills in the pink shading to indicate recession for us, as in the chart above. Thanks, fellas!

In retrospect, the forecast appears obvious. By combining various indicators, such as duration of unemployment, durable goods purchases, housing permits, and housing prices, and comparing these to historical trends, the start of the recession could be forecast a year in advance and confirmed after the start. Do your own independent research and analysis and you will come to the same conclusion.

Step 4: Stress test your theories. Develop a 10,000 plus member community of smart business people from all over the USA and globe and listen to them as they respond to your analysis and describe what they are seeing. We cannot always be correct right out of the chute, so an army of bright people correcting our errors helps us refine our theories. Trip reports over a period of years are especially helpful because they give a perspective on how economic conditions are changing.

Future Forcasts

Next you’ll hear FIRE Economy economists say, “We are in the worst recession since 1982” as if they’d been forecasting the recession all along and earned the right to continue to make forecasts. Then they will claim, “Like 1982, the recession will last about a year. We are through the worst of it.”

When you hear this prognosis note that it ignores the obvious fact that the 1980 to 1983 recessions were induced by the Fed on purpose by raising short-term rates a full 8% over the rate of inflation to 1) chase money out of hard assets and back into financial assets, launching the FIRE Economy in the process, and 2) create high enough unemployment to break the unions and maintain competitive low wage rates. Does any serious economist believe that the current now year old recession was induced by the Fed intentionally to manage inflation down? This is the real thing, a recession that the Fed didn't start. When is the last time that happened? That's right, in the 1930s.

Short rates are 1% yet the economy’s collapse, as measured in rising unemployment and declining output, is picking up speed. Since the early 1980s the US public and private sectors have borrowed their way out of recession and back to “recovery.” Each time the level of debt grew higher, from a dollar of new debt per dollar of GDP growth, to two, to three, to four, to five. Each time the US went into recession it dragged the world into recession with it, and each time US trade partners and political allies took turns bailing the US out to in turn pull them back out of recession with the great American demand engine.

It isn’t working this time. Major foreign private and official creditors to the US, especially the UK, China and Japan, are struggling with recessions. The US cannot pull them out of them because this time the domestic, credit-based US demand engine is broken.

We are in the first year of a multi-year debt deflation and transformational depression. Anyone who tells you otherwise does not understand the antecedents and processes driving the decline. Their forecasts will be incorrect.

The good news is that out of this the US economy may develop into a more honest, fair, and sustainable form based on saving and investment rather than borrowing and consumption. The bad news is that politics can just as easily take the economy the other way, with debtors pitted against creditors and the poor against the rich, with an Argentina Lite outcome. Watch debate over the US auto company and financial bailouts and you can already see the battle lines forming. For a country that has for hundreds of years depended on entrepreneurs and invention to drive the nation and economy forward, the signs are ominous. All the money to date has gone to large financial institutions and businesses. If we’re going to do that we also need to cut the income and capital gains tax rate for small businesses and private equity to zero to level the competitive playing field or we’re sunk.

When will the recession end that started a year ago? That will depend on the political response to the private sector debt problem. All the infrastructure programs in the world won't make it go away, and as long as it persists we're driving with the brakes on.

Here’s a thread (http://itulip.com/forums/showthread.php?p=63796#poststop) where we are sharing notes on how the recession is affecting our members' employers, including comments from a bunch of members who are employers.

First person experiences and critique will continue to inform our data-driven analysis. We'll let you know when we think the real bottom is in and you can count on the NBER to let you know a year later.

As a final note, I can't help sharing this video (http://bewareofthedoghouse.com/videoPage.aspx) sent to me by one of our friends. The economy may be going to hell in hand basket, but we refuse to give up our sense of humor in the holiday spirit.

Note: We have re-opened the Contest: Most Accurate Forecast of the Now Official Current Recession (http://itulip.com/forums/showthread.php?p=63735#post63735) since January. Good luck!

iTulip Select (http://www.itulip.com/forums/showthread.php?t=1032): The Investment Thesis for the Next Cycle™
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ddn3f
12-03-08, 07:06 PM
"We are in the first year of a multi-year debt deflation and transformational depression"

Does that mean the Ka phase will be going on for a little bit longer than was expected?

FRED
12-03-08, 08:06 PM
"We are in the first year of a multi-year debt deflation and transformational depression"

Does that mean the Ka phase will be going on for a little bit longer than was expected?

Debt deflation occurs within the FIRE Economy separate from the goods production and consumption economy, just as asset price inflation occurred within the FIRE Economy separate from the goods production and consumption economy. They are independent systems, although they can influence each other through spillover effects.

Monetary inflation can deflate debt, such as by raising nominal cash flows of households and businesses and allowing them to pay down debt at a faster rate as occurred 1975 to 1980. That was an inflationary debt deflation period when many US households paid off mortgages with inflated incomes. A high inflation rate is, however, anathema to FIRE Economy political interests because it reduces the purchasing power of interest payments.

For a description of the FIRE Economy, please read Saving, Asset-Price Inflation, and Debt-Induced Deflation. (http://itulip.com/forums/showthread.php?p=6738#post6738)

Basil
12-03-08, 10:11 PM
After reading this post and thinking of what it will mean for my family and friends, I think I might prefer the mushroom-tequila approach.;)

Chief Tomahawk
12-04-08, 12:55 AM
The FIRE economy isn't going down without a fight... to which:

Any ITulip opinion on the newest plan floated today about buying treasuries to force mortgage rates down to 4.5% to reinvigorate housing? Should I expect The Donald to latch onto the plan to push his Trump Baja project and show up in my e-mail inbox with a "terrific deal!"

http://www.trump-baja.com/

bart
12-04-08, 01:08 AM
You too can forecast recessions! Secrets revealed! Here’s how!


Next up, blue light specials? :eek:
http://www.nowandfutures.com/grins/blue_light_special.wav ;)

Great job EJ, as always.

unlucky
12-04-08, 06:42 AM
When will the recession end that started a year ago? That will depend on the political response to the private sector debt problem. All the infrastructure programs in the world won't make it go away, and as long as it persists we're driving with the brakes on.


Hmmm... that reminds of an editorial the FT ran a short while back on the problem of the debt. The link is here. (http://www.ft.com/cms/s/0/0af9eba4-a528-11dd-b4f5-000077b07658.html?nclick_check=1) The piece lists ways to get rid of the debt:

1. Inflation. Passed over without comment.
2. Let the banks fail. After Lehman brothers, we won't be trying that again.
3. Freeze new lending to reduce leverage. Bad idea.
4. "Grow the economy" to match the level of debt, via loose fiscal+monetary policies.

The FT's preferred option is 4. Given that it takes 5 dollars of new debt to get 1 dollar of GDP growth in the US, it will interesting to see how it works in practice.

If this list is truly an exhaustive set of options, then I think the real conclusion is that option 1 is inevitable...

labasta
12-04-08, 09:54 AM
Hmmm... that reminds of an editorial the FT ran a short while back on the problem of the debt. The link is here. (http://www.ft.com/cms/s/0/0af9eba4-a528-11dd-b4f5-000077b07658.html?nclick_check=1) The piece lists ways to get rid of the debt:

1. Inflation. Passed over without comment.
2. Let the banks fail. After Lehman brothers, we won't be trying that again.
3. Freeze new lending to reduce leverage. Bad idea.
4. "Grow the economy" to match the level of debt, via loose fiscal+monetary policies.

The FT's preferred option is 4. Given that it takes 5 dollars of new debt to get 1 dollar of GDP growth in the US, it will interesting to see how it works in practice.

If this list is truly an exhaustive set of options, then I think the real conclusion is that option 1 is inevitable...


Does option 4 overlap on to option 1? What I mean is, do loose fiscal policies mean more debt or printing which lowers bond ratings (or attractiveness), reducing capital inflows and pushing up imported prices?

Of course, as EJ had pointed out, the "rule of law" wild card may come into play, or the "law of the least ugly in a world of ugliness" keeping foreign inflows flowing in. If that happens, will the US still be able to use foreign money to get itself out of its hole? Will the foreign money be enough? Will the foreign money be thrown in the FIRE trying to restart the broken engine (which is happening now) instead of channeling it into the real economy via productive industries?

I would guess that if America gets lucky and foreigners don't drop treasuries like a stone, then the politicians would still waste their free money on getting the FIRE econ. started again and failing.

Also, when I say foreign money, I suppose that is relative to the current money pool, not one from a couple of years ago. The new much reduced amount of foreign money coming in might not be enough to get a real econ. engine started and so printing will begin.

Rajiv
12-04-08, 10:11 AM
Yes option 4 leads to inflation, and possibly hyperinflation -- that is if the CBs show little restraint in new money creation. If that is the case, then why would any asset owner trade the asset for "money" -- "money" being essentially worthless at this point -- I would rather go back to bartering (http://en.wikipedia.org/wiki/Barter) and to "barter exchanges (http://www.barternews.com/)" and "reciprocal trade (http://www.irta.com/)"

Charles Mackay
12-04-08, 11:59 AM
As a final note, I can't help sharing this video (http://bewareofthedoghouse.com/videoPage.aspx) sent to me by one of our friends. The economy may be going to hell in hand basket, but we refuse to give up our sense of humor.


Great piece of viral marketing!

LargoWinch
12-04-08, 12:46 PM
I thought the whole point was to inflate/hyperinflate, "grow out" of this mess and then bring people back to fiat currency with attractively high interest rates down the road.

It seemed to have worked in the 70s...

Rajiv
12-04-08, 01:25 PM
In the 70's, an additional dollar in money supply created ~$2 in addition to GDP. Today it takes $4 to create an Additional $ in GDP -- I could be wrong on the exact numbers, but the magnitude is correct -- That is the difference -- In the 70's we were just a few years away from the gold standard -- today we are 36 years away from the gold standard -- Think of the gap between GDP and interest payments growing exponentially!

Look again at Chris Martenson's The Crash Course (http://itulip.com/forums/showthread.php?t=4751), and also the video The Most IMPORTANT Video You'll Ever See (http://itulip.com/forums/showthread.php?t=2306)

LargoWinch
12-04-08, 02:18 PM
Thanks Rajiv, much appreciated.

Could this explain the huge increase in M1 (as per the latest shadowstats.com graph below)?

http://www.shadowstats.com/imgs/sgs-m3.gif?hl=ad (http://www.shadowstats.com/charts_republish#m3)

We see that M3 is dropping fast (credit being exhausted?), while the Fed is trying to compensate by printing it via M1?

KGW
12-04-08, 02:44 PM
Oh Yeah! On a side note, the picture in EJ's rearview mirror reminded me of this article on the little girl on her mother's shoulder at the left of the picture:

http://www.cnn.com/2008/LIVING/12/02/dustbowl.photo/index.html

By Thelma Gutierrez and Wayne Drash
CNN
<!--startclickprintexclude--><!--endclickprintexclude--><!--startclickprintexclude--> <!--endclickprintexclude--> MODESTO, California (CNN) -- The photograph became an icon of the Great Depression: a migrant mother with her children burying their faces in her shoulder. Katherine McIntosh was 4 years old when the photo was snapped. She said it brought shame -- and determination -- to her family.
<!--startclickprintexclude--> http://i2.cdn.turner.com/cnn/2008/LIVING/12/02/dustbowl.photo/art.dustbowl.cnn.jpg Katherine McIntosh holds the photograph taken with her mother in 1936.






http://i.cdn.turner.com/cnn/.element/img/2.0/mosaic/base_skins/baseplate/corner_wire_BL.gif



<script type="text/javascript"> var CNN_ArticleChanger = new CNN_imageChanger('cnnImgChngr','/2008/LIVING/12/02/dustbowl.photo/imgChng/p1-0.init.exclude.html',2,1); //CNN.imageChanger.load('cnnImgChngr','imgChng/p1-0.exclude.html'); </script> <!--endclickprintexclude--> "I wanted to make sure I never lived like that again," says McIntosh, who turns 77 on Saturday. "We all worked hard and we all had good jobs and we all stayed with it. When we got a home, we stayed with it."
McIntosh is the girl to the left of her mother when you look at the photograph. The picture is best known as "Migrant Mother," a black-and-white photo taken in February or March 1936 by Dorothea Lange of Florence Owens Thompson, then 32, and her children.
Lange was traveling through Nipomo, California, taking photographs of migrant farm workers for the Resettlement Administration. At the time, Thompson had seven children who worked with her in the fields.
"She asked my mother if she could take her picture -- that ... her name would never be published, but it was to help the people in the plight that we were all in, the hard times," McIntosh says.
"So mother let her take the picture, because she thought it would help."
The next morning, the photo was printed in a local paper, but by then the family had already moved on to another farm, McIntosh says.
"The picture came out in the paper to show the people what hard times was. People was starving in that camp. There was no food," she says. "We were ashamed of it. We didn't want no one to know who we were."
The photograph helped define the Great Depression, yet McIntosh says her mom didn't let it define her, although the picture "was always talked about in our family."
"It always stayed with her. She always wanted a better life, you know."
Her mother, she says, was a "very strong lady" who liked to have a good time and listen to music, especially the yodeler named Montana Slim. She laughs when she recalls her brothers bringing home a skinny greyhound pooch. "Mom, Montana Slim is outside," they said.
<!--startclickprintexclude--> <!--endclickprintexclude--> Thompson rushed outside. The boys chuckled. They had named the dog after her favorite musician.
"She was the backbone of our family," McIntosh says of her mom. "We never had a lot, but she always made sure we had something. She didn't eat sometimes, but she made sure us children ate. That's one thing she did do."
Her memories of her youth are filled with about 50 percent good times, 50 percent hard times.
It was nearly impossible to get an education. Children worked the fields with their parents. As soon as they'd get settled at a school, it was time to pick up and move again.
Her mom would put newborns in cotton sacks and pull them along as she picked cotton. The older kids would stay in front, so mom could keep a close eye on them. "We would pick the cotton and pile it up in front of her, and she'd come along and pick it up and put it in her sack," McIntosh says. http://i2.cdn.turner.com/cnn/.element/img/2.0/mosaic/tabs/video.gif Watch "we would go home and cry" »
They lived in tents or in a car. Local kids would tease them, telling them to clean up and bathe. "They'd tell you, 'Go home and take a bath.' You couldn't very well take a bath when you're out in a car [with] nowhere to go."
She adds, "We'd go home and cry."
McIntosh now cleans homes in the Modesto, California, area. She's proud of the living she's been able to make -- that she has a roof over her head and has been able to maintain a job all these years. She says her obsession to keep things clean started in her youth when her chore was to keep the family tent clean. There were two white sheets that she cleaned each day.
"Even today, when it comes to cleaning, I make sure things are clean. I can't stand dirty things," she says with a laugh.
With the nation sinking into tough economic times and analysts saying the current economic crisis is the worst since the Great Depression, McIntosh says if there's a lesson to be learned from her experience it is to save your money and don't overextend yourself. iReport: Are you worried about losing your job?
"People live from paycheck to paycheck, even people making good money," she says. "Do your best to make sure it doesn't happen again. Elect the people you think is going to do you good."
Her message for President-elect Barack Obama is simple: "Think of the middle-class people."
<!--startclickprintexclude--> http://i.l.cnn.net/cnn/.element/img/2.0/content/ads/advertisement.gif


<!--endclickprintexclude--> She says she'll never forget the lessons of her hard-working mother, who died at the age of 80 in 1983. Her gravestone says: "Migrant Mother: A Legend of the strength of American motherhood."
"She was very strict, but very loving and caring. She cared for us all," McIntosh says.

bart
12-04-08, 03:59 PM
Thanks Rajiv, much appreciated.

Could this explain the huge increase in M1 (as per the latest shadowstats.com graph below)?

http://www.shadowstats.com/imgs/sgs-m3.gif?hl=ad (http://www.shadowstats.com/charts_republish#m3)

We see that M3 is dropping fast (credit being exhausted?), while the Fed is trying to compensate by printing it via M1?

The simple answer - no. M1 is part of M3 and only about 10% of it. M1 is going up due to more cash being in circulation and larger balances being held in checking accounts.

M3 is going down due to large time deposits going down, repos going down and institutional money markets going down faster than M2 is going up.


And total credit as defined in the chart legend below is still growing (the thick red line) at about 6% year over year. All data is directly from the Fed.

http://www.nowandfutures.com/images/credit_types_roc_short_term.png

Mega
12-04-08, 04:07 PM
"Step 4: Stress test your theories. Develop a 10,000 plus member community of smart business people from all over the USA and globe and listen to them as they respond to your analysis and describe what they are seeing. We cannot always be correct right out of the chute, so an army of bright people correcting our errors helps us refine our theories. Trip reports over a period of years are especially helpful because they give a perspective on how economic conditions are changing."


Happy to help EJ, if you want any more info just ask :)
Mike

LargoWinch
12-04-08, 04:24 PM
Wow, a reply from the master himself (great stuff btw)! Thanks bart.

bart
12-04-08, 04:42 PM
Wow, a reply from the master himself (great stuff btw)! Thanks bart.

You're welcome LW... and I'm not sure whether to give it an "aw shucks, tweren't nuthin'" or just blush... ;)


By the way, here's my M3 reconstruction (created before John Williams came out with his) which shows a slightly different but similar picture. I recently added the 10 week moving average so it was more easily comparable with his.

http://www.nowandfutures.com/images/m3b.png

ocelotl
12-04-08, 04:49 PM
The FIRE economy isn't going down without a fight... to which:

Any ITulip opinion on the newest plan floated today about buying treasuries to force mortgage rates down to 4.5% to reinvigorate housing? Should I expect The Donald to latch onto the plan to push his Trump Baja project and show up in my e-mail inbox with a "terrific deal!"

http://www.trump-baja.com/

Once during my University Years I thought of turning into an Astronomical Instrumentation Specialist, based in Ensenada Campus of UNAM... Real life has had different plans so far...

My first post around here was related to an article comparing the US Economy with the outcome of Mexican development of 80's and 90's crisis (Can the U.S.A. have a "Peso Problem" (http://www.itulip.com/forums/showthread.php?p=30891#post30891)). I pointed out several considerations among my personal experience during the period, and did a couple of calls based on them... I still think we have a combination in U.S. Macroeconomics of Mexico 1981-2 (High debt and nationalization of Banks) with Mexico 1994-5 (Sudden stop), and that U.S. may see several of the points covered in the original thread, specially on the side of population disturbances.

The point that is different is the reserve currency status, that can change on a flight to other currencies and commodities, but it will have to wait until a decent level of deleveraging happens, and that is still going to take at least another year or two.

Contemptuous
12-04-08, 07:29 PM
The point that is different is the reserve currency status, that can change on a flight to other currencies and commodities, but it will have to wait until a decent level of deleveraging happens, and that is still going to take at least another year or two.

I agree 100% Ocelotl. Can easily be two years (or longer) before the USD shows signs of finally responding to the fundamentals. Markets can stay irrational longer than ... etc.

LargoWinch
12-04-08, 08:11 PM
I agree 100% Ocelotl. Can easily be two years (or longer) before the USD shows signs of finally responding to the fundamentals. Markets can stay irrational longer than ... etc.

Lukester (like you I believe), I am very bullish on energy (sweet crude especially). I am also dying to load up on crude oil, which I have no exposure too at the moment (sold my 2% today - long and sad story).

Would you happen to know the global costs of production for crude? I mean, I cannot image the price of oil dipping below production costs...

bart
12-04-08, 08:15 PM
A chart to make you go hmmmm..., based on this and the last hard asset cycle...

http://www.nowandfutures.com/images/usdx1966_1980and_now.png

Contemptuous
12-04-08, 08:58 PM
LargoWinch - Yummy light sweet crude! (slurp slurp). I don't know that there is a global cost - it's all over the map depending on the fields, no? But one thing seems sure is that anywhere south of $60-$70 a barrel the Canadian Oil sands shares will keep getting chewed to a pulp. The entire oil complex today - given where we know it has to wind up 6-10 years from now, seems the most astonishing gift - likely even if you have a 5 year time horizon. Bensimon is (was?) calling for the most mind boggling gyrations in the petroleum price over just the next 3-5 years. According to him it winds up at $450 a barrel out in the mid part of the next decade. From $47 today?? :eek: Uhm, what is that expressed as a percentage gain? No need to dink around with oil exploration juniors. Just owning a basket of the blue chips at these levels, if they go even halfway to the prices Bensimon was referring to out in 2015, these are life-changing investments somewhere out there. We're talking about stodgy blue chip oil stocks being "life changing investments" from these levels.


Lukester (like you I believe), I am very bullish on energy (sweet crude especially). I am also dying to load up on crude oil, which I have no exposure too at the moment (sold my 2% today - long and sad story). Would you happen to know the global costs of production for crude? I mean, I cannot image the price of oil dipping below production costs...

VIT
12-04-08, 09:51 PM
Lukester (like you I believe), I am very bullish on energy (sweet crude especially). I am also dying to load up on crude oil, which I have no exposure too at the moment (sold my 2% today - long and sad story).

Would you happen to know the global costs of production for crude? I mean, I cannot image the price of oil dipping below production costs...

It's varies. In Russia its 3-10 USD/bbl. In Middle East I would expect it even less.Very insignificant portion of oil was producing at 50+ USD/bbl. This does not include finding and development costs which are the big part of the equation. The production costs were rising last years mainly because service became more expensive so do not be fooled by this behavior.

The bottom line - do not look pure on "average production costs", the overall distribution is important.

Contemptuous
12-04-08, 10:41 PM
Bart -

This is definitely one of your more ambiguous charts in terms of what it may be hinting at. At least it ain't clear enough to me. What I read is a multi year period of range bound trading ahead.


A chart to make you go hmmmm..., based on this and the last hard asset cycle...

http://www.nowandfutures.com/images/usdx1966_1980and_now.png

bart
12-05-08, 01:25 AM
Bart -

This is definitely one of your more ambiguous charts in terms of what it may be hinting at. At least it ain't clear enough to me. What I read is a multi year period of range bound trading ahead.

Yes, the correlations definitely are not as good as many of the others charts comparing the two time periods. But I think you did get the possibility that it shows - a continuing uptrend and then roughly flat for a year or two.

I personally don't think its a high probability scenario at all and think its much more likely that we get a significant reversal during the next year... but then again I didn't think the Berlin Wall would come down either.

Basically, the chart is just food for thought - especially since its something that virtually no one is considering.

Chief Tomahawk
12-05-08, 02:07 AM
Pssst! EJ/Fred: I just noticed the copyright year at the bottom of the main page and also this piece by Eric is 2007. Might be time to leap frog 2008 and change it to 2009.

Chief Tomahawk
12-05-08, 02:11 AM
Wow! Did I trudge out old material or what?!? Not one comment about the Trump-Baja project. I bet Bear Stearns was the financier on that one....

Chris Coles
12-05-08, 05:06 AM
This might help those that are still having difficulties understanding what EJ is talking about. Newsnight is the UK's premier TV Late evening intellectual news show. You will get a very neat explanation of "Quantitative Easing" for example. The economic debate takes up some 23 minutes at the start of the show and is very worth the time taken to watch.

http://news.bbc.co.uk/player/nol/newsid_4670000/newsid_4679900/4679986.stm?bw=bb&mp=wm&news=1&ms3=6&ms_javascript=true&bbcws=2

EJ, you might find of particular interest, the comments by Prof. Robert Reich who is a member of Barack Obama's team.

"Consumers have run out of money" Shows that their general belief, certainly by Prof. Robert Reich; completely endorses your viewpoint as you have set out in this thread.

And, I might add, shows that the message I have been also working to get across, that the "grass roots" have run out of money, is also recognised.

Enjoy!

LargoWinch
12-05-08, 09:54 AM
Thanks Lukester. Your insight is much appreciated.

You see, like Jk, I've got an itchy finger and on Monday this week I put 2% of my net worth in crude (2x leverage, $CND hedged), BUT got my ass handed over to me when crude declined from $49 to now $42: a 29% loss in 4 business days.

...so I went back home packing, crying like a little girl.

However, I am still very bullish on crude and will jump in again with even more $$$ sometimes next year.