Current Key Issues Ahead

On today's market wrap on financialsense, Tony Allison wrote: Trading, Investing and Speculating

• Today’s culture seems to have a very short-term perspective on the just about everything. Wall Street focuses on this quarter’s results; Washington’s vision extends only to the next election cycle. The average Joe looks to the coming weekend, or perhaps his next paycheck. As the nation’s attention span appears to shorten further every year, so does its vision of the future. And as investors, it seems more and more people are adopting the behavioral characteristics of the trader.
  
  Looking out at some of the key economic issues directly in front of us we see:

1. The oversold US dollar starting to strengthen, as most of the planet has been in the “short the dollar” side of the boat this year.
2. Commodities starting to correct as the dollar strengthens, after a big run-up this fall.
3. Developing countries like China and Brazil looking ready for a correction.
4. The possibility of de-leveraging reasserting itself in 2010.

Rather intesting issues, issues which were as mentioned by Dr. Marc Faber in the posting Dr. Marc Faber Investment Suggestions For 2010

• Smart investors who made money in 2009 may sell emerging market stocks and start buying the S&P in the US as it may outperform because of a rally in the US dollar..
• Global stocks, commodities and precious metals have rallied sharply this year following an unprecedented easing of monetary policy by central banks across the globe to avert a 1930s-like depression. The rally has pushed mainly emerging market stocks to high valuations which may not be backed by a corresponding earnings growth. Hence, western investors who were borrowing cheap and investing in emerging markets may get back to buying assets in developed markets which are recovering and partly in anticipation of higher interest rates too.

ps: the article highlighted by Tony is also rather interesting: The Debt Bomb

Some Oil reminders

I would like to highlight the crude oil issue as reminded by FSO Market Commentator, Tony Allison, in his market wrap, The Fundamental Things Apply...as time goes by

• An Insatiable Thirst
  
  On any day of the week, those of us in Southern California can drive to the Port of Long Beach and see oil tankers lined up to the horizon and beyond, bringing in oil and refined products from all over the world. We as a nation will not and cannot stop using oil, and $70 per barrel is not slowing down demand. The US used to export oil to the rest of the world, but now we must import over 60% of our energy needs. That number will go higher with increasing energy demand, and with domestic supply steadily decreasing since the peak in 1970.
  
  Even if Wall Street insists on stripping out energy and food costs from the “core” CPI data, higher energy costs are seeping into every aspect of the economy. Our insatiable thirst for oil and our increasing energy dependence will add to our inflationary burdens. Inflation takes a long time to become embedded into the system. Once inflation awareness and expectations set in among the public, it will take a long time to get rid of it.
  
  In the years and decades to come, oil will be in ever-greater demand around the world. Supply will continue to be found, but the cost of getting the oil to market will get higher as companies and countries look to deep sea drilling, tar sands and oil shale production. All these methods are extremely expensive in terms of labor, materials and energy expended. Oil will always be available, but the cost of producing a barrel of oil, transporting it, and refining it will likely continue to rise. In addition, the supply of light, sweet crude is declining rapidly. Heavy sour crude will be the substitute, but it’s harder to extract and more expensive to refine. Many refineries are not equipped to refine heavy crude at any price. New technology will help, but labor and material costs are rising in the race to bring oil to market as quickly as possible. The demand for oil will continue unabated, given rapid Chinese and Indian industrialization, but future supply will likely arrive with a higher price tag. From an investment perspective, capital will continue to flow to this critical sector. The best companies, with good reserves in stable locations, will be enormously profitable in the years ahead.
  
  In 2002 oil was $20 per barrel. In 2004, $50 per barrel. Now it is $72+ per barrel and demand is still increasing at 2% per year (which exceeds growth in supply). The world is adjusting to a higher cost of energy, but it is functioning like a global tax, which is beginning to bite into US consumers.
  
  In the future, oil will be even more critical to global prosperity, as it will be more and more coveted by every nation on earth, both sellers and buyers. The arrival of Peak Oil will likely be the most critical and defining event of the 21st century. Energy and other tangible assets will form the mirror opposite of the global currency glut, as the particularly debased currencies become less and less coveted, as time goes by.

And in yesterday markets, Mr. Allison notes:

• Crude-oil futures fell Monday, but closed above $72 a barrel, as traders locked in profit from recent gains and shrugged off a bullish report from the International Energy Agency. Crude for August delivery closed down 62 cents at $72.19 a barrel on the New York Mercantile Exchange.
  
  "No less than the International Energy Agency has given market bulls its endorsement with its latest report, which states that world oil demand will rise faster than expected to 2012 with expected production lags, leading to a supply crunch," said Michael Fitzpatrick, analyst at Man Financial, in a research report. (emphasis added)
  
  There are those fundamentals again. Keep them in mind.

What about Inflation?

My Dearest Moo Moo Cow,

Today's market wrap commentary posted on FSO by Market Commentator, Tony Allison, whould be of interest to you: Inflation: Comparing Apples to Oranges, Smoke & Mirrors Won't Pay Your Bills

Mr. Allison argues that the inflation is there and it only appears to be under control because of how the inflation is measured simply has been changed.

• Inflation is one of those issues that concerns people, but the normal reaction is a shrug of the shoulders, and shake of the head. It’s a problem that affects lives and futures, but most see it as a murky, complex subject beyond their control. And the media seems to think it’s “well under control,” even if our wallets argue otherwise.
  For those who grew up in the 1950’s and 1960’s, the world was a different place. An average guy with a high school education could support a large family. His wife didn’t have to work. He could save for retirement. He could pay down, or even pay off his mortgage by retirement. According to the US Census Bureau, Department of Commerce, the average family income in 1950 was $3,300. But then the average cost of a loaf of bread was 14 cents. That wouldn’t pay the sales tax on a loaf of bread today.
  These days you need two paychecks to support a family, usually with no more than one or two kids. Both parents need college degrees to get good jobs. They have little or no savings and their kids will be saddled with student debt if they go college. How can a middle class family be worse off today than 50 years ago with a booming economy, low interest rates and “minimal” inflation?
  These are complex issues, and globalization and the exporting of a large portion of our manufacturing base play a role. But inflation has not gone away, and is not as “quiescent” as the Fed would like us to believe. In the early 1990’s, the government was watching inflation rise and adversely affect federal deficits and what it paid out in entitlements. To bring down the cost of entitlements, the inflation rate was adjusted lower, but not by cutting government spending, or raising interest rates. No, inflation was lowered simply by changing the way in which it is measured.

Don't you agree?

Even here in Malaysia, what was the price of your favourite plate of chicken rice a decade ago compared to now? What about your absolute favourite 'roti canai'? What's the price now? How?

And Mr. Allison highlights some issue on how they are changing (or should I say fudge?) the numbers.

• Based on today’s numbers, Williams believes that the current inflation rate is approximately 10%, given the way inflation was measured prior to the 1990’s. Williams also reconstitutes M3 (the money supply), which the government no longer reports. “It’s growing 11% on a year over year basis.” Williams notes with dismay that Fed Chairman Bernanke is already planning to change the current CPI index to even more of a substitution basis, instead of a fixed-weight basis.
  “The original intent of the CPI was to measure a constant standard of living,” said Williams. “They are moving toward a declining standard of living, where you substitute hamburger for steak in the CPI because steak is getting too expensive. The next (comparison) may go to dog food.”

Mr. Allison warns the danger in fudging the numbers...

• You can’t get rid of inflation by changing how it’s calculated. And no nation in recorded history has ever been able to create prosperity by printing increasing amounts of its currency. Smoke and mirrors only buys time for elected officials to gain reelection and sweep the problem temporarily under the rug. However, more Americans are discovering their quality of life is in retreat. If the CPI is really 10% as John Williams believes, then those 4.5% Treasury Bond yields don’t look so good on a real return basis.
  While the cost of many consumer goods has fallen over the last few decades, especially electronics, the cost of living has risen relentlessly. The easier availability of credit has helped many to survive, but ultimately the debt load becomes a burden that cannot continue.

My dearest Moo Moo Cow.

Do give the article a good read.

Cheers!