"Peak Oil" refers to an analysis of the likely trajectory of world crude production which suggests that the resource has already, or shortly will, commence an unstoppable decline. It was developed by a geophysicist named M. King Hubbert, who took into account several factors, such as the properties of oil depletion and market forces to produce a theory that production of any non-renewable resource would follow a bell-shaped curve. Once the peak had been reached, the resource would inevitably decline in production. When applied to crude oil, this concept became known as Peak Oil.
Decades ago, Hubbert predicted that world oil production would peak in about 2005. It did. However, as crude oil prices skyrocketed in 2007 and 2008 to nearly $150 per barrel, emergency output from giant Saudi Arabia briefly gave oil production a slightly higher peak in 2008. That high has not been surpassed since.
Oil production peaked in mid-2008 at just under 88 million barrels per day. Recently released data puts it at about 86.5 million, roughly equivalent to the 2005 level. Crude production has oscillated in a fairly tight range for the last 5 years, despite much higher average prices.
This plateau is VERY significant when compared to historical trends. For example, post Oil Embargo, worldwide production dipped to about 60 million barrels in the early 1980's and crossed 70 million in the mid-1990's. Thus, the failure to grow at historical rates, despite MUCH higher prices, suggests that the planetary capacity for oil production is quite constrained.
On the demand side, the United States remains the largest consumer, currently using about 19 million barrels per day, down from a peak of 21 million in 2007. China is now number 2 with consumption of about 10% of world production. Beijing's demand, however, is growing by leaps and bounds, up nearly 13% year-over-year and is expected to grow another 10% or so in the next 12 months. Should that forecast be realized, China alone will add about 1 million barrels per day to the demand picture.
The US military has warned that surplus oil production capacity could disappear within two years and there could be serious shortages by 2015 with significant economic and political impact. Surplus capacity is believed to be less than 4 million barrels per day.
The energy crisis has been outlined in a Joint Operating Environment report from the US Joint Forces Command. "By 2012, surplus oil production capacity could entirely disappear, and as early as 2015, the shortfall in output could reach nearly 10 million barrels per day," says the report.
Total oil reserves are estimated to be around 1.8 trillion to 2.2 trillion barrels, of which about 1.1 trillion barrels have been consumed through 2005. Another 1.5-1.6 trillion barrels remain to be extracted, of which 1 trillion barrels are proven reserves with the remaining 500-600 billion barrels consisting of reasonable projections.
About half of all the petroleum consumption has taken place after 1984 and about 90% of all the petroleum that has ever been consumed was done so after 1958. Most of the remaining oil could be extracted by 2060.
Investors looking to benefit from Peak Oil will have to take an indirect route. Oil companies will undoubtedly be slapped with a "Windfall Profits Tax", especially as the budget situation gets more desperate.
Therefore, the avenues for investment must be through alternative fuels such as uranium, tar sands, wind or shale. These are frought with peril since they require a high level of expertise as many alternative fuel concepts are not yet economically viable on a large scale.
Marko's Take
For more on "Peak Oil", we have two You Tube episodes to provide some background. They can be accessed by clicking here http://www.youtube.com/markostaketv#p/u/4/yFxE3GsPnRQ (Part 1) and here http://www.youtube.com/markostaketv#p/u/3/ywn2F3XAaJA (Part 2).
Saturday, May 22, 2010
Friday, May 21, 2010
Banking Sector Problems Accelerate
While the banking sector reported a profitable quarter for the first 3 months of 2010, problems are continuing to escalate.
The Federal Deposit Insurance Corporation (FDIC) reported an aggregate profit of $18.0 billion in the first quarter of 2010 for the commercial banks and savings institutions it insures, which was a $12.5 billion increase from the $5.6 billion earned for the similar period of 2009.
A small majority of all institutions reported year-over-year improvements in their quarterly net income. Those reporting net losses for the quarter were 18.7%, compared to 22.3% a year earlier. The average return on assets (ROA) rose to 0.54% , from 0.16% a year ago. This is the highest quarterly ROA for the industry since the first quarter of 2008.
The primary factor contributing to the year-over-year improvement in quarterly earnings was a reduction in provisions for loan losses. While first-quarter provisions were still high at $51.3 billion, they were $10.2 billion (16.6%) lower than a year earlier.
The number of institutions on the FDIC's "Problem List" rose to 775, up from 702 at the end of 2009. This represents 10% of all insured entities and is a dramatic rise from 252 at the end of 2008.
The total assets of problem institutions rose approximately 7% during the quarter from $403 billion to $431 billion. These levels are the highest since June 30, 1993, when the number and assets of problem institutions totaled 793 and $467 billion, respectively, but the increase in the number of problem banks was the smallest in four quarters.
While The Deposit Insurance Fund (DIF) balance improved for the first time in two years, its net worth is still NEGATIVE $20.7 billion - a negligible increase from the $20.9 billion deficit at the end of 2009.
The fund balance includes a whopping $40.7 billion contingent loss reserve that has been set aside to cover anticipated future losses. Combining the fund balance with this contingent loss reserve shows total DIF reserves of $20 billion.
The FDIC's liquid resources stood at $63 billion at the end of the first quarter, a decline from $66 billion at year-end 2009. In order to maintain emergency liquidity, the FDIC Board approved a measure on November 12, 2009, that required most insured institutions to prepay approximately three years' worth of deposit insurance premiums – about $46 billion – at the end of last year.
Despite the sanguine nature of the FDIC report, major problems persist. Poor loan performance in other sectors continued to hurt banks, with the total number of loans at least 3 months past due climbing for the 16th consecutive quarter.
Banks have been hurt by non-performing loans and the continued recession, causing them to dramatically reduce their lending. Commercial and Industrial Loans are down 25% from their peak. The industry's total loan balances grew by 3% during the quarter, but the increase was due to accounting changes. Without taking into account these changes, lending would have declined for the 7th straight quarter, as banks cut back across most major lending categories.
While the FDIC believes that problem banks will peak this year and decline smoothly thereafter, their optimism appears to have little basis. As the economy slips into the "Second Dip" of this "Double-Dip Hyper-Inflationary Depression" and the crisis in debt within the Euro-Zone intensifies, it is hard to believe that we are anywhere close to a termination of problems in the financial sector.
Marko's Take
For new readers interested in more of a political bent, we have converted some of our written blogs to video format on You Tube. They can be accessed by clicing here http://www.youtube.com/markostaketv.
The Federal Deposit Insurance Corporation (FDIC) reported an aggregate profit of $18.0 billion in the first quarter of 2010 for the commercial banks and savings institutions it insures, which was a $12.5 billion increase from the $5.6 billion earned for the similar period of 2009.
A small majority of all institutions reported year-over-year improvements in their quarterly net income. Those reporting net losses for the quarter were 18.7%, compared to 22.3% a year earlier. The average return on assets (ROA) rose to 0.54% , from 0.16% a year ago. This is the highest quarterly ROA for the industry since the first quarter of 2008.
The primary factor contributing to the year-over-year improvement in quarterly earnings was a reduction in provisions for loan losses. While first-quarter provisions were still high at $51.3 billion, they were $10.2 billion (16.6%) lower than a year earlier.
The number of institutions on the FDIC's "Problem List" rose to 775, up from 702 at the end of 2009. This represents 10% of all insured entities and is a dramatic rise from 252 at the end of 2008.
The total assets of problem institutions rose approximately 7% during the quarter from $403 billion to $431 billion. These levels are the highest since June 30, 1993, when the number and assets of problem institutions totaled 793 and $467 billion, respectively, but the increase in the number of problem banks was the smallest in four quarters.
While The Deposit Insurance Fund (DIF) balance improved for the first time in two years, its net worth is still NEGATIVE $20.7 billion - a negligible increase from the $20.9 billion deficit at the end of 2009.
The fund balance includes a whopping $40.7 billion contingent loss reserve that has been set aside to cover anticipated future losses. Combining the fund balance with this contingent loss reserve shows total DIF reserves of $20 billion.
The FDIC's liquid resources stood at $63 billion at the end of the first quarter, a decline from $66 billion at year-end 2009. In order to maintain emergency liquidity, the FDIC Board approved a measure on November 12, 2009, that required most insured institutions to prepay approximately three years' worth of deposit insurance premiums – about $46 billion – at the end of last year.
Despite the sanguine nature of the FDIC report, major problems persist. Poor loan performance in other sectors continued to hurt banks, with the total number of loans at least 3 months past due climbing for the 16th consecutive quarter.
Banks have been hurt by non-performing loans and the continued recession, causing them to dramatically reduce their lending. Commercial and Industrial Loans are down 25% from their peak. The industry's total loan balances grew by 3% during the quarter, but the increase was due to accounting changes. Without taking into account these changes, lending would have declined for the 7th straight quarter, as banks cut back across most major lending categories.
While the FDIC believes that problem banks will peak this year and decline smoothly thereafter, their optimism appears to have little basis. As the economy slips into the "Second Dip" of this "Double-Dip Hyper-Inflationary Depression" and the crisis in debt within the Euro-Zone intensifies, it is hard to believe that we are anywhere close to a termination of problems in the financial sector.
Marko's Take
For new readers interested in more of a political bent, we have converted some of our written blogs to video format on You Tube. They can be accessed by clicing here http://www.youtube.com/markostaketv.
Thursday, May 20, 2010
California Sinking Amid Its Budget Crisis
A popular wives tale in California is that a huge earthquake on the San Andreas fault would cause the Golden State to sink into the Pacific Ocean. It doesn't look like an earthquake will be necessary. California's own budget crisis has the state drowning in an ocean of red ink.
Last Friday, Governor Arnold Schwarzenegger proposed a new budget that would dramatically reduce aid to some of its poorest and neediest citizens.
His $83.4 billion plan would also cap funding for local schools, cut state workers' pay and reduce 60% of state money for local mental health programs. State parks and higher education are among the few areas the proposed budget doesn't impact.
The budget does not raise taxes, but assumes $3.4 billion in help from Washington, or roughly half of what the governor sought earlier this year in order to help close a budget gap now estimated at $19.1 billion. Billions more would be saved through accounting moves and fund shifts.
Elimination of the state's main welfare program called CalWorks, would affect 1.3 million people, of which 1 million are children. The program requires recipients to eventually have jobs and gives families an average $500 a month. Eliminating those payments would save the state $1.6 billion, the administration said. It would also make California the only state not to offer a welfare-to-work program for low-income families with children.
Under the proposed budget, local school funding would be frozen. Education officials claim they are owed a $2.8 billion increase, without which they wouldn't be able to cover scheduled cost-of-living raises and other obligations. Education spending has already been cut back substantially, requiring many districts to lay off teachers which will increase class sizes.
The governor's plan would reduce prison costs by shifting the responsibility for some state inmates to local governments. According to his estimate, the state would save $248 million by sending new low-level felons to local jails instead of to state prisons and by shifting supervision of state juvenile parolees to counties.
Sacramento is also looking to borrow $1.2 billion in gas tax revenue and other transportation-related funds to help balance the budget. Another idea is to raise more than $200 million by installing automated cameras at red-light intersections to ticket speeding drivers.
Schwarzenegger's latest budget proposal is merely a starting point for negotiations that typically stretch well into the summer. His previous attempts to impose more dramatic spending cuts have been opposed primarily by Democrats who reluctantly agreed to substantial cuts last year.
A main source of California's fiscal woes is pension obligations to civil servants, yet Democrats continue to resist substantive reform. "The cost of employee retirement benefits this year is $6.1 billion," said Mr. Schwarzenegger. "That is more than what it would cost to keep [the welfare-to-work program] CalWorks, child care, mental health services and in-home supportive services."
Democrats want the governor to agree to another income tax increase on the rich, even though California currently has one of the highest tax rates in the U.S. Yet, IRS statistics indicate that $10 billion in wealth has been lost from out-migration in the last 5 years.
The ongoing budget stalemate is largely the result of a poorly designed political system. Gerrymandered districts drawn by the legislators themselves, combined with a semi-closed primary election system, have tended to send the most extreme ideologues to Sacramento in the last decade. Voters can correct both flaws when they cast ballots this year.
California is the only state with a requirement that a two-thirds majority vote be achieved for both passage of a budget and an increase in taxes. So, if 51% of voters agree on how to fix the state budget, it still must be approved by two-thirds of each legislative house. That requirement explains the consistent gridlock.
As a result of the ongoing budget squabbles, Schwarzenegger's job approval rating has descended to an all-time low of only 24% among likely voters. The Legislature's approval is even lower, 11%, placing them below Attila The Hun.
Relief will likely come from the 2010 elections. Any shake-up in the political mix will require a new set of faces in Sacramento and a new governor. Unfortunately, given the rapidly deteriorating condition of California and the rest of world's economies, it may prove too little-too late.
Marko's Take
For new readers with a political bent, we are releasing video blogs on You Tube. Topics addressed include "Peak Oil", "The Federal Reserve", "Social Security" and "Personal Income Taxes". More videos to follow.
They can be accessed by clicking here http://www.youtube.com/markostaketv.
Last Friday, Governor Arnold Schwarzenegger proposed a new budget that would dramatically reduce aid to some of its poorest and neediest citizens.
His $83.4 billion plan would also cap funding for local schools, cut state workers' pay and reduce 60% of state money for local mental health programs. State parks and higher education are among the few areas the proposed budget doesn't impact.
The budget does not raise taxes, but assumes $3.4 billion in help from Washington, or roughly half of what the governor sought earlier this year in order to help close a budget gap now estimated at $19.1 billion. Billions more would be saved through accounting moves and fund shifts.
Elimination of the state's main welfare program called CalWorks, would affect 1.3 million people, of which 1 million are children. The program requires recipients to eventually have jobs and gives families an average $500 a month. Eliminating those payments would save the state $1.6 billion, the administration said. It would also make California the only state not to offer a welfare-to-work program for low-income families with children.
Under the proposed budget, local school funding would be frozen. Education officials claim they are owed a $2.8 billion increase, without which they wouldn't be able to cover scheduled cost-of-living raises and other obligations. Education spending has already been cut back substantially, requiring many districts to lay off teachers which will increase class sizes.
The governor's plan would reduce prison costs by shifting the responsibility for some state inmates to local governments. According to his estimate, the state would save $248 million by sending new low-level felons to local jails instead of to state prisons and by shifting supervision of state juvenile parolees to counties.
Sacramento is also looking to borrow $1.2 billion in gas tax revenue and other transportation-related funds to help balance the budget. Another idea is to raise more than $200 million by installing automated cameras at red-light intersections to ticket speeding drivers.
Schwarzenegger's latest budget proposal is merely a starting point for negotiations that typically stretch well into the summer. His previous attempts to impose more dramatic spending cuts have been opposed primarily by Democrats who reluctantly agreed to substantial cuts last year.
A main source of California's fiscal woes is pension obligations to civil servants, yet Democrats continue to resist substantive reform. "The cost of employee retirement benefits this year is $6.1 billion," said Mr. Schwarzenegger. "That is more than what it would cost to keep [the welfare-to-work program] CalWorks, child care, mental health services and in-home supportive services."
Democrats want the governor to agree to another income tax increase on the rich, even though California currently has one of the highest tax rates in the U.S. Yet, IRS statistics indicate that $10 billion in wealth has been lost from out-migration in the last 5 years.
The ongoing budget stalemate is largely the result of a poorly designed political system. Gerrymandered districts drawn by the legislators themselves, combined with a semi-closed primary election system, have tended to send the most extreme ideologues to Sacramento in the last decade. Voters can correct both flaws when they cast ballots this year.
California is the only state with a requirement that a two-thirds majority vote be achieved for both passage of a budget and an increase in taxes. So, if 51% of voters agree on how to fix the state budget, it still must be approved by two-thirds of each legislative house. That requirement explains the consistent gridlock.
As a result of the ongoing budget squabbles, Schwarzenegger's job approval rating has descended to an all-time low of only 24% among likely voters. The Legislature's approval is even lower, 11%, placing them below Attila The Hun.
Relief will likely come from the 2010 elections. Any shake-up in the political mix will require a new set of faces in Sacramento and a new governor. Unfortunately, given the rapidly deteriorating condition of California and the rest of world's economies, it may prove too little-too late.
Marko's Take
For new readers with a political bent, we are releasing video blogs on You Tube. Topics addressed include "Peak Oil", "The Federal Reserve", "Social Security" and "Personal Income Taxes". More videos to follow.
They can be accessed by clicking here http://www.youtube.com/markostaketv.
Wednesday, May 19, 2010
Is The Second Dip Imminent?
For a while, we have expected the "Second Dip" of this Double-Dip Hyper-Inflationary Depression to materialize. It sure looks like it's here.
While the economic statistics suggesting at least some economic recovery continue to pour in, behind the numbers, a much darker picture is being drawn.
The main culprit in the imminent downturn is the ongoing systemic evaporation of liquidity. The canaries in the coal mine are the world stock markets, which have suddenly begun to plunge precipitously along with world credit markets.
In addition, there are plenty of excellent and accurate leading indicators that have been screaming that a more vigorous downturn is immediately ahead.
The most ominous is the unprecedented shrink in the broad aggregates of our money supply.
Real M3, the broadest measure of money and liquidity has dropped by an unprecented 7% in the last 12 months, according to Shadow Stats (http://www.shadowstats.com/). While there have been instances when the economy has fallen into recession without money supply contracting first, there are NO examples of a prolonged drop in money which has NOT been followed by a sharp economic crunch.
Whenever real M3 has contracted on a year-to-year basis, the economy always has followed, either falling into recession, or if already in recession, intensifying. If liquidity contracts, the broad economy will inevitably suffer. The present contraction in broad liquidity is the deepest of the post-World War II era. Historically, the lead time between the liquidity signal and economic activity is roughly six-to-nine months.
A major component of money creation is the Commercial and Industrial Loan market, which according to the Federal Reserve Board, has fallen by a mind-numbing 25% from its peak in late 2008! If the economy were truly healthy and business expanding, this data set would be turning up rather than plunging. Commercial Paper outstanding has dropped by a staggering 50% since its peak in 2007!
These are both foretelling more problems in the banking sector with the reductions demonstrating just how poor the condition of the credit markets are.
The other issue to consider is that the Obama Adminstration, Federal Reserve (FED) and Department of Treasury are completely out of bullets. Given the combination of extra-ordinary stimulus packages, ZERO interest rates and aggressive market bail-outs like TARP, the economy ought to be humming along. At this point, there are few options left.
Add to that, the meltdown in Sovereign Debt in Europe, the massive worldwide budget deficits and runaway entitlement programs and it's obvious that further policy measures are not likely to be successful without experiencing a very painful period of economic adjustment.
One must ask the obvious question. Will the economic downturn bring down hard assets like GOLD? Temporarily perhaps, but ultimately the financial authorities will be forced to employ more desperate measures to restore liquidity. These measures will absolutely spark the embers of hyper-inflation which will provide a very beneficial environment to trigger the next mania in precious metals and the underlying mining stocks.
Marko's Take
For our solution to the Budget Deficit, we proposed a two-part program last weekend. The blogs can be read by clicking http://markostake.blogspot.com/2010/05/fixing-budget-mess-part-1-negative.html and http://markostake.blogspot.com/2010/05/fixing-budget-deficit-part-2.html.
While the economic statistics suggesting at least some economic recovery continue to pour in, behind the numbers, a much darker picture is being drawn.
The main culprit in the imminent downturn is the ongoing systemic evaporation of liquidity. The canaries in the coal mine are the world stock markets, which have suddenly begun to plunge precipitously along with world credit markets.
In addition, there are plenty of excellent and accurate leading indicators that have been screaming that a more vigorous downturn is immediately ahead.
The most ominous is the unprecedented shrink in the broad aggregates of our money supply.
Real M3, the broadest measure of money and liquidity has dropped by an unprecented 7% in the last 12 months, according to Shadow Stats (http://www.shadowstats.com/). While there have been instances when the economy has fallen into recession without money supply contracting first, there are NO examples of a prolonged drop in money which has NOT been followed by a sharp economic crunch.
Whenever real M3 has contracted on a year-to-year basis, the economy always has followed, either falling into recession, or if already in recession, intensifying. If liquidity contracts, the broad economy will inevitably suffer. The present contraction in broad liquidity is the deepest of the post-World War II era. Historically, the lead time between the liquidity signal and economic activity is roughly six-to-nine months.
A major component of money creation is the Commercial and Industrial Loan market, which according to the Federal Reserve Board, has fallen by a mind-numbing 25% from its peak in late 2008! If the economy were truly healthy and business expanding, this data set would be turning up rather than plunging. Commercial Paper outstanding has dropped by a staggering 50% since its peak in 2007!
These are both foretelling more problems in the banking sector with the reductions demonstrating just how poor the condition of the credit markets are.
The other issue to consider is that the Obama Adminstration, Federal Reserve (FED) and Department of Treasury are completely out of bullets. Given the combination of extra-ordinary stimulus packages, ZERO interest rates and aggressive market bail-outs like TARP, the economy ought to be humming along. At this point, there are few options left.
Add to that, the meltdown in Sovereign Debt in Europe, the massive worldwide budget deficits and runaway entitlement programs and it's obvious that further policy measures are not likely to be successful without experiencing a very painful period of economic adjustment.
One must ask the obvious question. Will the economic downturn bring down hard assets like GOLD? Temporarily perhaps, but ultimately the financial authorities will be forced to employ more desperate measures to restore liquidity. These measures will absolutely spark the embers of hyper-inflation which will provide a very beneficial environment to trigger the next mania in precious metals and the underlying mining stocks.
Marko's Take
For our solution to the Budget Deficit, we proposed a two-part program last weekend. The blogs can be read by clicking http://markostake.blogspot.com/2010/05/fixing-budget-mess-part-1-negative.html and http://markostake.blogspot.com/2010/05/fixing-budget-deficit-part-2.html.
Tuesday, May 18, 2010
Worldwide Inflation Data Reveals Building Pressure
New data for inflation for the U.K. and U.S. was released this morning. As has been the case since the beginning of the financial crunch, reported data for the U.S. continues to suggest that inflation is tame. This, of course, is at odds with real life experience, which suggests the opposite.
The Producer Price Index (PPI) edged lower 0.1% last month, the second decline in the past 3 months, the Labor Department said Tuesday. Core inflation, which excludes energy and food rose 0.2%, slightly faster than expected. But over the past year, core prices are up just 1%. Core prices, an invention of the government, are hardly representative of anecdotal experience since they assume that no one eats or drives.
For April, food costs dipped by 0.2%. It was the first decline in 9 months and came after a 2.4% surge during the previous month - the largest gain in 26 years. The March increase reflected the impact of a winter freeze in Florida that heavily damaged citrus and vegetable crops. Energy prices fell 0.8% in April with gasoline prices down 2.7%.
In the U.K., the reported numbers were far less sanguine.
Inflation leapt to 3.7% in April, significantly higher than expected, prompting a letter of explanation from the governor of the Bank of England to the new Chancellor George Osborne.
The annual inflation rate of the British Consumer Price Index (CPI) was up from 3.4% in March and well above the Bank’s 2% target. Economists had projected inflation to hit 3.5% this month.
The retail price index measure of inflation jumped even higher to 5.3% in April from 4.4% in March and reached its highest since 1991. The retail price index is used as a benchmark for many public sector contracts, benefits payments and wage settlements.
The further rise in inflation will prove sticky for the Bank of England. Interest rates are still at 0.5% and the Bank pumped £200 billion in newly created cash into the economy to fight the recession.
This news comes after many Asian countries are also experiencing various aspects of inflation - especially in the form of what appears to be housing bubbles. The housing price escalation is particularly prevalent in China and Australia. We have written two very recent blogs on the issues which can be reviewed by clicking http://markostake.blogspot.com/2010/05/asian-inflation-contagion.html and http://markostake.blogspot.com/2010/05/rising-chinese-inflation-augurs-well.html.
One has to remain vigilant as to the accuracy of inflation data as reported by the Labor Department. As we've also pointed out in various pieces, the methodology for computing the CPI has been altered several times since the beginning of the Clinton Administration. The effect of these alterations has been to substantially reduce the reported number. According to Shadow Stats (http://www.shadowstats.com/), the CPI would be reported at closer to 6% if the pre-Clinton methodology was still employed today.
The important thing to keep in mind is that the PPI and CPI are not necessarily indicative of what any individual will actually experience. A better measure is to review your outflows and compare them to the past. If your expenses are rising at 10%, then a tame CPI or PPI is completely irrelevant.
It's inevitable that even the reported numbers will start to creep higher and this should occur in the very near future. The most objective measure of inflation expectations is the GOLD market, which continues to surge to new all-time highs. If that market screams INFLATION, why isn't Uncle Sam listening?
Marko's Take
Some websites we like and urge you to check out are the following: LeMetropole Cafe (http://www.lemetropolecafe.com/) and Shadow Stats (http://www.shadowstats.com/). Both of these sites, like us, only deliver the unvarnished truth - a rare commodity these days.
The Producer Price Index (PPI) edged lower 0.1% last month, the second decline in the past 3 months, the Labor Department said Tuesday. Core inflation, which excludes energy and food rose 0.2%, slightly faster than expected. But over the past year, core prices are up just 1%. Core prices, an invention of the government, are hardly representative of anecdotal experience since they assume that no one eats or drives.
For April, food costs dipped by 0.2%. It was the first decline in 9 months and came after a 2.4% surge during the previous month - the largest gain in 26 years. The March increase reflected the impact of a winter freeze in Florida that heavily damaged citrus and vegetable crops. Energy prices fell 0.8% in April with gasoline prices down 2.7%.
In the U.K., the reported numbers were far less sanguine.
Inflation leapt to 3.7% in April, significantly higher than expected, prompting a letter of explanation from the governor of the Bank of England to the new Chancellor George Osborne.
The annual inflation rate of the British Consumer Price Index (CPI) was up from 3.4% in March and well above the Bank’s 2% target. Economists had projected inflation to hit 3.5% this month.
The retail price index measure of inflation jumped even higher to 5.3% in April from 4.4% in March and reached its highest since 1991. The retail price index is used as a benchmark for many public sector contracts, benefits payments and wage settlements.
The further rise in inflation will prove sticky for the Bank of England. Interest rates are still at 0.5% and the Bank pumped £200 billion in newly created cash into the economy to fight the recession.
This news comes after many Asian countries are also experiencing various aspects of inflation - especially in the form of what appears to be housing bubbles. The housing price escalation is particularly prevalent in China and Australia. We have written two very recent blogs on the issues which can be reviewed by clicking http://markostake.blogspot.com/2010/05/asian-inflation-contagion.html and http://markostake.blogspot.com/2010/05/rising-chinese-inflation-augurs-well.html.
One has to remain vigilant as to the accuracy of inflation data as reported by the Labor Department. As we've also pointed out in various pieces, the methodology for computing the CPI has been altered several times since the beginning of the Clinton Administration. The effect of these alterations has been to substantially reduce the reported number. According to Shadow Stats (http://www.shadowstats.com/), the CPI would be reported at closer to 6% if the pre-Clinton methodology was still employed today.
The important thing to keep in mind is that the PPI and CPI are not necessarily indicative of what any individual will actually experience. A better measure is to review your outflows and compare them to the past. If your expenses are rising at 10%, then a tame CPI or PPI is completely irrelevant.
It's inevitable that even the reported numbers will start to creep higher and this should occur in the very near future. The most objective measure of inflation expectations is the GOLD market, which continues to surge to new all-time highs. If that market screams INFLATION, why isn't Uncle Sam listening?
Marko's Take
Some websites we like and urge you to check out are the following: LeMetropole Cafe (http://www.lemetropolecafe.com/) and Shadow Stats (http://www.shadowstats.com/). Both of these sites, like us, only deliver the unvarnished truth - a rare commodity these days.
Monday, May 17, 2010
ECU Silver Mining Update: It Keeps Getting Better
A few months ago, we introduced what is possibly the best value in the junior precious metals sector - ECU Silver Mining (ECUXF or ECU.TO) http://markostake.blogspot.com/2010/02/ecu-silver-mining-as-good-as-it-gets_7745.html. The news on this company just keeps getting better.
ECU has continued to climb the rapid growth curve it commenced early this year. For the month of March, results were at record levels. Some of the highlights included a 12% increase in Silver to 33,614 ounces and a 40% increase in Gold to 705 ounces - resulting in a 27% increase in Silver equivalent to 79,443 ounces (using a 65 to 1 ratio of Silver to Gold).
The news got even better in April. The company realized a monthly sales figure of $2 million.
Recent drilling results have produced some prodigious finds.
In Velardena, the new results represent an increase in precious metals contents of about 10%, but the resources in that area would now be classified as "measured" as opposed to "inferred". The mineral resources for the CC vein in that area were classified as inferred with average width of 1.51 metres grading 1.94 grams per ton Gold, 127 grams per ton Silver, 0.80% Lead and 2.40% Zinc. By comparison, the updated results represent an increase in precious metals contents of more than 500% and the mineral resources in that area would also be upgraded to measured.
ECU now has mineral resources of 6 million ounces of Gold equivalent, which at current market prices would be worth approximately $7.2 billion! Naturally, resources in the ground do NOT take into account the cost of extraction, so the implied "asset value" would need to be discounted. However, the asset value DOES NOT take into account the in-ground assets yet to be completely delineated - resources which could theoretically multiply the potential value by many times.
Since 2007, ECU has increased its Silver equivalent ounce resource base from 100 million ounces to now more than 400 million ounces. With drilling results coming in so favorably, one can only imagine just how significant a miner this company is destined to become.
So, how much will it cost you to buy $7.2 billion in Gold in the ground plus the humongous upside of further resource upgrades? At the closing stock price of $0.75 multiplied by the roughly 300 million shares outstanding, the market capitalization is a mere $225 million. Yes, $225 Million! Put differently, ECU has $24 per share of resources, clearly at the extreme upper end of junior miner value.
The company is now profitable, has enough cash to meet future needs and has been successful in paying down its debt. As of the end of the year, ECU reported more than $7 million in cash and had reduced debt to about $15 million.
As a disclosure item, I continue to hold a decent stake in this company and expect to do so into the future. I expect to see ECU trading at many multiples its current price in the not-too-distant future - especially if precious metals prices continue their march upward.
Marko's Take
Please visit us on You Tube. You can access our video blog series by clicking here http://www.youtube.com/markostaketv.
ECU has continued to climb the rapid growth curve it commenced early this year. For the month of March, results were at record levels. Some of the highlights included a 12% increase in Silver to 33,614 ounces and a 40% increase in Gold to 705 ounces - resulting in a 27% increase in Silver equivalent to 79,443 ounces (using a 65 to 1 ratio of Silver to Gold).
The news got even better in April. The company realized a monthly sales figure of $2 million.
Recent drilling results have produced some prodigious finds.
In Velardena, the new results represent an increase in precious metals contents of about 10%, but the resources in that area would now be classified as "measured" as opposed to "inferred". The mineral resources for the CC vein in that area were classified as inferred with average width of 1.51 metres grading 1.94 grams per ton Gold, 127 grams per ton Silver, 0.80% Lead and 2.40% Zinc. By comparison, the updated results represent an increase in precious metals contents of more than 500% and the mineral resources in that area would also be upgraded to measured.
ECU now has mineral resources of 6 million ounces of Gold equivalent, which at current market prices would be worth approximately $7.2 billion! Naturally, resources in the ground do NOT take into account the cost of extraction, so the implied "asset value" would need to be discounted. However, the asset value DOES NOT take into account the in-ground assets yet to be completely delineated - resources which could theoretically multiply the potential value by many times.
Since 2007, ECU has increased its Silver equivalent ounce resource base from 100 million ounces to now more than 400 million ounces. With drilling results coming in so favorably, one can only imagine just how significant a miner this company is destined to become.
So, how much will it cost you to buy $7.2 billion in Gold in the ground plus the humongous upside of further resource upgrades? At the closing stock price of $0.75 multiplied by the roughly 300 million shares outstanding, the market capitalization is a mere $225 million. Yes, $225 Million! Put differently, ECU has $24 per share of resources, clearly at the extreme upper end of junior miner value.
The company is now profitable, has enough cash to meet future needs and has been successful in paying down its debt. As of the end of the year, ECU reported more than $7 million in cash and had reduced debt to about $15 million.
As a disclosure item, I continue to hold a decent stake in this company and expect to do so into the future. I expect to see ECU trading at many multiples its current price in the not-too-distant future - especially if precious metals prices continue their march upward.
Marko's Take
Please visit us on You Tube. You can access our video blog series by clicking here http://www.youtube.com/markostaketv.
Sunday, May 16, 2010
Fixing The Budget Deficit: Part 2, Incentivizing Politicians
Yesterday, we began a series on how to fix the budget deficit by suggesting wholesale changes to how individuals are incentivized through the structures of taxes. Change how people are rewarded and punished and you'll get them to do what we, as a society, would like to see done. That was Step 1.
Step 2: Create Appropriate Incentives For Politicians To Behave In The Country's Interest
Regardless of where someone aligns politically, the sentiment toward politicians could hardly get any lower. In special elections to replace vacant seats, the incumbent party is being rejected in droves, however, voter anger has mostly been directed at Democrats. Right now, politicians, especially CAREER politicians, are being looked upon as akin to either ambulance-chasing lawyers or used car salesmen - on a good day!
Let's face it. Politicians do such a crummy job because their incentive is to do whatever it takes to get re-elcted even if it means voting for a piece of legislation they KNOW will be ultimately harmful. Ideally, we need them to do the RIGHT thing for the LONG run even if it may affect their re-election campaigns because of SHORT run dynamics.
Do we need to change human behavior? Do we need to drug them? How do we get them to do the right thing?
We can get politicians to behave and vote exactly the way we want them to by changing their incentive structure. How? The same way a corporation does. By rewarding them for "success" and punishing them for "failure" in the performance of their duties.
Let's take the budget as an example - an area Congress has a direct hand in determining. Think of Representatives and Senators as large groups of two separate Boards of Directors for America Corporation. If we want them to balance the budget, PAY THEM A BONUS if they balance the budget!
That way, it's certain to happen.
Think it would be too expensive? Hardly! Let's say we paid a performance bonus to the entire House of Representatives of $100 million for achieving a balanced budget. If successful, that would produce more than $250,000 per person - more than a year's pay. We could do the same for Senators. A $100 million dollar bonus pool would translate into $1 million each. Think they couldn't balance the budget with that carrot hanging in front of them?
Given the size of budget deficit we now have of nearly $1.5 trillion, that bonus structure would save itself many, many times over. Suddenly, they wouldn't be so anxious to go on vacations. Suddenly, hard decisions would be made as to where to make cuts. Suddenly, we would see FAR FEWER pork projects.
We could also withhold some of that bonus until the goal is actually met. Since economic data like budget deficits are only known after the fact, we should only release the bonuses when the final tallies are in. That way, we don't pay them for their lousy projections, but for accomplishments.
This same methodology could be used to achieve other goals like reforming out of control entitlement programs, or trimming defense, or any other goal deemed to be in the best interests of our country as a whole.
The amount of pay could be determined by an executive compensation committee of respected and experienced people from all walks of life. This committee could be made up of folks such as former Presidents (at least those without a wife who is serving as Secretary of State and wants that Presidency oh so bad!) or business executives or other high profile and trusted individuals.
Another means of correcting the lunacy of our political ruling class would be to force them to eat their own cooking You like Obamacare so much? Sign up! You like Social Security so much? Sign up! There should be no ability to "opt out".
If we forced them to abide by the rules they set out for everyone else, they might just be a tad less inclined to stuff these rules and programs down our throats!
This approach to how we utilize our Congress, if properly stuctured, would completely change the horrendous and inefficient dynamic characterizing Washington, D.C. The interests of Congress and the populace would be completely aligned. We would have a more effective governing society.
Marko's Take
We devoted a two-part video blog series to fixing Social Security. Part 1 of the series, entitled "Social In-Security: The Problem" can be accessed by clicking here http://www.youtube.com/markostaketv#p/u/0/twFn9XyP2rI. Part 2 of the series, entitled "Social In-Security: The Solution" will be posted in the next couple of days.
Step 2: Create Appropriate Incentives For Politicians To Behave In The Country's Interest
Regardless of where someone aligns politically, the sentiment toward politicians could hardly get any lower. In special elections to replace vacant seats, the incumbent party is being rejected in droves, however, voter anger has mostly been directed at Democrats. Right now, politicians, especially CAREER politicians, are being looked upon as akin to either ambulance-chasing lawyers or used car salesmen - on a good day!
Let's face it. Politicians do such a crummy job because their incentive is to do whatever it takes to get re-elcted even if it means voting for a piece of legislation they KNOW will be ultimately harmful. Ideally, we need them to do the RIGHT thing for the LONG run even if it may affect their re-election campaigns because of SHORT run dynamics.
Do we need to change human behavior? Do we need to drug them? How do we get them to do the right thing?
We can get politicians to behave and vote exactly the way we want them to by changing their incentive structure. How? The same way a corporation does. By rewarding them for "success" and punishing them for "failure" in the performance of their duties.
Let's take the budget as an example - an area Congress has a direct hand in determining. Think of Representatives and Senators as large groups of two separate Boards of Directors for America Corporation. If we want them to balance the budget, PAY THEM A BONUS if they balance the budget!
That way, it's certain to happen.
Think it would be too expensive? Hardly! Let's say we paid a performance bonus to the entire House of Representatives of $100 million for achieving a balanced budget. If successful, that would produce more than $250,000 per person - more than a year's pay. We could do the same for Senators. A $100 million dollar bonus pool would translate into $1 million each. Think they couldn't balance the budget with that carrot hanging in front of them?
Given the size of budget deficit we now have of nearly $1.5 trillion, that bonus structure would save itself many, many times over. Suddenly, they wouldn't be so anxious to go on vacations. Suddenly, hard decisions would be made as to where to make cuts. Suddenly, we would see FAR FEWER pork projects.
We could also withhold some of that bonus until the goal is actually met. Since economic data like budget deficits are only known after the fact, we should only release the bonuses when the final tallies are in. That way, we don't pay them for their lousy projections, but for accomplishments.
This same methodology could be used to achieve other goals like reforming out of control entitlement programs, or trimming defense, or any other goal deemed to be in the best interests of our country as a whole.
The amount of pay could be determined by an executive compensation committee of respected and experienced people from all walks of life. This committee could be made up of folks such as former Presidents (at least those without a wife who is serving as Secretary of State and wants that Presidency oh so bad!) or business executives or other high profile and trusted individuals.
Another means of correcting the lunacy of our political ruling class would be to force them to eat their own cooking You like Obamacare so much? Sign up! You like Social Security so much? Sign up! There should be no ability to "opt out".
If we forced them to abide by the rules they set out for everyone else, they might just be a tad less inclined to stuff these rules and programs down our throats!
This approach to how we utilize our Congress, if properly stuctured, would completely change the horrendous and inefficient dynamic characterizing Washington, D.C. The interests of Congress and the populace would be completely aligned. We would have a more effective governing society.
Marko's Take
We devoted a two-part video blog series to fixing Social Security. Part 1 of the series, entitled "Social In-Security: The Problem" can be accessed by clicking here http://www.youtube.com/markostaketv#p/u/0/twFn9XyP2rI. Part 2 of the series, entitled "Social In-Security: The Solution" will be posted in the next couple of days.
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