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66 comments on POLL: CLV08 blew past $100...so, in the next 60 days, the front month price of CL will...

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steve from Virginia on September 22, 2008 - 11:49pm Permalink | Subthread | Parent | Comments top

This isn't just about peak oil, but the dollar.

On one hand, it's hard to see where the prices are going, it's easier to figure out where they are coming from.

Most of the people who participate in the financial markets at the highest levels ... hedge fund managers, equity money managers, commodities traders, currency traders ... are sophisticated and have good analytical tools. When they read the Treasury's plan to trade good money for banks' toxic paper ... they not only come to the conclusion the government has gone insane, they act on it.

What's happening in the credit markets is a giant bubble is bursting. The Treasury is trying desperately to keep it inflated. In the 'old days' when the government did something stupid and pointless, the bond market would react by lifting interest rates. Interest rates matter to the government ... which borrows trillions.

Bond traders became known as the 'Bond Vigilantes'. This was in the 1970's and 80'a.

Currency traders as well the bond traders would hedge their positions in Treasuries in the bond markets. The market is large enough to make a difference.

In the intervening years, the Fed has made it impossible to raise bond yields outside of a narrow range. One strategy has been for the Fed to manipulate the futures market by concentrating their buying and selling activities there. Their allies have been the big investment banks that are currently disappearing.

With the bond market unavailable to hedge currency and interest rate risk, traders have turned to the crude market as a synthetic bond market, a place to offset risk in dollars and dollar denominated securities. Instead of strangling the Treasury at the ATM, the public is strangled at the gas pumps.

Think of this $16 jump in crude price as the markets' 'vote' on the Treasury's Bailout plan ...

http://stevefromvirginia.blogspot.com/

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x on September 23, 2008 - 3:34am Permalink | Subthread | Parent | Comments top

Your blog spot appeals for higher interest rates for savers. Being a saver I can sympathize with that view. Real interest rates on savings are below zero giving no incentive to save.

However, we still live in a globalized economy. If interest rates rise here, the Japanese, Chinese or the wealthy oil exporting economies of the Middle East will rush to put money into the U.S. economy driving them down again. Savers have to compete with the Japanese whose interest rate is effectively zero and who have lots of money.

Buying appreciating assets like oil, gold or farm land is the only way out of this dilemma for savers IMO. Personally I like farm land. It is hard for anyone to steal it. It makes you an instant business person with the associated tax write offs plus you can live on it thereby reducing living expenses. It is not as easy as putting money in CDs but the reward seems to be higher over time.

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happlega on September 23, 2008 - 11:26am Permalink | Subthread | Parent | Comments top

I vote for farm land. Eventually we will all need to provide/create food and biomass energy. If you have food or the capacity to grow food it will be much more valuable than gold.

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memmel on September 23, 2008 - 11:50am Permalink | Subthread | Parent | Comments top

I disagree with your statement that farmland is hard to steal its trivial to steal just set the taxes higher then the profit margin on your product and pretty soon the state owns all the land.

Stealing of good farmland by the rich and powerful is a time honored profession probably the second oldest one.

Next as far as I can tell a lot of farmland is in a pricing bubble right now from the corn ethanol squeeze and at least in the US we have more than enough farmland to supply our population with food and enough for export.

Given that industrial agricultural will eventually get squeezed to the point that profit margins are lost as fuel and fertilizer prices increase we can expect a glut of formally good farmland laced with chemicals on the market.

Leaving all this fallow and reverting it back to sustainable agriculture will take some time but most importantly the land itself will have to be very cheap for quite some time to support reverting back to long fallow periods.

And last but not least on of the big drivers in land prices has been suburban expansion as this wanes land in general will revert back to being inline with its productive value.

And finally in the US at least the distribution of productive farmland and population is heavily distorted and abnormal with the larger cities located in some of the least productive regions. As transportation costs climb local but poorer land may well become more valuable then distant richer farmland.

And finally of course the distortion effect of subsidies.
http://query.nytimes.com/gst/fullpage.html?res=9C01E0DC173EF935A15751C1A...

Thus as a serious investment farmland does not look all that good to me it should lose 75-50% of its current price if not more.

I often get a lot of flack for making these statements but right now and for some time in the future investing in farmland for monetary gain is probably foolish. If you can afford to write off most of the money you put into farmland now and simply want the asset for its productive value then fine but its should not be treated as a good investment. At some point the rich that have bought up a lot of the farmland will dump the holding to raise cash and when they do farmland prices will plummet.

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Aniya on September 24, 2008 - 10:53pm Permalink | Subthread | Parent | Comments top

Hi memmel,

So...

1) What do you think *is* a good investment - (if anything)?

2) An anecdote from a recent National Geographic article
(http://ngm.nationalgeographic.com/2008/09/soil/mann-text/6)
involving a different version of the "improve land and lose it" story,

about farmer named Yacouba Sawadogo in Burkina Faso(excerpts):

"Sawadogo, too, laid cordons pierreux across his fields. But during the dry season he also hacked thousands of foot-deep holes in his fields—zaï, as they are called, a technique he had heard about from his parents. Sawadogo salted each pit with manure, which attracted termites. The termites digested the organic matter, making its nutrients more readily available to plants. Equally important, the insects dug channels in the soil. When the rains came, water trickled through the termite holes into the ground. In each hole Sawadogo planted trees. "Without trees, no soil," he says. The trees thrived in the looser, wetter soil in each zai. Stone by stone, hole by hole, Sawadogo turned 50 acres of wasteland into the biggest private forest for hundreds of miles.

Surveyors went through the property, slicing it into tenth-of-an-acre parcels marked by heavy stakes. As the original owner, Sawadogo will be allotted one parcel; his older children will also each receive land. Everything else will be sold off, probably next year. He watched helplessly as city officials pounded a stake in his bedroom floor. Another lot line cut through his father's grave. Today Yacouba Sawadogo is trying to find enough money to buy the forest in which he has invested his life. Because he has made the land so valuable, the price is impossibly high: about $20,000."

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tonyw on September 23, 2008 - 7:47am Permalink | Subthread | Parent | Comments top

"the public is strangled at the gas pumps"
Come on Steve you're having a laugh, Americans pay a ridiculously low price for gas so hardly being strangled. Take a look at European prices.

The big investment banks are already dead, the last two are to convert into tightly regulated bank holding companies. The US taxpayer bail-out of America’s banking sector will reverberate for many years. The US Treasury was already planning to borrow $400bn+ next year to shore up the budget deficit. That could now rise to $1 trillion or more - a significant number. This is not the sort of change you find down the back of the sofa. Failures now have a "get out of jail/bankruptcy free" card. Please tell the voters don't worry TPTB are "doing something".

Unfortunately the gap between the Fed funds rate and the Libor rate (rate at which banks lend to each other) has jumped to the widest for a very long time showing banks don't trust each other. This trillion of extra Treasuries should depress price (more supply less demand) so increasing yields (rates), higher rates will push up mortgage rates etc so slowing the economy. Rinse and repeat, vicious circle??

So as the dollar goes down oil goes up in symetry. Expect more calls against speculators.

Meanwhile over in Denmark, Ebh Bank put itself up for sale yesterday as it cut its profit forecast to zero and removed CEO Strier Poulsen after bad real-estate related loans were larger than expected. Sound familiar? Many senior managers at banks simply did not understand how their institution funded itself. Things have improved but they can still be blindsided by sudden events. That's another fine mess they've gotten us into.

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66 comments on POLL: CLV08 blew past $100...so, in the next 60 days, the front month price of CL will...

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