World Energy Outlook: Prices will rise, dampening growth

As of  November 9th, 2010, the World Energy Outlook 2010 was released by the IEA. Some charts of the press presentation are really worrysome:

1. Conventional oil production has already peaked 2006. Conventional oil  can be pumped out of the ground cheaply and easily. Unconventional oil is extracted from oil sands or from deep water oil fields; production costs are high.
   
   To maintain todays production levels in the next decades, crude oil fields have to be developed on a big scale. Personally, I am scratching my head, wondering whrere we will find those oil fields. Remember, that the we are not talking about the hard to develop unconventional oil, its share is small.
   
   
2.  The next chart is about energy consumption. While the IEA correctly assumes that emerging economies will consume more oil and coal...
   ... it assumes that the developed countries are willing to reduce their oil and gas consumption significantly. So, please sell your Porsche or your Range Rover. China needs it all, sorry!
   
   
3. Hence, we can safely assume that belows oil increases are an understatement.
   

It seems evident, that the IEA is downplaying future oil price hikes. Follow this blog to read more about the IEA report.

Bottom line, those higher energy costs will damp future growth significantly!

European Sovereign Debt Crisis

Marktets have been weak today, partially because of the European sovereign debt crisis caused by Ireland's banks: Today's Financial Times has a nice graphs giving you an idea of the size of the problem:

Germany is in a real dilemma: Since its banks are loaded with Irish bank debt, banks will lobby hard for government protection, while hard working citizen will loath paying for it.

I have also found a Morgan Stanley Report as of November 22, 2010 (Morgan Stanley Strategy Forum) going into the details of the crisis:

Global Economics by Joachim Fels:

"The support package for Ireland that was agreed in principle last night won’t mark the end of the European sovereign debt crisis; it just opens a new chapter. Our view all along had been that Greece was only the beginning and that the sovereign debt crisis would work its way through the periphery and eventually into the core of Europe. Also, when the big European rescue fund, the EFSF, was created in the spring, we said that governments’ hopes that it would never be used would be disappointed. Last night, the European finance ministers decided to activate the fund."

 Moreover he mentions 3 uncertainties:

1. The European help for Ireland will increase the banks' solvency but the ability to repay the Irish government debt is still in doubt.
2. What happens when the rescue fund expires in 3 years? Should bond holders contribute as well? This would downgrade government bonds!
3. The rescue fund is importing the debt crisis from peripheral Europe to core Europe (core Europe is guaranteeing  debts of peripheral Europe).

What if I had bought Apple stock instead...

Blogger Kyle Conroy researched prices of Apple products and stock prices. He came up with a interesting table which gives you the value of your Apple stocks if you had invested the money in Apple stocks instead of buying an Apple product:

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Instead of buying a PowerBook G3 in 1997 for USD 5700.- you would have Apple stocks (AAPL) worth USD 330.000.-. The reason for this staggering investment performance is of course AAPL stellar increase from USD 4. to USD 300.-:

Source: Reuters

In hindsight, we all know better.

Taleb: The Fed is squeezing the ketchup bottle of inflation until we are all covered

Nassim Taleb author of "Fooled by Randomness" and "The Black Swan" and succesfull options trader is a outspoken critic of the financial establishment. He is focussed on non-linear relationship and improbable events which are occuring in financial markets far too often. Recently, he discussed the Fed policy on Bloomberg TV and made pitroesque comparison with a ketchup bottle:

Outperformance of Low Risk / Value Stocks

Last week I have attended a interesting presentation by Prof. Haugen organised by the Swiss CFA Society.
 Mr Haugen made very convincing case for low risk value stocks. These are stable stocks with a sound business which generates nice but stable (not fast growing stocks) stocks with attractive dividends reasonably priced. His empirical research proved that these stocks are outperforming the market consistently over the last 80 years.

His explanation in his 2008 paper "Case Closed":
..."we feel that the market overreacts to past record of success and failure on the part of companies, making relatively expensive (growth) stocks too expensive and relatively cheap (value) stocks too inexpensive. After the initial overreaction, the market tends to correct itself, producing low returns to expensive growth stocks and high returns to cheap value stocks, as the relative profitability of these companies tends to mean-revert faster than expected."

This paper has very important implications for stock selection, and provides the empirical evidence for the successful value approach of Warren Buffet.

Quantitative Easing for Kids

At a presentation of Morgan Stanley, we were informed about a very educational movie. Enjoy!

US Monatery Base

The monetary base is the amount of money in the economy and consists of coins, paper money, and commercial banks' reserves with the central bank. This base is the only thing a central bank can control directly.

I have plotted a historic graph of the monetary base below. The base shot up like a rocket in the last two years. The Fed must be desperate to employ such an unprecedent measure.

Please keep in mind that the USD 600 billions of QE2 are not included (it would not even fit in)!

Chinas Property Market and High Risk Rally

BCA’s Arthur Budaghyan made in a presentation following keypoints about Chinas property market and its influence on emerging markets equity: 

In the last two years, the global recovery was driven by government stimulation of Chinese housing/construction. Properties rallied additional 45% in the12 year old bull marked. The Chinese government seems now to be concerned and increased interest rates to stop the overheating property market. Last time the Chinese government increased interest rates (end of 2007), commodities and emerging markets tanked 6 months later (usual time lag of monetary policy). Arthur thinks QE2 ignites only a short rally and in 3 months a bear market will start hitting emerging markets hard. 

Other indicators of a market peak are increased IPO activity by commodity traders (commodities and Emerging Markets correlate highly) such as Glencore (remember Goldman Sachs IPO was in 1999 and Blackstone in 2007).

Moreover, trading volume in emerging markets went ballistic because of  indiscriminate purchases and massive capital inflows. 

Also, in the last months commodities rallied in USD terms but not in CHF or JPY termsf (defensive currencies). The former is a sign of USD weakness and the latter of a non-confirmation of sustained emerging market performance.

Hence, the prefered asset class is cash. Arthur is also not negative on the USD since he believes that QE2 will not feed into the real economy which would be consistent with a deflationary scenario

Greek Swap File

Bloomberg has reported that the ECB is not going to disclose a report of Greeks' swap transaction with Goldman Sachs. The Bank helped Greece to access the EU by selling them dubious swap transactions which hid the countries debts and deficit.
ECB's Monsieur Trichet has been quoted: “The information contained in the two documents would undermine the public confidence as regards the effective conduct of economic policy...” and “... in the current very vulnerable market environment, the substantial and acute risk of adding to volatility and instability.”

Needless to say that this swap has damaged the Europes citizen.
 Anyone Euros or Greek bonds?

Barton Biggs and Bill Fleckenstein on Bloomberg TV

On the blog Dealbreaker.com I stumbled over a funny interview. The cluelessnes of anchor Betty Liu is especially entertaining, although Barton Biggs is not convincing.