Do we have an oil bubble?

[metalman]

Re: We have an oil bubble : the proof

I don't think OPEC was on the Oilron play , although initially they may have gladly tagged along (and made good money form their SWF's too), now that the monster has grown out of control they are really scared, because the meltdown of virtual markets may bring a few years of under priced oil in the context of global recession and consequently declinign demand.


You are correct. That's a good telltale sign. Multiply that by 5-20 times (I don't have the numbers to calculate a precise leverage for paper:virtual, so your guess is as good as mine) and you have the volumes of the money invested in virtual oil.


Exactly! But the funny part is that the physical delivery cannot exceed physical demand as long as the refiners play the Enron-aluminum game and nobody wants to take delivery of excess crude production: the Iranians can't move their heavy oil, the Saudis send "ghost tankers" in hope they'll find a buyer by the time the oil gets to destination, and the Quataris are using now personal adds in papers, maybe they can ship to someone 1.2mil barrels Al Shaheen this September.

This time the Saudi King is absolutely right. Increasing the OPEC production will do nothing to prices.



That's a good analogy. As long as Oilron remains an open system (money keeps pouring in ETNs and ETN "producers" have unrestricted access to a real/physical oil anchor) it's will work fine and continue to be extremely profitable even if oil reaches $1gazzilon/barrel.

The big question comes if we look to the monumental error in risk assessment the ETN "maufacturers" are making. The ETN spawning banks are deluded into believing they are perfectly hedged against an oil price decline, because (in their thinking) if the oil price goes down, their funny spread indexes will go down too .... theoretically they can keep making money even on the ride down...

That kind of thinking, IMHO is completely wrong, stupid and delusional. If the ETN buyers get suddenly spooked and they all go short at the same time, the virtual-paper leverage vanishes and the whole correlation physical-paper(Nymex futures)-virtual(ETN oil) breaks down. These banks will suddently have to back gazzilions of virtual oil paper and not even the Fed can dump money so fast to save them.

Of course, if one has access to good data and takes the pain/time to calculate the recycling paper-hedge frequency (by taking into account the net long volume increases on all futures markets, the total volume and the average lifespan lag) a pretty accurate prediction of the bust moment (and optimum moment for making good money ) can be made.

If the second derivative of the recycling frequency goes toward zero, that means that the so called Index specualators have to put the pedal to the metal with their paper-hedge spinning motion... ;) I guess in the end the collapse will be almost a copy of the Enron final nose dive. Maybe we will see investment banks even creating new strange funds to launch/dump the ETN anchorage there, trying to escape thorugh the Enron partnership scheme.

Well ... "this time" is never different, it's always the same!:rolleyes:

i'm coming down on grg's side. why?

1. he's an oil industry expert
2. i don't suspect he's either long or short oil... you argue like a guy who's short, or has a ax to grind.

you've never answered my question: what is the mean price of oil for it to revert to once it everts to the mean as all bubbles must? $10? $50? you must have a number in mind.

then explain this magical paper oil process all over again for oil/rice...

and oil/gold...

and so on.

obviously, there is something else going on besides oil speculation.

as ej says, for oil to crash down (ala your roller coaster picture) the dollar has to crash up.

[Supercilious]

Re: We have an oil bubble : the proof

i'm coming down on grg's side. why?

1. he's an oil industry expert

From the few exchanges with GRG, he seems to me like being a smart and competent person, but no bubble could have ever happened without the majority of industry experts being carried away by analyzing details and forgetting to take a good look at the big picture.

you argue like a guy who's short, or has a ax to grind.

Discrediting the opponent in a debate when running out of valid arguments seems to be in fashion today, and I don't think we should blame only GWB and Karl Rove for this. Anyway, I appreciate I don't have to talk to the hand again.
I have no ax to grind. I'm simply not ready to accept the mantra of "global shortage of commodities" without a close scrutiny of fundamentals.
One more thing: I'm neither long nor short in commodities of any kind, since I have no commodies positions whatsoever. These days I wouldn't touch any commodity with a 30ft pole. Why should I take such a high risk for a questionable potential return when banks and agencies are so good and safe to short sell? Bear Stearns definitely beats Bull Oil

you've never answered my question: what is the mean price of oil for it to revert to once it reverts to the mean as all bubbles must? $10? $50? you must have a number in mind.

OK. Now I get your point. Your question cannot be answered though, because:
-every person who really understands peak oil (and consequently peak cheap oil) knows there is no such thing as a mean price of oil. Of course, one could construe a price dynamic function, based on shaky PDE's, and build a numerical model for simulating physical demand and supply as well as depletion-extraction dependencies. Of course the model would be based based on boundary conditions taken out of the hat (or from scientific journals ). IMHO, such an elaborate model, if carefully tuned, may be as accurate as a well worn Tarot deck or a good crystal ball.
-every person who truly understands the concept of bubble and monetary viscoelasticity models, knows there is no such thing as return to a mean value after a bubble. That's a myth. Look at tulips: even today, some tulip bulbs can be sold with almost $1000.

If you want to ask about my guesses on the bottom price (first derivative of amortized oscillation becomes null) reached after a bubble, I would say that it depends on what happens with the current oil-futures-bubble. I can imagine two extreme scenarios:
-if there is a quasi orderly retreat into forex markets I would guess the price of oil could slowly retreat to $80-90 in about one year or so
-if a doomsday scenario takes place, banks and IB's burst on fire and Bernanke cannot put down those fires with his T-bonderman hose, then I wouldn't be surprised to see the prices going to less than $15.

But without knowing how all this will end, or at least having unrestricted access to data from private pool transactions, your guesses are as good as mine.

then explain this magical paper oil process all over again for oil/rice...

and oil/gold...

and so on.

OK Let's try this:
http://online.wsj.com/public/article...nal_primary_hs

Indexing & ETFs
Trade Oil, Gold, Rice and More in One Fund

By ELEANOR LAISE
November 25, 2007

[...]
A new exchange-traded product may be useful to commodities investors looking to cast a wide net. The Rogers International Commodity Index -- Total Return Elements (RJI), which started trading last month, tracks an index that includes not only standard fare like gold and heating oil but also more exotic commodities like greasy wool, rice and azuki beans.
[...]
Like a number of other newly-launched commodity products, the Rogers Elements are debt securities known as exchange-traded notes or ETNs -- not index mutual funds or ETFs. While funds and ETFs hold a basket of stocks or other securities, exchange-traded notes are essentially just a promise that the issuer will give investors the return of a particular index, after subtracting fees.

That eliminates the risk of tracking error -- the risk that a fund won't follow its index's return as closely as expected.

I bet the price of greasy wool and azuki beans has increased too ....

Anyway, if we talk about ETNs with rice indexing we should not forget our good german friends from Deutsche Bank:
http://biz.yahoo.com/ibd/080416/etf.html?.v=1

DB Agriculture Double Short (AGA)
DB Agriculture Double Long (DAG)
DB Agriculture Short (ADZ)
DB Agriculture Long (AGF)

I also have very good news for those traders who enjoy taking a pleasant break at Starbucks, listening to Elton John on their iPods, browsing the latest trends in interior decoration design on their laptops (you know ... those gorgeous sienna and beige pastels ), while sipping a cup of Gourmet Hot Chocolate. Look at this:

http://www.etftrends.com/2008/06/cocoa-shortage.html

Cocoa Shortage Could Be Sweet for Cocoa ETN

June 27, 2008 at 3:00 pm by Tom Lydon


Corn, wheat, soybeans, sugar, you name it - it’s getting pricier by the minute. But…chocolate? Precious, precious chocolate that many of us consume by the pound?

Yes, indeed. The world’s cocoa supply is threatened, reports Scott Jagow for Marketplace. Now, let’s everybody stay calm - there’s no reason to run to your local Sweet Shoppe and hoard the chocolate goods yet, unless you’ve got a craving that just can’t be denied.
[..]
The newly-launched iPath Dow Jones-AIG Cocoa Total Return Sub-Index (NIB) is one way to capture the rise in cocoa prices, especially if drought and disease continue to be a factor.

metalman, in order to preempt another question and chart attack based on self-evident and self-reinforced mantras, I'll say that the steep increase in the price of iron ore (which is not traded on commodities markets) has nothing to do with commodities ETN's ...., but has everything to do with Renmimbi and BRIC indexed ETN's ;)

[GRG55]

Re: We have an oil bubble : the proof

...One more thing: I'm neither long nor short in commodities of any kind, since I have no commodies positions whatsoever. These days I wouldn't touch any commodity with a 30ft pole. Why should I take such a high risk for a questionable potential return when banks and agencies are so good and safe to short sell? Bear Stearns definitely beats Bull Oil

If the banks can make such an easy killing from issuing ETNs would seem to me they'd be a bad bet to short...;)

[metalman]

Re: We have an oil bubble : the proof

you're not a subscriber so i can't send you to links of previous victims of the fantasy that oil is a bubble here over the years. they had their asses handed to them year after year. so... ok. you win it's a bubble. short the hell out of it. make a killing. we're only trying to educate you. why the lady doth protest so much?

[Guest]

Re: We have an oil bubble : the proof

Discrediting the opponent in a debate when running out of valid arguments seems to be in fashion today ... I'm simply not ready to accept the mantra of "global shortage of commodities" without a close scrutiny of fundamentals. ... in order to preempt another ... attack based on ... self-reinforced mantras, I'll say that the steep increase in the price of iron ore ... has nothing to do with commodities ETN's

$#*; - Hey guy, I've not been following all this very closely but stopped in to read through this thread this evening. Your "close scrutiny of fundamentals" on the topic in question here seems to take a back seat to the "debunking activity" which is instead a good deal more vigorous. Lots of interesting ideas there, and fun to read, but not something I'd want to put any of my own hard won money behind.

I read through your many arguments and wonder at their complexity. We can get some small part of our bearings on the reality of fundamental inputs into petroleum just by looking at global spare capacity, which is down to mere 'vapors' at this point. That might be called a "broad and very straightforward hint" to any foolhardy soul wishing to plonk their hard earned money down on real market bets, based on theories such as you have.

Nobody is "running out of valid arguments" here - we just look at your notions and shrink at the idea of investing based upon them. I hasten to add that it's your own money and you can of course play with it as you please. You've constructed an intricate set of rationales for a popping of the speculative component in oil which is most likely going to disappoint you. Of course if you merely opine about it but steer entirely clear of it with your money, it will go against you but you won't lose money. And of course that's a good thing.

The question is another one really: when it does go against your notions here, will you re-examine the process by which you constructed this complex thesis to find your incorrect premises?

Your theories about the overwhelmingly speculative fundamentals underpinning today's high energy prices are intricate, smart, and even quite interesting. But I for one don't regard them as remotely actionable.

People like Metalman are inviting you to pursue your bubble insights about petroleum with your own money, and along with that, one might note that they are expressing marked reluctance at even the idea of putting a penny of their own money behind your ideas on this topic. I read your explanations and must presume by the vigor of your arguments, that this is an investment thesis about which you have a good deal of conviction?

Well, good luck with that. If anything, I am relieved on your behalf, that you are meanwhile choosing to stick with shorting the financials, rather than venturing into shorting the petroleum sector about which you seem so self-assured, because I personally believe that if you do, you are venturing into an area where the odds are high that you'll get your ass handed to you.

Seems to me we've seen a good few such cases, including one or two high rollers who put some serious change down to back that bet. As for shorting financials, that's speculative, and it's also quite short term "investing" - ultra short term playing like that is good for nimble (and more to the point, astute) players. Better you than me pal.

[Supercilious]

Re: We have an oil bubble : the proof

The question is another one really: when it does go against your notions here, will you re-examine the process by which you constructed this complex thesis to find your incorrect premises?

Lukester, I'm trying to re-examine my view all the time in order to see if my premises are incorrect or not. This is why I enjoy debating here because I can get help with critical scrutiny from others. And I appreciate any help received regardless if it's pro- or con-

Your theories about the overwhelmingly speculative fundamentals underpinning today's high energy prices are intricate, smart, and even quite interesting. But I for one don't regard them as remotely actionable.

Thank you for taking interest in my opinions. And you are right, my theory (at this point at least) is not even remotely actionable. As I said before in this thread, correctly recognizing a bubble is not the same with correctly identifying the precise bubble bust moment and detailed bust scenario. Only the latter is actionable information.

Notwithstanding that nobody should expect to find on a public forum (or on any internet forum) precise actionable information, still understanding a bubble mechanism is a prerequisite for obtaining reliable information and IMHO, examining a potential bubble mechanism makes an interesting debate subject on a public forum, as long as all parties prefer to keep an open critical mind.

People like Metalman are inviting you to pursue your bubble insights about petroleum with your own money, and along with that, one might note that they are expressing marked reluctance at even the idea of putting a penny of their own money behind your ideas on this topic.

First, who said anything about money? As I said before here, I wouldn't touch commodities right now even with a 30ft pole. Although the housing bubble proved to be extremely profitable for me (and still does to some extent), most probably, I'll stay out of commodities altogether this time. My interest in this theory an educational and curiosity-satisfaction exercise.

Also I believe that, at the bottom of the forum page, there is a clear disclaimer:

"Nothing on this website is intended or should be construed as investment advice. It is intended to be used for informational and entertainment purposes only. By using this board you agree that you understand the risks of trading, and are solely responsible for your own investment and trading decisions."

People who can't even read a disclaimer have no business to be even close to an exchange.

I read your explanations and must presume by the vigor of your arguments, that this is an investment thesis about which you have a good deal of conviction?

I think you presumption is wrong... it's just curiosity ... and no .... curiosity doesn't kill cats ... it kills only stupid cats.

If anything, I am relieved on your behalf, that you are meanwhile choosing to stick with shorting the financials, rather than venturing into shorting the petroleum sector about which you seem so self-assured, because I personally believe that if you do, you are venturing into an area where the odds are high that you'll get your ass handed to you.

I know that very well.

Seems to me we've seen a good few such cases, including one or two high rollers who put some serious change down to back that bet.

I'm sorry to hear that. You may remember that many people got "cleaned" by prematurely calling the Enron's collapse, although they were correct in believing Enron had to collapse. There is just one investing advice that I give for free, anywhere I can, to anyone who listens and I'll give it here to: "Know your limits!". About high rollers in general, I have mixed feelings ... empathy and disapproval ... because you know that old NASA saying: "He flies so high, ... he will burn on reentry!"

As for shorting financials, that's speculative, and it's also quite short term "investing" - ultra short term playing like that is good for nimble (and more to the point, astute) players.

I completely agree with that.

Anyway I think mistakes were made on both sides:
-some oldtimers of this board, based on quite a few sad previous experiences, mislabeled me as just another disaster in the making.
-I made the mistake (and I apologize for that) to believe that kicking the "debunking activity" another notch of cynical skepticism would result in a deeper and more interesting debate. Metalman though it was "lady doth", but it was just an poorly executed attempt for getting from him a deeper and more focused feed-back in debunking my arguments.

I apologize for any misunderstanding and discomfort of any kind I've created through my posts.

I just want to explore the possibility we re facing actually a structured investment bubble attached to the commodity futures through a complex mechanism of virtual closed markets, that was sparked by the US deficit (and irresponsible monetary policies) and has resulted in a secondary effect of increasing the price of all commodities: from oil, corn, rice, to azuki beans, greasy wool and ... cocoa (yes ... let's not forget the hot chocolate )

If I'm right, the current commodities bubble is nothing else then a Subprime-SIV 2.0 , but bigger, longer, uncut and blown into the future(s) ...

But how can I explore this idea on iTulip forum if without producing discomfort for questioning the well established conclusion reached by the majority on this board?

Any advice ?

[c1ue]

Re: We have an oil bubble : the proof

Metalman,

No one here is attacking GRG's credentials.

However, I think GRG's credential regarding an Enron style, oil derivative, new fangled pump and dump are not so strong.

We're not talking about whether there is or is not peak oil, what $#* and I are pointing out is that it is (and has been) possible to affect market prices without an actual shortage.

Only the appearance of a shortage was enough.

With Enron, with Florida land, and with tulip bulbs, all three instances were predicated on a belief of intrinsic advantage through scarcity.

With the latter 2 cases, it was clearly a self-reinforcing mania. With Enron, however, it was not a mania but a criminally intentioned and deliberate manipulation of the market.

All we're saying here is that the ETN method - where a bank can issue futures for oil without actually ever owning any oil - is a possible avenue for an Enron style manipulation of the markets.

Nowhere have either $#* or I stated that there is no peak oil, that oil should be fundamentally cheap, etc etc.

That this strategy is similar to MBS's, is in my opinion what makes it MORE likely to be true. It is something perfectly positioned to take advantage of sector rotation.

MBS's were created to fulfill the demand for high yielding bonds, oil futures in turn can be said to fulfill the demand for inflation indexed alpha.

[Judas]

Re: We have an oil bubble : the proof

I apologize for any misunderstanding and discomfort of any kind I've created through my posts.

I just want to explore the possibility we re facing actually a structured investment bubble attached to the commodity futures through a complex mechanism of virtual closed markets, that was sparked by the US deficit (and irresponsible monetary policies) and has resulted in a secondary effect of increasing the price of all commodities: from oil, corn, rice, to azuki beans, greasy wool and ... cocoa (yes ... let's not forget the hot chocolate )

If I'm right, the current commodities bubble is nothing else then a Subprime-SIV 2.0 , but bigger, longer, uncut and blown into the future(s) ...

But how can I explore this idea on iTulip forum if without producing discomfort for questioning the well established conclusion reached by the majority on this board?

I've read through this now and it's a bit fascinating. You want someone to "debunk" your theory that oil (and I guess just about every other product/resource on the planet if your posts about other products having ETNs and therefore bubbly as well) is a bubble. But your theory is based upon:

A. There are ETNs for oil;
B. Sector rotation exists;

therefore...

oil is a bubble.


You say you have no idea what the actual price is, you have no information about the transactions causing this bubble, etc... the only facts we have for your theory are points A and B above.

So there is no actual way to "debunk" you as far as I can tell. Anything someone says does not negate the fact that ETN's and sector rotation exist (your points A and B), and the rise of prices in just about every other resource or product on the planet going up as well you can "refute" by posting a link to an ETN for that product- which in your mind means you have "won" and therefore the other person is stupid.

What could anyone possibly say?

I'm not saying that there isn't a speculative portion of the price of oil, or that it is/isn't a bubble, or anything else. I just can't figure out how someone can "debunk" the opinions you've expressed.

[Supercilious]

Re: We have an oil bubble : the proof

You say you have no idea what the actual price is, you have no information about the transactions causing this bubble, etc... the only facts we have for your theory are points A and B above.

Judas, I believe you are putting words in my mouth. What I said in my reply to metalman is that I don't think there is a such thing as a "mean price" level to return to after a bubble. The actual price of oil is the current price of $140+ right now (with such volatility is hard even to come with a precise spot price without specifying the time stamp in day:hours:minute format )

What would one can calculate, for oil, is the marginal cost distribution for a narrow sector of demand-supply slopes with subsidy-inflation-taxes distortion included. But even if such complex modeling is performed, the result can't be considered an "actual price" of oil (obtained through a price discovery/fixing process) and definitely can't be the bottom price of reference after a bubble bust.

What i was trying to explain metalman is that IMHO the whole idea of a "mean price" of oil to which there is a necessary return after a bubble bust, is a simplistic red herring.

If you or metalman (or anybody else for that matter) has any idea how to model and precisely determine such a "mean price", I'm ready to listen and learn form those more knowledgeable than me.

So there is no actual way to "debunk" you as far as I can tell.
[...]
What could anyone possibly say?

Hmmm ... Debunking a flawed theory is the easiest thing to do. No numbers needed, although if someone would debunk my arguments with solid numbers I would be more than grateful.

Look at what I have done so far. In order to put my theory under debate here, I had to attempt a debunk of the the theory adopted currently by the majority of this board.


Fred gave me 10 arguments in his rebuttal. As I've said and showed here I beleive the the four most impostant of them are very questionable:

5. No new source of credit has been created to finance oil purchases (No oil CDOs)
ETN's - Actually one may argue that the oil indexed ETF share are the real Oil CDO's while the ETNs are in fact some funky form of structured credit default swaps (CDS) based on those Oil ETN's or sometimes based jsut on thin air (virtual oil) since there are some ETN's which have no index conenction with a an ETF.

6. No government deregulation (No change in government regulatory environment fueled the oil bubble; policy has been a constant)
I disagree here. IMHO Enron (2000) and Swaps (20060 loopholes) are exactly that. After reading carefully Greenberger's testimony before the Senate how can someone say that?
How come that Goldman Sachs, or JP Morgan are considered "comemrcial hedgers" ( I haven't seen yet a GS refinery, JPM gas station, or a Lehman oil rig or a Merryl pipeline) exempt from any position limits and regulatory disclosures?
How come that a trader in Texas is subjected to CFTC regulations when making a transaction on Nymex, but the same trader if places his orders on Nymex through ICE or Dubai his transaction is not anymor esubject to the same CFTC regulations.

7. No new tax incentives (No new tax laws lowering capital gains taxes on oil investing ala 1986 tax relief act)
Isn't the Sullivan & Cromwell loophole a great tax incentive for investign in ETN's? And if not why?

8 Lack of enforcement of securities law or other market regulations (No instances of market regulators looking the other way while laws are broken)
Ok on this one I have to be softer because after the recent news about regulation of the expired CDO fest, it's pretty hard to argue that the regulatory bodies are not looking the other way when they are not asllep at their desks. So I'll point only to Grenberger's testimony again

So far Fred didn't offer any direct reply on arguments 5-8 so I have to assume he agrees with me now (at least on 5-8).

Also Fred wrote a great post, full with charts, supporting his views of a high price as a result of dwindling supply of (cheap) oil.

But as c1lue very well has argued, it is quite possible to affect market prices without a real shortage. Enron did it and everybody believed them, at the time all the charts showed a clear supply and demand imbalance.

I just can't figure out how someone can "debunk" the opinions you've expressed.

I think that is very simple:if you have time, take a look on your own at index investing and ETNs If my logic is flawed it shouldn't take long to find and obvious mistake.

I really appreciated metalman's question on how can ETN's can explain the price increase of rice. That was a very pertinent and insightful question.

If he asks me another question like that I'm ready to hold to speeched for the hand and write three disclaimers that I have no short positions in oil and I'm not going to rush head on into commodities and break my neck, based on a hairbrained theory.

No hard feelings ... This is just a debate for educational and entertainment purposes.

[FRED]

Re: We have an oil bubble : the proof

I don't think there is a such thing as a "mean price" level to return to after a bubble.

This is incorrect.

[Supercilious]

Re: We have an oil bubble : the proof

This is incorrect.

Oh! So, should I understand that there is such a thing as the concept of "mean price" and it's not just another academic red herring perfectly suited for writing journal papers on theoretical modeling ? (IMHO theoretical modeling sounds even better than applied astrophysics )
My knowledge in modeling and markets is very limited, therefore I'm very eager to learn more. If you have time to educate me, I would be grateful Maybe you can start with the basics: is there any model available that:

- has been successfully used to precisely determine the "mean price" (of after bubble-bust price dynamics) in the real market (not in a laboratory experiment);

AND

- has successfully predicted the "mean price" before the bubble bust moment??

By the way, I believe you have forgotten again to give a direct answer to my contention of the arguments 5 to 8 you put forward for the no-bubble case.

[FRED]

Re: We have an oil bubble : the proof

Oh! So, should I understand that there is such a thing as the concept of "mean price" and it's not just another academic red herring perfectly suited for writing journal papers on theoretical modeling ? (IMHO theoretical modeling sounds even better than applied astrophysics )
My knowledge in modeling and markets is very limited, therefore I'm very eager to learn more. If you have time to educate me, I would be grateful Maybe you can start with the basics: is there any model available that:

- has been successfully used to precisely determine the "mean price" (of after bubble-bust price dynamics) in the real market (not in a laboratory experiment);

AND

- has successfully predicted the "mean price" before the bubble bust moment??

By the way, I believe you have forgotten again to give a direct answer to my contention of the arguments 5 to 8 you put forward for the no-bubble case.

Long time readers know we used our research in the late 1990s to target March 2000 a NASDAQ decline to 73% from peak based on mean reversion analysis. If oil were a bubble we'd similarly estimate the mean reversion price. Since it isn't, we haven't.

With so many unexplained riddles to solve, we do not have time to rehash established positions: NASDAQ was a bubble that ended, housing was a bubble that continues to decline, and oil is not a bubble. Once we have established a position we have to move on to the unsolved mysteries, such as:

- When will long term interest rates increase to price in the true rate of inflation?

- Are CDS in a bubble? If so, what will happen if and when it bursts?

[Guest]

Re: We have an oil bubble : the proof

- When will long term interest rates increase to price in the true rate of inflation?

Some interesting speculations on stubbornly low bond yields from statistician Jim Willie (Jim Willie CB is an analyst in marketing research and retail forecasting. He holds a PhD in Statistics. ). Dr. Willie is BTW predicting "very high inflation", therefore his unnaturally low bond yields are posed as a paradox, not a rationale for deflationary developments.

Extract from LONG TERM BOND BULL PARADOX:

THE GREAT HIDDEN TAX

In the Hat Trick Letter Special Report entitled "The Schizophrenic Bond Market" a detailed but not comprehensive analysis is given for the troubled and confusing USTreasury Bond market. To be sure, price inflation has risen tremendously in recent months. However, it has done so on the cost side without benefit of wage increases to households or much pricing power to businesses. Thus, the inflation has a net suppressive effect on the USEconomy like a giant tax, since it shows up on the cost side of the economic ledger. Analysts understand tax hikes to push toward recession, but miss how cost inflation does the same.

Many reasons are provided, ten in a list within the report, as to why long-term USTreasury Bond yields should remain flat to down in the intermediate term. The 10-year USTNote yield deserves close watch, since its chart pattern might be showing a hint of powerful upward bond yield move. JPMorgan stands as the biggest interventionist reason why bond yields should remain flat to down, since they have essentially destroyed that market. Imagine a gorilla at your dinner table every night, as parents pursue a balanced diet for their children. Your children will tend to lose weight, just as the USTBonds will fall in yield.

CONFIRMATION IN BY SHORT-TERM USTBILLS

The confirmation of lower sustained US bond yields, NOT higher, has come from both the 1-month USTreasury Bill and 2-year USTBill. Since the USFed was unmasked at their last FOMC meeting, exposed on their bluff of inflation vigilance, the short-term USTBill yields have come down, especially the 1-month. It flirted with 3.0% on the actual FOMC debutante ball event, where Young Benjamina not only failed to wear a nice gown, but she wore nothing at all. Since then, the 1-month TBill yield has slipped down to below 2.5% incredibly. That takes pressure off the rate hike. The 2-year USTBill yield has come down below the magic 2.0% mark and has come down to below 1.5% incredibly.

That actually puts pressure to cut rates by the USFed, who have almost as little control as they have credibility. Bear in mind that the USFed and their megaphone are rarely known to speak either words in sensible language or plain truth. Their job is to obfuscate. When they cannot raise interest rates to defend the beleaguered USDollar, they talk about vigilance. When they have no policy options left to address rising prices, they hint of rate hikes. Their credibility is nil, a subject addressed in the July Hat Trick Letter Macro Economic Report out yesterday.

TEN KEY FACTORS KEEP BOND YIELDS DOWN



In the shizophrenia Special Report, ten reasons are provided in a list as to why long-term USTreasury Bond yields should remain flat to down in the intermediate term. They are tracked from diverse arenas and sources, some of which are mysterious. In my view, they are compelling. The consensus expectation of higher long-term bond yields in my view is incorrect. The only way that they could rise substantially is if a global boycott becomes deeply rooted, and the Untied States simply cannot any longer fund its capital requirements. In other words, the world might permit the US to fail financially, but at a great cost to themselves from reserves wealth stored, banking system foundations, and a lost market for exports.

• The rising costs have resulted in squeezed profit margins, squeezed households, depleted wealth, and broad bankruptcies. The great untold story is that wages have fallen since 2003, like over 25% on an inflation adjusted basis in the United States.

• Recession outcomes lift USTBonds. The most profound elements of the USEconomy are a housing market bust, a mortgage bond debacle, an insolvent banking system, tightened credit supply, evaporation of commercial bank paper, grotesque debt collapse, and ruined confidence. Hardly a combination urging to hit of the brakes with higher long-term bond yields.

• Funds flow from stocks to bonds typically occurs in cyclical rotation. Corporate profits are on the decline, as are most estimates for future quarters. That harms stocks. When US banks begin the orchestrated liquidation process this late summer or early autumn, a flight to perceived safety will occur into USTreasurys.

• Many bond spread trades are anchored in USTreasurys. They involve mortgage spreads, corporate spreads, emerging market spreads. All have widening bond differences, as many are being unwound. The process requires buyback of the USTBond anchors, a strong demand in the cover to unwind.

• The monstrous JPMorgan credit derivative book keeps the lid on long-term USTBonds. They comprise 85% of the total credit derivatives. They are not subject to ordinary accounting rules, a license to corrupt markets and commit fraud. The behemoth remains very actively to keep long-term rates down by using basic and exotic credit derivatives.

• The most powerful reason is the strong Chinese presence in global trade has an enormous effect on the all important labor market. Together with India, the two nations create a vast ceiling on labor wages for the majority of manufacturing industry and a sizeable slice of service industry. The USEconomy is held firm in a constant state of sluggishness and recession.

• Back in the 1990 decade, the 'Bond Vigilantes' as they were known, had a powerful role in the bond market. They are not a dying breed. Vigilantes see the price inflation as embedded in costs, thus pulling the USEconomy deeper into recession. Vigilantes are buying USTBonds.

• An unorthodox reason (more a personal tool) is that a certain group of analysts forecast higher long-term USTreasury Bond yields. They tend to offer carefully articulated, but wrong forecasts. They tend to have vested interests in the system. They have a bad track record.

[Supercilious]

Re: We have an oil bubble : the proof

Long time readers know we used our research in the late 1990s to target March 2000 a NASDAQ decline to 73% from peak based on mean reversion analysis.

Since I'm a new member on this board I would like to read that analysis and it would be great if you can provide some reference links.

With so many unexplained riddles to solve, we do not have time to rehash established positions: NASDAQ was a bubble that ended, housing was a bubble that continues to decline, and oil is not a bubble.

Fred if, for the housing bubble you were able in, let's say 2004, to provide a model for accurate prediction of the "mean price" of housing in June 2006, or January 2007 I would would admit I was wrong and I had no reasons to consider the concept of "mean price" as a red herring.

If not, we have to agree to disagree on this one, and also, remind you what I was trying to reply to metalman: after a bust there is no automatic withdrawal to a fix level of a "mean price". We can talk about post-bust price dynamics, but that I don't think such price dynamics can be acurately predicted before a bubble bust.


Is it possible to split from this thread the interesting post Lukester on a potential CDS bubble and bonds?

Still there is no reply from you regarding points 5-8 from your No-Oil-Bubble argumentation.

Anyway it seems, at least, CFTC has finally agreed that allowing unregulated trades through ICE and Dubai was equivalent with a de facto deregulation through looking the other way. Last week the Enron-Dubai Loophole has been closed (at least partially):

http://www.cftc.gov/newsroom/general...pr5514-08.html

Hopefully, the Swaps Loophole is to follow... That would be really interesting to watch...

And in other ETN news I found an older article about an ETN which couldn't even screw its own investors only through black-box index manipulation and they had resorted to crude "value adjustments" :

http://seekingalpha.com/article/5685...ving-badly-inp

[Guest]

Re: We have an oil bubble : the proof

- When will long term interest rates increase to price in the true rate of inflation? - Are CDS in a bubble? If so, what will happen if and when it bursts?

More thoughts on the "bond yield conundrum" from Prof. Antal Fekete:

BANK CAPITAL AND THE DERIVATIVES MONSTER - A. FEKETE

( HOW PERSISTENTLY LOW BOND YIELDS ARE MAINTAINED IN A HIGH INFLATION WORLD - CORE DRIVER OF THE DERIVATIVES PILE )

The dominant fact to understand is that yield varies inversely with the value of the underlying asset. Therefore increasing the rate of interest would further erode the capital structure of the American banking system, already badly shattered by the subprime crisis.

It is out of the question that the Fed could follow the Volcker-recipe, 1980 vintage, of letting interest rates go double-digit. Contrariwise, if the Fed were able to lower interest rates by hook or crook, that would be a reprieve for the banks with melting capital. It is my considered opinion that the Fed is doing what it does because the effect of a falling interest rate on bank capital is instantaneous. By contrast, pumping money into the banking system works by way of trickle-down. Talk about "stimulating the economy" is for the birds. The real reason why the Fed has to lower interest rates in a hurry when logic would call for increasing them is the emergency to stave off an implosion of bank capital.

How can the Fed engineer a falling trend in interest rates? This is the point where my own analysis diverges from that of others. Interest rates will fall because bond speculation in which the banks engage is risk-free, on the strength of the open market operations of the Federal Reserve.

The banks preempt the Fed in buying the bonds. The consensus is that the ailing dollar can be bailed out only through a regimen of rising interest rates. But the banks bet at the roulette table that interest rates will fall, against everybody else betting that they will rise. Why, the $500 trillion strong derivatives monster serves one purpose and one only, that the bull market in bonds may continue indefinitely. In other words, the infinitely elastic supply of interest rate derivatives is there to make sure that the shorts in the bond market will burn their fingers right to the armpit. Interest-rate derivatives did not come about by accident.

Like the original Tower of Babel, the Tower of Derivatives is being built deliberately. It was conceived and nurtured by megalomaniacs, in this instance the managers of the global fiat money system. They understand that bank capital hangs precariously on the cliff of vanishing confidence. They are confident that they can patch up even the largest holes in the balance sheet of banks on capital account, provided that the derivatives monster will not unravel in the meantime. The big unknown is whether the escalation of counterparty risk will trigger the self-destruction of derivatives before the managers are through.

Here is the strategy. The Fed will keep halving the rate interest as many times as necessary. Each halving nearly doubles bank capital. It worked in Japan where the authorities have kept the brain-dead banks in business through thick and thin. The Japanese merry-go-round has been supported by the yen-carry trade; the American merry-go-round will be supported by the derivatives farce.

Both represent a game of musical chairs. It is a matter of opinion how long the music can go on. I am reminded of the sinking Titanic aboard which the orchestra continued playing even after all lights went out. I don’t see that the music would stop this year even if the lights go out and industrial production starts to sputter. The conundrum of a weak dollar cum strong bonds will continue to baffle all the experts, and lead a lot of gold bugs astray.

The 1980-2000 bear market in gold was made possible by the Volcker-coup in pushing interest rates past 20 percent. It was designed to trick people out of their gold position. The Volcker-coup was an expensive gamble that succeeded, because the economy was fairly strong in 1980, a condition completely lacking today. If Bernanke tried to mount the Volcker-coup now, the economy would go into a tailspin. We may conclude that another bear market in gold is well-nigh impossible.

The world’s finance capital is on its way to total annihilation. The essence of the subprime crisis was not the slack in lending standards. The essence is that the worm of doubt is eating confidence away.

Banks no longer trust the promises of other banks. Under a gold standard trust could quickly be restored by paying out gold. That’s what gold is for, to restore trust whenever doubt arises. But gold has been removed from the banking system. Now irredeemable promises can only be redeemed by issuing more irredeemable promises. In such a system the erosion of confidence cannot be checked. Lack of confidence becomes cumulative. It is like kicking garbage upstairs. When the attic can take no more, the day of reckoning has dawned, and the garbage comes crashing down.

http://www.professorfekete.com/artic...HighIsHigh.pdf