It makes no difference who gets the extra money from the Fed, because the recipient is no wealthier than before (money is swapped for bonds) and hence they have no incentive to spend any more. Rather the impact occurs in the AGGREGATE. Total holdings of the base now exceed total base demand at the current price level, and hence aggregate nominal spending rises (if the injection is permanent.) [Emphasis added.]
So, Sumner is essentially asserting that the people who sell bonds to the government for cash are essentially kind-hearted souls who are doing the economy a big ol’ favor by spending a ton of time and energy in an unprofitable activity to help plain ol’ average Americans avoid a liquidity trap. And who are these blessed, selfless individuals? Why, these oh-so-helpful people who are engaging in unprofitable activities for the sake of all Americans are none other than bankers!
It is truly amazing how some economists can get so wrapped up in their abstract theories that they cling to the point of absurdity. Seriously, Sumner’s model is essentially predicated on an implicit assumption that those who engage in trading bonds for cash from The Fed only do so out of the goodness of their hearts. It ignores the actual motivations of the economic actors involved, and somehow ignores that most people engage in what they determine to be profitable activities (in whatever way they subjectively value profit). And if Sumner’s theory is predicated on the assumption that bankers do not, when messing around with hundreds of billions of dollars, seek to make a profit, then his theory is probably not all that realistic.
It makes considerably more sense to assume that bankers will swap out their bonds for cash from the central bank because doing so is quite profitable. The central bank will take the hit because, like all good political agencies, it is corrupt and inefficient, and exists to channel wealth from the middle and lower class into the hands of the wealthy. Of course, Sumner can’t admit this because committing heresy against the church of the central bank and its high priest Ben Bernanke would miraculously cause Sumner’s head to explode. And so, he assumes that bankers (again, bankers) engage in economically unprofitable activity because…bankers are nice people, I guess.
And so, you can see that Sumner’s assertion is probably false because there is quite a mismatch between incentives and behaviors. At least it’s a wonderful theory.
Supply threats in the Middle East have governments around the world hoarding oil, largely in secret. But it didn’t get past Raymond James Director for Energy Research Marshall Adkins, who noticed the 200 million-barrel discrepancy between what was pumped and reported global oil reserves. Where did the missing oil go, and why don’t prices reflect this substantial surplus? More importantly, what happens once the reality of an oversupply sets in?—A tough six months, Adkins expects. Read on to find out where you can hide when prices plummet.
The Energy Report: You’ve written a provocative research report titled “Hello, We’d Like to Report a Missing 200 Million Barrels of Crude.” It argues that the global oil inventory should have grown by over 200 million barrels (200 MMbbl) during the first six months of 2012. Where did this oil go? And a better question is, why hasn’t this surplus shown up in pricing?
Marshall Adkins: When the U.S., the European Union and the United Nations imposed sanctions against Iran, the world responded by putting oil into storage. China rapidly began filling its strategic petroleum reserves. Saudi Arabia topped off its surface reserves. Iran put oil in the floating tankers.
TER: Why isn’t this storage being reported? Is it normal for this oil to not go into the regular reporting channels?
MA: Yes. Unfortunately, it takes three or four months, and often six months, to get good data from the Organization for Economic Cooperation and Development (OECD). It’s a lag, but at least you usually get the data. We estimate that OECD data accounts for about two-thirds of global oil inventory capacity. The other third, which is just an estimate, is off the radar. Few sources really track this non-OECD data. The International Energy Agency (IEA) does not track it either, because there’s simply no reliable way of getting the information. China is probably the best example of that. It just does not tell us exactly how much it has.
TER: Could this result in dumping at some time in the future, potentially after the November election in the U.S.?
MA: It could. But even if they don’t dump it, we think there is an even bigger structural problem. We are running out of places to put the growing supply of oil. Based on our supply-demand numbers, the world is poised to build significant inventories in early 2013. There is a very real possibility that if Saudi Arabia does not initiate production cuts sometime in early 2013, we will run out of places to put this oil around the world.
TER: Your particular specialty area is oilfield services. You maintain a U.S. rig-count table, which showed a 6% drop year-to-date as of August 31, 2012. Does this indicate that it’s getting easier to get oil horizontally than it is to drill straight down?
MA: There is no question that the application of horizontal oil technology has completely changed the game for both oil and natural gas here in the U.S. Yes, it’s just a much more efficient way of extracting oil and gas, particularly from formations that are very tight. This is a trend that’s going to be here for a long time. It has led to an incredible increase in production per well.
TER: I noted dry gas rigs in your table are down 57% during that same one-year period. Even wet gas rigs are down 40%. How long can this go on before gas prices turn around?
MA: The decline in the overall rig count this year is mainly a function of the falling natural gas rig count, both wet and dry gas rigs. Early on, oil rig growth offset a lot of that gas decline, but the growth rate in oil has stagnated. So, low prices for natural gas are causing a meaningful decrease in gas drilling, but we think there will continue to be reasonable growth in gas supply from the oil wells in operation. That said, gas prices should gradually rebound as we build out infrastructure and consumers start to take greater advantage of extremely low gas prices in the U.S. Next year, we think the overall U.S. rig count will continue to deteriorate with lower oil prices. As that happens, overall gas production growth should flatten. That allows growing gas demand to offset stagnating supply growth. That should eventually drive U.S. natural gas prices higher. It will take a while, but we expect gas prices to improve steadily over the next several years.
TER: Natural gas prices were up about 35–40% before summer. Was this just a bounce, or could this be the beginning of a bull market in natural gas?
MA: I wouldn’t call it a bull market in gas. Gas prices have certainly improved, but I think most people who are out there drilling for gas would say that $3 per thousand cubic feet ($3/Mcf) isn’t exactly a bull market. They simply aren’t making a whole lot of money at that price. That said, today’s prices are much better than six months ago and things are looking better. We think natural gas prices will average closer to $3.25/mcf next year and $4/Mcf the year after. Yes, we think the gas price bottom that we saw earlier this year, $2/Mcf, is well behind us. Directionally, things should continue to improve.
TER: Should investors be bullish on any segment in energy right now? If so, which ones?
MA: In light of our relatively bearish overall stance on crude, we don’t have any Strong Buy recommendations in our oil services universe. We’re not recommending a whole lot of exploration and production (E&P) names at this stage either. The ones that we think do perform here are refiners that benefit from the price differential between West Texas Intermediate (WTI) and Brent crude. In addition, infrastructure companies such as master limited partnerships (MLPs) and companies that service either pipelines, refineries or other new infrastructure should outperform over the next several years.
TER: Any final thoughts?
MA: The bottom line is that we have a tough six months ahead of us for crude oil prices as inventories continue to build in Q1/13. Sometime in early 2013, oil prices should deteriorate as much as 30% from where we are today and hit bottom in mid-2013. At that point, we’ll probably get a lot more constructive on oil services and E&P names.
TER: Thank you very much.
MA: Thank you for having me.
Marshall Adkins focuses on oilfield services and products, in addition to leading the Raymond James energy research team. He and his group have won a number of honors for stock-picking abilities over the past 15 years. Additionally, his group is well known for its deep insight into oil and gas fundamentals. Prior to joining Raymond James in 1995, Adkins spent 10 years in the oilfield services industry as a project manager, corporate financial analyst, sales manager, and engineer. He holds a Bachelor of Science degree in petroleum engineering and a Master of Business Administration from the University of Texas at Austin.
It was almost exactly 20 years that statistics prepared by Paul Krugman about the extent of rising income inequality began to show up in the New York Times on page 1. Back then we–or at least I–thought that this would quickly reverse itself: I remember one dinner at which Claudia Goldin challenged Paul, asking him to agree that rising inequality had made going to college such a no-brainer that we would soon see a flood of increasing investment in education that would bring income distribution back into balance. She was wrong. I was wrong. The American income distribution righted itself, at least for white guys, after the Gilded Age. It did so with mass education and the rise of the social democratic welfare state. What is different this time?
This paragraph belies some astonishing ignorance, held by one of the better-known mainstream economists.
In the first place, DeLong assumes that the laws of supply and demand do not apply to college graduates. How else to explain his assumption that continuing to increase the supply of college-educated labor would either a) drive up the price of marginal college-educated labor or b) drive down the price of fundamental college-educated labor? That there was such a high degree of price inequality in the college-educated labor market should have suggested that market was near saturation (side note: this is perfectly exemplified in the current labor market for lawyers, in that wages are generally low, but there is a high degree of inequality among income-earners).
In the second place, DeLong assumes that there is a natural balance of income distribution. There is not, because humans are not equal to one another in terms of drive, ability, temperament, sociability, intelligence, and other factors that are tied together in determining one’s income. As such, it is unreasonable to assume a trend towards income equality in general. However, the presence of extreme inequality should at least be checked out, if for no other reason than to ensure that politicians aren’t enriching themselves or their cronies by defrauding the populace. But it shouldn’t be assumed that high degrees of inequality are themselves bad. Basically, inequality should be viewed as a consequence, not a cause.
Thus, DeLong is unable to understand why the policies that appeared to work the first time around don’t work the second time around. Here’s a hint: the market for educated workers has obviously reached its saturation point. Also, people aren’t equal. Expecting more equality and more education to fix the problem is therefore stupid, and DeLong is stupid for not seeing why. The sad thing is that he is not alone; there are many experts asking the same question, unable to provide the answer. They are not to be trusted; in fact, they should be ignored.
I am sure many of my readers will have caught this Bloomberg piece earlier this week, but if you haven’t it is a brilliant piece of journalism by Bloomberg reporters Sharon Smyth, Neil Callanan and Dara Doyle. The story takes us to Spain and Ireland and the former’s denial with regards its housing market.
In the stages of death of a real estate boom, Spain is still in denial. In Ireland, they’re moving toward acceptance. The first auction of one of 2,000 unfinished housing estates takes place tomorrow at the Shelbourne Hotel in central Dublin, with sales expected to fetch cents on the euro, showing the Irish may be closer to the end than the beginning.
“Ireland faced up to its problems faster than others and we expect growth there rather soon,” said Cinzia Alcidi, an analyst at the Centre for European Policy Studies in Brussels. “In Spain, there was kind of a denial of the scale of the problem and it may be faced with many years of significant challenges before full recovery takes place.”
Spain, Europe’s fifth-largest economy, is the current focus of attempts to contain the region’s sovereign debt crisis, as Prime Minister Mariano Rajoy struggles to quell speculation it will need a bailout. Developers are showing similar optimism. They continue to build even with 2 million homes vacant around the country, new airports that never saw a single flight being mothballed, and property appraisers and banks reporting values have fallen only about 22 percent, said Encinar, who estimates the real decline is probably at least twice that.
Another passage that was staggering to my mind was the comments by Miguel Angel Garcia Nieto, mayor of Avila (a town showcased in the article) that this is just an interim soft spot as a result of the crisis and that oversupply and overcapacity will eventually be absorbed.
“When we approved the first urban plan back in 1998 there was an unprecedented demand for homes,” Nieto said in a telephone interview on April 19. “Yes, there is oversupply at the moment because of the financial crisis and everyone’s gone back home to live with their parents, but it’s not because there is lack of demand. When the economy gets back on track I am confident the supply will be absorbed.”
Hope as they say, spring eternal.
Businesses aren’t investing in the United States because of a lack of consumer demand, International Paper CEO John Faraci said Friday.
“I think this was all about consumer spending and demand. You know, the problem we have is there’s inadequate demand to create jobs. We know how to respond when there is demand,” he said on CNBC’s “The Kudlow Report.”
The U.S. Commerce Department estimated that gross domestic product expanded at a 2.2 percent annual rate in the first quarter, falling short of analysts’ expectations it would grow 2.5 percent and slowing down from the fourth quarter’s 3-percent rate.
The more correct way of saying this is that there is a lack of consumer demand for products at profitable prices. There is plenty of demand for cheap goods (for example, imagine what would happen to iPad sales if the price dropped to $150 each). The problem is that cheap goods often have very thin profit margins.
Also overlooked in this admittedly shallow Keynesian market analysis is that purchasing power has declined. It’s not that demand has disappeared or necessarily reduced (who doesn’t want stuff?); it’s that people don’t have the ability to act on their demand. Put plainly, people don’t have money, regardless of whether we’re talking cash or credit.
Thus, saying that demand has declined is a rather shallow way of addressing the problem and thus begs a shallow solution (quantitative easing, e.g.). The deeper issue is that people’s real income has declined, alongside their ability or willingness to use credit to purchase things. Therefore, the proper solution is not a short-term stimulation of demand, but rather an attempt to fix the structural flaws that have caused a decline in real income. The causes for such a decline are various: free labor, inflation, free trade, and so on. Fixing these things won’t be easy—in fact, they’ll be quite painful in the short-term—but they will lead to a long-term fix. Unlike a stimulus.
Join the forum discussion on this post - (1) Posts
Eric Sprott and David Baker has a new article out discussing central bank buying of gold and particularly China. I agree with his conclusion that this is an important demand side shift in the market but then Sprott plays it up way too much with statements like:
“… there isn’t a physical market on earth that can withstand that type of demand increase without higher prices over the long-run, and the gold market is no different. There are no sellers of physical gold that we know of who can satiate that scale of new demand …”
“Who is going to give up their gold purchases to make room for this scale of new demand? Where is the gold going to come from? We ask because we don’t actually know.”
“We have written at length about the disconnect between the paper gold price and the physical gold market. If the demand changes stated above applied to any other market, the investing public would lose their minds.”
“The paper market for gold can continue its charade, but demand in the physical market will soon overpower it through sheer momentum – there’s only so much physical to go around, and it appears that there are some very large buyers that are eager to take it.”
If Sprott and Baker “are students first and foremost of the physical market” then they surely are aware that the one thing which makes gold different from all the other physical markets on earth is its huge above ground stocks relative to new mine supply – 170,000 tonnes versus 2800 tonnes.
This, I suggest, is a quite material fact and one which may be where “the gold is going to come from”. Unlike “any other market”, to which conventional supply/demand analysis can be applied, one cannot understand the gold market by just looking at annual supply/demand numbers when there is such a large overhang of stock.
What drives the gold price I would therefore argue, is not so much demand, but to what extent existing holders of the 170,000t will withhold it from the market. It is actually supply – the withholding of supply – that matters most. If even a small fraction of these holders decide to sell, then that supply “will soon overpower” the physical market, China or no China. This is not a negative statement. The decade long gold bull market is a message that the existing holders are requiring higher and higher gold prices to let go of their gold and that the new holders are more likely to withhold it.
The reason you don’t see this approach to analysing the gold market is because there are only sketchy numbers on the flow of gold from existing holders to new holders – say ETF volumes, futures warehouses and scrap – and therefore its difficult if not impossible to get any handle on total real supply so analysts just avoid it. It doesn’t mean you should.
This unique feature of the gold market, which we can describe as “a stock overhang so large relative to new supply that in any other market would push the price to zero, but for some reason for gold it doesn’t”, is often referred to as monetary demand or gold as a monetary metal. When you see someone refer to gold as a commodity, it tells you they don’t really understand the gold market and you need to exercise some caution with their statements.
Gold is monetary in nature, with only a small commodity component. Further proof of this is the fact that central banks hold it as they generally hold only money as reserves. A lot more can be said on this but it is 8:30 on Sunday night.
The other thing I find interesting about the Sprott piece, and what I react to negatively, is the use of emotive phrases like “on earth”, “lose their minds”, “charade” etc. Never a good thing when we are talking about investing and its a point Kid Dynamite has made, that Screwtape dissects, and which Erik Townsend makes quite forcefully in the Martenson/Harvey interview discussion.
Speaking of that discussion and Sprott, for those interested in Sprott’s silver delivery problem, Jeff Christian has weighed in with some interesting comments at the Martenson/Harvey interview. Warren James has updated Screwtape’s post on the issue with the relevant material and it is a good summary and discussion of the “problem” for those new to it (or who want a refresher).