n the late 1880s, trade journals in the electrical sciences were predicting “free electricity” in the near future. Incredible discoveries about the nature of electricity were becoming commonplace. Nikola Tesla was demonstrating “wireless lighting” and other wonders associated with high frequency currents. There was an excitement about the future like never before.
Within 20 years, there would be automobiles, airplanes, movies, recorded music, telephones, radio, and practical cameras. The Victorian Age was giving way to something totally new. For the first time in history, common people were encouraged to envision a utopian future, filled with abundant modern transportation and communication, as well as jobs, housing, and food for everyone.
Disease would be conquered, and so would poverty. Life was getting better, and this time, everyone was going to get “a piece of the pie.”
So, what happened?
In the midst of this technological explosion, where did the energy breakthroughs go? Was this excitement about “free electricity,” which happened just before the beginning of the last century, all just wishful thinking that “real science” eventually disproved?
Current State of Technology
Actually, the answer to that question is no. In fact, the opposite is true. Spectacular energy technologies were developed right along with the other breakthroughs.
Since that time, multiple methods for producing vast amounts of energy at extremely low cost have been developed. But none of these technologies has made it to the “open” consumer market as an article of commerce. Exactly why this is true will be discussed shortly.
But first, I would like to describe to you a short list of “free energy” technologies that I am currently aware of, and that are proven beyond all reasonable doubt.
The common feature connecting all of these discoveries is that they use a small amount of one form of energy to control or release a large amount of a different kind of energy. Many of them, in some way, tap the underlying ether field: a source of energy conveniently ignored by “modern” science.
Radiant Energy
Nikola Tesla’s Magnifying Transmitter, T. Henry Moray’s Radiant Energy Device, Edwin Gray’s EMA Motor, and Paul Baumann’s Testatika Machine all run on radiant energy. This natural energy form can be gathered directly from the environment (mistakenly called “static” electricity) or extracted from ordinary electricity by the method called “fractionation.”
Radiant energy can perform the same wonders as ordinary electricity, at less than 1 percent of the cost. It does not behave exactly like electricity, however, which has contributed to the scientific community’s misunderstanding of it.
The Methernitha community in Switzerland currently has five or six working models of fuelless, self-running devices that tap this energy (see our Methernitha article elsewhere in this issue).
Permanent Magnets
Dr. Robert Adams of New Zealand has developed astounding designs of electric motors, generators, and heaters that run on permanent magnets. One such device draws 100 watts of electricity from the source, generates 100 watts to recharge the source, and produces over 140 BTU’s of heat in two minutes!
Dr. Tom Bearden of the United States has two working models of a permanent magnet-powered electrical transformer. It uses a 6-Watt electrical input to control the path of a magnetic field coming out of a permanent magnet. By channeling the magnetic field, first to one output coil and then a second output coil, and by doing this repeatedly and rapidly in a ping-pong fashion, the device can produce a 96-Watt electrical output with no moving parts.
Bearden calls his device a Motionless Electromagnetic Generator, or MEG.
Jean-Louis Naudin has duplicated Bearden’s device in France. The principles for this type of device were first disclosed by Frank Richardson of the United States in 1978.
Troy Reed, also of the United States, has working models of a special magnetized fan that heats up as it spins. It takes exactly the same amount of energy to spin the fan whether it is generating heat or not.
Beyond these developments, multiple inventors have identified working mechanisms that produce motor torque from permanent magnets alone.
Mechanical Heaters
There are two classes of machines that transform a small amount of mechanical energy into a large amount of heat.
The best of these purely mechanical designs are the rotating cylinder systems designed by Frenette and Perkins of the United States. In these machines, one cylinder is rotated within another cylinder with about an eighth of an inch clearance between them.
The space between the cylinders is filled with a liquid, such as water or oil, and it is this “working fluid” that heats up as the inner cylinder spins.
Another method uses magnets mounted on a wheel to produce large eddy currents in a plate of aluminum, causing the aluminum to heat up rapidly.
These magnetic heaters have been demonstrated by Muller (Canada), Adams (NZ) and Reed (USA). All of these systems can produce ten times more heat than standard methods using the same energy input.
Super-Efficient Electrolysis
Water can be broken into hydrogen and oxygen using electricity.
Standard chemistry books claim that this process requires more energy than can be recovered when the gases are recombined. But this is true only under the worst case scenario. When water is hit with its own molecular resonant frequency, using a system developed by Stan Meyers (USA) and again recently by Xogen Power, Inc., it collapses into hydrogen and oxygen gas with very little electrical input.
Also, different electrolytes (additives that make the water conduct electricity better) can change the efficiency of the process dramatically. It is also known that certain geometric structures and surface textures work better than others.
The implication is that unlimited amounts of hydrogen fuel can be made to drive engines (like the one in your car) for the cost of water. Even more amazing is the fact that a special metal alloy was patented by Freedman (USA) in 1957 that spontaneously breaks water into hydrogen and oxygen with no outside electrical input and without causing any chemical changes in the metal itself. This means that this special metal alloy can make hydrogen from water for free — forever.
Implosion/Vortex
All major industrial engines, including the engine in your car, use the release of heat to cause expansion and pressure to produce work. But nature uses the opposite process, cooling to cause suction and vacuum to produce work, as in a tornado.
Viktor Schauberger (Austria) was the first to build working models of Implosion Engines in the 1930s and 1940s. Since that time, Callum Coats has published extensively on Schauberger’s work in his book Living Energies, and subsequently a number of researchers have built working models of implosion turbine engines. These are fuelless engines that produce mechanical work from energy accessed from a vacuum.
There are also much simpler designs that use vortex motions to tap a combination of gravity and centrifugal force to produce a continuous motion in fluids.
Cold Fusion
In March 1989, two chemists from Brigham Young University in Utah (USA) announced that they had produced atomic fusion reactions in a simple tabletop device. The claims were “debunked” within six months, and the public lost interest.
Nevertheless, cold fusion is very real. Not only has excess heat production been repeatedly documented, but also low energy atomic element transmutation has been catalogued, involving dozens of different reactions!
This technology definitely can produce low cost energy and scores of other important industrial processes.
Solar Assisted Heat Pumps
The refrigerator in your kitchen is the only “free energy machine” you currently own. It’s an electrically operated heat pump. It uses one unit of energy (electricity) to move three units of energy (heat). This gives it a “coefficient of performance” (COP) of about 3.
In other words, your refrigerator uses one amount of electricity to pump three amounts of heat from the inside of the refrigerator to the outside of the refrigerator. This is its typical use, but it is the worst possible way to use the technology. Here is why.
A heat pump pumps heat from the “source” of heat to the “sink,” or place that absorbs the heat. The “source” of heat should obviously be hot and the “sink” for heat should obviously be cold for this process to work best.
In your refrigerator, it’s exactly the opposite. The “source” of heat is inside the box, which is cold, and the “sink” for heat is the room temperature air of your kitchen, which is warmer than the source. This is why the coefficient of performance remains low for your kitchen refrigerator. But this is not true for all heat pumps. COP’s of 8 to 10 are easily attained with solar-assisted heat pumps.
In such a device, a heat pump draws heat from a solar collector and dumps the heat into a large underground absorber, which remains at 55 degrees F, and mechanical energy is extracted in the transfer. This process is equivalent to a steam engine that extracts mechanical energy between the boiler and the condenser, except that it uses a fluid that “boils” at a much lower temperature than water.
One such system that was tested in the 1970s produced 350 hp, measured on a dynamometer, in a specially-designed engine from just 100 square feet of solar collector (this is not the system promoted by Dennis Lee). The amount of energy it took to run the compressor (input) was less than 20 hp, so this system produced more than 17 times more energy than it took to keep it going! It could power a small neighborhood from the roof of a hot tub gazebo, using exactly the same technology that keeps the food cold in your kitchen!
Currently, there is an industrial scale heat-pump system just north of Kona, Hawaii that generates electricity from temperature differences in ocean water.
Other Technologies
There are dozens of other systems that I have not mentioned, many of them as viable and well tested as the ones I have just recounted. But this short list is sufficient to make my point: Free energy technology is here, now. It offers the world pollution-free, energy abundance for everyone, everywhere.
It is now possible to stop the production of “greenhouse gases” and shut down all of the nuclear power plants. We can now desalinate unlimited amounts of seawater at an affordable price, and bring adequate fresh water to even the most remote habitats.
Transportation costs and the production costs for just about everything can drop dramatically. Food can even be grown in heated greenhouses in the winter, anywhere.
All of these wonderful benefits that can make life on this planet so much easier and better for everyone have been postponed for decades.
Why? Whose purposes are served by this postponement?
The Invisible Enemy
There are four gigantic forces that have worked together to create this situation.
But to say that there is and has been a “conspiracy” to suppress this technology only leads to a superficial understanding of the world, and it places the blame for this completely outside of ourselves. Our willingness to remain ignorant and actionless in the face of this situation has always been interpreted by two of these forces as “implied consent.”
So, besides a “non-demanding public,” what are the other three forces that are impeding the availability of free energy technology?
In standard economic theory, there are three classes of industry. These are capital, goods, and services.
Within the first class, capital, there are also three sub-classes. These are:
1. Natural Capital This relates to raw materials (such as a gold mine) and sources of energy (such as a hydroelectric dam or an oil well).
2. Currency This relates to the printing of paper “money” and the minting of coins. These functions are usually the job of Government.
3. Credit This relates to the loaning of money for interest and its extension of economic value through deposit loan accounts.
From this, it is easy to see that energy functions in the economy in the same way as gold, the printing of money by the government, or the issuing of credit by a bank.
In the United States, and in most other countries around the world, there is a “money monopoly” in place. I am “free” to earn as much “money” as I want, but I will only be paid in Federal Reserve Notes. There is nothing I can do to be paid in Gold Certificates, or some other form of “money.”
This money monopoly is solely in the hands of a small number of private stock banks, and these banks are owned by the Wealthiest Families in the world. Their plan is eventually to control 100 percent of all of the capital resources of the world, and thereby to control everyone’s life through the availability (or non-availability) of all goods and services.
An independent source of wealth (free energy device) in the hands of each and every person in the world ruins their plans for world domination, permanently.
Why this is true is easy to see. Currently, a nation’s economy can be either slowed down or sped up by the raising or lowering of interest rates. But if an independent source of capital (energy) were present in the economy, and any business or person could raise more capital without borrowing it from a bank, this centralized throttling action on interest rates would simply not have the same effect.
Free energy technology changes the value of money. The Wealthiest Families and the Issuers of Credit do not want competition. It’s that simple. They want to maintain their current monopoly control of the money supply. For them, free energy technology is not just something to suppress, it must be permanently forbidden!
The First Force
So the Wealthiest Families and their central banking institutions are the First Force operating to postpone the public availability of free energy technology.
Their motivations are the imagined “divine right to rule,” greed, and their insatiable need to control everything except themselves.
The weapons they have used to enforce this postponement include intimidation, “expert” debunkers, buying and shelving of technology, murder and attempted murder of the inventors, character assassination, arson, and a wide variety of financial incentives and disincentives to manipulate possible supporters.
They have also promoted the general acceptance of a scientific theory that states that free energy is impossible (Laws of Thermodynamics).
The Second Force
The Second Force operating to postpone the public availability of free energy technology is national governments.
The problem here is not so much related to competition in the printing of currency, but in the maintenance of National Security.
The fact is that the world out there is a jungle, and humans can be counted upon to be cruel, dishonest, and sneaky. It is Government’s job to “provide for the common defense.” For this, “police powers” are delegated by the Executive Branch of Government to enforce “the rule of law.”
Most of us who consent to the rule of law do so because we believe it is the right thing to do, for our own benefit. There are always a few individuals, however, who believe that their own benefit is best served by behavior that does not voluntarily conform to the generally agreed upon social order. These people choose to operate outside of “the rule of law” and are considered outlaws, criminals, subversives, traitors, revolutionaries, or terrorists.
Most national governments have discovered, by trial and error, that the only Foreign Policy that really works, over time, is a policy called “tit for tat.” What this means to you and me is that governments treat each other the way they are being treated. There is a constant “jockeying” for position and influence in world affairs, and the strongest party wins!
In economics, it’s the Golden Rule, which states:
“The one with the gold makes the rules.”
So it is with politics, also, but its appearance is more Darwinian. It’s simply “survival of the fittest.” In politics, however, the “fittest” has come to mean the strongest party who is also willing to fight the dirtiest.
Absolutely every means available is used to maintain an advantage over the “adversary,” and everyone else is the “adversary” regardless of whether they are considered friend or foe. This includes outrageous psychological posturing, lying, cheating, spying, stealing, assassination of world leaders, proxy wars, alliances and shifting alliances, treaties, foreign aid, and the presence of military forces wherever possible.
Like it or not, this IS the psychological and actual arena National Governments operate in. No national government will ever do anything that simply gives an adversary an advantage for free. Never! It’s national suicide.
Any activity by any individual, inside or outside the country, that is interpreted as giving an adversary an edge or advantage, in any way, will be deemed a threat to “national security.” Always!
Free energy technology is a national government’s worst nightmare! Openly acknowledged, free energy technology sparks an unlimited arms race by all governments in a final attempt to gain absolute advantage and domination.
Think about it. Do you think Japan will not feel intimidated if China gets free energy? Do you think Israel will sit by quietly as Iraq acquires free energy? Do you think India will allow Pakistan to develop free energy? Do you think the USA would not try to stop Osama bin Laden from getting free energy?
Unlimited energy available to the current state of affairs on this planet leads to an inevitable reshuffling of the “balance of power.” This could become an all-out war to prevent “the other” from having the advantage of unlimited wealth and power. Everybody will want it, and at the same time, will want to prevent everyone else from getting it.
So, national governments are the Second Force operating to postpone the public availability of free energy technology. Their motivations are “self-preservation.”
This self-preservation operates on three levels. First, by not giving undue advantage to an external enemy. Second, by preventing individualized action (anarchy) capable of effectively challenging official police powers within the country. And third, by preserving income streams derived from taxing energy sources currently in use.
Their weapons include preventing of the issuance of patents based on national security grounds, legal and illegal harassment of inventors with criminal charges, tax audits, threats, phone taps, arrest, arson, theft of property during shipment, and a host of other intimidations which make the business of building and marketing a free energy machine impossible.
The Third Force
The Third Force operating to postpone the public availability of free energy technology consists of the group of deluded inventors and outright charlatans and con men.
On the periphery of the extraordinary scientific breakthroughs that constitute the real free energy technologies lies a shadow world of unexplained anomalies, marginal inventions, and unscrupulous promoters.
The first two Forces have constantly used the media to promote the worst examples of this group, to distract the public’s attention and to discredit the real breakthroughs by associating them with the obvious frauds.
Over the last hundred years, dozens of stories have surfaced about unusual inventions. Some of these ideas have so captivated the public’s imagination that a mythology about these systems continues to this day. Names like Keely, Hubbard, Coler, and Henderschott immediately come to mind. There may be real technologies behind these names, but there simply isn’t enough technical data available in the public domain to make a determination. These names remain associated with a free energy mythology, however, and are cited by debunkers as examples of fraud.
The idea of free energy taps very deeply into the human subconscious mind. A few inventors with marginal technologies that demonstrate useful anomalies have mistakenly exaggerated the importance of their inventions. Some of these inventors also have mistakenly exaggerated the importance of themselves for having invented it. A combination of “gold fever” and/or a “messiah complex” appears, wholly distorting any future contribution they may make.
While the research thread they are following may hold great promise, they begin to trade enthusiasm for facts, and the value of the scientific work from that point on suffers greatly. There is a powerful, yet subtle seduction that can warp a personality if they believe that “the world rests on their shoulders” or that they are the world’s “savior.”
Strange things also happen to people when they think they are about to become extremely rich. It takes a tremendous spiritual discipline to remain objective and humble in the presence of a working free energy machine. Many inventors’ psyches become unstable just believing they have a free energy machine.
As the quality of the science deteriorates, some inventors also develop a “persecution complex” that makes them very defensive and unapproachable. This process precludes them from ever really developing a free energy machine, and fuels the fraud mythologies tremendously.
Then there are the outright con men. In the last fifteen years, there is one person in the USA who has raised the free energy con to a professional art. He has raised more than $100 million has been barred from doing business in the State of Washington, has been jailed in California, and he’s still at it.
He always talks about a variation of one of the real free energy systems, sells people on the idea that they will get one of these systems soon, but ultimately sells them only promotional information which gives no real data about the energy system itself. He has mercilessly preyed upon the Christian community and the patriot community in the USA, and is still going strong.
His current scam involves signing up hundreds of thousands of people at locations where he will install a free energy machine. In exchange for letting him put the FE generator in their home, they will get free electricity for life, and his company will sell the excess energy back to the local utility company.
After becoming convinced that they will receive free electricity for life, with no out-front expenses, people gladly buy a video that helps draw their friends into the scam as well.
Once you understand the power and motivations of the first two Forces I have discussed, it’s obvious that this person’s current “business plan” cannot be implemented. This one person has probably done more harm to the free energy movement in the USA than any other Force, by destroying people’s trust in the technology.
So, the Third Force postponing the public availability of free energy technology is delusion and dishonesty within the movement itself.
The motivations are self-aggrandizement, greed, desire for power over others, and a false sense of self-importance.
The weapons used are lying, cheating, the “bait and switch” con, self-delusion, and arrogance, combined with lousy science.
The Fourth Force
The Fourth Force operating to postpone the public availability of free energy technology is all of the rest of us. It may be easy to see how narrow and despicable the motivations of the other forces are, but actually, these motivations are still very much alive in each of us as well.
Like the Wealthiest Families, don’t we each secretly harbor illusions of false superiority, and they want to control others instead of ourselves? Also, wouldn’t you “sell out” if the price were high enough? Say, take $1 million cash today?
Or, like the governments, don’t we each want to ensure our own survival? If caught in the middle of a full, burning theater, do you panic and push all of the weaker people out of the way in a mad, scramble for the door?
Or, like the deluded inventor, don’t we trade a comfortable illusion once in a while for an uncomfortable fact? And don’t we like to think more of ourselves than others give us credit for? Or don’t we still fear the unknown, even if it promises a great reward?
You see, really, all Four Forces are just different aspects of the same process, operating at different levels in the society.
There is really only ONE FORCE preventing the public availability of free energy technology, and that is the unspiritually motivated behavior of the human animals.
In the last analysis, free energy technology is an outward manifestation of Divine Abundance. It is the engine of the economy of an enlightened society, where people voluntarily behave in a respectful and civil manner toward each other. Where all members of the society have everything they need, and do not covet what their neighbor has. Where war and physical violence have become socially unacceptable behaviors, and people’s differences are at least tolerated, if not enjoyed.
The appearance of free energy technology in the public domain is the dawning of a truly civilized age. It is an epochal event in human history. Nobody can “take credit” for it. Nobody can “get rich” on it. Nobody can “rule the world” with it. It is, simply, a Gift from God. It forces us all to take responsibility for our own actions and for our own self-disciplined self-restraint when needed.
The world as it is currently ordered cannot have free energy technology without being totally transformed by it into something else. This “civilization” has reached the pinnacle of its development, because it has birthed the seeds of its own transformation.
Unspiritualized human animals cannot be trusted with free energy. They will only do what they have always done, which is to take merciless advantage of each other, or kill each other and themselves in the process.
If you go back and read Ayn Rand’s Atlas Shrugged or the Club of Rome Report, it becomes obvious that the Wealthiest Families have understood this for decades. Their plan is to live in The World of Free Energy, but permanently freeze the rest of us out.
But this is not new. Royalty has always considered the general population (us) to be their subjects. What is new is that you and I can communicate with each other now better than at anytime in the past. The Internet offers us, the Fourth Force, an opportunity to overcome the combined efforts of the other Forces preventing free energy technology from spreading.
The Opportunity
What is starting to happen is that inventors are publishing their work, instead of patenting it and keeping it secret. More and more, people are “giving away” information on these technologies in books, videos, and websites.
While there is still a great deal of useless information about free energy on the Internet, the availability of good information is rising rapidly. Check out the list of websites and other resources at the end of this article.
It is imperative that you begin to gather all of the information you can on real free energy systems. The reason for this is simple. The first two Forces will never allow an inventor or a company to build and sell a free energy machine to you! The only way you will ever get one is if you, or a friend, build it yourself.
This is exactly what thousands of people are already quietly starting to do. You may feel wholly inadequate to the task, but start gathering information now. You may be just a link in the chain of events for the benefit of others.
Focus on what you can do now, not on how much there still is to be done. Small, private research groups are working out the details as you read this. Many are committed to publishing their results on the Internet.
All of us constitute the Fourth Force. If we stand up and refuse to remain ignorant and action-less, we can change the course of history. It is the aggregate of our combined action that can make a difference.
Only the mass action that represents our consensus can create the world we want. The other three Forces will not help us put a fuelless power plant in our basements. They will not help us to be free from their manipulations.
Nevertheless, free energy technology is here. It is real, and it will change everything about the way we live, work, and relate to each other. In the last analysis, free energy technology makes obsolete both greed and the fear for survival.
But like all exercises of spiritual faith, we must first manifest the generosity and trust in our own lives.
The Source of Free Energy is inside of us. It is that excitement of expressing ourselves freely. It is our spiritually guided intuition expressing itself without distraction, intimidation, or manipulation. It is our open-heartedness.
Ideally, the free energy technologies underpin a just society where everyone has enough food, clothing, shelter, self-worth, and the leisure time to contemplate the higher Spiritual meanings of Life.
Do we not owe it to each other to face our fears and take action to create this future for our children’s children?
Perhaps I am not the only one waiting for me to act on a greater Truth.
The Coming Times
Free energy technology is here, it has been here for decades. Communication technology and the Internet have torn the veil of secrecy off of this remarkable fact. People all over the world are starting to build free energy devices for their own use. The bankers and the governments do not want this to happen, but cannot stop it.
Tremendous economic instabilities and wars will be used in the near future to distract people from joining the free energy movement. There will be essentially no major media coverage of this aspect of what is going on. It will simply be reported as wars and civil wars erupting everywhere, leading to UN “peace keeper” occupation in more and more countries.
Western society is spiraling down toward self-destruction due to the accumulated effects of long-term greed and corruption. The general availability of free energy technology cannot stop this trend. It can only reinforce it.
If, however, you have a free energy device, you may be better positioned to survive the political/social/economic transition that is underway.
No national government will survive this process. The question is, who will ultimately control the emerging World Government — the First Force? or the Fourth Force?
The last Great War is almost upon us.
The seeds are planted. After this will come the beginning of a real Civilization. Some of us who refuse to participate in war will survive to see the dawn of the World of Free Energy.
I challenge you to be among the ones who try.
Dr. Peter Lindemann became interested in free energy in 1973, when he was introduced to the work of Edwin Gray.
By 1981, he had developed his own free energy systems based on variable reluctance generators and pulsed motor designs. During the 1980s, he worked off and on with both Bruce DePalma and Eric Dollard, and in 1988 joined the board of directors at Borderland Sciences Research Foundation, serving until 1999.
Currently, he is a research associate of Dr. Robert Adams in New Zealand, as well as a close collaborator with Trevor James Constable in the United States.
Dr. Lindemann is one of the foremost authorities on the practical applications of Ether technology and Cold Electricity. He is currently director of research for Clear Tech, Inc., Box 37, Metaline Falls, WA 99153, phone 509-44…, fax 509-446-2354. To find out more about his work, you may visit the Clear Tech website at Free-Energy.cc
Tuesday, 30 June, 2009
The “American Clean Energy and Security” Rip-Off
The House of Representatives passed the American Clean Energy and Security Act (ACES), a well-intentioned but misbegotten Frankenstein monster of a bill intended to combat climate change. Republicans Mary Bono Mack, Mike Castle, Mark Kirk, Frank LoBiondo, John McHugh, Dave Reichert, and Chris Smith joined 211 Democrats to put the bill over the top 219-212. Showing the profiles in courage typical to elected politicians, about three dozen Democrats hung back during the roll call until passage was certain, waiting until they could safely vote no without riling their party’s leaders.
As its sponsors struggled to make it palatable to representatives from energy-producing states, the bill swelled from 942 pages to just over 1,200, leaving undecided members little time to digest the new material.
This brings to mind Rep. John Conyers’s admission to Michael Moore that members of Congress “don’t really read most of the bills” they vote for, because it would “slow down the legislative process.”
Two weeks after his election as president, Barack Obama said, “Few challenges facing America and the world are more urgent than combating climate change. The science is beyond dispute and the facts are clear.” Shortly thereafter, more than 100 scientists signed a newspaper advertisement responding,
“With all due respect Mr. President, that is not true.”
The scientists, from places as varied and esteemed as Los Alamos National Laboratory, the American Physical Society, the Intergovernmental Panel on Climate Change, the Massachusetts Institute of Technology, Princeton University, and the University of Pennsylvania, said the “case for alarm regarding climate change is grossly overstated.”
But even many who are not skeptical about global warming found things to dislike in ACES. Rep. Dennis Kucinich, who voted against it, said, “It won’t address the problem. In fact, it might make the problem worse.” Kucinich faulted the bill’s “Enron-style accounting methods” and allocation of $60 billion for Carbon Capture and Sequestration, “a single technology which may or may not work.” Kucinich faulted the corporate welfare embedded in the bill, saying that the “trillion dollar carbon derivatives market will help Wall Street investors,” with any benefits “passed through coal companies and other large corporations, on whom we will rely to pass on the savings.”
“I take climate change seriously,”
libertarian economist Megan McArdle wrote last week. But she said the projections for ACES’s “effect on global warming are entirely negligible,” and any hope that U.S. passage of the bill will “persuade China and India to get on board” is “entirely wishful thinking on the part of American environmentalists.
China is not going to let its citizens languish in subsistence farming because 30 years from now, some computer models say there will be some not-well-specified bad effects from high temperatures. Nor is India.”
Indeed, United Nations data suggest that ACES will reduce global warming by 0.07 of a degree Fahrenheit by 2050. In exchange, the U.S. risks sparking a trade war with those two massive economic powers when their own near-certain failure to act results in U.S. sanctions.
While the Congressional Budget Office says ACES will drive up the average family’s energy bill by about $175 per year by 2020, that does not take into account the larger economic cost.
A Center for Data Analysis study concludes ACES will hurt the gross domestic product by $9.4 trillion by 2035 and cost the average family $1,241 per year. That’s because, as the Wall Street Journal put it last week,
“the whole point of cap and trade is to hike the price of electricity and gas so that Americans will use less. These higher prices will show up not just in electricity bills or at the gas station but in every manufactured good, from food to cars.”
A British analysis finds the average family there is paying nearly $1,300 a year for carbon-cutting programs that were introduced just a few years ago.
As Obama himself said during his run for the Democratic presidential nomination, “Under my plan of a cap and trade system, electricity rates would necessarily skyrocket. Businesses would have to retrofit their operations.
That will cost money. They will pass that cost onto consumers.” Meanwhile, reductions in consumer spending will necessarily mean a decline in production which could eliminate more than 1.1 million jobs.
This is an awful lot to pay for legislation that will not reduce global warming and will not encourage other major economic powers to become more environmentally conscious.
Maybe next time, Congress should read the bill before voting on it.
Responses to “The “American Clean Energy and Security” Rip-Off” http://tinyurl.com/m5lbjx
As its sponsors struggled to make it palatable to representatives from energy-producing states, the bill swelled from 942 pages to just over 1,200, leaving undecided members little time to digest the new material.
This brings to mind Rep. John Conyers’s admission to Michael Moore that members of Congress “don’t really read most of the bills” they vote for, because it would “slow down the legislative process.”
Two weeks after his election as president, Barack Obama said, “Few challenges facing America and the world are more urgent than combating climate change. The science is beyond dispute and the facts are clear.” Shortly thereafter, more than 100 scientists signed a newspaper advertisement responding,
“With all due respect Mr. President, that is not true.”
The scientists, from places as varied and esteemed as Los Alamos National Laboratory, the American Physical Society, the Intergovernmental Panel on Climate Change, the Massachusetts Institute of Technology, Princeton University, and the University of Pennsylvania, said the “case for alarm regarding climate change is grossly overstated.”
But even many who are not skeptical about global warming found things to dislike in ACES. Rep. Dennis Kucinich, who voted against it, said, “It won’t address the problem. In fact, it might make the problem worse.” Kucinich faulted the bill’s “Enron-style accounting methods” and allocation of $60 billion for Carbon Capture and Sequestration, “a single technology which may or may not work.” Kucinich faulted the corporate welfare embedded in the bill, saying that the “trillion dollar carbon derivatives market will help Wall Street investors,” with any benefits “passed through coal companies and other large corporations, on whom we will rely to pass on the savings.”
“I take climate change seriously,”
libertarian economist Megan McArdle wrote last week. But she said the projections for ACES’s “effect on global warming are entirely negligible,” and any hope that U.S. passage of the bill will “persuade China and India to get on board” is “entirely wishful thinking on the part of American environmentalists.
China is not going to let its citizens languish in subsistence farming because 30 years from now, some computer models say there will be some not-well-specified bad effects from high temperatures. Nor is India.”
Indeed, United Nations data suggest that ACES will reduce global warming by 0.07 of a degree Fahrenheit by 2050. In exchange, the U.S. risks sparking a trade war with those two massive economic powers when their own near-certain failure to act results in U.S. sanctions.
While the Congressional Budget Office says ACES will drive up the average family’s energy bill by about $175 per year by 2020, that does not take into account the larger economic cost.
A Center for Data Analysis study concludes ACES will hurt the gross domestic product by $9.4 trillion by 2035 and cost the average family $1,241 per year. That’s because, as the Wall Street Journal put it last week,
“the whole point of cap and trade is to hike the price of electricity and gas so that Americans will use less. These higher prices will show up not just in electricity bills or at the gas station but in every manufactured good, from food to cars.”
A British analysis finds the average family there is paying nearly $1,300 a year for carbon-cutting programs that were introduced just a few years ago.
As Obama himself said during his run for the Democratic presidential nomination, “Under my plan of a cap and trade system, electricity rates would necessarily skyrocket. Businesses would have to retrofit their operations.
That will cost money. They will pass that cost onto consumers.” Meanwhile, reductions in consumer spending will necessarily mean a decline in production which could eliminate more than 1.1 million jobs.
This is an awful lot to pay for legislation that will not reduce global warming and will not encourage other major economic powers to become more environmentally conscious.
Maybe next time, Congress should read the bill before voting on it.
Responses to “The “American Clean Energy and Security” Rip-Off” http://tinyurl.com/m5lbjx
Bond guarantee will give Central Bank greater control
The UAE Federal Government's move to guarantee debt instruments, including bonds to be issued by UAE national banks, will result in the Central Bank wielding greater control over banks, said bankers and analysts.
The Federal National Council (FNC) yesterday gave its go-ahead to the bond guarantee scheme that banking circles say will give UAE banks the much-needed bargaining power in raising funds from local and international markets.
"The UAE, as a country, currently doesn't have a rating from an international agency and hence the federal guarantee will derive strength from the rating of Abu Dhabi. And this in turn would mean that the banks can use Abu Dhabi bond pricing as their benchmark," said a bond specialist based in Abu Dhabi.
The recently issued five-year Abu Dhabi bond is trading at about 200 basis points above five-year US Treasury bonds. "Since Abu Dhabi bond yield currently works out to about five per cent, the UAE national banks will be able to borrow from the market at a premium to the Abu Dhabi bond yield," an analyst explained.
Welcoming the FNC decision, Sanjay Uppal, Group Chief Financial Officer of Emirates NBD, the largest bank in the GCC in terms of assets, said: "This is a very positive development for the market and will help renew access to medium- and long-term stable funding for the banking sector. This development together with other measures previously taken by the government will further enhance the liquidity and strength of the UAE's banking sector."
He also noted that the federal guarantee will significantly contribute to UAE banks' access to international markets for medium- and long-term funding on improved financial terms. The decision has come at a time when banks have started worrying about ways to establish a medium-term fund base.
Credit Suisse, in an analysis last month, said the UAE banking system would experience a funding gap of Dh52.3 billion.
"The cost of funds is expected to remain relatively high throughout 2010, as liquidity is likely to remain in focus given the Dh20.9bn of EMTNs [Euro medium-term notes] maturing during the period," said the report.
While some larger banks will be able to raise funds against maturing bonds, new players may have to seek other ways of raising money.
Raj Madha, senior banking analyst with investment bank EFG-Hermes, told Emirates Business that though the new move sounds like a blanket guarantee, the likelihood is that some limitations of scope or applicability will be introduced.
The Federal National Council (FNC) yesterday gave its go-ahead to the bond guarantee scheme that banking circles say will give UAE banks the much-needed bargaining power in raising funds from local and international markets.
"The UAE, as a country, currently doesn't have a rating from an international agency and hence the federal guarantee will derive strength from the rating of Abu Dhabi. And this in turn would mean that the banks can use Abu Dhabi bond pricing as their benchmark," said a bond specialist based in Abu Dhabi.
The recently issued five-year Abu Dhabi bond is trading at about 200 basis points above five-year US Treasury bonds. "Since Abu Dhabi bond yield currently works out to about five per cent, the UAE national banks will be able to borrow from the market at a premium to the Abu Dhabi bond yield," an analyst explained.
Welcoming the FNC decision, Sanjay Uppal, Group Chief Financial Officer of Emirates NBD, the largest bank in the GCC in terms of assets, said: "This is a very positive development for the market and will help renew access to medium- and long-term stable funding for the banking sector. This development together with other measures previously taken by the government will further enhance the liquidity and strength of the UAE's banking sector."
He also noted that the federal guarantee will significantly contribute to UAE banks' access to international markets for medium- and long-term funding on improved financial terms. The decision has come at a time when banks have started worrying about ways to establish a medium-term fund base.
Credit Suisse, in an analysis last month, said the UAE banking system would experience a funding gap of Dh52.3 billion.
"The cost of funds is expected to remain relatively high throughout 2010, as liquidity is likely to remain in focus given the Dh20.9bn of EMTNs [Euro medium-term notes] maturing during the period," said the report.
While some larger banks will be able to raise funds against maturing bonds, new players may have to seek other ways of raising money.
Raj Madha, senior banking analyst with investment bank EFG-Hermes, told Emirates Business that though the new move sounds like a blanket guarantee, the likelihood is that some limitations of scope or applicability will be introduced.
Debt Deflation in America
What the Jump in the U.S. Savings Rate Really Means
The Happy-face media reporting of economic news is providing the usual upbeat spin on debt-deflation statistics.
The Commerce Department's National Income and Product Accounts (NIPA) for May show that U.S. “savings” are now absorbing 6.9 percent of income.
Put the word “savings” in quotation marks because this 6.9% is not what most people think of as savings. It is not money in the bank to draw out on the “rainy day” when one is laid off as unemployment rates rise.
The statistic means that 6.9% of national income is being earmarked to pay down debt – the highest saving rate in 15 years, up from actually negative rates (living on borrowed credit) just a few years ago.
The only way in which these savings are “money in the bank” is that they are being paid by consumers to their banks and credit card companies.
Income paid to reduce debt is not available for spending on goods and services. It therefore shrinks the economy, aggravating the depression.
So why is the jump in “saving” good news?
It certainly is a good idea for consumers to get out of debt. But the media are treating this diversion of income as if it were a sign of confidence that the recession may be ending and Mr. Obama's “stimulus” plan working.
The Wall Street Journal reported that Social Security recipients of one-time government payments “seem unwilling to spend right away," while The New York Times wrote that “many people were putting that money away instead of spending it.”
It is as if people can afford to save more.
The reality is that most consumers have little real choice but to pay. Unable to borrow more as banks cut back credit lines.
Their “choice” is either to pay their mortgage and credit card bill each month, or lose their homes and see their credit ratings slashed, pushing up penalty interest rates near 20%!
To avoid this fate, families are shifting to cheaper (and less nutritious) foods, eating out less (or at fast food restaurants), and cutting back vacation spending. It therefore seems contradictory to applaud these “saving” (that is, debt-repayment) statistics as an indication that the economy may emerge from depression in the next few months.
While unemployment approaches the 10% rate and new layoffs are being announced every week, isn't the Obama administration taking a big risk in telling voters that its stimulus plan is working? What will people think this winter when markets continue to shrink? How thick is Mr. Obama's Teflon?
We are living in the wreckage of the Greenspan bubble
As recently as two years ago consumers were buying so many goods on credit that the domestic savings rate was zero. (Financing the U.S. Government's budget deficit with foreign central bank recycling of the dollar's balance-of-payments deficit actually produced a negative 2% savings rate.)
During these Bubble Years savings by the wealthiest 10% of the population found their counterpart in the debt that the bottom 90% were running up. In effect, the wealthy were lending their surplus revenue to an increasingly indebted economy at large.
Today, homeowners no longer can re-finance their mortgages and compensate for their wage squeeze by borrowing against rising prices for their homes. Payback time has arrived – paying back bank loans, whose volume has been augmented to include accrued interest charges and penalties.
New bank lending has hit a wall as banks are limiting their activity to raking in amortization and interest on existing mortgages, credit cards and personal loans.
Many families are able to remain financially afloat by running down their savings and cutting back their spending to try and avoid bankruptcy. This diversion of income to pay creditors explains why retail sales figures, auto sales and other commercial statistics are plunging vertically downward in almost a straight line, while unemployment rates soar toward the 10% level. The ability of most people to spend at past rates has hit a wall.
The same income cannot be used for two purposes. It cannot be used to pay down debt and also for spending on goods and services. Something must give. So more stores and shopping malls are becoming vacant each month. And unlike homeowners, absentee property investors have little compunction about walking away from negative equity situations – owing creditors more than the property is worth.
Over two-thirds of the U.S. population are homeowners, and real estate economists estimate that about a quarter of U.S. homes are now in a state of negative equity as market prices plunges below the mortgages attached to them.
This is the condition in which Citigroup and AIG found themselves last year, along with many other Wall Street institutions. But whereas the government absorbed their losses “to get the economy moving again” (or at least to help Congress's major campaign contributors to recover), personal debtors are in no such favored position. Their designated role is to help make the banks whole by paying off the debts they have been running up in an attempt to maintain living standards that their take-home pay no longer is supporting.
Banks for their part are slashing credit-card debt limits and jacking up interest and penalty charges. (I see little chance that Congress will approve the Consumer Financial Products Agency that Mr. Obama promoted as a flashy balloon for his recent bank giveaway program.
The agency is to be dreamed about, not enacted.) The problem is that default rates are rising rapidly. This has prompted many banks to strike deals with their most overstretched customers to settle outstanding balances for as little as half the face amount (much of which is accrued interest and penalties, to be sure).
Banks are now competing not to gain customers but to shed them. The plan is to offer steep enough payment discounts to prompt bad risks to settle by sticking rival banks with ultimate default when they finally give up their struggle to maintain solvency. (The idea is that strapped debtors will max out on one bank's card to pay off another bank at half-price.)
The trillions of dollars that the Bush and Obama administration have given away to Wall Street would have been enough to buy a great bulk of the mortgages now in default – mortgages beyond the ability of many debtors to pay in the first place.
The government could have enacted a Clean Slate for these debtors – financed by re-introducing progressive taxation, restoring the full capital gains tax to the same rate as that levied on earned income (wages and profits), and closing the tax loopholes that effectively free finance, insurance and real estate (FIRE) sector from income taxation. Instead, the government has made Wall Street virtually tax exempt, and swapped Treasury bonds for trillions of dollars of junk mortgages and bad debts.
The “real” economy's growth prospects are being sacrificed in an attempt to carry its financial overhead.
Banks and credit-card companies are girding for economic shrinkage. It was in anticipation of this state of affairs, after all, that they pushed so hard from 1998 onward to make what finally became the 2005 bankruptcy laws so pro-creditor, so cruel to debtors by making personal bankruptcy an economic and legal hell.
It is to avoid this hell that families are cutting their spending so as to keep current on their debts, against all odds that they can avoid default in today's shrinking economy.
Working off debt = “saving,” but not in liquid form, People are putting more money away, but not into savings accounts.
They are indeed putting it into banks, but in the form of paying down debt.
To accountants looking at balance sheets, savings represent the increase in net worth. In times past this was indeed the result mainly of a buildup of liquid funds. But today's money being saved is not available for spending.
It merely reduces the debt burden being carried by individuals. Unlike Citibank, AIG and other Wall Street institutions, they are not having their debts conveniently wiped off the books. The government is not nice enough to buy back their investments that had lost up to half their value in the past year. Such bailouts are for creditors and money managers, not their debtors.
The story that the media should be telling is how today's post-bubble economy has turned the concept of saving on its head. The accounting concept underlying balance sheets is that a negation of a negation is positive. Paying down debt liabilities is counted as “saving” because one owes less.
This is not what people expected a half-century ago. Economists wrote about how technology would raise productivity levels, people would be living in near utopian conditions by the time the year 2000 arrived. They expected a life of leisure and prosperity. Needless to say, this is far from materializing. The textbooks need to be rewritten – and in fact, are being rewritten.3
Keynesian economics turned inside-out.
Most individuals and companies emerged from World War II in 1945 nearly debt-free, and with progressive income taxes. Economists anticipated – indeed, even feared – that rising incomes would lead to higher saving rates.
The most influential view was that of John Maynard Keynes. Addressing the problems of the Great Depression in 1936, his General Theory of Employment, Interest, and Money warned that people would save relatively more as their incomes rose. Spending on consumer goods would tail off, slowing the growth of markets, and hence new investment and employment.
This view of the saving function; the propensity to save out of wages and profits –viewed saving as breaking the circular flow of payments between producers and consumers. The main cloud on the horizon, Keynesians worried, was that people would be so prosperous that they would not spend their money. The indicated policy to deter under-consumption was for economies to indulge in more leisure and more equitable income distribution.
The modern dynamics of saving – and the increasingly top-heavy indebtedness in which savings are invested – are quite different from (and worse than) what Keynes explained. Most financial savings are lent out, not plowed into tangible capital formation and industry. Most new investment in tangible capital goods and buildings comes from retained business earnings, not from savings that pass through financial intermediaries. Under these conditions, higher personal saving rates are reflected in higher indebtedness. That is why the saving rate has fallen to a zero or “wash” level. A rising proportion of savings find their counterpart more in other peoples' debts rather than being used to finance new direct investment.
Each business recovery since World War II has started with a higher debt ratio. Saving is indeed interfering with consumption, but it is not the result of rising incomes and prosperity. A rising savings rate merely reflects the degree to which the economy is working off its debt overhead. It is “saving” in the form of debt repayment in a shrinking economy. The result is financial dystopia, not the technological utopia that seemed so attainable back in 1945, just sixty-five years ago. Instead of a consumer-friendly leisure economy, we have debt peonage.
To get an idea of how oppressive the debt burden really is, the 6.9% savings rate does not even reflect the 16% of the economy that the NIPA report for interest payments to carry this debt, or the penalty fees that now yield as much as interest yields to credit-card companies or the trillions of dollars of government bailouts to try and keep this unsustainable system afloat.
How an economy can hope to compete in global markets as an industrial producer with so high a financial overhead factored into the cost of living and doing business must remain for a future article to address.
The Happy-face media reporting of economic news is providing the usual upbeat spin on debt-deflation statistics.
The Commerce Department's National Income and Product Accounts (NIPA) for May show that U.S. “savings” are now absorbing 6.9 percent of income.
Put the word “savings” in quotation marks because this 6.9% is not what most people think of as savings. It is not money in the bank to draw out on the “rainy day” when one is laid off as unemployment rates rise.
The statistic means that 6.9% of national income is being earmarked to pay down debt – the highest saving rate in 15 years, up from actually negative rates (living on borrowed credit) just a few years ago.
The only way in which these savings are “money in the bank” is that they are being paid by consumers to their banks and credit card companies.
Income paid to reduce debt is not available for spending on goods and services. It therefore shrinks the economy, aggravating the depression.
So why is the jump in “saving” good news?
It certainly is a good idea for consumers to get out of debt. But the media are treating this diversion of income as if it were a sign of confidence that the recession may be ending and Mr. Obama's “stimulus” plan working.
The Wall Street Journal reported that Social Security recipients of one-time government payments “seem unwilling to spend right away," while The New York Times wrote that “many people were putting that money away instead of spending it.”
It is as if people can afford to save more.
The reality is that most consumers have little real choice but to pay. Unable to borrow more as banks cut back credit lines.
Their “choice” is either to pay their mortgage and credit card bill each month, or lose their homes and see their credit ratings slashed, pushing up penalty interest rates near 20%!
To avoid this fate, families are shifting to cheaper (and less nutritious) foods, eating out less (or at fast food restaurants), and cutting back vacation spending. It therefore seems contradictory to applaud these “saving” (that is, debt-repayment) statistics as an indication that the economy may emerge from depression in the next few months.
While unemployment approaches the 10% rate and new layoffs are being announced every week, isn't the Obama administration taking a big risk in telling voters that its stimulus plan is working? What will people think this winter when markets continue to shrink? How thick is Mr. Obama's Teflon?
We are living in the wreckage of the Greenspan bubble
As recently as two years ago consumers were buying so many goods on credit that the domestic savings rate was zero. (Financing the U.S. Government's budget deficit with foreign central bank recycling of the dollar's balance-of-payments deficit actually produced a negative 2% savings rate.)
During these Bubble Years savings by the wealthiest 10% of the population found their counterpart in the debt that the bottom 90% were running up. In effect, the wealthy were lending their surplus revenue to an increasingly indebted economy at large.
Today, homeowners no longer can re-finance their mortgages and compensate for their wage squeeze by borrowing against rising prices for their homes. Payback time has arrived – paying back bank loans, whose volume has been augmented to include accrued interest charges and penalties.
New bank lending has hit a wall as banks are limiting their activity to raking in amortization and interest on existing mortgages, credit cards and personal loans.
Many families are able to remain financially afloat by running down their savings and cutting back their spending to try and avoid bankruptcy. This diversion of income to pay creditors explains why retail sales figures, auto sales and other commercial statistics are plunging vertically downward in almost a straight line, while unemployment rates soar toward the 10% level. The ability of most people to spend at past rates has hit a wall.
The same income cannot be used for two purposes. It cannot be used to pay down debt and also for spending on goods and services. Something must give. So more stores and shopping malls are becoming vacant each month. And unlike homeowners, absentee property investors have little compunction about walking away from negative equity situations – owing creditors more than the property is worth.
Over two-thirds of the U.S. population are homeowners, and real estate economists estimate that about a quarter of U.S. homes are now in a state of negative equity as market prices plunges below the mortgages attached to them.
This is the condition in which Citigroup and AIG found themselves last year, along with many other Wall Street institutions. But whereas the government absorbed their losses “to get the economy moving again” (or at least to help Congress's major campaign contributors to recover), personal debtors are in no such favored position. Their designated role is to help make the banks whole by paying off the debts they have been running up in an attempt to maintain living standards that their take-home pay no longer is supporting.
Banks for their part are slashing credit-card debt limits and jacking up interest and penalty charges. (I see little chance that Congress will approve the Consumer Financial Products Agency that Mr. Obama promoted as a flashy balloon for his recent bank giveaway program.
The agency is to be dreamed about, not enacted.) The problem is that default rates are rising rapidly. This has prompted many banks to strike deals with their most overstretched customers to settle outstanding balances for as little as half the face amount (much of which is accrued interest and penalties, to be sure).
Banks are now competing not to gain customers but to shed them. The plan is to offer steep enough payment discounts to prompt bad risks to settle by sticking rival banks with ultimate default when they finally give up their struggle to maintain solvency. (The idea is that strapped debtors will max out on one bank's card to pay off another bank at half-price.)
The trillions of dollars that the Bush and Obama administration have given away to Wall Street would have been enough to buy a great bulk of the mortgages now in default – mortgages beyond the ability of many debtors to pay in the first place.
The government could have enacted a Clean Slate for these debtors – financed by re-introducing progressive taxation, restoring the full capital gains tax to the same rate as that levied on earned income (wages and profits), and closing the tax loopholes that effectively free finance, insurance and real estate (FIRE) sector from income taxation. Instead, the government has made Wall Street virtually tax exempt, and swapped Treasury bonds for trillions of dollars of junk mortgages and bad debts.
The “real” economy's growth prospects are being sacrificed in an attempt to carry its financial overhead.
Banks and credit-card companies are girding for economic shrinkage. It was in anticipation of this state of affairs, after all, that they pushed so hard from 1998 onward to make what finally became the 2005 bankruptcy laws so pro-creditor, so cruel to debtors by making personal bankruptcy an economic and legal hell.
It is to avoid this hell that families are cutting their spending so as to keep current on their debts, against all odds that they can avoid default in today's shrinking economy.
Working off debt = “saving,” but not in liquid form, People are putting more money away, but not into savings accounts.
They are indeed putting it into banks, but in the form of paying down debt.
To accountants looking at balance sheets, savings represent the increase in net worth. In times past this was indeed the result mainly of a buildup of liquid funds. But today's money being saved is not available for spending.
It merely reduces the debt burden being carried by individuals. Unlike Citibank, AIG and other Wall Street institutions, they are not having their debts conveniently wiped off the books. The government is not nice enough to buy back their investments that had lost up to half their value in the past year. Such bailouts are for creditors and money managers, not their debtors.
The story that the media should be telling is how today's post-bubble economy has turned the concept of saving on its head. The accounting concept underlying balance sheets is that a negation of a negation is positive. Paying down debt liabilities is counted as “saving” because one owes less.
This is not what people expected a half-century ago. Economists wrote about how technology would raise productivity levels, people would be living in near utopian conditions by the time the year 2000 arrived. They expected a life of leisure and prosperity. Needless to say, this is far from materializing. The textbooks need to be rewritten – and in fact, are being rewritten.3
Keynesian economics turned inside-out.
Most individuals and companies emerged from World War II in 1945 nearly debt-free, and with progressive income taxes. Economists anticipated – indeed, even feared – that rising incomes would lead to higher saving rates.
The most influential view was that of John Maynard Keynes. Addressing the problems of the Great Depression in 1936, his General Theory of Employment, Interest, and Money warned that people would save relatively more as their incomes rose. Spending on consumer goods would tail off, slowing the growth of markets, and hence new investment and employment.
This view of the saving function; the propensity to save out of wages and profits –viewed saving as breaking the circular flow of payments between producers and consumers. The main cloud on the horizon, Keynesians worried, was that people would be so prosperous that they would not spend their money. The indicated policy to deter under-consumption was for economies to indulge in more leisure and more equitable income distribution.
The modern dynamics of saving – and the increasingly top-heavy indebtedness in which savings are invested – are quite different from (and worse than) what Keynes explained. Most financial savings are lent out, not plowed into tangible capital formation and industry. Most new investment in tangible capital goods and buildings comes from retained business earnings, not from savings that pass through financial intermediaries. Under these conditions, higher personal saving rates are reflected in higher indebtedness. That is why the saving rate has fallen to a zero or “wash” level. A rising proportion of savings find their counterpart more in other peoples' debts rather than being used to finance new direct investment.
Each business recovery since World War II has started with a higher debt ratio. Saving is indeed interfering with consumption, but it is not the result of rising incomes and prosperity. A rising savings rate merely reflects the degree to which the economy is working off its debt overhead. It is “saving” in the form of debt repayment in a shrinking economy. The result is financial dystopia, not the technological utopia that seemed so attainable back in 1945, just sixty-five years ago. Instead of a consumer-friendly leisure economy, we have debt peonage.
To get an idea of how oppressive the debt burden really is, the 6.9% savings rate does not even reflect the 16% of the economy that the NIPA report for interest payments to carry this debt, or the penalty fees that now yield as much as interest yields to credit-card companies or the trillions of dollars of government bailouts to try and keep this unsustainable system afloat.
How an economy can hope to compete in global markets as an industrial producer with so high a financial overhead factored into the cost of living and doing business must remain for a future article to address.
Study says sun getting hotter
The sun is getting hotter, adding heat to an Earth already thought to be warming from greenhouse gases.
Solar radiation reaching the Earth is 0.036 percent warmer than it was in 1986, when the current solar cycle was beginning, a researcher reports in a study to be published Friday in the journal Science. The finding is based on an analysis of satellites that measure the temperature of sunlight.
The increase is only a small fraction of the total heat from the sun, but in a century it would be enough to seriously aggravate problems of global warming thought to be caused by greenhouse gases, says Richard C. Willson of Columbia University's Center for Climate Systems Research.
Willson said that most researchers expect greenhouse gases to warm the planet by 3.6 degrees Fahrenheit in the next 100 years. Solar irradiance could add another 0.72 degrees F and ''that is not an insignificant number. It is smaller than the greenhouse effect, but it is not trivial,'' he said.
''This is a significant increase,'' said John Firor of the National Center for Atmospheric Research in Boulder, Colo. ''It would increase the rate at which we go into warming.''
Firor said that based on the current estimate of how greenhouse gases will warm the planet over the next century, the solar heat increase found by Willson would boost that warming trend by about 20 percent.
Although studies show that the Earth has warmed about one degree in the last century and the trend continues, there is a division among scientists about what is causing it. Some believe it is a natural cycle for the planet, unrelated to humans. Others blame the warming on an increase in the atmosphere of greenhouse gases, mostly carbon dioxide from the burning of oil, gas, coal and wood.
At an international meeting in Japan in three months, the United States and other nations will debate the need to reduce the burning of fuels in order to slow global warming.
Solar radiation reaching the Earth is 0.036 percent warmer than it was in 1986, when the current solar cycle was beginning, a researcher reports in a study to be published Friday in the journal Science. The finding is based on an analysis of satellites that measure the temperature of sunlight.
The increase is only a small fraction of the total heat from the sun, but in a century it would be enough to seriously aggravate problems of global warming thought to be caused by greenhouse gases, says Richard C. Willson of Columbia University's Center for Climate Systems Research.
Willson said that most researchers expect greenhouse gases to warm the planet by 3.6 degrees Fahrenheit in the next 100 years. Solar irradiance could add another 0.72 degrees F and ''that is not an insignificant number. It is smaller than the greenhouse effect, but it is not trivial,'' he said.
''This is a significant increase,'' said John Firor of the National Center for Atmospheric Research in Boulder, Colo. ''It would increase the rate at which we go into warming.''
Firor said that based on the current estimate of how greenhouse gases will warm the planet over the next century, the solar heat increase found by Willson would boost that warming trend by about 20 percent.
Although studies show that the Earth has warmed about one degree in the last century and the trend continues, there is a division among scientists about what is causing it. Some believe it is a natural cycle for the planet, unrelated to humans. Others blame the warming on an increase in the atmosphere of greenhouse gases, mostly carbon dioxide from the burning of oil, gas, coal and wood.
At an international meeting in Japan in three months, the United States and other nations will debate the need to reduce the burning of fuels in order to slow global warming.
Monday, 29 June, 2009
"Seven Blunders of the World"
"Seven Blunders of the World"
1. Wealth without work
2. Pleasure without conscience
3. Knowledge without character
4. Commerce without morality
5. Science without humanity
6. Worship without sacrifice
7. Politics without principle
1. Wealth without work
2. Pleasure without conscience
3. Knowledge without character
4. Commerce without morality
5. Science without humanity
6. Worship without sacrifice
7. Politics without principle
A tale of two economies
Indian consumers have shown themselves willing to spend more of their income, say experts
While investors hope consumer spending growth in China will eventually balance its export dependence, in the short term it is India that presents more opportunity.
Economists crow over the long-term domestic growth prospects in both emerging Asian giants, which is likely to be led by a young generation of spenders eager to buy clothes, computers, cars and other goods.
Until recently, China's massive government stimulus spending worth six per cent of gross domestic product was the biggest draw in Asia for investors chasing growth. However, last month's stunning election victory by India's Congress-led coalition, which allowed it to secure a parliamentary majority, has turned the heads of some fund managers to the consumer-oriented sectors in India.
In addition, India's valuations are cheaper, suggesting more upside potential for any investments.
"For the first time in 12 years, I am more confident of India than China because India has made good macro improvements," says Stephen Roach, chairman of Morgan Stanley Asia. "It has well managed companies, entrepreneurial talent, English-speaking population, well developed capital markets and now the political will to reform."
Investors have had every reason to look at India's consumer market anyhow. The median age in the billion-plus population is 25 years and private-sector consumption makes up about 60 percent of economic activity.
Consulting group AT Kearney says the sector will grow 63 per cent between 2008 and 2013 to become a $833 billion market. By comparison, the median age in China's billion-plus population is slightly older, at 30 years, and the private sector makes up a smaller part of the economy, at 40 per cent.
"Changes in consumption patterns in China will occur gradually. It won't happen overnight. Indian consumers have shown themselves willing to spend more of their income, and changes in the government will act as a catalyst more immediately in the next 12 months," says Robert Tucker, investment director of Asian equities at Halbis, a unit of HSBC Global Asset Management in Hong Kong.
Since Beijing announced spending of $588billion in November to support its economy, portfolio flows have chased China's domestic growth story. But India's election results in mid May have added to the consumer appeal of the country because the ruling coalition's strong position is expected to translate into a slew of incremental reforms.
Such reforms are expected to relax foreign direct investment limits for single and multi-brand companies in the retail sector, Credit Suisse analysts said in a research note.
The impact would be high because the retail sector is fragmented and dominated by small, independently-owned stores. So any chains, which make up just five per cent of stores, would be prime investment targets, such as Pantaloon, Shopper's Stop Ltd, Vishal Retail Ltd and Koutons, but the likelihood of it happening in the next 12 months is low.
China's valuations in the consumer discretionary sector have risen more rapidly than India's, all the more reason why asset managers have been sifting through Indian markets in search of value.
Not only are India's consumer discretionary stocks cheaper than China's, the broad market is outperforming as well. Ninety-day rolling total returns of the FTSE index for India are 74 per cent, compared with China's 57 percent and Hong Kong's 45 per cent.
On March 9, when a global equity rally began, 90-day total returns for the FTSE India showed a loss of 13 percent. They were flat for Hong Kong and were up 20 percent for China.
Within India, retailers Pantaloon and Shopper's Stop have outperformed the main Bombay stock index by a wide margin in the last 90 days by more than doubling their returns compared with the index's 78 per cent.
"Going by our bottom-up investment strategy, China has attracted a little more interest in the first half. So India may see higher allocation in the second half of the year," says Mark Konyn, who overseas about $11 billion as the Asia-Pacific chief executive with RCM, a unit of Allianz Global Investors.
Chinese car sales in May were 829,100, just short of April's record 831,000. However, economists believe the lack of an institutionalised social insurance system will keep precautionary saving levels high in China, especially so at this time of economic uncertainty and rising job losses.
"The welfare system in China is still very weak so even riche people have to make precautionary savings," says Grace Tam, vice president of investment services at JPMorgan Asset Management in Hong Kong. "Government measures, like increasing the medical insurance coverage, will not change things immediately but they are steps in the right direction to unlock domestic consumption."
Tam adds that India has some catch up to do in terms of infrastructure investment, which will speed up the process of migration to cities.
Marco Giubin, senior portfolio manager for Mirae Asset's Asia Pacific consumer equity portfolios, says he expects the Indian government to push through some infrastructure projects with its election mandate, and improved business confidence should stimulate credit flow there.
Yet, he says the best way to differentiate Asian portfolios at this stage is by pricing power. "The strength in the demand profile is already well known to a lot of multinational companies, so it's about the areas where we see players that get pricing power from their brand or distribution network," he says.
India
GDP PER CAPITA (USD)
National: $999
Mumbai: $2,600
New Delhi: $1,734
Calcutta: $1,564
Ahmedabad: $1,142
Bangalore: $1,268
Lucknow: $550
CONSUMER PATTERNS
Indian mobile operators have been adding more than 10 million users a month, making it the world's fastest-growing wireless services market. With more than 400 million users at the end of April, India lags only China in market size. Still, just over a third of the population have a phone.
The Indian car market, which reported a volume sales growth of 1 per cent last fiscal year to March, is forecast to grow 3-5 per cent in 2009-2010 with momentum picking up in the second half of the year when the economy is seen recovering, the Society of Indian Automobile Manufacturers said.
India's PC market is smaller than China's, but is expected to grow faster in coming years, Gartner says.
India's retail sector is expected to grow 63 per cent between 2008 and 2013 to become a $833 billion market, though retail chains currently make up only 5 per cent of stores, according to consulting group AT Kearney.
China
GDP PER CAPITA (USD)
National: $3,259
Shanghai: $10,440
Beijing: $9,072
Tianjin: $7,984
Zhejiang: $6,076
Sichuan: $2,213
Guangxi: $2,154
Chongqing: $2,594
CONSUMER PATTERNS
The single-child generation is spending more on clothing and entertainment, including eating out. Interestingly, saving and investment levels are similar across age groups, though the 50-59 year-olds save 5 percentage points more of their household income than the single-child generation.
China became the biggest automobile sales market in the world in January and sales remain robust. Merrill Lynch said in a report that in the Western city of Xi'an, buyers of new vehicles have to wait 2-3 weeks for some popular brands because inventories have been run down so much.
The so-called single-child generation, between 20-29 years old, has consistently seen the biggest growth in average personal income and has been spending more.
GDP per capita is much lower in interior and central cities compared with coastal areas, which had benefited from the export boom of the last decade.
Saudi continues asset pullout despite oil gains
Saudi Arabia has assumed a price of around $50 for its crude in its 2009 record budget.
Saudi Arabia is continuing to drain its foreign assets to fund record spending this year and prevent its economy from sliding into contraction although oil prices have exceeded its budget projections, official data showed yesterday.
The Kingdom, which controls nearly 25 per cent of the world's extractable oil deposits, withdrew about SR21 billion (Dh20.5bn) in May to bring the total funds withdrawn from its overseas assets to SR164.1bn, showed the figures by the Saudi Arabian Monetary Agency (Sama) – the central bank.
The withdrawal was from both Sama's deposits with banks abroad and investment in foreign securities, some of which have apparently matured and cashed by the Kingdom, according to financial sources.
From SR281.7bn at the end of April, Sama's deposits with foreign banks declined to SR272.5bn at the end of May. Investments in foreign securities also continued their steady decline from about SR1.102 trillion to SR1.098trn.
The figures showed that since the end of 2008, Sama's deposits with foreign banks have plunged by SR106.89bn. Investments in foreign securities dipped by about SR55.34bn.
The monthly report by Sama showed the size of withdrawal in May was far lower than in the previous four months apparently because of the improvement in oil prices.
About SR42bn was withdrawn from the foreign assets each in April and March while funds withdrawn in February and January were estimated at about SR31bn and SR28bn respectively.
Saudi Arabia has assumed a price of around $50 for its crude in its 2009 record budget but the price of Organisation of the Petroleum Exporting Countries' basket averaged nearly 57 in May and around $50.2 in April.
It was below the Gulf Kingdom's forecasts at around $45.7 in March and nearly $41.4 in February and January 2009.
Economists said the steady decline in assets in the first five months was a result of the Kingdom's withdrawal of funds to meet its budget target, which is aimed at supporting growth and mitigating the impact of the global financial crisis.
"The Kingdom is trying to honour its commitment to spend more this year as part of an economic stimulant package," a Riyadh-based economist said. "In the past, it had opted to borrow from the local market but the situation now is different as liquidity is tight and the country has sufficient financial resources," he said.
Saudi Arabia, which pumps around 10 per cent of the world's oil supplies, approved record spending of SR475bn for 2009 and expected revenue at SR410bn, leaving a deficit of SR65bn.
Experts believe the actual shortfall could be lower by the end of the year, while more optimistic sources expect a small surplus.
This is in sharp contrast with 2008, when Saudi Arabia recorded its highest ever surplus of SR590bn after crude oil prices climbed to a record average of $95 a barrel.
The Kingdom's decision to withdraw from foreign assets has clearly been prompted by a sharp decline in its oil export earnings, which were estimated by the US Energy Information Administration at around $48bn in the first five months of 2009, below half its income of $110bn in the same period of 2008.
Bankers said Riyadh can still borrow on the grounds its public debt has been slashed over the past few years but they added such borrowing could adversely affect the liquidity situation in the Kingdom.
Heavy borrowing by Saudi Arabia in the previous years boosted its public debt above its gross domestic product in 1999 before the record surge in oil prices allowed it to gradually slash the debt in the following years.
Official estimates showed the Gulf country's public debt dived below 15 per cent of the gross domestic product at the end of 2008 from 18 per cent at the end of 2007 and more than 100 per cent at the end of 1999.
China and Brazil plan currency trade deal
The People’s Bank of China has arranged six bilateral currency swaps, totalling 650 billion yuan.
China and Brazil are working on a currency arrangement to allow exporters and importers to settle deals in their local currencies, bypassing the US dollar, the countries’ central banks said.
Speaking on the sidelines of the Bank for International Settlement’s (BIS) annual general meeting in the Swiss city of Basel, other central bankers questioned the dollar’s future role as the world’s dominant reserve currency.
China’s Central Bank Governor Zhou Xiaochuan and Brazil’s Central Bank President Henrique Meirelles discussed the bilateral deal in a meeting at the BIS on Saturday. “It is agreed in principle,” said a spokeswoman for the Brazilian central bank. “They will start to study this.”
No details were available on the size of the arrangement or the timeline for finalising details.
The debate of an alternative international currency to the dollar has heated up in recent months after the world’s key reserve holders in emerging economies have expressed concern about the US dollar remaining the dominant reserve currency.
As emerging nations gain more clout in the global economy, they also want to study how they might increase the use of local currencies in international trade.
China – the world’s top holder of foreign exchange reserves – renewed its call on Friday for the creation of a super-sovereign reserve currency to reduce the dollar’s global domination, which it said had worsened the financial crisis.
Russia, whose reserves are the world’s third largest, has also called for the world to become less dependent on the dollar. “You have China, Russia proposing we should think about a more international reserve currency other than the dollar,” said Jassem Al Mannai, Director-General, Arab Monetary Fund. “The United States, through this crisis, accumulated huge debts. It’s a heavy burden on the dollar.”
Argentina’s Central Bank Governor Martin Redrado said the dollar will have to share the global stage with strong regional currencies such as the Chinese yuan and Brazilian real in the future.
“The yuan will have a role in Asia with the yen; obviously the euro; in South America probably the real… so we are looking at a world in which the dollar will continue to be the leading currency, but it will be a much more shared approach,” he said.
Philippine Central Bank Governor Amando Tetangco said the recent trend of diversification away from the dollar is set to continue.
“For emerging central banks to shift out of the US dollar, it has been always an option and this has happened to some extent in the form of diversification into foreign currencies... this process will inevitably continue,” he said.
Zhou said a further step was for Brazilian President Luiz Inacio Lula da Silva and Chinese President Hu Jintao to discuss the arrangement, which he said would not necessarily involve a currency swap like those China has in place with other countries.
“What we are discussing is that Brazil’s President Lula and our president Hu talk about the possibility and gradual development to use our local currency for some trade settlement and... investment, that’s the major thing,” he said. “It's not necessarily to use a currency swap.” The People’s Bank of China (PBOC) has arranged six bilateral currency swaps, totalling 650 billion yuan (Dh349bn), since December with countries including Malaysia, Argentina and Hong Kong.
Under the arrangements, a central bank on the other side of the swap will be able to lend the yuan provided by the PBOC to domestic commercial entities to pay for imports.
More money laundering reports forecast
The number of suspected money-laundering deals being reported by UAE-based banks and financial firms is expected to increase by about 10 per cent this year compared to 2008, as awareness of laundering methods is raised, senior regulators said yesterday.
As many as 6,198 "suspicious transaction reports", or STRs, pertaining to money laundering have been filed in the UAE until May this year and the number may increase to 15,000 for the full year, Saeed Abdullah Al Hamiz, Senior Executive Director in the UAE Central Bank's Banking Supervision and Examination Department, said at an anti-money laundering (AML) briefing at the Dubai Financial Services Authority (DFSA).
In 2008, 13,101 STRs were filed, bringing the total to 80,592 from 2002 to date. Of the total STRs filed to date, 285 have been referred to the UAE Public Prosecutor's Office, of which 20 have reached court, Hamiz said. "To take it to court, you need to investigate, seek documentary evidence and build a foolproof case," he said.
Hamiz refused to give the monetary size of the cases that have reached the prosecution stage, but DFSA Chief Executive Paul M Koster agreed that each suspected money-laundering transaction would involve "a minimum of seven digits or eight".
The increase in the number of suspect transactions "is not – repeat not – a bad sign", Koster said. "It indicates that awareness is being raised about these issues. I must stress that awareness [of AML issues] has to be constant."
Hamiz said: "More institutions are aware of this issue and there is a level of training that has been imparted by the regulators."
Crude and gold likely to climb
The bullion's price set to oscillate between $920 and $960
Both crude oil and gold are expected to appreciate in the coming weeks as the dollar's depreciation continues, analysts say.
Following the uptrend is silver which normally does not attract as much attention as gold.
"Energies are expected to trade with a higher bias. Support will come from potential weakness in dollar, the recovery in risk matters and signs of economic improvement," Tom Pawlicki, a Chicago-based analyst with MF Global wrote in a report.
Besides crude, Pawlicki forecast an uptrend in prices for both gold and silver. "Precious metals are expected to witness a higher trend," he wrote. Gold and oil that had lost their correlation in the thick of the crisis have recently regained it.
As per the latest available pricelist, crude oil last traded at $69.43 a barrel and the bullion last traded at $939.0 an ounce.
Commodity traders forecast medium term prices of $960 an ounce for gold and a mid-$70s a barrel price for crude. In the long term the forecasts are brighter.
Dubai-based gold dealers said that the yellow metal is expected to continue its rally.
"Gold added another $5 to its impressive recovery from Monday's dip below $915 to end the day at $939 (an ounce). A cocktail of stronger oil prices, a weaker dollar and a rally in equities has given gold a firm reeling," Dubai-based INTL Commodities said in its recent report.
The report said that a price level of $960 an ounce is the next resistance level that the bullion is expected to face.
Silver, according to INTL commodities, will move up if gold prices continue to rise.
"On the charts, the likely trading range is defined by good support at $13.70(an ounce) and stiff resistance is pegged at $14.50.
It will need a major move in gold to stimulate sufficient interest to spark a break outside these technical parameters," said INTL commodities.
The greenback said the CEO of Dubai-based JRG metals and commodities Sajith Kumar PK will continue to struggle with devaluation pressure till the next year.
"The huge amount of funds that the Barack Obama administration has pressed into US economy under the Troubled Assets Relief Programme (Tarp) was expected to have these consequences. This is expected to continue for the next one year," he said.
The US dollar stood at 1.4056 against a euro on Sunday. The greenback stood at 48.115against the Indian rupee.
Jeffrey Rhodes, the CEO of INTL commodities, recently told Emirates Business that the bullion's price will oscillate in the range of $920 and $960 with a risk of price surging by $50 or declining by an equal amount if it touches either of the limits.
Financial firms Bank of America Merrill Lynch and UBS have earlier forecast that the bullion will touch a high of $1500 an ounce and $2600 in the long run.
UAE's April crude output below Opec quota
The UAE slashed its oil production below Opec's quota in April to demonstrate the strongest commitment to agreed output cuts in the 12-nation group.
Saudi Arabia, the world's dominant oil exporter, pumped close to its quota, while the other Gulf oil heavyweights Kuwait and Iran also showed strong compliance.
Reporting its production level to the Riyadh-based Joint Oil Data Initiative (Jodi), the UAE said it produced 2.217 million barrels per day (bpd) in April, slightly below its Opec-decreed output quota of 2.22 million bpd.
Saudi Arabia said it pumped 8.038 million bpd compared with a quota of 8.05 million bpd, while Kuwait's actual crude supplies stood at 2.250 million bpd against its assigned quota of 2.22 million bpd.
Iran, the second largest oil producer in Opec, said its production stood at 3.571 million bpd in April, higher than its quota but sharply lower than its output in the previous months.
Qatar, a small Opec oil producer but the world's largest gas power, pumped 737,000 bpd in April, almost equivalent to its quota.
The output cuts by the Gulf's Opec members were in line with collective agreements by the oil group to trim production by up to 4.2 million bpd since September to prop up crude prices after their collapse in late 2008.
Although Opec has not fully complied with the agreed cuts, they have pushed crude prices above $70, nearly double their level in early 2009.
Saudi Arabia, sitting on a quarter of the world's recoverable oil deposits, has shouldered the bulk of the reduction, with its output sliding by more than 1.4 million bpd since September, when it pumped 9.463 million bpd, according to Jodi, which groups nearly 100 oil producers and consumers.
The UAE trimmed supplies by more than 400,000 bpd, while the cut by Kuwait stood at 600,000 bpd and that by Iran exceeded 400,000 bpd. Despite its relatively low output, Qatar reduced supplies by more than 100,000 bpd.
As a whole, the five Gulf Opec oil producers have slashed their crude supplies by a staggering 3.11 million bpd since September, when their combined production stood at around 19.92 million bpd, Jodi figures showed.
Iraq boosted its production to 2.293 million bpd in April from 2.187 million bpd in February but the conflict-battered Arab nation has remained outside Opec's quota system for many years.
Lower oil prices have sharply hit the coffers of Opec members, depressing their income to $178 billion (Dh653bn) in the first five months of 2009 compared with more than $350bn in the first five months of 2008.
Forecasts by the Energy Information Administration of the US Department of Energy showed Opec's earnings could dive to $530bn this year from a record $968bn in 2008, when crude prices averaged $95.
But the agency expects the income to rebound to $620bn in 2010, apparently due to a recovery in demand and consequently in prices.
Saudi Arabia, the world's dominant oil exporter, pumped close to its quota, while the other Gulf oil heavyweights Kuwait and Iran also showed strong compliance.
Reporting its production level to the Riyadh-based Joint Oil Data Initiative (Jodi), the UAE said it produced 2.217 million barrels per day (bpd) in April, slightly below its Opec-decreed output quota of 2.22 million bpd.
Saudi Arabia said it pumped 8.038 million bpd compared with a quota of 8.05 million bpd, while Kuwait's actual crude supplies stood at 2.250 million bpd against its assigned quota of 2.22 million bpd.
Iran, the second largest oil producer in Opec, said its production stood at 3.571 million bpd in April, higher than its quota but sharply lower than its output in the previous months.
Qatar, a small Opec oil producer but the world's largest gas power, pumped 737,000 bpd in April, almost equivalent to its quota.
The output cuts by the Gulf's Opec members were in line with collective agreements by the oil group to trim production by up to 4.2 million bpd since September to prop up crude prices after their collapse in late 2008.
Although Opec has not fully complied with the agreed cuts, they have pushed crude prices above $70, nearly double their level in early 2009.
Saudi Arabia, sitting on a quarter of the world's recoverable oil deposits, has shouldered the bulk of the reduction, with its output sliding by more than 1.4 million bpd since September, when it pumped 9.463 million bpd, according to Jodi, which groups nearly 100 oil producers and consumers.
The UAE trimmed supplies by more than 400,000 bpd, while the cut by Kuwait stood at 600,000 bpd and that by Iran exceeded 400,000 bpd. Despite its relatively low output, Qatar reduced supplies by more than 100,000 bpd.
As a whole, the five Gulf Opec oil producers have slashed their crude supplies by a staggering 3.11 million bpd since September, when their combined production stood at around 19.92 million bpd, Jodi figures showed.
Iraq boosted its production to 2.293 million bpd in April from 2.187 million bpd in February but the conflict-battered Arab nation has remained outside Opec's quota system for many years.
Lower oil prices have sharply hit the coffers of Opec members, depressing their income to $178 billion (Dh653bn) in the first five months of 2009 compared with more than $350bn in the first five months of 2008.
Forecasts by the Energy Information Administration of the US Department of Energy showed Opec's earnings could dive to $530bn this year from a record $968bn in 2008, when crude prices averaged $95.
But the agency expects the income to rebound to $620bn in 2010, apparently due to a recovery in demand and consequently in prices.
On the rise ... Again
Oil prices are inching upwards again. Just as last year, some people are starting to tell fairy tales instead of facing the reality of limited oil supplies.
If my car mechanic explained that my car was overheating because of fairies and pixie dust, I'd take my business elsewhere. I expect my mechanic to know the fundamentals of how the radiator works. Yet senators, fuel dealers, and editorial writers seem to believe in pixie dust.
For example, the Times Argus editorial writer (June 11) concluded that speculators were behind last year's dramatic rise in oil prices. Why? The oil price dropped from near $150 a barrel to under $40, and "(t)he recession decreased demand, but not by two thirds."
The writer apparently assumes that oil prices have a one-to-one relationship with demand: double demand, and you can expect the price of oil to double. Halve demand, and the price of oil halves, too.
The oil market doesn't work that way. Oil is a classic example of a price-inelastic commodity. That's economist talk for saying that demand doesn't change much when prices go up or down.
Introductory economics classes even use oil to illustrate the concept. When oil prices jump, people still commute alone in cars, drive kids to soccer practice, and heat their homes. Oil prices increased nearly 15 times over the last eight years, yet demand didn't drop. Instead, it increased.
The potential oil supply became maxed out over this period. The spigots were open as wide as they would go, yet people kept consuming more oil. In reaction, the price just kept climbing.
What would a price spike driven by speculators look like? Only through storing oil can speculators make money by driving up prices. If speculators had been responsible for last year's price spike, we would expect to see increases in stored oil.
In fact, the opposite happened. World oil consumption exceeded production in 2007 and the first half of 2008. Inventories were drawn down. At least, that's what happened to the inventories we have records for.
Paul Krugman, winner of last year's economics prize in memory of Alfred Nobel, brought up the concept of hidden inventories last June to explain why speculators were not responsible for the run-up in prices.
He calculated that for speculation to have driven the price spike, someone would have to be buying and hiding 84 million gallons of oil each and every day. That would take a lot of fairies and pixie dust!
What about this year? How come prices are rising now, when oil inventories are higher than usual and OPEC has been scrambling to reduce production? Morgan Downey, author of "Oil 101," an authoritative overview of all aspects of the oil industry, points to the fundamentals.
"The thing that annoys me about those sorts of articles [blaming speculation] is that it says oil demand is down and so price should not be rising. Since the beginning of 2009 demand is down year on year by 2 million barrels per day but supply is down over 3.5 million barrels per day (due to OPEC cuts)."
Ah, have we found a real culprit at last, in OPEC? Well, yes, but only for the time being. Without OPEC production cuts, prices would surely be lower this year. Last year, not so much. Every oil producer in the world was producing at or near capacity.
In the near future, prominent third-party observers expect a new oil production shortfall. They include the US Department of Energy, the International Energy Agency, and the International Monetary Fund.
Each year, depletion in existing oil fields reduces available oil by 4 million barrels per day. That means that within five years, the equivalent of two new Saudi Arabias need to be brought on line, just to keep world production from dropping.
Meanwhile, with the easy oil gone, it costs a lot more to find and develop new oil. The 2008 cost doubled, to over $50 per barrel, from the three year average, according to a study released this month by Ernst & Young. Yet investment is falling, not rising. Already this year, investment in new oil fields has dropped by $100 billion.
The third-party observers expect the economy to recover in a year or two, leading to increased oil consumption. And then the world smashes right into the ceiling of limits to production again.
Good energy policy will only occur if people are willing to face these hard facts and drastically cut dependence on oil.
Trying to rid the world of fairies and pixie dust just guarantees a repeat of the oil price pain of 2008.
If my car mechanic explained that my car was overheating because of fairies and pixie dust, I'd take my business elsewhere. I expect my mechanic to know the fundamentals of how the radiator works. Yet senators, fuel dealers, and editorial writers seem to believe in pixie dust.
For example, the Times Argus editorial writer (June 11) concluded that speculators were behind last year's dramatic rise in oil prices. Why? The oil price dropped from near $150 a barrel to under $40, and "(t)he recession decreased demand, but not by two thirds."
The writer apparently assumes that oil prices have a one-to-one relationship with demand: double demand, and you can expect the price of oil to double. Halve demand, and the price of oil halves, too.
The oil market doesn't work that way. Oil is a classic example of a price-inelastic commodity. That's economist talk for saying that demand doesn't change much when prices go up or down.
Introductory economics classes even use oil to illustrate the concept. When oil prices jump, people still commute alone in cars, drive kids to soccer practice, and heat their homes. Oil prices increased nearly 15 times over the last eight years, yet demand didn't drop. Instead, it increased.
The potential oil supply became maxed out over this period. The spigots were open as wide as they would go, yet people kept consuming more oil. In reaction, the price just kept climbing.
What would a price spike driven by speculators look like? Only through storing oil can speculators make money by driving up prices. If speculators had been responsible for last year's price spike, we would expect to see increases in stored oil.
In fact, the opposite happened. World oil consumption exceeded production in 2007 and the first half of 2008. Inventories were drawn down. At least, that's what happened to the inventories we have records for.
Paul Krugman, winner of last year's economics prize in memory of Alfred Nobel, brought up the concept of hidden inventories last June to explain why speculators were not responsible for the run-up in prices.
He calculated that for speculation to have driven the price spike, someone would have to be buying and hiding 84 million gallons of oil each and every day. That would take a lot of fairies and pixie dust!
What about this year? How come prices are rising now, when oil inventories are higher than usual and OPEC has been scrambling to reduce production? Morgan Downey, author of "Oil 101," an authoritative overview of all aspects of the oil industry, points to the fundamentals.
"The thing that annoys me about those sorts of articles [blaming speculation] is that it says oil demand is down and so price should not be rising. Since the beginning of 2009 demand is down year on year by 2 million barrels per day but supply is down over 3.5 million barrels per day (due to OPEC cuts)."
Ah, have we found a real culprit at last, in OPEC? Well, yes, but only for the time being. Without OPEC production cuts, prices would surely be lower this year. Last year, not so much. Every oil producer in the world was producing at or near capacity.
In the near future, prominent third-party observers expect a new oil production shortfall. They include the US Department of Energy, the International Energy Agency, and the International Monetary Fund.
Each year, depletion in existing oil fields reduces available oil by 4 million barrels per day. That means that within five years, the equivalent of two new Saudi Arabias need to be brought on line, just to keep world production from dropping.
Meanwhile, with the easy oil gone, it costs a lot more to find and develop new oil. The 2008 cost doubled, to over $50 per barrel, from the three year average, according to a study released this month by Ernst & Young. Yet investment is falling, not rising. Already this year, investment in new oil fields has dropped by $100 billion.
The third-party observers expect the economy to recover in a year or two, leading to increased oil consumption. And then the world smashes right into the ceiling of limits to production again.
Good energy policy will only occur if people are willing to face these hard facts and drastically cut dependence on oil.
Trying to rid the world of fairies and pixie dust just guarantees a repeat of the oil price pain of 2008.
The Interplay Between OPEC Decisions and Oil Hoarding
A lot of oil has been floating in idle tankers at sea recently, as traders sought to hoard oil and take advantage of contango (higher future prices than current).
The number of supertankers being used to store crude and oil products shrank by about a third since March [according to ICAP]... About 30 very large crude carriers (VLCCs) are in use now, compared with about 45 late in the first quarter, shipping analyst Simon Newman said on Wednesday... A supertanker can hold about two million barrels of crude, more than France consumes every day.
The amount of oil stored at sea climbed to the highest in at least two decades, Frontline Ltd (FRO), the biggest supertanker operator, said in January.
Traders sought to profit from contango, where longer-dated contracts are more expensive than near-term supply. The spread is profitable so long as it exceeds storage and finance costs.
The hoarding of oil at sea an interesting dynamic in the tanker shipping world. For perspective, 15 less ships at sea hoarding oil is 30m barrels of crude, which compares to about 85m barrels/day global consumption.
Such hoarding has taken place in the last six months at an unprecedented scale, and reportedly a lot of money has been made recently trading oil in such a fashion.
While it appears recent OPEC production cuts have put some pressure on the trade going forward, at the same time it appears that the same cuts helped facilitate traders' unwinding of seaborne hoarding positions without hurting the market price too much.
Oil trading profits are hard to track. But analysts say the crude contango probably helped several firms book billions in collective profits since late 2008.
Koch, Shell and Vitol which held the largest floating stocks declined comment on their storage positions or trading gains.
BP has said crude storage plays helped it gain $500 million in trading profits during the first quarter alone... "OPEC's whole idea in bringing production down has been to draw oil out of storage and lower import levels," said Roger Diwan, a partner at PFC Energy in Washington.
The oil sold ashore has gone almost unnoticed, offset by output cuts by the Organization of the Petroleum Exporting Countries that allowed traders to unload tankers without causing a tsunami of U.S. oil imports that would crash prices.
One has to wonder how many senior people involved with OPEC decisions might make money trading oil on the side.
The number of supertankers being used to store crude and oil products shrank by about a third since March [according to ICAP]... About 30 very large crude carriers (VLCCs) are in use now, compared with about 45 late in the first quarter, shipping analyst Simon Newman said on Wednesday... A supertanker can hold about two million barrels of crude, more than France consumes every day.
The amount of oil stored at sea climbed to the highest in at least two decades, Frontline Ltd (FRO), the biggest supertanker operator, said in January.
Traders sought to profit from contango, where longer-dated contracts are more expensive than near-term supply. The spread is profitable so long as it exceeds storage and finance costs.
The hoarding of oil at sea an interesting dynamic in the tanker shipping world. For perspective, 15 less ships at sea hoarding oil is 30m barrels of crude, which compares to about 85m barrels/day global consumption.
Such hoarding has taken place in the last six months at an unprecedented scale, and reportedly a lot of money has been made recently trading oil in such a fashion.
While it appears recent OPEC production cuts have put some pressure on the trade going forward, at the same time it appears that the same cuts helped facilitate traders' unwinding of seaborne hoarding positions without hurting the market price too much.
Oil trading profits are hard to track. But analysts say the crude contango probably helped several firms book billions in collective profits since late 2008.
Koch, Shell and Vitol which held the largest floating stocks declined comment on their storage positions or trading gains.
BP has said crude storage plays helped it gain $500 million in trading profits during the first quarter alone... "OPEC's whole idea in bringing production down has been to draw oil out of storage and lower import levels," said Roger Diwan, a partner at PFC Energy in Washington.
The oil sold ashore has gone almost unnoticed, offset by output cuts by the Organization of the Petroleum Exporting Countries that allowed traders to unload tankers without causing a tsunami of U.S. oil imports that would crash prices.
One has to wonder how many senior people involved with OPEC decisions might make money trading oil on the side.
Iraq to unveil winners of oil deals
Iraq will this week unveil which foreign firms have won contracts to develop its oil and gas fields, nearly four decades after Saddam Hussein nationalised the country's energy infrastructure.
The deals, expected to be announced live on television today and tomorrow, will provide the government with much-needed revenue as it struggles to rebuild the country after three wars and 20 years of debilitating economic sanctions.
Thirty-one companies have submitted bids to develop six giant oil fields and two gas fields. The oil deposits, holding known reserves of 43 billion barrels of crude, are in southern and northern Iraq while the gas concessions are west and northeast of Baghdad.
"Our principal objective is to increase our oil production from 2.4 million barrels per day to more than four million in the next five years," Oil Minister Hussein Al Shahristani said in an interview on Iraqi public television. Increasing production to that level will, according to him, pump an extra $1.7 trillion (Dh6.24trn) into government coffers over the next 20 years.
Shahristani has said only $30 billion of that sum will go to the companies that have extracted the oil.
"This is a huge amount that would finance infrastructure projects across Iraq – schools, roads, airports, housing, hospitals," he said, insisting that the country would retain control over its oil reserves.
For energy firms the appeal of the Iraqi contracts is the chance to plant a foot firmly in the country, the first time such an opportunity has been offered since Saddam nationalised the Iraq Petroleum Company in 1972.
"Thanks to sanctions and war, no company has wanted or been able to invest," said Ruba Husari, an energy expert and the founder of the website iraqoilforum.com.
"Today, the country is stable, in both its security and its institutions."
A source involved in the bidding, who spoke on condition of anonymity, described Iraq as "one of the rare countries in the world where the coming decades will bring real growth in production". "It's a rare opportunity," said the source.
Not all energy companies are happy, though, with the terms of the contracts being offered by Baghdad.
The foreign firms awarded deals to work here will have to partner with Iraqi Government-owned firms, principally the South Oil Company (SOC), and share management of the fields despite fully financing their development. They will be paid a fixed fee per barrel, not a share of the profits, and the fee will only be paid once a production threshold set by the government is reached.
"This raises the question of the profitability of the contract," the source said. "The companies are the ones investing, but have a big problem with the fact that management will be shared."
But international energy giants cannot afford to ignore the contracts on offer.
"For foreign companies, this is like a first step," the source said. "They are saying, 'Let's accept these terms, even though they're not our preferred model, just to stay in the game, and hope conditions improve'."
In effect, foreign energy executives may well be targeting the next round of contracts to be offered next year, when Iraq will grant licences for exploitation of 16 other undeveloped fields.
Domestic companies, including SOC, are furious, however, that contracts are being awarded to their foreign counterparts.
Along with the Shia Fadhila party, which lost control of the Ministry of Oil in 2006, the companies have launched a campaign against Shahristani. SOC insists it can fulfil the same objectives set for international companies, and in less time.
"The fields in question represent 85 per cent of actual production and 50 per cent of reserves," said SOC Chief Executive Fayad Hassan Nima. "A loss of control would lead to the death of national companies."
Jaber Khalifa Jaber, head of the Iraqi parliament's oil and gas committee and a Fadhila party MP, said Iraq is under threat from an "economic occupation".
"The companies will just share the oil between the Americans, the French, the British and the Japanese… just like the Sykes-Picot agreement," he said, referring to the Anglo-French accord that divided up influence in the Middle East in 1916.
The deals, expected to be announced live on television today and tomorrow, will provide the government with much-needed revenue as it struggles to rebuild the country after three wars and 20 years of debilitating economic sanctions.
Thirty-one companies have submitted bids to develop six giant oil fields and two gas fields. The oil deposits, holding known reserves of 43 billion barrels of crude, are in southern and northern Iraq while the gas concessions are west and northeast of Baghdad.
"Our principal objective is to increase our oil production from 2.4 million barrels per day to more than four million in the next five years," Oil Minister Hussein Al Shahristani said in an interview on Iraqi public television. Increasing production to that level will, according to him, pump an extra $1.7 trillion (Dh6.24trn) into government coffers over the next 20 years.
Shahristani has said only $30 billion of that sum will go to the companies that have extracted the oil.
"This is a huge amount that would finance infrastructure projects across Iraq – schools, roads, airports, housing, hospitals," he said, insisting that the country would retain control over its oil reserves.
For energy firms the appeal of the Iraqi contracts is the chance to plant a foot firmly in the country, the first time such an opportunity has been offered since Saddam nationalised the Iraq Petroleum Company in 1972.
"Thanks to sanctions and war, no company has wanted or been able to invest," said Ruba Husari, an energy expert and the founder of the website iraqoilforum.com.
"Today, the country is stable, in both its security and its institutions."
A source involved in the bidding, who spoke on condition of anonymity, described Iraq as "one of the rare countries in the world where the coming decades will bring real growth in production". "It's a rare opportunity," said the source.
Not all energy companies are happy, though, with the terms of the contracts being offered by Baghdad.
The foreign firms awarded deals to work here will have to partner with Iraqi Government-owned firms, principally the South Oil Company (SOC), and share management of the fields despite fully financing their development. They will be paid a fixed fee per barrel, not a share of the profits, and the fee will only be paid once a production threshold set by the government is reached.
"This raises the question of the profitability of the contract," the source said. "The companies are the ones investing, but have a big problem with the fact that management will be shared."
But international energy giants cannot afford to ignore the contracts on offer.
"For foreign companies, this is like a first step," the source said. "They are saying, 'Let's accept these terms, even though they're not our preferred model, just to stay in the game, and hope conditions improve'."
In effect, foreign energy executives may well be targeting the next round of contracts to be offered next year, when Iraq will grant licences for exploitation of 16 other undeveloped fields.
Domestic companies, including SOC, are furious, however, that contracts are being awarded to their foreign counterparts.
Along with the Shia Fadhila party, which lost control of the Ministry of Oil in 2006, the companies have launched a campaign against Shahristani. SOC insists it can fulfil the same objectives set for international companies, and in less time.
"The fields in question represent 85 per cent of actual production and 50 per cent of reserves," said SOC Chief Executive Fayad Hassan Nima. "A loss of control would lead to the death of national companies."
Jaber Khalifa Jaber, head of the Iraqi parliament's oil and gas committee and a Fadhila party MP, said Iraq is under threat from an "economic occupation".
"The companies will just share the oil between the Americans, the French, the British and the Japanese… just like the Sykes-Picot agreement," he said, referring to the Anglo-French accord that divided up influence in the Middle East in 1916.
Sunday, 28 June, 2009
Why Mutual Funds are the WORST Investments During Bear Markets (Part 2)
Let me explain further why mutual funds can get killed during bear markets. A down market is the best way to lower the cost basis of the fund’s securities positions. But during a bear market, funds have very little cash because investors aren’t buying funds. As well, remember that fund managers can’t go to cash so they’re not able to lower the cost basis of their most undervalued positions.
But they have another, often bigger problem to contend with; net redemptions. Fund managers also have to worry about redeeming shares of the fund for investors who want out. And if they don’t estimate this amount accurately, they might have to sell when stocks reach multi-year lows (which is typically the worst time to sell). And with fewer investors buying mutual funds during bearish periods, fund managers have less new cash to lower the cost basis.
Fund managers should be buying during bear markets but they just don’t have the cash. Remember, lowering the cost basis of the fund’s securities positions is their single best asset management tool.Even when they do have sufficient cash, they are betting that their favored positions won’t go to 0; you know, like WorldCom, Enron, Washington Mutual, Lehman Brothers, Bear Stearns, and soon to be General Motors, Ford, Fannie Freddie, etc.
Therefore, unless a fund has been structured in a way that allows the fund manager to invest in special asset classes that provide hedging strategies, the fund will get slammed hard during large market corrections, often more so than the market itself.
You might recall that during the height of the dotcom bubble, there were more mutual funds than individual securities, at nearly 13,000. By 2003, there were just over 7000 mutual funds remaining. So much for the safety provided by diversification.
The fact is that the ability to avoid or minimize market risk is the single best asset management skill to have. Mutual funds aren’t able to do this. And Wall Street won’t tell you this because they are in bed with the fund industry.
While there are a few of these so-called “bear market” funds, when you examine the returns, they are far from impressive. One such fund is Federated’s Prudent Bear Fund (BEARX) recently purchased from David Tice; a CNBC media ham. If you look at the returns over the most favorable period for this fund (from 2000 to current), after adjusting for all costs, your returns would have been similar to that of a Certificate of Deposit (CD). If you look at the performance prior to the current bear market (i.e. before 2008) the results would be much worse.
Finally, if you look at the cost-adjusted performance since inception, you’d be lucky if you netted 1% after all fees and taxes. To have a fund focused on the short side over the two biggest bear markets in history with these returns is beyond lousy.
So who do you think is REALLY making money in mutual funds? Over a long period, the real money is being made by the fund in terms of the various fees. Data shows that the average mutual fund, if invested for around 50 years, will take most of your gains in the form of fees, or around 79% of the gross returns. Hopefully by now you realize why. It’s those dang bear markets that kill fund investors the most.
Either way, during a bull and bear markets, mutual funds will snag you for an average of 3.5% annually for the average no-load fund, after you account for all expenses (some of which are not adequately disclosed). And most important, they have no means to manage risk, specifically the most deadly risk of all; market risk.
In reality, mutual funds are only appropriate for people who have very little money, as a way for them to participate in the stock market.After all, the minimums to open these accounts are usually $500-$3000. What does that say about the market they are trying to reach? Now you know why so many fund managers and investment advisers love going on CNBC; because sheep aren’t particularly wealthy.
One must question whether such individuals should even be in the stock market. Perhaps they are better off in CDs. The problem is that most investors got spoiled by the bull market of the 1990s, unaware that most funds were underperforming when adjusted for fees and investment risk.
Why does no one else bother to tell you this? Mainly because very few investment professionals understand how mutual funds really work. Even if they did, they aren’t going to bite the hand that feeds them. In fact, people like to make money the easy way; by riding the wave – writing books and newsletters on mutual funds because they know there will be a huge audience.
But they have another, often bigger problem to contend with; net redemptions. Fund managers also have to worry about redeeming shares of the fund for investors who want out. And if they don’t estimate this amount accurately, they might have to sell when stocks reach multi-year lows (which is typically the worst time to sell). And with fewer investors buying mutual funds during bearish periods, fund managers have less new cash to lower the cost basis.
Fund managers should be buying during bear markets but they just don’t have the cash. Remember, lowering the cost basis of the fund’s securities positions is their single best asset management tool.Even when they do have sufficient cash, they are betting that their favored positions won’t go to 0; you know, like WorldCom, Enron, Washington Mutual, Lehman Brothers, Bear Stearns, and soon to be General Motors, Ford, Fannie Freddie, etc.
Therefore, unless a fund has been structured in a way that allows the fund manager to invest in special asset classes that provide hedging strategies, the fund will get slammed hard during large market corrections, often more so than the market itself.
You might recall that during the height of the dotcom bubble, there were more mutual funds than individual securities, at nearly 13,000. By 2003, there were just over 7000 mutual funds remaining. So much for the safety provided by diversification.
The fact is that the ability to avoid or minimize market risk is the single best asset management skill to have. Mutual funds aren’t able to do this. And Wall Street won’t tell you this because they are in bed with the fund industry.
While there are a few of these so-called “bear market” funds, when you examine the returns, they are far from impressive. One such fund is Federated’s Prudent Bear Fund (BEARX) recently purchased from David Tice; a CNBC media ham. If you look at the returns over the most favorable period for this fund (from 2000 to current), after adjusting for all costs, your returns would have been similar to that of a Certificate of Deposit (CD). If you look at the performance prior to the current bear market (i.e. before 2008) the results would be much worse.
Finally, if you look at the cost-adjusted performance since inception, you’d be lucky if you netted 1% after all fees and taxes. To have a fund focused on the short side over the two biggest bear markets in history with these returns is beyond lousy.
So who do you think is REALLY making money in mutual funds? Over a long period, the real money is being made by the fund in terms of the various fees. Data shows that the average mutual fund, if invested for around 50 years, will take most of your gains in the form of fees, or around 79% of the gross returns. Hopefully by now you realize why. It’s those dang bear markets that kill fund investors the most.
Either way, during a bull and bear markets, mutual funds will snag you for an average of 3.5% annually for the average no-load fund, after you account for all expenses (some of which are not adequately disclosed). And most important, they have no means to manage risk, specifically the most deadly risk of all; market risk.
In reality, mutual funds are only appropriate for people who have very little money, as a way for them to participate in the stock market.After all, the minimums to open these accounts are usually $500-$3000. What does that say about the market they are trying to reach? Now you know why so many fund managers and investment advisers love going on CNBC; because sheep aren’t particularly wealthy.
One must question whether such individuals should even be in the stock market. Perhaps they are better off in CDs. The problem is that most investors got spoiled by the bull market of the 1990s, unaware that most funds were underperforming when adjusted for fees and investment risk.
Why does no one else bother to tell you this? Mainly because very few investment professionals understand how mutual funds really work. Even if they did, they aren’t going to bite the hand that feeds them. In fact, people like to make money the easy way; by riding the wave – writing books and newsletters on mutual funds because they know there will be a huge audience.
Why Mutual Funds are the WORST Investment During Bear Markets
If you’re like most investors, you’ve probably stopped looking at your 401(k) statements and other investment accounts.
The pain associated with watching your retirement savings evaporate for over a year has become too much for most to bear. But this highlights an important lesson. You need to understand your investments.
Simply having a fund that invests in companies you’re familiar with isn’t enough. Knowing the fees, turnover ratio, historical performance, risk-adjusted returns, and so forth isn’t enough either.
When you invest in managed funds, closed-end funds, REITs, or oil trusts, you really need to dig deep. You not only have to understand the investments of each fund, but you also need to understand how the funds work.
Hopefully, after you read this article you’ll be prepared to act quickly when the next bear market strikes. Acting quickly in my opinion means you should shift to money market funds (i.e. cash), and in some cases bond funds.
In other words, you should avoid equity-based mutual funds during bear markets because they generally get hammered more than the overall stock market. So let’s examine why this might be the case.
As you might appreciate, fund managers don’t care if a company is a great stock. This designation can be attained by an impressive short-term price performance.
Since most mutual funds are not structured to take full advantage of short-term trading opportunities, they’re only concerned with identifying great companies. Great companies will become great stocks over the long-term, which is the time frame funds target.
Keep in mind that money managers work in a very similar manner.
But the fact is that most mutual funds fail to beat the indexes.
Why might this be?
In short, the fees charged by mutual funds are disproportionate to the skills provided.
This is a statement of fact, so you should never forget it.
Rather than some great investment vehicle, most funds are simply glorified marketing machines that spend billions of dollars each year convincing you they have some special edge or understand the investment process in a way like no others.
In most cases, all they really understand is dollar-cost averaging and diversification, but so does a sixth grader. Other times, the fund’s investment strategy is so generic it mirrors an index fund with much higher fees.
Quite simply, mutual funds practice very little risk management. Rarely do they even consider technical analysis. Rarely are they able to hedge declines using options and other risk management tools.
Most important, mutual funds are unable to cash out when the market collapses because their securities positions are too large. Besides, they can’t charge huge fees if the assets are in cash, so they have an incentive to keep you in the market at all times.
As a result of these limitations, mutual funds are exposed to the biggest investment risk – market risk, or the risk that the market will decline. This risk is not possible to hedge through diversification.
Mutual funds don’t want you to know this. And you can imagine why none of the so-called experts in the financial media bother to mention these facts. Here is a reminder. http://tinyurl.com/ndqot3
As you will see, mutual funds have other features that place them at a great disadvantage during bear markets.
To compensate for these shortfalls, they do have a few tools. The problem is that they’re inadequate.
Funds take a very long-term investment approach; with good reason. They have virtually limitless cash to invest; but only during bull markets. During bear markets, investors aren’t so crazy about handing their cash over, with good reason.
When a fund manager likes a company’s fundamentals, he will buy more of the stock after declines, focusing on the long-term picture.
The problem with this is two-fold. First, investors are not aware that funds are making big bets that will impact short-term performance. And many investors do not have the investment horizons that funds do.
The second problem is the absence of risk management. Without a risk management system in place, fund managers are likely to buy shares of Enron and WorldCom all the way down to zero. This is precisely what they did. They did the same thing with the banks last year.
Similar to mutual funds, money managers must remain at least 80 to 90 percent invested at all times due to their structure.
As you can imagine, this can be very risky, especially during large market declines. As well, because they can only charge for assets under management, money managers and mutual funds have an incentive to always remain invested in the market.
This results in the perpetual bull-market mentality preached by these firms. As a result, mutual fund investors are unprotected against bear markets.
These characteristics of fund investment structure explain the lack of availability of risk management tools.
Even if fund managers could liquidate a large portion of the portfolio’s holdings during or prior to a large market sell-off, most funds are so large they wouldn’t be able to dump enough shares of their largest holdings quickly enough without incurring significant losses.
Now let’s look at fund management more closely. Because mutual funds must remain nearly fully invested at all times, rather than practice risk management, fund managers buy more as the price declines.
Therefore, the most important asset management tool of mutual fund managers is to lower the cost basis of each position. As you might imagine, this strategy is heavily dependent upon generating cash.
Fund managers have two ways to generate cash. They can sell more shares of the fund or they can rebalance the investment portfolio.
They frequently use both methods in concert.
Rebalancing basically involves selling shares of positions that have appreciated above the fund’s asset allocation model, and buying more shares of positions that have fallen below that dictated by the model. As a result, the rebalancing process yields very little net selling.
Therefore, the primary manner by which mutual funds generate cash is by selling more shares of securities held by the fund.
Now imagine what happens during bear markets. Stocks get hammered. Eventually, some mutual fund investors sell shares of securities held by the fund. But they are mainly selling shares of stocks they expect to fall the most and use the proceeds to purchase what they feel are undervalued securities.
In other words, they are not doing much net selling during bear markets, so they are exposed to market risk. During bear markets, funds certainly don’t see a big influx of new cash from investors.
So they won’t have much cash to lower the cost-basis of the most undervalued securities.
Finally, as investors sell their mutual funds, fund managers sometimes get stuck in a liquidity crisis, forcing them to sell positions at the bottom.
The result is that during bear markets, mutual funds won’t have their biggest tool available; cash.
As a consequence, mutual funds can decline by more than the stock market itself.
Part 2 of this article http://tinyurl.com/lt9tge
The pain associated with watching your retirement savings evaporate for over a year has become too much for most to bear. But this highlights an important lesson. You need to understand your investments.
Simply having a fund that invests in companies you’re familiar with isn’t enough. Knowing the fees, turnover ratio, historical performance, risk-adjusted returns, and so forth isn’t enough either.
When you invest in managed funds, closed-end funds, REITs, or oil trusts, you really need to dig deep. You not only have to understand the investments of each fund, but you also need to understand how the funds work.
Hopefully, after you read this article you’ll be prepared to act quickly when the next bear market strikes. Acting quickly in my opinion means you should shift to money market funds (i.e. cash), and in some cases bond funds.
In other words, you should avoid equity-based mutual funds during bear markets because they generally get hammered more than the overall stock market. So let’s examine why this might be the case.
As you might appreciate, fund managers don’t care if a company is a great stock. This designation can be attained by an impressive short-term price performance.
Since most mutual funds are not structured to take full advantage of short-term trading opportunities, they’re only concerned with identifying great companies. Great companies will become great stocks over the long-term, which is the time frame funds target.
Keep in mind that money managers work in a very similar manner.
But the fact is that most mutual funds fail to beat the indexes.
Why might this be?
In short, the fees charged by mutual funds are disproportionate to the skills provided.
This is a statement of fact, so you should never forget it.
Rather than some great investment vehicle, most funds are simply glorified marketing machines that spend billions of dollars each year convincing you they have some special edge or understand the investment process in a way like no others.
In most cases, all they really understand is dollar-cost averaging and diversification, but so does a sixth grader. Other times, the fund’s investment strategy is so generic it mirrors an index fund with much higher fees.
Quite simply, mutual funds practice very little risk management. Rarely do they even consider technical analysis. Rarely are they able to hedge declines using options and other risk management tools.
Most important, mutual funds are unable to cash out when the market collapses because their securities positions are too large. Besides, they can’t charge huge fees if the assets are in cash, so they have an incentive to keep you in the market at all times.
As a result of these limitations, mutual funds are exposed to the biggest investment risk – market risk, or the risk that the market will decline. This risk is not possible to hedge through diversification.
Mutual funds don’t want you to know this. And you can imagine why none of the so-called experts in the financial media bother to mention these facts. Here is a reminder. http://tinyurl.com/ndqot3
As you will see, mutual funds have other features that place them at a great disadvantage during bear markets.
To compensate for these shortfalls, they do have a few tools. The problem is that they’re inadequate.
Funds take a very long-term investment approach; with good reason. They have virtually limitless cash to invest; but only during bull markets. During bear markets, investors aren’t so crazy about handing their cash over, with good reason.
When a fund manager likes a company’s fundamentals, he will buy more of the stock after declines, focusing on the long-term picture.
The problem with this is two-fold. First, investors are not aware that funds are making big bets that will impact short-term performance. And many investors do not have the investment horizons that funds do.
The second problem is the absence of risk management. Without a risk management system in place, fund managers are likely to buy shares of Enron and WorldCom all the way down to zero. This is precisely what they did. They did the same thing with the banks last year.
Similar to mutual funds, money managers must remain at least 80 to 90 percent invested at all times due to their structure.
As you can imagine, this can be very risky, especially during large market declines. As well, because they can only charge for assets under management, money managers and mutual funds have an incentive to always remain invested in the market.
This results in the perpetual bull-market mentality preached by these firms. As a result, mutual fund investors are unprotected against bear markets.
These characteristics of fund investment structure explain the lack of availability of risk management tools.
Even if fund managers could liquidate a large portion of the portfolio’s holdings during or prior to a large market sell-off, most funds are so large they wouldn’t be able to dump enough shares of their largest holdings quickly enough without incurring significant losses.
Now let’s look at fund management more closely. Because mutual funds must remain nearly fully invested at all times, rather than practice risk management, fund managers buy more as the price declines.
Therefore, the most important asset management tool of mutual fund managers is to lower the cost basis of each position. As you might imagine, this strategy is heavily dependent upon generating cash.
Fund managers have two ways to generate cash. They can sell more shares of the fund or they can rebalance the investment portfolio.
They frequently use both methods in concert.
Rebalancing basically involves selling shares of positions that have appreciated above the fund’s asset allocation model, and buying more shares of positions that have fallen below that dictated by the model. As a result, the rebalancing process yields very little net selling.
Therefore, the primary manner by which mutual funds generate cash is by selling more shares of securities held by the fund.
Now imagine what happens during bear markets. Stocks get hammered. Eventually, some mutual fund investors sell shares of securities held by the fund. But they are mainly selling shares of stocks they expect to fall the most and use the proceeds to purchase what they feel are undervalued securities.
In other words, they are not doing much net selling during bear markets, so they are exposed to market risk. During bear markets, funds certainly don’t see a big influx of new cash from investors.
So they won’t have much cash to lower the cost-basis of the most undervalued securities.
Finally, as investors sell their mutual funds, fund managers sometimes get stuck in a liquidity crisis, forcing them to sell positions at the bottom.
The result is that during bear markets, mutual funds won’t have their biggest tool available; cash.
As a consequence, mutual funds can decline by more than the stock market itself.
Part 2 of this article http://tinyurl.com/lt9tge
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