From 6:30 to 8:00 PM ET, the will be a live stream of professors Tony Atkinson and Paul Krugman discussing inequality and growth at CUNY. The dialogue will be moderated by Chrystia Freeland.

As we endure the slow, uneven recovery from the “Great Recession,” there is no more critical or timely question than that of the relationship between economic growth and inequality. Join two preeminent economists as they assess the connection between prosperity for some and poverty for others. Paul Krugman is professor of economics at Princeton University, a Nobel laureate, and a New York Times columnist. He is the author of numerous books, including the recently published End This Depression Now! Sir Tony Atkinson, professor of economics at Oxford's Nuffield College, is one of the world’s foremost scholars of inequality and author or editor of more than thirty books on inequality and related topics. He recently coedited Top Incomes: A Global Perspective, a volume that analyses high-end income inequality around the world.

Chrystia Freeland will be taking questions at #GCinequality

This is a very interesting topic. Intuitively it seems higher inequality should lead to slower growth (I think it would at the extreme!), but I'm not sure the relationship between inequality and growth is clear.

You know it's getting frothy when... "We're seeing many people cash out 401(k)s or IRAs because they want to take advantage of the [real estate] market." As CNNMoney reports, in order to get in on hot housing markets, amateur investors are buying up homes and taking risky measures - like tapping their retirement accounts - to fund the deals. As one adviser noted, "our average client has retirement accounts of about $150,000 and is looking to buy one or two properties," he said. "After 2008, they didn't trust Wall Street. They wanted hard assets." but as with every bubble there is always the greater fool to rely on - "They bought a lot of stuff cheap last year, but now they're paying market value," said Jack McCabe, a Florida-based real estate consultant. "Sometimes they're overpaying... There's no way they can get an 8% return buying at today's market prices." The problem, of course, is amateur investors sometimes spend all their free cash on their purchases, as "a whole lot of the people in the markets are not experts."  If the real estate market turns south again, that could leave a lot of investors in dire financial condition for their golden years.

Via CNNMoney,

In order to get in on hot housing markets, amateur investors are buying up homes and taking risky measures -- like tapping their retirement accounts -- to fund the deals.

 

"We're seeing many people cash out 401(k)s or IRAs because they want to take advantage of the market," said Sean Galaris of financial services firm LM Funding, based in Tampa. "This new scenario involves people losing significant personal funds since they are financing real estate through retirement accounts, savings and life insurance."

 

...

 

"The decision to take money from your 401(k) is not for everyone," said McDermott. At the age of 48, she has already had five arterial stents implanted. "Having heart disease put me in a position where I was scrambling for life insurance," she said. " I looked elsewhere to create a legacy: real estate."

 

...

 

"Our average client has retirement accounts of about $150,000 and is looking to buy one or two properties," he said. "After 2008, they didn't trust Wall Street. They wanted hard assets."

 

...

 

But Wall Street is getting into this market as well and that is driving prices higher.

 

...

 

"They bought a lot of stuff cheap last year, but now they're paying market value," said Jack McCabe, a Florida-based real estate consultant. "Sometimes they're overpaying."

 

As home prices rise, profits are harder to come by for investors than they were a year or two ago. "There's no way they can get an 8% return buying at today's market prices," said McCabe.

 

...

 

"They're lucky to get a 2% return," he said.

 

And that's if all goes well when they rent out the property. It often does not. Investments in rental properties can quickly sour if, say, a tenant stops paying rent for a few months or if a condo or homeowners association imposes special assessments to pay for major repairs.

 

"When that happens, investors may not have the wherewithal to pay their monthly common charges and property taxes," said Galaris. "A whole lot of the people in the markets are not experts."

    

Coming soon.

It appears that the noose is tightening and the wobbly-chair that Steve Cohen is standing on is getting wobblier... As Bloomberg reports, after five years under investigation for insider trading Steve Cohen is considering a 'deal' with prosecutors that would shut his $15 billion fund to outside investors and (as we noted this morning) shift a family (friends and employees) office.

• *COHEN SAID TO HAVE DISCUSSED DEFERRED PROSECUTION AGREEMENT
• *COHEN SAID TO CONSIDER RETURNING OUTSIDE INVESTORS' MONEY
• *COHEN SAID TO CONSIDER CONTINUING AS A FAMILY OFFICE

The deferred prosecution is intriguing as "when a company enters into a DPA with the government, or an NPA for that matter, it almost always must acknowledge wrongdoing..." and the clock is ticking with the statute of limitations up at the end of July.

And as so often happens, what we said this morning, turned out to be spot on: "All of which simply means that Cohen will merely convert into a "friend, employees and family" office: at last check just the employees had billions of their own cash invested in the hedge fund."

In other words, while implicitly admitting guilt for trading on illegal information for decades, the government will be generous enough to leave Stevie his ill-gotten $8+billion, which like Soros, will be the sole source of cash in the former hedge fund titan's ongoing attempts to corner assorted "expertly networked" markets. You know, with "information arbitrage"...

    

My afternoon train reading:

• Boom or Bubble? (The New Yorker) but see Is This the Best Time for Investors? Don’t Bet On It. (WSJ)
• How Benjamin Graham Revolutionized Shareholder Activism (Echoes)
• Dear NYSE: Canceling Trades Destroys The Integrity of The Market (Kid Dynamite’s World)
• Telling the Truth on Fees, Warts and All (NYT) see also Making your financial adviser measure up (MarketWatch)
• Gross to Buffett Omens Disregarded as Sales Soar (Bloomberg)
• What’s Holding Back Hiring? (Real Time Economics)
• Wall Street Deregulation Advances Despite Warnings Vote Could ‘Haunt’ Congress (HuffPo)
• How much? Samsung swipes 95% of Android profits (Digital Trends)
• Tesla’s fight with America’s car dealers (CNN Money)
• 12 reasons X-Prize billionaires are cheapskates (MarketWatch)

What are you reading?

 

Where International Migration Passes Natural Population Increase (Births ‐Deaths): 2012 to 2060

Source: Census

All major US cash equity indices closed an odd shade of 'green' today which some have called 'red' - though only marginally and Treasuries ended the day practically unchanged (with 10Y +1bps). But the real action took place away from these two asset-classes. Precious metals were monkey-hammered at their open overnight but staged a miraculous recovery leaving gold with its best gain since June 2012 (didn't hear too much about that on TV?). Credit markets notably under-performed - never managing to get into the green on the day. VIX rose over 0.5 vols to close back above 13%. On the bright side, only a few more hours until Tuesday...

 

 

Gold and Silver were making the headlines early on after yet another seeming coordinated smackdown as markets opened late last night.

 

Mainstream media quickly jumped on the disaster. Few hung around to the close to notice the massive rally back in both. Gold closes today with its best day's gains since June 2012 and Silver up over 11% off its lows...

 

USDJPY crashed down to 102 as precious metals were monkey hammered overnight - boucned all the way back, and then faded all day long (JPY strength) to close near the lows of the day just above 102.00. This is JPY's best gain in a month... up around 1% against the USD (with the USD having its worst day in a month)...

 

Credit markets remain severley unimpressed with no bounce at all today...

 

VIX still ain't buying it...

 

Charts: Bloomberg and Capital Context

    

Think of the scolds left behind.

Thud.

Need a quick GDP boost in a world in which the uber levered consumer is tapped out and has no more savings or purchasing power, in which the government is facing an existential socialism or bust crisis even as global sovereign debt levels are at unseens before levels, and in which global trade has collapsed (so there go the C, G and (X-M) components of GDP)?

No problem, just add some I for Inventory.

Better yet, add a whole lot of I, especially if you are that global growth dynamo, China, which over the years many have accused of having taken the term "overcapacity" and put it through the Barry Bonds juicer yet where courtesy of a central-planning regime that has made sure nothing appears to be unused, except for the occasional ghost city or empty mall, proof of such overcapacity has been scarce in official, government data.

Well, today we have definitive evidence - once again courtesy of the private sector where fudging and manipulating data is that much more difficult - that Chinese Inventory is now at absolutely all time record highs.

Below, courtesy of CLSA's Chris Wood, is a chart of rising inventories as a percentage of revenue. What is visible is that the inventory-to-revenue ratio of A share companies, excluding financials and energy, increased to a historical high of 1.37x in 1Q13, while the receivable-to-revenue ratio also rose to a 10-year high of 0.52x.

And that's were the bulk of Chinese "growth" has come from, which in turn is supposed to be the global growth buffer because without China growing at a comfortable 7.5%-8%, the rest of the world is lost.

But don't worry, "if you stock up on enough inventory, they will come."... Unless they don't.

In which case the resultant massive wholesale inventory dump will be an epic sight to behold.

    

Weekly Update: One of key questions for 2013 is Will Housing inventory bottom this year?. Since this is a very important question, I'm tracking inventory weekly in 2013. 

There is a clear seasonal pattern for inventory, with the low point for inventory in late December or early January, and then peaking in mid-to-late summer.

The Realtor (NAR) data is monthly and released with a lag (the most recent data was for March).  However Ben at Housing Tracker (Department of Numbers) has provided me some weekly inventory data for the last several years. This is displayed on the graph below as a percentage change from the first week of the year (to normalize the data).

In 2010 (blue), inventory increased more than the normal seasonal pattern, and finished the year up 7%. However in 2011 and 2012, there was only a small increase in inventory early in the year, followed by a sharp decline for the rest of the year.

Click on graph for larger image.

Note: the data is a little weird for early 2011 (spikes down briefly).

So far in 2013, inventory is up 17.7%. This is well above the peak percentage increases for 2011 and 2012 and suggests to me that inventory is near the bottom. It now seems likely - at least by this measure - that inventory bottomed early this year (it could still happen early next year). 

It is important to remember that inventory is still very low, and is down 15.1% from the same week last year according to Housing Tracker.  Once inventory starts to increase (more than seasonal), buyer urgency will wane, and I expect price increases to slow. 

Evans Quote #1: "Chicago Federal Reserve Bank President Charles Evans on Monday reiterated his belief that the US economy will begin to turn around in the second half of this year. "We think conditions will improve in the second half of this year,"

Evans Quote #2: "The sovereign debt crisis that has enveloped three European nations and threatens to spread to others will slow U.S. economic growth, but the impact will be “minimal to modest," the president of the Federal Reserve Bank of Chicago said Friday.

Evans Quote #3: Chicago Fed’s Evans comments in speech in Chicago: "economy improving quite a lot; companies seem to be in pretty good shape. Optimistic [XXXX] Will Be Year of Turnaround; US growth will be self-sustaining in [XXXX+1]"

 

For clarification, three different quotes - three different years...

Answers:

Quote #1

Quote #2

Quote #3

    

Submitted by Alasdair Macleod via GoldMoney.com,

There has been a growing shift in favour of assets relative to bank deposits. This was initially encouraged by zero interest rates, but more recently there is little doubt that Cyprus’s bail-in has accelerated the trend. This explains the bull markets in bonds and equities, which conveniently underwrites the entire banking system. It is however too early to offer evidence of falling deposit balances held by non-banks and the general public because depositors as a whole have been remarkably complacent, but there is ample evidence that liquidity from monetary expansion is inflating financial assets faster than bank deposits.

This helps explain why, for example, Italian 10-year bonds are on a 4% yield. The reason, doubtless reaffirmed by the Cyprus bail-in, is that investors with cash balances think over-priced sovereign debt is less risky than adding to their euro deposits. However, the central banks are relaxed because weakness in deposits at any single bank is easily covered through the banking system, insulating individual banks from depositor-withdrawal systems. Presumably, banking counterparties are also complacent because they can be reasonably sure to be exempt from any bail-ins. They have the comfort of knowing the banking system is underwritten by all those complacent enough to leave money on deposit beyond the insured level.

However, some of depositors’ cash balances post-Cyprus will have gone into physical gold and silver, which explains why the bullion banks operating in the futures markets and the central banks behind them are so keen to dissuade us that gold and silver is a safe haven. I recently interviewed Ronnie Stoerferle, the Vienna-based analyst, who put his finger on it: since Cyprus, there has been a sharp rise in European demand for physical gold, with the pressure being felt by the bullion banks unable to deliver bullion.

At least one bank was recently reported to be only prepared to settle bullion liabilities in cash. Therefore the price knock-down in April was a logical response by the bullion banks, which had to defuse customer demand for physical delivery. But given that the driving factor was not speculation but a reluctance to add to deposits in the banking system, the jump in demand for bullion at lower prices was inevitable.

Where does this leave things? The crisis in bullion markets is worse than it was before. A good example of how little physical stock there is can be gained by tracking bullion deliveries on the Shanghai Gold Exchange. In the last few weeks they have dwindled to virtually nothing, having been a truncated 190 tonnes in April and 297 tonnes in March. Yet we know from reports that retail demand in China has taken off; so it is only a matter of time before prices are bid up on the Shanghai Gold Exchange enough to replace lost inventory.

It will be interesting to see how many more bullion banks are forced to admit the fiction behind their customer accounts in the coming weeks. For the moment the temporary solution amounts to rationing bullion supplies to the public.

    

It will come as no surprise to ZH readers that the topic of youth unemployment is critical in Europe but as Der Speigel reports, while the German government's efforts remain largely symbolic, Southern European leaders pander to older voters by defending the status quo and are failing in their fight against the potential for social unrest. One graduate noted, "None of my friends believes that we have a future or will be able to live a normal life," as a lost generation is taking shape in Europe. And European governments seem clueless; instead of launching effective education and training programs to prepare Southern European youth for a professional life after the crisis, the Continent's political elites preferred to wage old ideological battles. In this way, Europe wasted valuable time, at least until governments were shaken early this month by news of a very worrisome record: Unemployment among 15- to 24-year-olds has climbed above 60 percent in Greece. Suddenly Europe is scrambling to address the problem making it an 'obseesion'. There are strong words coming out of Europe's capitals today, but they have not been followed by any action to date.

 

 

Via Der Spiegel,

Stylia Kampani did everything right, and she still doesn't know what the future holds for her.

 

...

 

"None of my friends believes that we have a future or will be able to live a normal life," says Kampani. "That wasn't quite the case four years ago."

 

...

 

The unemployment rate among Greeks under 25 has been above 50 percent for months. The situation is similarly dramatic in Spain, Portugal and Italy. According to Eurostat, the European Union's statistics office, the rate of unemployment among young adults in the EU has climbed to 23.5 percent. A lost generation is taking shape in Europe. And European governments seem clueless..

 

...

 

Instead of launching effective education and training programs to prepare Southern European youth for a professional life after the crisis, the Continent's political elites preferred to wage old ideological battles.

 

...

 

These are strong words coming out of Europe's capitals today, but they have not been followed by any action to date.

 

For instance, in February the European Council voted to set aside an additional €6 billion ($7.8 billion) to fight youth unemployment by 2020, tying the package to a highly symbolic job guarantee. But because member states are still arguing over how the money should be spent, launching the package has had to be postponed until 2014.

 

...

 

A recent Franco-German effort remains equally nebulous.

 

...

 

Economists also argue that it's about time Europe did something about the problem. "The long-term prospects of young people in the crisis-ridden countries are extremely grim. This increases the risk of radicalization of an entire generation," warns Joachim Möller, director of Germany's Institute of Employment Research, a labor market think tank. "It was a mistake for politicians to acknowledge the problem but do nothing for so long,"

 

...

 

The key to combating youth unemployment is to reform the divided labor market. But as an internal report by the German government shows, the crisis-stricken countries have hardly made any progress on this front.

 

...

 

In Athens, young university graduate Stylia Kampani is now thinking of starting over. She is considering moving to Germany. And this time, she adds, she might stay there.

    

Here is a good valumentum (value + momentum) screen we came up with using FusionIQ
http://www.fusionmarketsite.com/?p=9501

It’s time for another installment of FusionIQ’s Screen Pass.  IQ Screen Pass utilizes FusionIO’s proprietary metrics along with widely followed industry metrics to create high level investing and trading screens.  Today’s edition of Screen Pass looks for stocks that combine both Value and Momentum, or as we like to call it … Valumentum.

The variables used in today’s screen are as follows: (1) Fusion Technical Scores (ETech) between 70 – 100; (2) Market Cap (EMC) of > $ 1 billion; (3) Trading Volume (EV) of 500,000 or >; (4) Closing Price (Price) of > $ 5; (5) Price to Sales Ratio (PSR) of < 1.9; (6) Forward P/E < 18; (7) Price to Growth Ratio (PEG) of < 1.5; and (8) out-performance vs. the S&P 500 (market) over the last 4 weeks of > 5 % (PM4W).

With the market rising a lot of late, we wanted to add a value component to our momentum inputs, to gives us the best of both worlds.

Eight stocks hit today’s list; E-Trade Financial (ETFC), Genworth Financial (GNW), Dresser-Rand Group (DRC), Eaton Corp (ETN), Dicks Sporting Goods (DKS), United Rentals (URI),Pier 1 Imports (PIR) and Foot Locker (FL).

Click to enlarge

Moments ago, GETCO's rampathon algos did not like what they heard coming out of the mouth of the Fed's biggest permadove, Charles Evans.

That thing was math, and it was as follows:

• IF FED CONTINUES TO BUY ASSETS AT CURRENT PACE THROUGH YEAR END,BALANCE SHEET WOULD BE 'VERY LARGE' $4 TRILLION

Supposedly this was news to someone although it wasn't news to our readers who knew since September that not only will the Fed's balance sheet hit "a very large" $4 trillion by 2014, it would hit an "very larger" $5 trillion by 2015, when the Fed may realistically start abandoning QE.

Obviously it was the concern creeping in Evans voice at the size of this number, that forced various vacuum tubes to give up the day's gains.

To think: all the Fed had to do was engage in simple first grade math to show just how ludicrous its own policy is getting.

But wait, there's more.

Because for all the jawboning by the Fed, the reality is that even if it were to halt QE, the resulting plunge in stocks would force Bernanke, or Yellen, or satan forbid Geithner, to reactivate it post haste as it is the only weapon in the Fed's arsenal.

So here is some even more critical math. Since the Fed will most likely continue to monetize debt at some ungodly pace for the next 18 months or more, with or without tapering and brief intervals, what it will run up on is what we wrote about nearly a year ago: the exhaustion of monetizable bonds in the private market.

Indeed, as we explained back in September, at the current pace, the Fed would end up owning a ridiculous 65% of all TSYs in the 6Y-30Y bucket, meaning liquidity would be severely limited as a result of the Fed's endless bond monetizations in this most critical and formerly liquid of bond markets. Now when one assumes that the Fed may indeed reduce the amount of deficit funding it needs and thus forcing the Fed to buy even more bonds from the secondary market, this number rises to a mindblowing 70%!

For those who forgot, here is the math that matters:

In terms of outstandings, we expect the Fed to end up owning more than 33% of the total market by the end of 2014, which is also significant since many mortgage investors tend to reinvest paydowns. These investors would need to be persuaded to sell MBS to the Fed, which would require tighter spreads.

 

Treasuries: Fed will own a 45-50% in the long end in a year

 

...

 

Table 3 and Table 4 simulate the Treasury universe during the course of 2013 and 2014. Fed ownership across the 6y-30y portion Treasury curve is likely to reach about 50% by end of 2013 and an average of 65% by end of 2014. Given the current issuance schedule, we believe it is very likely that the Fed changes its purchase buckets through the next round of Treasury purchases. In particular, the Fed will begin to run out of issues in the 8y-10y bucket and will be forced to buy newly issued 10y notes should they choose to maintain the same distribution.

That's right: there is a possibility the Fed would end up owning over two-thirds of all Treasurys with a maturity over 6 years by the end of 2014, especially now that the US suddenly needs to issue less primary debt than expected previously.

Extrapolating further: 80% by 2015; 90%+ by 2016 and #Ref! by 2017 and onward.

And that, ladies and gents, is the real math that the Fed does not want to talk about.

    

The last few years have been dominated by one theme and every trade has been a derivative bet on that theme. The idea that by inflating another asset bubble, a wealth effect will ripple through the market to the real economy, encourage animal spirits and spark a renaissance (in something, we are not sure what). Well, so far no good. The real economy, as discussed at length, is not recovering; but the question of just who is benefiting from the wealth effect is unclear. As the following charts across the 100 largest G4 pension plans show, the asset managers have missed the trickle-down. Despite bad (and worsening) under-funding and a Fed repressing 'safe' assets to the point of ultimate risk, G4 pension funds have refused to partake of any mythical 'great rotation', remain avid bond buyers, are as drastically under-funded as ever, and finally, have maintained the same 'cash on the sidelines' for 14 years now...

 

G4 Pension funds and insurance company equity and bond flows... (it seems like the great rotation has been a theme for 14 years - from equities to bonds...)

 

G4 Pension funds and insurance company equity and bond allocations... (nothing has changed since the crisis in terms of allocation shifts - despite all the Fed's best efforts)

 

Pension fund deficits... (and even with huge and growing under-funding pension fund managers are unwilling to jump into risky assets)

 

G4 Pension funds and insurance company cash and alternatives levels... (keeping cash steady (so much for the cash on the sidelines myth; and not reaching aggressively into alternatives or riskier asset classes)

 

Of course, with volumes low, the marginal momentum buck entering this market is all that matters but it seems for now that broadly speaking, the biggest funds have not benefited the from the 'recovery' and as for the 'money on the sidelines' - well... that appears as 'real' as the economic recovery and the 'great rotation' - it is painful when facts get in the way of a good story...

 

Charts: JPMorgan

    

Just over a month ago I mentioned that lumber prices were nearing the housing bubble highs. Since then prices have declined sharply, with prices off about 20% from the recent highs.

Some of the decline could be related to additional supply coming on the market, and some due to less buying from China (several sources are reporting that China has pulled back significantly on buying North American lumber).

On additional supply, two months ago the WSJ had an article about some producers increasing supply:

Georgia-Pacific, the largest U.S. producer of plywood ... plans to invest about $400 million over the next three years to boost softwood plywood and lumber capacity by 20%.

Click on graph for larger image in graph gallery.

This graph shows two measures of lumber prices (not plywood): 1) Framing Lumber from Random Lengths through last week (via NAHB), and 2) CME framing futures.

Lumber prices are now 20% off the recent highs.

Submitted by James Howard Kunstler of Kunstler.com,

The collective state of mind in the USA these days may be even more peculiar than what went on in Germany in the early 1930s, when the Nazis were freely elected to lead the country and reconstructed the battered national psyche into a superman cult that soon beat a path to mass death and ruin. America has its own way of going crazy. We don't goose-step to tragedy; we coalesce into an insane clown posse and stumble into it by pratfall -- juggaloes dancing backwards off the cliff edge. 

We've been softened up and made extra-stupid on a 60-year-long diet of TV and kreme-filled donuts.  Instead of a "master race," our political fantasies revolve around a master wish - to get something for nothing. Want to feel good about yourself? Smoke some crank. Want to become economically secure? Buy a Powerball ticket or drive to the local casino. Want political esteem? Plug a flag pin into your lapel. Want status? Borrow free money from the Federal Reserve at zero interest and arbitrage it into massive earnings for your primary dealer bank. All these behaviors are the consequence of a culture that elevated advertising to such a high social good, it ended up drowning in its own manufactured bullshit.     A subset of our master wish has been on vivid display in recent months, namely the idea that God has blessed the USA with a limitless supply of new oil that will allow us to keep driving to WalMart forever. This propaganda from an oil industry desperate for capital investment has been swallowed whole by people in authority who ought to know better, just as that same class of people in Germany of 1934 should have known better about what they were bargaining for in economic well-being with the Nazi agenda. In our case, the propaganda drumbeat is being led by formerly respectable news organizations. The New York Times, National Public Radio, Bloomberg News, Forbes, and The Atlantic Magazine are media giants that have lately spread the "good news" that America will soon be 1) "energy independent," 2) the world's leading oil exporter (greater than Saudi Arabia is now!), and the "go-to nation" for cheap manufacturing. All of these claims are false, by the way. The American way-of-life was designed to run on $20-a-barrel oil, not $90-a-barrel oil, and "new technology" has not changed that. The unfortunate and, to some extent, mendacious memes about the wonders of "new technology" have only snookered the public into a false sense of security about a future that will disappoint them badly and probably provoke an extreme political reaction as the reality of our predicament sweeps through daily life. Most of the current "endless oil" fantasy revolves around shale oil. Just to get a visual idea of what this amounts to, consider this map. It depicts the two major shale oil production regions of the USA: the Bakken in North Dakota and the Eagle Ford "play" in Texas. Bakken production is confined almost entirely to four counties in North Dakota (Williams, Mountrail, McKenzie, Dunn). The Eagle Ford region touches perhaps ten Texas counties. Now, realize that the oil fields all over the rest of the USA (including Alaska) are in decline. Here's where the "bonanza" of new oil all comes from:   The oil coming out of these places is high cost and low flow-rate oil. This is exactly the opposite of what US oil production used to be (low cost and high flow-rate) when we were busy building all the freeways, strip malls, housing subdivisions, suburban office parks and all of the other stranded assets that now make up the infrastructure of daily life in this country. Those were the days when you could pound a single pipe vertically 1000 feet down (not much deeper than many home water wells) into the temperate wheatfields of Oklahoma (drive to work in shirtsleeve weather!) and after that modest investment in drilling you could kick back and depend on a great flow rate (5,000 barrels-a-day, not unusual) of sweet light petroleum for years. Horizontal drilling (often more than 10,000 feet down + many "laterals" an additional 10,000 feet horizontally) and then fracturing "tight" rock for shale oil is not only a way larger capital expense (lots of steel!) but the flow rates per well (82 barrels-a-day average) are laughable compared to the halcyon days of conventional oil -- little better than "stripper" wells. Consider also that shale oil well flow-rates decline greater than 60 percent in the first year (rapidly thereafter, too) and you can see easily that there will be no "kicking back" to run the pump-jacks like cash registers, as in the old days. In fact, the rapid depletion only prompts more frantic drilling and re-drilling to keep the production at its current rate - the "Red Queen Syndrome" ("I'm running as fast as I can to stay where I am"), which means fantastic capital expenditure to keep drilling and fracking more wells (even more steel!). Consider also, that the small "sweet spots" in the shale oil regions were the ones drilled first (in earnest after 2003), for the simple reason that they were the most promising. This was the "low hanging fruit" -- easy to pick. Outside these sweet spots the oil may be too meager or difficult or costly to bother drilling for. This is a picture of a boomlet that may run a few more years -- if the banking system doesn't implode and the massive stream of capital doesn't quit flowing to the shale counties. The excitement will all be over before 2020, but I suspect that troubles in finance and banking will put the schnitz on the shale gas mania long before that date. What will happen when the American public discovers that they were lied to about yet another important matter? The discovery will coincide with very severe changes in daily life that won't be avoidable. Everyone will be affected. Many will be impoverished and suffer real hardship. That's when the public goes apeshit and starts tearing down the house. Apart from the issue of sheer economic suffering and all the damage that will ensue, consider that it will be generations before anyone believes the "authorities" again -- though, like the oil age itself, the era of giant national media will probably prove to be a one-shot deal, too. Future generations -- if they are lucky -- may read the news on one-page circulating broadsides, printed laboriously in hand-set type by letterpress. Or maybe they'll be reduced to just parsing out rumors.      

While the mainstream media will likely be loathed to mention it, gold and silver are surging higher. Gold has retested $1400 and Silver $23 on no news... so it seems the demand for 'cheaper' precious metals was enough to warrant a 4.6% rally off overnight lows in gold and 12.5% in silver amid heavy volume in futures markets...

 

 

Charts: Bloomberg

    

Last week, I mentioned Merrill Lynch’s Market Analysis Technical Handbook. I was somewhat smitten by the wire house attempt to explain the basics of technicals to a broader layperson audience.

Several BP readers at Mother Merrill (as she used to be known) directed my attention to another annual release: US Quantitative Primer 2013. It is described thusly:

Everything you wanted to know about Quant
Our fourth publication of the Quantitative Primer includes historical charts and
explanations of the proprietary stock screens that we draw upon in our strategy
work, and which we use as a crucial input into our investment views. What’s new:

This year, we have added a few new features, including an in-depth focus on what drives market performance, an analysis of quantitative factor sensitivity to macro variables, and an update to our roadmap for stock pickers including historical intra-stock correlation charts for each industry group.

Again, color me impressed that a big firm would put out a document that at its heart challenges many of the fundamental principles the rest of the firm is built upon.

I do not see a public link for this one (either) but I have put in a request.

 

 

 

Source:
Everything you wanted to know about Quant
Savita Subramanian
Equity & Quant Strategist
MLPF&S