Tag Archives: us

Hand Quantitative Easing to Germany

Is it possible that Ben Bernanke and now, Janet Yellen along with the rest of the Federal Reserve Board got it right? Have they captained us out of the depths of global financial collapse and into a new golden era of stock market gains and low interest rates? Quantitative Easing one, two and three along with Operation Twist were all specifically designed to keep interest rates artificially low by flooding the financial markets with cash. That cash found its way into the stock market, the commodity markets and the housing markets because the artificially low interest rates it created pushed money away from interest rate investments. Currently, the process has come full circle and now that the stock market is at all-time highs, it appears that the hot potato balancing act between stimulus and inflation is being handed off to Germany. This is probably not a good sign.

Continue reading Hand Quantitative Easing to Germany

Defending the Global Slowdown

I’ve taken a bit of heat over the last few weeks as I’ve suggested that we may be nearing the end of a very good bull run in all tangible markets. These include the stock and commodity markets which are at levels we haven’t seen since before the economic crisis began. More and more data has come out on the negative side of things going forward and it’s being discussed and given weight to, by several economists, central bankers, traders and hedge fund managers.

Here is a consensus survey of their bearish take on the global economic landscape:

China – Their economy is slowing down. I mentioned the declining velocity of trade in China a few weeks ago. This includes shipping, fertilizer sales, stock market turnover, raw steel manufacturing as well as other factors. China has also raised the required lending reserves on their banks as well as raising the outright interest rates at which they can lend to fight off inflation and cool down their economy.

United Kingdom – Their economy shrank by .5% in the last quarter of 2010.  Their unemployment rate is 7.7% and rising. They’ve yet to work through the excesses of their own housing bubble. Finally, the voting members of the Bank of England are already at odds over raising rates to combat inflation. High unemployment, high interest rates and declining production are spurring fears of stagflation.

Eurozone – Ireland and Greece have been forced to accept bailout money and enact austerity measures that would cause civil upheaval in the United States. Spain and Portugal are on the cusp of having bailout funds and austerity measures jammed down their throats and Italy is now on the short list, as well. Germany is the only Eurozone country that benefits from a strong Euro, which attracts capital to their value added manufacturing and technology industries. The agrarian and tourist based economies of southern Europe desperately need to weaken their currencies to allow them to compete in the global market. This is creating a huge political disconnect between Germany and the other members of the European Union.

India – India nearly doubled their interest rates in 2010 and just raised it another .25% on Tuesday. The sincerity of India’s government to get a grip on inflation dropped crude oil nearly $2 per barrel due to forecasts of declining Indian demand.

Brazil – Brazil’s currency has appreciated 40% since the bottom in 2008. The global surge in food prices is placing severe strain on the manufacturing and public service sectors. Brazil is using interest rate manipulation to cap currency valuation. This is effective on low value added agricultural exports but hinders the ability of the manufacturing sector by making capital more expensive. This also hurts the public sector as workers are laid off and look to more expensive government programs for support.

United States – The broad strokes are best covered by Gary Shilling in his January 2011 edition of, “Insight.” We look for slow U.S. economic growth of 2% or less this year. The post-recession inventory bounce is over. Consumers are probably more interested in saving and repaying debt than in spending. State and local government spending and payrolls are falling. Excess capacity will retard capital equipment spending while low rents curtail commercial real estate construction. Economic growth abroad is unlikely to kindle a major export boom. Housing is overburdened with excess inventories. QE2 will be no more effective than QE1 in spurring lending and economic growth, while net fiscal stimuli will decline $100 billion in 2011 compared with 2010.

These global factors all point to a pending slowdown in economic activity. Many of the discussions I’ve had recently have focused on the recognition of the turn. The simplest predictor I can share is when what has been making money quits working. We use pattern recognition to determine market setups and risk values. When the bullish patterns stop working and the bearish patterns start to pan out, the turn will be near. Fortunately, this tool can be used on everything from one- minute charts to weekly charts. We will watch for the turns in scale as they progress from minute to hourly, daily and weekly. This is not doom and gloom. It’s simply the ebb and flow of the markets and with these tools we hope to see the tide’s reversal.

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.

Oil Addiction

The United States’ energy dependence has followed the same path as a junkie. We have become addicted to cheap oil over the last forty years. In fact, our entire economy was built on cheap oil. Just like any good junky, we weathered the initial supply crisis in the 1970’s and, having seen the error of our ways, vowed to set ourselves straight. Fortunately, it was just a temporary shock and we didn’t really mean it. Besides, remember how bad it was? It was horrible for domestic employment and inflation was everywhere. We were invaded by foreign automobiles. We were forced to listen to crackpot after crackpot on the evening news telling us that we should be using alternative energy sources available right here in the U.S.  Thank goodness that didn’t last.


Fast- forward to 1990 and a tiny little country in the Golden Crescent was having its, “freedom” threatened. Amazingly, one little country, smaller than New Jersey and with fewer people than the city of Houston, was able to mobilize the mightiest fighting force in the world. A desperate addict needing a fix will do almost anything to ensure their supply keeps flowing. The subsequent rally in oil prices was hardly noticed due the prosperous economic times of the period. We got to watch the war on TV with Wolf Blitzer calling the commentary from the video feed on the nose of precisely guided weapons. The technology boom got underway, the war was a huge success and we reveled in national pride.


Here we are in 2010 and we’ve gotten used to paying a higher premium for petroleum products and we’ve successfully defended our suppliers. My issue is this; the United States must develop a consistent and focused energy plan if we are ever going to become self -sustaining. We have the resources. The U.S. has greater natural gas reserves than the Saudi’s have oil. This past week I’ve read two alarming pieces targeting the future of the United States’ energy consumption. After doing some research on my own, it has become clear that there is a major disconnect between where we are being told we are headed versus where we actually are headed.


The government stimulus packages and vehicle emission standards have pushed for electric cars as the primary source of green energy. It’s made for great press as our ailing auto manufacturers have produced catchy, warm and fuzzy commercials and brainwashed the general public into believing we are on the road to self-sufficiency, leading us away from foreign oil dependency and the wars it has brought with it.


However, if look behind the Wizard’s curtain, we reveal some startling facts.

The U.S. currently imports 67% of its oil.

The cessation of Gulf oil production will increase this to 75% by 2012. This will put oil at $125 per barrel and gas at $4-$5 by 2012.

Half of our top ten oil importers are countries that are unsafe to visit according to our State Department. Their official language reads, “Travel Warnings are issued when long-term, protracted conditions that make a country dangerous or unstable lead the State Department to recommend that Americans avoid or consider the risk of travel to that country.” This includes countries like, Iraq, Nigeria, Saudi Arabia, etc.

According to T. Boone Pickens, our current energy policy prices in oil at $300 per barrel by 2020. Oil is currently just over $80 per barrel.


I wrote about the spread between natural gas and crude oil a few weeks ago stating that it was near an all time high. The spread between any two markets is based on using a standard measure for both to determine absolute value. Energy markets are measured in British Thermal Units, BTU’s. This defines how much work or, power, is generated by the combustion of a given quantity of substance. The current relationship between crude oil and natural gas is that it takes $14.07 worth of crude oil to do the same work as $3.80 worth of natural gas. This means we pay about 3.7 times as much for crude oil to do the same amount of work as we would for natural gas. The five- year average for this ratio, including today’s inflated price is, 1.7.


Natural gas has always sold at a discount to crude oil and until the last 10 years, the relatively low price of crude oil has dictated business as usual. In the wake of 9/11 and the global recession, the government has spent hundreds of billions of dollars aimed at stimulating the economy, nurturing energy independence, cleaning up the environment and improving the infra structure of the country. Unfortunately, the money from that pie, our tax dollars, have been sliced so thinly that the result is virtually, nil. Our dollars’ have been spent on a Jack-of-all trades and master of none. This is most clearly evident in the outside investment and performance of alternative energy source companies specializing in wind, geothermal, solar and fuel cells, which have all lost at least 30% over the last year. Clearly, the investment community has little faith in the current administration’s ability to coordinate a sustainable alternative energy plan.


Finally, the push towards electric automobiles is simply a public relations gimmick. According to the U.S. Energy Information Administration, highway diesel usage trumps residential gasoline consumption by more than an 8 to 1 margin. Does it really make sense that the government enacted emission restrictions on passenger vehicles prior to commercial vehicles? Electric, residential automobiles with two seats and a 100 mile range are not going to effectively address the problem of energy independence.


The primary focus of our energy policy should be natural gas. It burns 30% cleaner than crude oil and nearly twice as clean as coal, which it’s also currently cheaper than. Finally, in energy equivalents, apples to apples, we have three times more energy reserves than Saudi Arabia. We should regain our dignity by developing the infrastructure, creating fueling stations and putting our people to work through the use of new technologies with an extended shelf life. This is a fundamentally sound path towards a cleaner, more productive and independent country.


This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.

Outside Views on Obama’s

This blog is published by Andy
Waldock. Andy Waldock is a trader, analyst, broker and asset manager.
Therefore, Andy Waldock may have positions for himself, his family, or, his
clients in any market discussed. The blog is meant for educational purposes and
to develop a dialogue among those with an interest in the commodity markets.
The commodity markets employ a high degree of leverage and may not be suitable
for all investors. There is substantial risk in investing in futures.

Here are a couple of takes on Obama’s new position on
Afghanistan and what it means. The first is from George Friedman of Stratfor Research
and the second is a collection of global quotes on the topic put together by David
Galland of Casey Daily Dispatch.


By George Friedman

U.S. President Barack Obama announced the broad structure of his Afghanistan
in a speech
at West Point on Tuesday evening. The strategy had three core elements. First,
he intends to maintain pressure on al Qaeda on the Afghan-Pakistani border and
in other regions of the world. Second, he intends to blunt the Taliban
offensive by sending an additional 30,000 American troops to Afghanistan, along
with an unspecified number of NATO troops he hopes will join them. Third, he
will use the space created by the counteroffensive against the Taliban and the
resulting security in some regions of Afghanistan to train and build Afghan
military forces and civilian structures to assume responsibility after the
United States withdraws. Obama added that the U.S. withdrawal will begin in
July 2011, but provided neither information on the magnitude of the withdrawal
nor the date when the withdrawal would conclude. He made it clear that these
will depend on the situation on the ground, adding that the U.S. commitment is

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In understanding this strategy, we must begin with an obvious but unstated
point: The
extra forces
that will be deployed to Afghanistan are not expected to
defeat the Taliban. Instead, their mission is to reverse the momentum of
previous years and to create the circumstances under which an Afghan force can
take over the mission. The U.S. presence is therefore a stopgap measure, not
the ultimate solution.

The ultimate solution is training an Afghan force to engage the Taliban
over the long haul, undermining support for the Taliban, and dealing with al
Qaeda forces along the Pakistani border and in the rest of Afghanistan. If the
United States withdraws all of its forces as Obama intends, the Afghan military
would have to assume all of these missions. Therefore, we must consider the
condition of the Afghan military to evaluate the strategy’s viability.

Afghanistan vs.

Obama went to great pains to distinguish Afghanistan
from Vietnam
, and there are indeed many differences. The core strategy
adopted by Richard Nixon (not Lyndon Johnson) in Vietnam, called
“Vietnamization,” saw U.S. forces working to blunt and disrupt the
main North Vietnamese forces while the Army of the Republic of Vietnam (ARVN)
would be trained, motivated and deployed to replace U.S. forces to be
systematically withdrawn from Vietnam. The equivalent of the Afghan surge was
the U.S. attack on North Vietnamese Army (NVA) bases in Cambodia and offensives
in northern South Vietnam designed to disrupt NVA command and control and
logistics and forestall a major offensive by the NVA. Troops were in fact
removed in parallel with the Cambodian offensives.

Nixon faced two points Obama now faces. First, the United States could not
provide security for South Vietnam indefinitely. Second, the South Vietnamese
would have to provide security for themselves. The role of the United States
was to create the conditions under which the ARVN would become an effective
fighting force; the impending U.S. withdrawal was intended to increase the
pressure on the Vietnamese government to reform and on the ARVN to fight.

Many have argued that the core weakness of the strategy was that the ARVN
was not motivated to fight. This was certainly true in some cases, but the idea
that the South Vietnamese were generally sympathetic to the Communists is
untrue. Some were, but many weren’t, as shown by the minimal refugee movement
into NVA-held territory or into North Vietnam itself contrasted with the
substantial refugee movement into U.S./ARVN-held territory and away from NVA
forces. The patterns of refugee movement are, we think, highly indicative of
true sentiment.

Certainly, there were mixed sentiments, but the failure of the ARVN was not
primarily due to hostility or even lack of motivation. Instead, it was due to a
problem that must be addressed and overcome if the Afghanistation war is to
succeed. That problem is understanding the role that Communist sympathizers and
agents played in the formation of the ARVN.

By the time the ARVN expanded — and for that matter from its very foundation
— the North Vietnamese intelligence services had created a systematic program
for inserting operatives and recruiting sympathizers at every level of the
ARVN, from senior staff and command positions down to the squad level. The
exploitation of these assets was not random nor merely intended to undermine
moral. Instead, it provided the NVA with strategic, operational and tactical
intelligence on ARVN operations, and when ARVN and U.S. forces operated
together, on U.S. efforts as well.

In any insurgency, the key for insurgent victory is avoiding battles on the
enemy’s terms and initiating combat only on the insurgents’ terms. The NVA was
a light infantry force. The ARVN — and the U.S. Army on which it was modeled —
was a much heavier, combined-arms force. In any encounter between the NVA and
its enemies the NVA would lose unless the encounter was at the time and place
of the NVA’s choosing. ARVN and U.S. forces had a tremendous advantage in
firepower and sheer weight. But they had a significant weakness: The weight
they bought to bear meant they were less agile. The NVA had a tremendous
weakness. Caught by surprise, it would be defeated. And it had a great
advantage: Its intelligence network inside the ARVN generally kept it from
being surprised. It also revealed weakness in its enemies’ deployment, allowing
it to initiate successful offensives.

All war is about intelligence, but nowhere is this truer than in
counterinsurgency and guerrilla war, where invisibility to the enemy and
maintaining the initiative in all engagements is key. Only clear intelligence
on the enemy’s capability gives this initiative to an insurgent, and only
denying intelligence to the enemy — or knowing what the enemy knows and intends
— preserves the insurgent force.

The construction of an Afghan military is an obvious opportunity for Taliban
operatives and sympathizers to be inserted into the force. As in Vietnam, such
operatives and sympathizers are not readily distinguishable from loyal
soldiers; ideology is not something easy to discern. With these operatives in
place, the Taliban will know of and avoid Afghan army forces and will identify
Afghan army weaknesses. Knowing that the Americans are withdrawing as the NVA
did in Vietnam means the rational strategy of the Taliban is to reduce
operational tempo, allow the withdrawal to proceed, and then take advantage of
superior intelligence and the ability to disrupt the Afghan forces internally
to launch the Taliban offensives.

The Western solution is not to prevent Taliban sympathizers from penetrating
the Afghan army. Rather, the solution is penetrating the Taliban. In Vietnam,
the United States used signals intelligence extensively. The NVA came to
understand this and minimized radio communications, accepting inefficient
central command and control in return for operational security. The solution to
this problem lay in placing South Vietnamese into the NVA. There were many cases
in which this worked, but on balance, the NVA had a huge advantage in the
length of time it had spent penetrating the ARVN versus U.S. and ARVN
counteractions. The intelligence war on the whole went to the North Vietnamese.
The United States won almost all engagements, but the NVA made certain that it
avoided most engagements until it was ready.

In the case of Afghanistan, the United States has far more sophisticated
intelligence-gathering tools than it did in Vietnam. Nevertheless, the basic
principle remains: An intelligence tool can be understood, taken into account
and evaded. By contrast, deep penetration on multiple levels by human
intelligence cannot be avoided.

Pakistan’s Role

Obama mentioned Pakistan’s
critical role. Clearly, he understands the lessons of Vietnam regarding
sanctuary, and so he made it clear that he expects Pakistan to engage and
destroy Taliban forces on its territory and to deny Afghan Taliban supplies,
replacements and refuge. He cited the Swat
and South
offensives as examples of the Pakistanis’ growing effectiveness.
While this is a significant piece of his strategy, the Pakistanis must play
another role with regard to intelligence.

The heart of Obama’s strategy lies not in the surge, but rather in turning
the war over to the Afghans. As in Vietnam, any simplistic model of loyalties
doesn’t work. There are Afghans sufficiently motivated to form the core of an
effective army. As in Vietnam, the problem is that this army will contain large
numbers of Taliban sympathizers; there is no way to prevent this. The Taliban
is not stupid: It has and will continue to move its people into as many key
positions as possible.

The challenge lies in leveling the playing field by inserting operatives
into the Taliban. Since the Afghan intelligence services are inherently
insecure, they can’t carry out such missions. American personnel bring
technical intelligence to bear, but that does not compensate for human
intelligence. The only entity that could conceivably penetrate the Taliban
and remain secure is the Pakistani Inter-Services Intelligence (ISI). This
would give the Americans and Afghans knowledge of Taliban plans and
deployments. This would diminish the ability of the Taliban to evade attacks,
and although penetrated as well, the Afghan army would enjoy a chance ARVN
never had.

But only the ISI could do this, and thinking of the ISI as secure is hard to
do from a historical point of view. The ISI worked closely with the Taliban
during the Afghan civil war that brought it to power and afterwards, and the
ISI had many Taliban sympathizers. The ISI underwent significant purging and
restructuring to eliminate these elements over recent years, but no one knows
how successful these efforts were.

remains the center of gravity of the entire problem. If the war is about
creating an Afghan army, and if we accept that the Taliban will penetrate this
army heavily no matter what, then the only counter is to penetrate the Taliban
equally. Without that, Obama’s entire strategy fails as Nixon’s did.

In his talk, Obama quite properly avoided discussing the intelligence aspect
of the war. He clearly cannot ignore the problem we have laid out, but neither
can he simply count on the ISI. He does not need the entire ISI for this
mission, however. He needs a carved out portion — compartmentalized and
invisible to the greatest possible extent — to recruit and insert operatives into
the Taliban and to create and manage communication networks so as to render the
Taliban transparent. Given Taliban successes of late, it isn’t clear whether he
has this intelligence capability. Either way, we would have to assume that some
Pakistani solution to the Taliban intelligence issue has been discussed (and
such a solution must be Pakistani for ethnic and linguistic reasons).

Every war has its center
of gravity
, and Obama has made clear that the center of gravity of this war
will be the Afghan military’s ability to replace the Americans in a very few
years. If that is the center of gravity, and if maintaining security against
Taliban penetration is impossible, then the single most important enabler to
Obama’s strategy would seem to be the ability to make the Taliban transparent.

Therefore, Pakistan is important not only as the Cambodia of
this war, the place where insurgents go to regroup and resupply, but also as a
key element of the solution to the intelligence war. It is all about Pakistan.
And that makes Obama’s plan difficult to execute. It is far easier to write
these words than to execute a plan based on them. But to the extent Obama is
serious about the Afghan army taking over, he and his team have had to think
about how to do this.


Obama’s Speech – Views from Abroad

One of the more memorable
moments of Obama’s meteoric rise to power was his speech in front of hundreds
of thousands of adoring fans in Berlin.

So, what do the Europeans
think about El Magnifico now?

The following is a quote from
Spiegel Online, one of Germany’s most influential news outlets.

Never before has a speech by President
Barack Obama felt as false as his Tuesday address announcing America’s new
strategy for Afghanistan. It seemed like a campaign speech combined with Bush
rhetoric — and left both dreamers and realists feeling distraught.

One can hardly blame the West
Point leadership. The academy commanders did their best to ensure
thatCommander-in-Chief Barack Obama’s speechwould be well-received.

Just minutes before the
president took the stage inside Eisenhower Hall, the gathered cadets were asked
to respond “enthusiastically” to the speech. But it didn’t help: The
soldiers’ reception was cool.

One didn’t have to be a cadet
on Tuesday to feel a bit of nausea upon hearing Obama’s speech.It was the least
truthful address that he has ever held. He spoke of responsibility, but almost
every sentence smelled of party tactics. He demanded sacrifice, but he was
unable to say what it was for exactly.

You can read
the rest of the article here

Also reporting in was friend
and correspondent Mr. Watson, writing from his cozy pad on the Algarve, with a
rather unique (and, I suspect, unworkable) idea… though I present it anyway as
it may stimulate some further thoughts on the matter of Afghanistan.

Living in Portugal, I had to
stay up to the early hours of the morning to watch President Obama’s much
trumpeted speech. Frankly, apart from the much anticipated increase in troops
and the cost to the taxpayer, there was really nothing new. Just the same old
rhetoric that the president is very good at delivering.

During his speech the
president said that these additional 30,000 soldiers alone were going to cost
the long-suffering taxpayer an additional $30 billion per year. I then thought,
could there be a more cost-effective use of these funds? Most of the Taliban, I
understand, are not hardcore fundamental fanatics. They are referred to as the
“$10 a day Taliban.” These are Afghanis who are just trying to make a
living for themselves and their families. Basically they are mercenaries.

Let’s assume that there are
also about 30,000 Taliban. If you take the same $30 billion dollars, you could
pay these guys $100,000 a year each, for 10 years. The deal is, to get these
funds, they would have to switch to our side and either fight for us, against
the limited number of Al Qaedafanatics, or at the very least stop fighting the
U.S. and NATO troops. If anybody moralizes about the taxpayer paying for
mercenaries, they might want to rethink things a minute. There are still 75,000
so-called “contractors” working for the U.S. in Iraq and Afghanistan. They are
nearly all ex-U.S. service personnel and get paid more than $100,000 a year each.
They are mercenaries.

There are other benefits to
this policy. The Afghanis probably would have no need to grow poppies for the
opium trade. They could feed and provide health services to their families. The
kids could get a good education – at the moment only 7% of Afghanis are
literate. This new program in effect would be “Quantitative Easing”
for Afghanistan, and the economy would take off with this “pump priming”
operation. Against a backdrop of improving economic conditions, the country
would have ten years to develop new business enterprises and to settle into a
stable condition. Also, of course, you can largely bring the U.S. and NATO
troops home and save a lot of lives.

Now, to be clear, I think the
odds of that idea working are scant indeed… but even so, I’d rank the odds a
lot better than continuing to pour troops into the country in the attempt to
beat the Taliban into submission.