The land outside my 9th floor office is a tepid and mild temperature and disposition. There is no snow left on the ground, although there was almost an inch of the cold powder just this weekend. That’s been the very essence of this winter; sporadic and fleeting.

And because of it, natural gas remains a dead investment.

Looking back to early September, I’ll just say that I reminded you this would happen. I actually titled the piece “The Winter That Killed Natural Gas.” And I would take a minute to cheer the source of my weather forecast – none other than the illustrious Old Farmer’s Almanac.

This is one of the oldest publications in America, and I cannot recall the last year that they blew a prediction. If you don’t read the book, you are missing out, sorely.

However, natural gas will not maintain these low price levels forever. I’d guess it is going to be a great buy soon enough. This year’s weather is a phenomenon. But at these prices, a bad year one, perhaps even two, years from now could be enough to squeeze supplies and send prices ramping. However, it is tricky with natural gas because of the storage costs adding a significant time constrain.

I’ll be looking into it and trying to figure out of buying natural gas soon is a good investment. My guess is that buying in March or April is best; although the summer is also traditionally weak, especially if crude oil and other alternative fuels take a dive. But I have a feeling that natural gas may get a demand pump soon, if only because people will be looking to add natural gas lines, as permitting, to cut their energy bills.

Moving on to today; if you haven’t noticed, you are in very deep trouble, if you are voting on a rally continuing. Crude oil has been in a steady bleed since January. I know plenty of you rushed into this rally when crude oil ran from the high $70’s back into the $90’s and, later, $100’s. You took it as an indication that the economy was improving and demand was ramping up.

I’m afraid you were mistaken. Actually, demand has not ramped up significantly, and much of what was there was the product of temporary policy (like the latest expired government tax credit for heavy capital expenditures). The cause of the run in oil was predominantly built on three factors that I have thus far identified: (1) Middle East instability (2) rerouting of the Cushing, OK supply glut and (3) the Dodd-Frank Bills’ provisions for limiting ownership of commodities through derivative products.

Each of these three causes appears to have had some impact on the run in crude oil. Yet, as we have seen consistently through European manufacturing numbers, some of the local manufacturing numbers (although not the latest, necessarily), and most recently with the DOW earnings report, demand for crude oil remains soft at best.

This rally is built on “cheap” tech and trash rockets. It will end as spectacularly as it began.

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I want to show you a couple of things I’m looking at.

Firstly, the Baltic Dry Index versus the price of oil:

(Image from investmenttools.com)

A bit of background; the BDI has been plunging as represented by the cost people are willing to pay globally to ship goods to other parts of the world. This coincides with a drop in global demand as represented by worldwide manufacturing.

I’m hearing the voices trying to dismiss the BDI as a poor indicator; the BDI like basically every other type transaction, determines price on the margin, which is to say very small net imbalances relative to the gross numbers coincide with disproportionately large price swings (a small shortage causes prices to skyrocket and a small amount of excess can collapse them). Okay, well then you’ll have to dismiss more or less every other indicator also, because that’s how trade works.

I could agree that the BDI is off mark if it weren’t that it is coinciding with other ominous signs. Firstly, as I’ve already displayed with the image above, is that oil and fuel prices are increasing. If energy prices were increasing because of demand, then wouldn’t the BDI be increasing alongside them? Secondly, look at the collapse of rail traffic that occurred last month. The third is the strengthening U.S. dollar, and the weakening euro, which really together powerful sway global trade.

So why is the BDI dropping like this? I admit it could be that the prices of basic materials have been dropping, and so raw material producers are demanding a subsequent decrease in shipping margins. This is the most sanguine outcome. Dollar strength, in and of itself, is causing lower good prices forcing concession on the part of shippers, but that strength is only redirecting trade flows and net transactions are actually stable.

(Image from Yahoo)

However, because of the magnitude which input costs like fuel affect the room for prices to move, I am inclined to believe that a bigger reason is that, globally, demand for goods is slowing down.

Now more directly to our situation here in the U.S.: our GDP is probably about $15 trillion, give or take. Meanwhile, thanks to a cheaper dollar up until mid-2011, our exports were booming and our imports were stabilized, resulting in some steady reductions of our trade deficit…until recently. Our exports according to World Bank numbers, as of 2010, were 13% of GDP; so how much directly would exports have to collapse, by themselves, to utterly abolish any hopes of the U.S. growing?

The answer is about 20%. That reduction would more than suffice to send U.S. growth screaming to zero.

But in actuality, the amount needed is less. Reduction in exports also causes U.S. unemployment which will directly harm U.S. domestic spending. How badly does it skew? Well it’s impossible to lock down for sure, but understanding how consumer participation in networking works, if our trade deficit starts to blow out because of exports collapsing, then the U.S. economy could see a multiple of those base numbers; maybe 2:1, maybe much more. So really a reduction of U.S. exports by 7-10% would definitely be more than sufficient to crush U.S. growth.

And the worst part is, the Fed would be nearly powerless to fix such a problem in the current environment.

It’s tempting to fall on the old crutch; well Bernanke will just devalue the dollar improving U.S. exports.

Will he now?

But at $100 a barrel, oil is already straining the margins of business profits considerable, slowing the flow of currency, and any act of easing would cause oil prices to go higher, not lower. What would that do to the economy? It is unfortunate, but at some point, dollar devaluation is incapable of being absorbed by the population, and reality materializes anyway…plus additional consequences. Do not overlook the fate of the nations of history, who dared to believe that printing money was some catchall. I couldn’t tell you if this next round of expected printing would actually fail; all I can say for sure is that, where we are now, printing is a wild card with uncertain ends.

If basic demand is really inverse to price, then Bernanke cannot increase exports without creating a counter effect on domestic consumption and production. And besides, it’s not like devaluing the monetary supply to increase exports is some great secret of the 21st century. Every other country on Earth could use the extra cash flow, so why do you think a Bernanke print job would not be simultaneously met by all the emerging markets of the world?

Now, the latest report from November shows net exports shrinking about 1%. Another 6 months of that and I’d bet all U.S. growth is gone. However, the potential for a shakedown of exports is much worse than that. Remember, the greatest growing export of the U.S. is actually fuel.

How much fuel do you think Europe is going to need, if they keep shrinking? Ditto for emerging markets, given the precarious state of their biggest buyer?

Actually, the decline of our exports could accelerate based on the developments in Europe. And if fuel costs begin to fall dramatically in fashion, then our exports could be hit by a third force of momentum.

So, based on the latest trade reports, I’d guess we’re about one quarter of the business cycle away before hope that the U.S. somehow mystically leaves the rest of the planet behind is extinguished in a plume of disappointment. And the worst part is I don’t think Europe or other markets are going to greatly benefit from our stronger currency because the disappointment from the U.S. letdown will very likely temper purchases of imports. Not to mention that their problems are so extensive, continued austerity and reservation will overpower whatever slight benefit they gain in trade pricing.

In conclusion, dollar strength is persisting because of investors looking for safe havens, a weak economy in foreign trade partners, and a broad drop in most basic materials – energy notwithstanding. This, and the plunging demand abroad plus softening demand at home, is causing the Baltic Dry Index to plummet; which is very likely a good indicator of the direction which economies and markets are headed right now, rather than some sort of false signal. I expect the dollar to continue to gain against other currencies going forward, further decrease in demand globally, a discontinuation for the expectation of growth in the U.S. and most other nations, and eventually a run lower in markets for both equities and commodities as people finally acknowledge these developments and adjust to them.

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Even now oil prices are breaking fast, as Obama reminds the world that he is a presidential candidate first and a president second.

Basically, Obama did the math and realized something very important, where P equals price of oil and s equals people’s savings, over a period of time after Obama fucked with Iran in an election year, from before:

(P-s)/(t_2-t_1 ) = Δ

I don’t really buy that the Iranian oil embargo would have done much to the supply situation of oil anyway, as the world is more than happy to go behind our backs to do what they need to do to secure cheap energy. If anything, I think the embargo would have given powerful leverage to other countries in their efforts to force pricing lower.

It would have created local markets for Iran with very few buyers. And big countries that can satisfy their thirst cheap with Iran don’t need to meddle in European markets.

And European markets that don’t have China budging in would have prices that make coming to U.S. markets unattractive.

And a U.S. without European interference has more than enough oil.

But I don’t disagree that the market didn’t see eye to eye with me and was more than too happy to bid oil up anyway. So Obama and company just caved. Pretty hilarious, actually, since now those of you pushing oil as the single greatest investment of 2012 now need to come up with an excuse to hold prices here…and how quickly too.

Don’t look now, but I bet Nigerian oil worker strikes will be the number one Twitter feed any minute…

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This game where my positions lose all ways is wearing thin. If the golden tale is that oil must go higher, can we at least get some follow through to other sectors.

Point of information: the Canadian dollar, as assumed to be backed by Canada’s vast fields of oil and other bountiful natural resources, is just a little below par with the dollar. This strength, at a time when the euro is collapsing and treasury yields have never been lower, is solely a product of the strength of crude oil at this point in time.

CCJ is a Canadian uranium mining company. Recently, CCJ lost a stupid sum of money. They did this because they hedged against (one might say they went so far as to bet on) renewed dollar weakness.

They blew that call.

So the company was shedding $3 million in profit for ever one cent move higher against the Canadian dollar. $1.10 would have resulted in all profits for the company vanishing.

So where are we now? Well, the Canadian dollar is much stronger against the U.S. dollar that it was back in November. The rally in oil that has so mercilessly bit my hand has simultaneously graced my Cameco Corporation, which no longer needs to fear about their ill-devised “hedges” ripping a hole the size of a cantaloupe out of their chests.

And how have the markets responded?

Nothing.

CCJ gets no love. The force that directly hammers me indirectly gives me no benefit, when it most definitely should. CCJ trades below $20, holding me at vast losses when it should be getting a reprieve. This isn’t the end of the world; I’m a long term holder of CCJ and this is probably a buying opportunity, if I hadn’t already bought at these levels.

My point is, if the world is going to be insane, be insane. But please, can it just be consistently insane?

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