I’m A Human Shish Kebab

This is not easy, having crude oil light my portfolio up every single day. I don’t enjoy it, and am absolutely furious that I added to my hedge/short where I did. This position is swallowing me whole.

Thank God for the rest of my portfolio which is at least holding me to limited losses; but make no mistake, I have taken losses over the last three weeks. Between being short UCO and MGM, plus being “blessed” to own garbage like CCJ…well, it’s been a rough October.

But despite that, I’ve made the decision to not cover until this immediate European Union issue resolves itself.

I just cannot believe we sprint higher…uh, -er, even if the Europeans announce a bailout fund that defies all expectations.

We have absolutely rocketed. Oil is now basically going for $90 /barrel. Did you see that??

Chinese and U.S. manufacturing barely expand, European manufacturing gets crippled, yet oil is bid up to $90 a barrel.

Oil bulls need their heads examined.

For better or for worse, I await the resolution of this nonsense. If I am wrong, then I will accept the Godless losses (10% and counting) this rally has bestowed on me.

On my bloodline, the Europeans will disappoint. They have a long history of being disappointing; they will be so again.

The EU probably needs about $3 trillion in euros just to get them to 2014. I doubt they pull it off without the euro taking a hit.

As of my writing this, European leaders have not come to an agreement on any solution for the debt crisis plaguing their countries. But never fear, they shall surely reach just such an agreement, or else come up with some other small victory to parade in front of journalists before tomorrow Morning.

Sarkozy and Merkel have nothing to gain from failing to meet their own deadline, so I can’t imagine they won’t figure out something they both agree on to send to the table, just so they can create a victory here. I don’t really question that will happen although I suppose it could.

Also, with regards to the sums of money being discussed, I want to say that if the European Union can muster $2 trillion, that would be more than enough to end the European debt crisis.

I do not contest that point.

Italy, Spain, Portugal and Greece have a combined rough $3 trillion in national debt (if the records are to be believed). But even if they have another $1 trillion combined in off-the-record debt, then $2 trillion will still more than suffice to put an end to the solvency debate surrounding Europe.

Italy owes just under $1 trillion from now until 2014. It’s heavily skewed to the front end. I didn’t bother checking the others, because even assuming that all four countries are in as bad of shape, with about half their money owed due by 2014, they would only need about $1.5 trillion to get them there. Throw in our $1 trillion “dirty bastards” allowance, and $2 trillion would still about do the trick.

That would buy the EU two whole years, during which any number of wonderful things could happen. You can bet that if I thought the only issue was time, I would not be short oil here like I am. I have no desire to be short oil for 2 years; or another 2 thereafter…

No, the real issue has always been that even if the Europeans decide to bail themselves out, they cannot possibly do it without destroying the value of the Euro.

Consider: according to the ECB, there was about €900 billion in circulation this year – an increase of almost 50% from 2006. This compares with about $2 trillion U.S. dollars in circulation. So on face value, the euro to dollar exchange would be 2:1.

Now presently the euro trades for about 1.4 dollars, a discrepancy which exists for two reasons. The first is opportunity cost – my understanding is that most goods like gasoline are more expensive in Europe so there’s no reason to make the exchange at 2:1. The second is speculation – in this case, that the euro will get weaker against the dollar.

So the first real challenge is to figure out what the real exchange rate would be without the speculation. You could compare the CPI’s of the U.S. and Europe, which I was going to do. But then I decided instead to just run with the 2:1 number and see what popped out.

It’s faster and if the conclusions are big enough, then they translate to a weaker euro.

There are two main points of view you need to consider when looking at the European problem.

The first is that the European debt crisis is also a financial crisis. It has infected their banking system, sparking the beginning of necessary bailouts. Now we’re hearing talk of European banks being made to raise their reserves by $1 trillion across the board.

In the U.S. we were forced to raise our currency in circulation by 50% while implementing the bailout funds, such as TARP. If Europe is in a similar situation, then some of the $1 trillion may have to come from government backed loans similarly weakening the Euro.

At the 50% level, that would place the EU M1 level at about €1,300 billion, lowering the face value exchange rate of the dollar to euro to around 1.5 from the theoretical 2 to 1 rate that exists now. That number is subject to error.

The second point of view is that there are not enough savings in Europe to cover the hyped $2 trillion bailout fund they’re supposedly considering right now. So who can fill the gap? There is much talk of China stepping in and levering the ECB bailout fund to the $2 trillion number.

China, after all, has over $3 trillion in foreign currency reserves.

However, that number is not necessarily helpful. How much of the $3 trillion is in actual euros? After all, if the Chinese convert dollars to euros and then loan those euros to Europe, while they may have succeeded in keeping the euro strong, they have simultaneously weakened the dollar. That’s a relationship which China is keeping in very tight control.

Based on the latest few trade deficits, I figure the most euros China could have accumulated over the last six years is about €1 trillion. If China has held onto all of them, then they themselves could barely fund the full, speculative $2 trillion fund.

But even if the Chinese do jump in and stopgap the entire difference, then what? As a European, would you want to be holding a currency which is about to have an addition one trillion notes find active circulation? What would that do to EU inflation rates?

Basically, what I’m thinking is that in order for Europe to fight off their financial problems, they will need to take the euro’s theoretical value to about where it stands today. Except that the real exchange rate stands where it is today for a reason; there is much less encouragement to hold euros which limit you to trade in Europe, than dollars, which allow you to trade pretty much anywhere. That act alone probably puts the value of the euro to dollar inside of 1:1. Then the Europeans need to fight off insolvency, which at best does not increase the number of outstanding notes but does increase the circulation of money; creating a huge disincentive for Europeans to hold their own currency or invest in euro denominated fixed income investments. That will make it harder for European countries to finance the remaining debt after 2014.

The EU participants have a huge need of currency. Their banks need more euros. Their governments need more euros. And no one in their country has enough to cover the full amount. The difference is going to come from someplace, and that someplace is going to broadly weaken the currency.

Now, again, I think the final price tag is $3 trillion. Anything less and they’re in trouble, but even if they pull it off, no way they do so while maintaining the current strength in the euro.

Or, of course, they could always just elect to fail tomorrow. Either way, I would not be holding the currency right now. Best case, it’s undervalued by about 10%. But worst case, the euro is about to lose more than 1/3 of its value.

While Congress Stonewalls, Fed Hatches New Scheme To Save Economy

Tell me, when you see this headline, what do you think the article is going to be about?

So then why the fuck is this the second paragraph of the God-damned piece? No! It’s not just the second paragraph – it starts at the eighth fucking word.

“The Federal Reserve, which has tried everything it can think of over the past two years to resuscitate the economy, is now reportedly telling Congress behind closed doors that it has done all it can and that it’s Congress’s turn to do something.”

Funny, that doesn’t sound like hatching a brilliant plan to me.

That sounds like throwing in the towel.

And as for the “important” act of the Fed starting to buy more MBS paper; look guys, the New York Fed dropped less than $6 billion. Do you know what six billion dollars is?

Interest.

That’s absolutely jack shit. QE2 was $600 billion, meaning the New York Fed’s actions are literally less than 1% of what they did last summer. Although smaller than QE1, QE2 was also equivalent to more than half of all outstanding U.S. currency before 2008.

Compared to that, the New York Fed’s purchase of MBS paper this month is no more than a rounding error of last summer’s program. A pimple on QE2’s ass cheek, if you will.

The Fed officials admitted as much themselves, when they said right out in the open “Hey jackoff’s, we’re just rolling over proceeds.” But you don’t want to hear that, so you’re busy building Potemkin speeches and conspiracy theories where there are simple, insignificant announcements.

The dollar is not getting any weaker because of what the Fed is doing. In fact, if they didn’t roll over the proceeds, the dollar would have slowly, incrementally strengthened. That’s why the Fed chooses to buy fixed-income investments to begin with.

So, in summary:

1. If you’re hyping this announcement you’re dumb UNLESS
2. You know damn well the Fed rolling over ROI money was always part of the plan IN WHICH CASE
3. You are a manipulative dick who will get your comeuppance one day

Today’s second order rumor is of a “broad agreement” between Angela Merkel and Nicholas Sarkozy. Kindly ignore that they have had a broad agreement with one another since day one, and the fact that Angela Merkel does not speak on behalf of all (or maybe even most) Germans.

Then buy stocks and oil.

I’m going to call it right now. This is no different than back in July when everyone was so convinced that the debt ceiling was the end-all be-all. If we failed to raise that ceiling then by golly, we were going on a one way trip to hell. But if we raised it, then by the sweat from Odin’s brow, there would be no stopping us.

We would be unstoppable. Do you hear me? Un-stop-able…

We shit the bed immediately following the announcement that the ceiling had been raised.

Europeans bailing themselves out is a non-issue in U.S. markets. If they fail to do so, then they dry up something fierce and we take a hit as our largest combined group of trading partners slows to a crawl. But if they do bail themselves out, it’s not necessarily different from where we’re sitting.

The Europeans are not going to be able to save Italy, Portugal, Spain, and Greece (or any combination of the three…or two…hell, maybe not even one) without devaluing the euro. There’s not enough savings to pull it off.

So America watches as Europe goes into a recession, or the euro takes a massive hit and we become grotesquely uncompetitive.

Listen you, Japan keeping a weak currency in the ‘70’s was enough to almost single handedly destroy the U.S. automotive industry. The Chinese and similar foreign countries near totally destroyed American textile and electronics production. What do you think an entire continent weakening their currency will do to us?

There’s only one way to avoid the accompanying slowdown should the Europeans choose to bail versus bankruptcy; we can print to keep the race to the bottom going. In that case, the Europeans wouldn’t be able to gain free productivity for their treachery. When all countries are devaluing their currencies together, then the effect is more like a sort of global debt forgiveness…unless of course you’re the last guy getting paid, at which point it’s more like “getting fucked over.”

This “universal, non-compulsory haircut” is the only thing that will make me consider covering my hedges. In fact, I would do a 180 and run up silver stocks so fast, you’d think I were a hypocrite. But looking at the state of affairs at the Fed, I also don’t expect it to happen.

For the moment, the Federal Reserve significantly altering the value of the currency is off the table. There is too much resistance to the move internally to be feasible, and too many people anticipating such a move externally to be effective.

Devaluing the currency doesn’t help when the markets immediately translate that act into price inflation.

Thus, for the moment I’m looking for a continuing rally in the dollar, and weakening of commodities.

Look, as much as I would love for the major news outlets to hammer crude into oblivion, I can’t let this slip past. The Associated Press is harolding the new dawn of Libyan oil to the market place and how it could help suppress prices another $10-25 a barrel.

Awesome, I welcome the news.

But if that news hasn’t been priced in over the months since the rebels took control of Tripoli, then I will be absolutely shocked. If you didn’t know that oil was going to resume export from the country, then you either didn’t know where or what Libya was, or were dead. If it’s the former case, then you’re excused for your ignorance.

Why do you think we had that much firepower raining down on Qaddafi’s loyalist forces? Because we care about the Libyan people?

Was it a coincidence that the strategic oil port of Brega was one of the very first locations to fall? Why not have gone straight to Tripoli?

Because we didn’t care if the freedom fighters ultimately salvaged the country or not. If they wanted our help in taking down the whole thing, then they needed to show strategic usefulness first. That meant clearing the path to restoring the flow of oil and helping to guarantee we didn’t see a repeat “Kuwait Move.”

So it was; the oil port fell, the rebels secured some of the fields, and we knew that if we protected them we’d at least get some benefit from it. Obama presses with drone attacks and other aid for the rebel forces. But if they had failed, we would still have secured what we wanted. Libya would have probably been split into two countries, with the central region left landlocked and without anything to trade with.

So excuse me if I think now maybe isn’t the time to be selling oil because of “Libya.” But hey, you’ve all been behaving so crazy lately, maybe this is the cow that burns down Chicago. And if you want any better reasons to sell oil, I’m sure I can provide you with a whole host of them.

Sorry for the silence, but this will be my only piece today. If you really want to have some material to read, I suggest you go back to yesterday, and the day before that, and re-read what I wrote then. The entire premise of the bounce we experienced today is gibberish.

That move in oil was so large and so fast; I swear on my honor I almost liquidated my accounts to begin the peaceful life of a gardener.

I am not impractical. If this move continues and shows no signs of slowing, I will cut down my hedges and raise cash. But I’m not going to do anything of the sort while the market is being shaken like this on nothing but hearsay.

My time has been spent solely to my labor, for the past week or so. Oh how I missed working, this time last year. However, it does have the tradeoff of being especially busy during the Fall. It’s just the nature of the consultation business.

I’ve been putting in 10-12 hour days, easily, and work on other endeavors at night. So my time on the site has been limited to about one post a day.

But I see the light at the end of the tunnel. It won’t be long now before I have significantly more free time on my hands.