Tuesday, January 13, 2015

Copper & Crude Convolutions: "The More This Goes On The More It Looks Like 1937"

Submitted by Jeffrey Snider via Alhambra Investment Partners, (ZeroHedge)

The primacy of the monetary pyramid in 2015 is not really about money as it is all ideology. If you believe that monetary policy provides “stimulus” then you immediately remove all thoughts of any economic decline during times when monetarism is most active. Since “it works” then all else must fall into place. Contrary indications are thus given extraordinary lengths to maintain logical consistency.
Economic commentary as it exists is incredibly short-sighted, though there is no reason to believe that is anything other than exactly what I stated above. The state of economics even as a discipline has internalized Keynes so deeply that all that matters is what happens month-to-month. That makes it easier to maintain the status quo of opinion about “stimulus” – in the short run it is very easy to find a suggestion for something behaving “unexpectedly.”
That was certainly the case with crude oil prices these past few months, as the initial impulse was uniformly and incessantly prodded to over-supply. Again, the reasoning behind that was simply since “stimulus” works and it was being practiced and replicated all over the world there was no possible means by which “demand” might drop, and so precipitously. After a few weeks of oil “unexpectedly” falling further, re-assurances were more difficult and increasingly derivative by nature.
The parallel excuse was that oil prices were oil prices and that very little else “important” was behaving as was crude. And whatever commodity prices were falling in parallel fashion, that was distilled as being nothing more than either an oil “echo” or supply everywhere. This was written in November 2014:
The simple reason for the dip in commodities prices, these experts say, is that we have too much of a good thing: too much gold; a bumper crop of corn; a glut of iron ore because the big three producers, Rio Tinto, Vale and BHP Billiton have all increased output. In crude oil, members of the Organization of Petroleum Exporting Countries keep pumping out oil, while US production is at its highest level since 1986…

That lack of demand is why the commodity markets aren’t forecasting bad times in the future; they’re mirroring the current dark “mood” of the commodity investor, said analysts at Citi Research in a research note from 16 November.
The article should have just come right out and stated the central theme: commodity “investors” are in a “dark mood” because the world is so good right now. And while that may hold some minor plausibility on the surface, it is, again, far too narrow and focused solely on this moment. Even if commodity prices were, in fact, trading only on over-supply, therein lies the seeds of the next economic problem anyway. What factor in this economic world would lead to such an imbalance in the first place?
After all, businesses are supposed to be set on expectations for future conditions, and this narrative more than suggests that they were decidedly bad at doing so. Producers that so over-produce themselves into big trouble are either really stupid, or led astray by prices that, at their core, don’t make fundamental sense.
In other words, even if you follow this tendency to excuse “unexpected” weakness, it still amounts to largely the same problem – an artificial “boom” predicated on artificial prices rather than something more fundamentally sound and thus sustainable. It all ends up in the same place as an imbalance that will have to be cleared via retrenchment; a fact that is missed in the euphoria of “this month is compared only to last month.”
One reason Haworth said he’s not worried about a bigger global recession is the behavior of copper prices. Because the red metal has many industrial uses, commodity watchers will sometimes say copper has “a PhD in economics”, and it can be a gauge of future industrial demand. US copper futures prices have dipped below $3 a pound on rare occasions in 2014, but it’s always bounced back up. Prices currently are around $3.04.

Haworth called that “heartening” and posits copper prices are suggesting that while global growth is not strong, it’s not falling apart.

“In order for me to become worried about a recession, I think we’d need to see a much bigger fall in the price of copper and that’s not happening,” Haworth said. [emphasis added]
Almost immediately upon having those words printed, the price of copper declined below $3 and has remained lower ever since; in fact still falling further even now. I don’t profess to know at what price Mr. Haworth would consider low enough to change his global recession stand, but in wider context it is clear that the possibility has already been more than suggested.
ABOOK Jan 2015 Copper Long
As of this morning, the front month futures price of copper delivery is almost exactly the same price as it was in June 2010 at the lows when recovery after the Great Recession was very much in doubt – leading to QE2 and the last great “rip” in commodity prices (as if that were a good thing). It only matters that copper prices are not wholly collapsing right now, in scale closer to what happened starting July 2008, if your view of the world is temporally tapered. Taking a longer view, copper prices have been falling since the 2011 apex of the $/€ crisis, with the longer-term trend established in early 2012 as global growth (demand) has done nothing but wane.
In a physical world where supply and demand have to clear at some price, it is not really surprising that a slow attrition in economic activity would show up as a much more durable and extended slide in not just copper, but almost every economically-sensitive commodity. Since that trend includes the beginning and end of QE 3 & 4, as well as innumerable “stimulus” programs in Japan, Europe, China and elsewhere, with nary a durable upward impression, it speaks very ill of the impact of monetarism on actual “demand”, even if it were “over-supply.”
ABOOK Jan 2015 Copper IMF Indices
The mainstream impression of all of this is one of independent and discrete trends with no unifying nature. That fits the idea that “market” prices can be as they are without disrupting the narrative of an economy on the upswing. But the financial system, especially globally, does not behave as a segregated and compartmentalized price engine – and certainly not for extended periods. The fusion of all these pieces, and why crude collapse is really indicative of the underlying trend, is, of course, the “dollar.”
ABOOK Jan 2015 Copper Short
In a globalized and financialized world, financial disruption, which is what a “rising” dollar signifies, is not an independent paradigm. The more prices trend exactly opposite of how “stimulus” is supposed to work, the less these convolutions will hold up whereby, eventually, reality sets in. The significance of the action in December is that there are no more lines in the sand left to defend the “honor” of monetarism; copper isn’t anywhere near $3 anymore and the long-predicted crude oil bounce to $70 is instead $45 and falling. Only equities remain, and at these valuations they signify nothing but the folly of the artificial economy. The more this goes on, the more it looks like 1937 lives again.
© 2014 Alhambra Investment Partners

Source, Alhambra Investment Partners

Thursday, January 8, 2015

Part 1: Bitcoin, Internet Security and Consumer Safety

With the holiday season over, now is an important time to reflect on our economic and structural security online and at retail locations. When consumers shop, they put valuable information about their identity out into the open. While the majority of consumers never think twice about swiping their credit card or putting their personal information online, the cold reality of identity theft and personal information leaks are alive and well. Some reports state that in America, “A new identity fraud victim was hit every two seconds...with the number of victims climbing to 13.1 million over the year...”(Rogers) Beyond credit cards, online security relating to mobile applications, social media and recent scandals with Sony and Apple show how vulnerable this system truly is.

Many pundits and “experts” will discuss how we need to revamp the infrastructure, placing chips into cards and using solutions like iPay to “move forward”. These talking heads miss the entire point (maybe on purpose) and avoid the true problem: centralization. The question is rarely brought up;

What if the system itself is inherently flawed? What if there is no real solution to fixing this infrastructure? What if the solution is not patching and building more on top of an already cracked foundation, but replacing the entire infrastructure with a new, systemically different philosophy and platform? This of course, is the distributed model of decentralized, consensus based technology.

Take for instance the new hyper chatter of Apple Pay and it's “revolution” in the payment space. Here we have a centralized model, based on a single company taking millions of consumer credit cards, storing them on localized servers and then allowing for touchpay and other means of payment to vendors. While many may respect Apple for their contributions to smart-phone technology, Apple simply cannot handle the disruptive and consistent attacks by hackers around the globe. Hackers need not look anywhere else, but towards Apple to think, “Hey, Apple is now holding X million credit cards, time to focus here.” A centralized point of infrastructure is a point of failure. And we've seen this with Apple, during the recent “Celebgate” attack on Apple iCloud.

If scandalous pictures of celebrities can get hackers to break the Apple protected wall, millions of credit cards will do that much quicker. Do we really want to trust Apple with our personal information if they cannot even contain top-level A-list celebrity pictures?

Now, many individuals will understand this centralization model and it's inherent failures, but they often seek to see real world examples of this distributed and decentralized model. Fortunately for us, there are many examples, with the biggest names being BitTorrent, Bitcoin( Blockchain Technology) and the Dark Web. A notable example is the move of peer to peer technology from Napster to BitTorrent. What we saw here was the State intervening in a peaceful activity of sharing via Napster, which exposed to individuals the issue of the centralized model. This lead to creative and entrepreneurial pushes towards solving an issue that wasn't visible before. From Napster, we end up with BitTorrent and the technologies as mentioned above.

BitTorrent is a peer-to-peer way to distribute information and data over the Internet, without having a central point of failure. While there are some centralized aspects of torrents, such as the indexing pages where users can find certain information, these “centralized” parts are merely the leaves, not the root. While these websites can be shut down, it doesn't disable the protocol of BitTorrent itself. However, there are new applications, such as Tribler, which uses internal searches via P2P networks rather than by websites to find torrent information. Moreover, removing these “leaves” of the tree actually strengthen the tree as a whole, due to the resiliency of the market and programmers in the space itself. As with anything on the open market, when a flaw or issue is detected, market participants see profit and opportunity, eliminating that issue, which then strengthens the system itself.

Stay tuned for Part 2
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Harrison Fischberg is a Bitcoin entrepreneur, writer and enthusiast