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Han Jun Low
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I am an extreme contrarian investor, aquarium hobbyist and health-food guzzler. Let it be known that I intend to examine opinions, and see if they can be backed up with evidence. Also, I try to be as easy going as possible, but apologize in advance for any unholy rambling rants that occur while... More
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  • Saudi Arabia, Unintended Consequences Or Best Frenemies?

    Saudi Arabia is perhaps one of the US's oldest friends, and so the cynical among us would like to see their recent suppression of oil as a move against Russia; on the face, this would certainly make sense as a plunging oil price would severely affect the oil-dependent Russian economy.

    On the other side of this trade, however, waits China. It stands as the greatest beneficiary from low oil prices, and has been buying a great deal of it. In fact, China is the largest single purchaser of oil in the world. In this light one might ask if the suppression of oil were really only for the "benefit" of the US.... I'll get back to that later.

    To complicate matters further, cheap oil is not a purely beneficial arrangement for the US. It certainly allows the average person to spend less at the pump, and for this reason would boost the US economy by allowing him to consume more of other things (consumption being the primary driver of GDP growth in the US).

    On the other hand, the shale oil industry is notorious for its high costs per barrel.... In fact, with costs ranging from $50-$100, some production will be curtailed now that prices have gone below $80. Cheap oil benefits China in both manufacturing AND increased consumer activity.

    Finally, one has to consider the state of the so-called recovery in the Western developed countries; with low demand for oil, this would tend to suppress oil prices further even without Saudi Arabian intervention. Perhaps Saudi Arabia is merely reacting to reduced demand.

    Three scenarios present themselves if we consider the above factors; first, that Saudi Arabia had pushed prices down to help their US allies spite Russia, and unfortunately because China is buying so much of their oil, they have no choice but to raise prices slightly in Asia and Europe. However, that begs the question of why they continued to reduce prices in the US.

    Second, it was reacting to overall reduced demand by aggressively clawing for market share. A canary in the coal mine to some extent.

    Most likely, this move was aggressive rather than friendly, and was aimed directly at the US shale industry. Nip a potential rival in the bud, perhaps, and after investors had already sunk a great deal of capital into the industry.

    Such a move has far wider implications than mere market share expansion, it suggests that Saudi Arabia is distancing itself from the US and does not depend quite so heavily on US support. The petrodollar itself becomes less of a certainty in coming years.

    In conclusion, I believe that if prices continue to stay below 80USD or fall much further, oil companies and particularly fracking companies will be facing more pain. Exposure to oil and fracking equity will thus be unwise in the short-run. Russia will also be hard hit, although the question is if the recent sell-off of Russian equity and the Ruble has been over-done at this point. In the long-run, this might have particularly troubling implications for the US. This is because a large advantage that the US has is its reserve currency status, itself closely linked to the petrodollar. Is one of its closest allies considering backing the new largest purchaser of oil? I would like to know what our readers think, feel free to leave a comment below.

    Tags: commodities
    Nov 12 1:27 PM | Link | Comment!
  • Gold: Yet More Examples Of The Media Getting It Wrong

    In this article, I intend to explain yesterday's gold spot decline with what financial reports have told us; once you eliminate the impossible, whatever remains, no matter how improbable, must be the truth.

    Syrian War And the Flight Into USD And Treasuries

    What the media has done once again is create a false association between gold and war; first they cite the Syrian war as a reason for gold's rise, and then proceed to convince people that the smart money is going into the US dollar out of gold or implying that the US dollar is the ultimate safe-haven. To prove it they show us an epic crash in gold spot today 28th of August and into the 29th, with it crashing 19 dollars from its high. This false association between gold and war is being used to convince people that if gold cannot rise in the face of war, it is a truly worthless metal. In fact it may be later found that war is entirely unlikely, so oops I guess there goes the only reason for the gold spot's rise (I actually find out much later that Bloomberg had written a report after I had written this, discussing this very idea. I have included my discussion of that report at the end)

    Although the prospect of war should very well improve gold's performance, I say that it is a false association because it is not the main factor affecting the recent build-up in gold. News articles overlook theUS's fumbling recovery, enormous…no, ginormous debt (it's a real word now) and a dozen or so real economic factors and focus on reasons that while logical, are in fact of relatively small importance because the upward trend had already been observed long before war. In this way the media draws in panicked crowds and drives them out as quickly as possible when these 'reasons' do not come to play, or another 'better' safe haven such as US dollars or Treasuries come up.

    Seriously, the very financial instruments that are going to crash because of the non-recovering economy, which will be further affected by war-spending which benefits nobody financially, is a safe haven during a war of its own making?This surely does not make sense, and I can prove that it is not the reason for gold's crash.

    (click to enlarge)

    You see, the USD Bullish index UUP is up 0.4%, but it has fluctuated in that range more or less every day, and is down from the highs of the month previous. Although the UUP seems to be headed up again today, I believe it to be a result of media reporting rather than the other way around, and anyway is still insufficient as an explaination for gold's spot crash. Can I explain it though? I do not know, but it may be related to my previous observations.

    On a side-note: this is not the only false association that has been backed by the media, first it was inflation, but there was 'low' CPI which would create losses in gold and then the prospect of tapering, which would apparently reduce inflation further, resulting in greater losses in gold. This statement from the last article I had linked to from Market Watch stood out however:

    "Geopolitical tensions may also lead the Fed hold off the reduction in stimulus, some analysts have said. The Fed's $85 billion worth of bond buying per month has been aimed at spurring economic growth."

    No Tapering? No problem! We clearly meant to do it but gosh darn this war came out of nowhere…
    (click to enlarge)

    Guess we'll just have to flush all those hundreds of articles discussing tapering down the toilet, oh well.

    Indian Connection
    In India we see conflicting reports showing demand for gold rising as the rupee falls and demand for gold falling as people trade gold for cash. Wow, I guess 2-3 hours (Check out the time stamps on those articles) is sufficient for people to start doing the complete opposite of whatever they had been doing previously. Funny that this change of heart comes with the fall of spot, which does not react to physical buying immediately, even assuming that the Indians had flip-flopped. I suppose the two news reporters could have just coincidentally been reporting in different parts of India, but that would not excuse the use of a small sample of people to extrapolate their preconceived ideas onto the whole of India.

    Side-note: it seems India is going to buy gold from its citizens now. They seem rather desperate, seeing as their 90 billion dollar debt is so very large (the Fed creates almost that much money in a month FYI). Seems they are even considering selling off gold to repay the debt, which could dampen gold prices, and we have a new Cyprus all over again. I wonder what the chances are that they would actually sell though. Seems they are going to sell US dollar reserves as well, no mention of the fact that this could depress dollar value.

    There Is 'No' Reason To Hold Gold

    By the way, according to these experts, it is too late to buy gold; it would seem you should have bought a month ago, when the experts told you to….Wait, Goldman and JP were telling you to sell gold?? Oh well, just a coincidence then, clearly you should not buy gold when it's going down, going up, or going nowhere! There is never a case for gold. Goldman's long you say? Clearly they've been wrong before (but still profit regardless) Syrian war Syrian war Syrian war We're not tapering Syrian war Syrian war.

    On a side-note: It seems this guy from Goldman saw it all coming Wednesday, the 28th. So we finally have our answer for the gold miner crash. As for the gold spot crash that followed, it may be argued that gold buyers had decided to follow his recommendation today... But manipulation is manipulation damn it. Need I mention again that having this spot crash come after a concentrated sell-off in the miners makes no sense, and is incredibly profitable to someone who had sold on the very day before (for arguably no good reason other than he had vaguely feltthat it was overvalued)? What a stunning coincidence that 'people' take their profits in miners a day the spot reaches a high; in the real world spot drives gold miner valuations, not the other way around. We all know there is no way for anyone to have known the spot would crash just so suddenly, especially with an unexpected war thrown into the mix.

    One final note: The gold spot has declined slightly to 1405 today yet gold miners are up. Perhaps the same trader had bought back all his positions and told his clients to do so as well before making yet another announcement.

    Conclusion

    I see no change in the fundamental reasons for gold, and many attempts at confusing the general public on the behalf of the financial media. As such, if the real reasons for gold had always been the same. If you have eliminated all that has been reported to explain the gold spot, whatever remains, the manipulation of the spot, which although seems improbable, must be the truth.

    I intend to hold my gold shares. I'm going down with my ship if I must, and I may be wrong, but I am a fundamental-contrarian to the end. I need a rallying cry, something dashing. Follow the yellow brick road!

    Edit (one day after I had written this article): Gold Spot is down again to 1390. No new reasonable explainations are to be had.

    Bloomberg has finally found a reason to bash gold again, and claims that the Syrian war is now unlikely because the UK is not in it. It repeats this assertion several times in other articles. False associations crumble so the reason to buy gold crumbles too, the real reasons forgotten. Bloomberg further reports that now it is time to focus on the robust American economy which has grown higher than expected (after revising them with more lenient conditions, which is to be expected, and is still in the forecast stage, which has been wrong before, remember how first quarter had been 2.4 before being revised down three times) and the unholy prospect of tapering again. That the reasons against gold can switch within a day or two and switch back is profoundly amazing to me, and how switching up the reasons provides a reason for gold when it goes up but always predicts a decline in gold because the previous reason no longer applied. Speculating on the very likelihood of the war would seem to be suicidal, and far from a foregone conclusion in my opinion, but I suppose that Bloomberg either has a high risk tolerance or some sort of ability to see the future.

    Aug 30 9:11 AM | Link | 2 Comments
  • A Ridiculous Metaphor For Economics, The Ridiculous Science

    The economist is a fan salesman.

    Imagine a fisherman Jim and his friend…. Ben. Ben raises his hand and tries to determine the direction the wind is blowing; he then signals Jim how best to compensate for the wind by throwing his line at a certain angle. So too in modern Economics, where economists (Bens) tell the producers (Jims) how to compensate for economic weather, with interest rates the signal which determines the production and investment decisions they should make.

    Allow us to complicate the analogy a bit. What if Jim was fishing for a deep-water fish? Then the wind would be a less important factor, as the line is heavily weighted; also, the current underneath the surface may well be moving opposite in direction to that of the wind; for Ben to give Jim the same advice he may well cause Jim to throw the line too far to compensate for a weak problem, while amplifying the deeper problem. Such is the problem for economists, trying to determine all the factors that are applicable and the extent of their impact. Some of these may not be even observable to Ben, especially as markets become more complex and services more abstract(Collateralized Debt Obligations anyone??). If he were a good economist, Ben must tell Jim that while he can offer some guidance, he may be wrong in some areas; Ben has to be humble enough to admit he had made a mistake based on ALL the data he is receiving, not just a carefully filtered portion of it. He would then tell Jim that he is the fisherman and since he knows his craft best he is the best person to decide on how long to stick with Ben's advice and that he is willing to listen to Jim about his insights into the craft of fishing so that he can optimize the model and account for the undercurrents. This analogy is untrue only in that an Economist deals with far more than two variables, and several of the variables are not only unknown; they adapt to overcome his policies, the ingenuity of human behavior which behaves like a random-walk and a trend- line, a psychopath and a genius.

    Economists today and in particularly large countries see this challenge as irrelevance…. And hence as a threat to their existence; unwilling to concede defeat they oversimplify matters by telling Jim that the wind is all that matters and prescribe a slew of signals that serve to confuse and deceive the fishermen of today. They tell Jim that it takes time for his compensation to take effect, and to keep throwing his line further. Worse, in order to manipulate the market in their favour they implement monetary policies like Quantitative Easing, which is akin to buying a gigantic fan to blow so strongly that the wind is always predictable and temporarily renders their predictions correct; the undercurrents still unaddressed (Though if the fan is big enough even the undercurrents may be completely swept away, together with all the fish). QE is presumed to create high levels of inflation (wind) that would overcome deflation (natural weather), the underlying unemployment and GDP (undercurrent) can only be known after the overall production can be measured (fisherman has determined how many fish he has caught).

    Despite the poorer catch resultant upon their recommendations, they presume to tell the fisherman that his skill was poor, or that if he had not compensated as they had prescribed he would not have caught any fish at all, or that despite having caught guppies rather than groupers, that he had caught MORE fish and was thus better off, or that it would have all worked out if only Jim had believed with all his heart and soul in the process.... The giant fan however costs money to operate, and must be shut off eventually. When it does the overcompensation the fisherman has made will be compounded by the backlash of natural weather. He will be left with the bill for 1 giant fan, which he had never agreed to buy, whiplash injuries that prevent him from working and to add insult to injury have caught fewer fish for all his effort at fighting the artificial weather than required to pay for either the fan or medical treatment to get him back on his feet. The fan producers don't even end up being paid for the fan in the end, and will probably go bankrupt too if there are too many Bens around. Some may be bailed out with Jim's meagre remaing savings, but as with any decisions he makes, they occur for reasons Ben-only-knows.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

    Tags: economy
    Jul 22 4:07 AM | Link | Comment!
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