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  • Archive for December, 2008

    The oil conundrum

    Posted by Frugal on 29th December 2008

    What should be the fair price of oil? The fair price is obviously the market price. But the price oscillation is really too big to be “credible”. From $51 to $147 in 1.5 years, and then from $147 to $36 in 4 to 5 months, do you know anything that you buy everyday that changes price so much (besides oil-related stuffs)?

    Market price is always right (for the very second), but from such big oscillation, it is obviously that the market is extremely short-sighted. Rephrasing in mathematical terms, the best predictor for the near term price is the current market price, but the prediction power of the current market price further out in time is essentially zero. And that is the point that I want to make: the current oil price probably is reflecting very little with the fundamental picture of the coming oil depletion.

    If you have some time, you should take a look at Matt Simmons’ presentation slides. It’s an excellent source of information. And for the record, I’m still in the peak oil camp. I’m short-term (3-4 months) and long-term (2+ years) bullish on oil. For the intermediate term however, I think oil prices may stay in the lower range along with the stock markets.

    I won’t repeat things in Simmons’ slides, but the title captures it all: The risk of misjudging peak oil: a real physical crisis. In fact, I think the consequence of a real physical crisis in the oil market can easily be the biggest paradigm change in the next decade. Let’s hope that civilization is wise enough NOT to rely on the current market prices of oil to determine what may come in the next 10-20 years. Otherwise, using the zero information content from the current market price will most likely lead us into a bigger crisis down the road.

    Posted in Investing | 6 Comments »

    The Final Episode of Serial Bubbles: Bond

    Posted by Frugal on 18th December 2008

    First it was high-tech boom. Then it was real estate. Now it is the bond bubble. Bonds have appeared to go into the last phase of parabolic rise.


    Fall it must eventually, yet the timing is hard to determine. The timing could probably be approximated from the log-periodic power law which puts a hard limit on the parabolic (or rather super-exponetial) price function. For this bond bubble however, it is going to take quite a lot of “approaching infinity” for it to burst since Federal Reserve does have the capacity to print infinite amount of money to buy up bonds. According to the log-periodic power law, at the time of burst, the rate of money creation is infiinity. Let’s see if we get there. Of course, central bankers would think that the money printing power grants them a staying power for continuing to blow the bond bubble. But mathematically, the time to burst is finite in time.

    Wishing to lower the long term interest rates so that housing markets will not deflate or collapse, Federal Reserve does not learn from financial history that ALL financial bubbles cannot be reflated. Not a single bubble in human history that I know of was reflated over its peak in the duration of less than 20 or even 100 years. In fact, bubbles like Tulip bubble never get reflated again. The only way to save this economy is to have dramatically lower US dollar to create mild to high inflation. That is the only way to sustain or increase the housing nominal prices at the current level, while let the housing markets slowly go back to a healthy balance between supply and demand at the inflation-adjusted price. With higher inflation, there will be higher rents. With higher rents, the housing prices are automatically supported. Lowering the long term interest rates is simply not sustainable. It is creating unnecessary further dislocation of precious capital in the marketplace.

    We just passed the mid-point (2007/2/27) of current 52 years cycle of private wave of economic confidence, which will last until 2033. I would rather put this private wave as a non-public wave, meaning that gradually we will be losing more and more confidence in public government (and government bonds too). If the economic confidence model by Martin Armstrong is really correct, I think you may add another bubble after bond bubble, which could be the gold bubble.

    Posted in Investing | 3 Comments »

    The risk of demand/supply destruction

    Posted by Frugal on 16th December 2008

    With crude oil fallen thru $40 recently, the demand destruction is in full force, or is it?

    At gasoline prices of about $1.60 to $1.70, my recent trip on freeway was met with so much more traffics. At 2pm on a Saturday, I ran into traffics on freeway TWICE! That was just unbelievable. I thought there must be some accidents on freeway. At the mall (in California), the parking lots are totally packed. It was simply impossible to park. So many people driving around. And I see Hummers going around again. The old habits die hard, I guess.

    The fact is that according to IEA energy report in 2008, existing oil fields are declining at 9% (pg.7 of the link). There is an oil depletion problem. But no one wants to talk about it with crude oil falling to $40. What I’m really afraid however is that the needed investment for alternative energy gets pushed out once more, and that the cycle of dramatic rise and fall in energy occurs once more in the future, but only with bigger magnitude and pain. By the time when capital markets realize that the prices should be much higher, it is already too late for any energy projects to be built.

    Everyone complains about the big oil companies making insane profits at high oil prices. Now at the low oil prices, who is going to bailout all the billion dollar energy projects that are deep in the red (oil shale projects need a $80 crude oil to break even, just as an example)? Energy is a capital-intensive industry, and if we leave the decisions of our energy infrastructure to the ups and downs of capital market, we are putting ourselves at risk. Let’s hope that Obama will continue to push through those alternative energy projects to lessen the magnitude of the next energy rollercoaster ride.

    Posted in Investing | 5 Comments »

    Just back from my vacation & some notables

    Posted by Frugal on 8th December 2008

    With Xmas seasons here, I probably won’t have a lot of posts before the year end.

    Here are some of the things that I thought you may want to know:
    1. Bob Hoye continued to call for a upward march towards March, and that gold shares have bottomed.
    2. There is a backwardation in gold for 2 days, first ever in history. Think about it for a second. Why on Earth do you want not to cash in your gold/silver if you can get 2% more (annualized return) in the next 1 or 2 months? If this happens consistently/persistently, I think the only good answer would be that holders are not sure whether they can get them in 2 months.
    3. For those who have spent time reading thru my last link on Armstrong, here is some of my thoughts.

    1. He played a lot with numbers, which doesn’t have much ground in physics. But it actually got me interested in more decodings of it. As I have always said long time ago that I don’t believe in 3.14159 * 1000, because 1000 is not very meaningful in physics, yet 1000 is the third power of 10. 10 means nothing in physics also. But I just found out where 10 can be fit in. When you walk around the unit circle (with a radius of 1) by 10 divisions (36 degree = 360 / 10), that is the only way to get an Y or X-axis projection of the walked arc to be the length exactly equals to (the inverse of golden ratio)=~0.618. I’m using golden ratio as 1.618, but 0.618 is much more commonly known in the Elliot waves or fractal analysis of financial prices. An X or Y-axis projection in physics usually mean a realization of the physical phenomenon. Most mathematical or physical waves including sines and cosines are projections from unit circle.
      I know 99.9% of you are not interested in this, but 10 and 12 are the two most important numbers in Chinese astrology, which creates the famous 60=10*12 year cycle. And of course, 12 is present in Armstrong’s cycle work, as the two complementary private/public cycle of 6. Along the same thought, I did find a number very close to 12 from the golden ratio also. It’s the golden angle which in radians is about 2.399963, from which you can get pi divided by the square of golden ratio is approximately 1.2=12/10. I don’t see any physical meaning for 1.2, except for the fact that 2.399963 is simply way too close to 2.4. That would be a prediction error of 0.0015% if that is actually how 12 is derived.
    2. Armstrong’s computer had a conversational interface. That is beyond most of the published reports of techonology in his time. However, it is not impossible. Here is a company which created such conversational system in about 6 years. The other extremely important factor to consider is that a conversational computer system is highly dependent on the scope of vocabulary words. With a limited (financial) vocabulary, such systems could easily be created.

    Posted in Astrology, Investing | 2 Comments »

    Studies on economic cycles from the best

    Posted by Frugal on 3rd December 2008

    Directly from the jailed but the best economist in the human history IMHO: (found the link at

    Enjoy! (Yeah, it’s 77 pages long, but I wouldn’t miss 1 word of it. In fact, I would probably re-reading and regurgitating pages after pages.)

    By the way, I haven’t read it yet, but I can’t wait to post it here.

    The mid/full cycle low point in the year 2011 will be a force that you cannot contend with.

    Posted in Investing | 4 Comments »

    Bond trading indicating serious deflation problems

    Posted by Frugal on 1st December 2008

    The current bond trading is NOT consistent with a stock market recovery. This is putting big fears for my projected March/April stock market rebound.

    The 30-year treasury bonds have broken the all time low, and currently trading at about 3.3% (for the next 30 years). Is USA heading into a Japanese-style 20+ years recession?


    Mish has always been calling for the Japanese style recession. Bob Hoye however indicated that long bonds will trade some 10% higher! I don’t know any other pundits that came away somewhat unscathed from the recent financial turmoil. I tend to side with Bob Hoye more possibly because his opinions are more consistent with my own forecast. However, the current bond trading is telling a different story, and definitely going against Bill Cara’s repeated call on the trade of the generation: sell bonds and buy gold.

    I will be keeping an eye on bond prices. My portfolio is set up according to Bob Hoye and Bill Cara’s forecast. However, it is always possible that their calls are simply earlier by months if not years. From all I can see, both stocks and bonds are diverging away from Bill Cara’s projection, and indicating a Great Depression II.

    Posted in Investing | 4 Comments »