Monthly Archives: December 2013

Sam Collins – January 2014

  • Short-term:
    • down
  • Midterm:
    • down
  • Long-term:
    • the long-term trend is decidedly bullish

Flash Point: Cornucopiahhhh …

In recent years, shale oil has been billed as the resource that will break America’s dependence on foreign oil and make it a net exporter, improving the county’s balance of payments. While this oil cornucopia is real, the depletion rates of wells in the current shale fields may make this independence short lived. We have been reading reports for some time of this situation and have decided to capture a few recent ones. We will not attempt an analysis but only offer a heads-up for the interested.

We begin with a Zero hedge report: The Shale Oil Party Is Ending, Phibro’s Andy Hall Warns. As reported, According to the DOE data, for Bakken and Eagle Ford the legacy well decline rate has been running at either side of 6.5 per cent per monthShale production may peak shortly after 2020.

In the RCS Investments Global Macro Outlook 2014 report, issues around fracking and shale oil production are discussed beginning on page 19. The depletion rate given in the report is that production from fracking in  tight oil [shale] formations declines by 60-70%  within the first year alone. Traditional  wells on the other hand take roughly 2  years to fall 50-55%.

These figures are consistent with what we have read in the past.

Further Reading

Following are relevant articles:

Jeffrey Saut – 2014

  • Short-term:
    • up
  • Medium-term:
    • up despite traditional Sept. weakness.
  • Long-term:
    • Primary trend is a DOW theory bull market and the 4th major breakout in a century. (see June 2013 gleanings)

Welcome to the “New Great Game”

One of the major interests that motivated the creation of this blog was that of geopolitics. One of our primary sources of geopolitical intelligence has been Stratfor and we continue to republish material that they make available for free distribution. Good sources of geopolitical analysis are important because the media and the intelligentsia have a geopolitical focus that is dominated by the meme of the need to impose democratic government on the non-democratic nations of the world.

This doctrinal approach seems oblivious to its failures. The deep irony is that democracy itself is a transitional state in a larger totalitarian framework, a theme we approach in our series on socialism (find the series at Socialism: One of the Two Great Destructive Forces of the Twenty-first Century). The result is no good understanding of geopolitics can be achieved by following Westerner media. One has to to do one’s homework to find sources that offer commentary and analysis where  the bias is understood.

It was with some delight that we read an essay today published in Zero Hedge titled The New New Great Game: Geography, Energy, The Dollar And Gold. Extracted from the December Thunder Road Report by Paul Mylchreest of Monument Securities, this report opens with the position:

Sir Halford Mackinder’s 1904 speach in which he outlined his “Heartland Theory” was a founding moment for geo-politics. He argued that control of the Eurasian landmass (Europe, Asia and the Middle East), which contained the bulk of the world’s population and natural resources, was the major geo-political prize.

Mylchreest then offers an update of the theory to the current geopolitical context.

Summa: The Great Myth

Listening to an interview of Richard Duncan by David McAlvany we were finally motivated to explore an issue that has nagged at us for quite a while. What disturbs us is that we find ourselves alone in disagreement with the prevalent ‘wisdom’ regarding the Fed’s quantitative easing (QE) policies and their effects on liquidity and markets. This essay will explore our position.

Israel’s Water Challenge

December 25, 2013

Israel's Water Challenge
Filters at the Ashkelon seawater reverse osmosis plant south of Tel Aviv in 2008. (DAVID BUIMOVITCH/AFP/Getty Images)

Summary

Israel’s successful efforts to increase water security will lessen one of the country’s geographical constraints. But new sources of water are more energy intensive, and this could increase Israel’s short-term dependence on energy imports unless domestic energy sources are successfully developed.

Too many PhDs and Not Enough Common Sense

Thousands of investors, both professional and amateur, build models of markets, hopefully with sufficient predictive power to make money – or avoid loosing too much. To validate their models, they back-test them. That is they run the model over a number of previous years of data to study the accuracy of their models’ predictions over the time frame chosen.

The most celebrated case is that of Long-Term Capital Management L.P. (LTCM). Founded in 1994 as a hedge fund, it counted 2 economic Nobel laureates on its staff as well as dozens of PhDs in math, physics and economics. They produced spectacular returns based on their models and strategies that were highly leveraged to produce these outsized results. Then in 1997 and 1998, the Asian and Russian financial crises produced adverse conditions of a nature that their back-testing had failed to include. A story we recall reading but could not find was that their data set stopped just short of the 1987 market crash. Had they gone back further, the outcome may have been radically different. As it was their high leverage worked against them, bankrupting the company and threatening the stability of thew entire financial system. Only Fed intervention saved it.

With this background we are perplexed that we have not heard about back-testing of climate models. The importance of such may be understood in the butterfly effect. Based on a set of mathematical equations developed by Edward Norton Lorenz, an American mathematician and meteorologist, and a pioneer of chaos theory, this effect also called the Lorenz attractor, has characteristics that show up widely in natural systems and particularly climate systems. The idea is that where your model goes depends on what set of initial conditions you use. In some systems the results of very small changes in the initial parameters create widely divergent results.

Ukraine: On the Edge of Empires

Tuesday, December 17, 2013

Stratfor

Editor’s Note: The following Geopolitical Weekly originally ran in November 2010 as part of our Geopolitical Journey series. We repost it today as Ukraine’s position between Europe and Russia puts it in the spotlight.

By George Friedman

The name “Ukraine” literally translates as “on the edge.” It is a country on the edge of other countries, sometimes part of one, sometimes part of another and more frequently divided. In the 17th and 18th centuries, it was divided between Russia, Poland and the Ottoman Empire. In the 19th century, it was divided between Russia and Austria-Hungary. And in the 20th century, save for a short period of independence after World War I, it became part of the Soviet Union. Ukraine has been on the edge of empires for centuries.

My father was born in Ukraine in 1912, in a town in the Carpathians now called Uzhgorod. It was part of Austria-Hungary when he was born, and by the time he was 10 the border had moved a few miles east, so his family moved a few miles west. My father claimed to speak seven languages (Hungarian, Romanian, Slovak, Polish, Ukrainian, Russian and Yiddish). As a child, I was deeply impressed by his learning. It was only later that I discovered that his linguistic skills extended only to such phrases as “What do you want for that scrawny chicken?” and “Please don’t shoot.”

Of Elephants and Black Swans

Consider the parable of the three blind men and an elephant. As Wikipedia explains it (emphasis added):

The story of the blind men and an elephant originated in the Indian subcontinent from where it has widely diffused. It has been used to illustrate a range of truths and fallacies; broadly, the parable implies that one’s subjective experience can be true, but that such experience is inherently limited by its failure to account for other truths or a totality of truth.

 Also consider the notion of a black swan (BS) event introduced by Nicholas Taleb. As Wikipedia describes it:

The black swan theory or theory of black swan events is a metaphor that describes an event that comes as a surprise, has a major effect, and is often inappropriately rationalized after the fact with the benefit of hindsight. … “black swan theory” refers only to unexpected events of large magnitude and consequence and their dominant role in history.

Summarizing these two notions:

  1. Our knowledge of anything in the world is necessarily and always partial;
  2. this knowledge as far as it goes may or may not be true;
  3. there can be events that come to pass that while being known, are considered to be so improbable they are not taken into consideration in any planning or action;
  4. these improbable events may have huge consequences; and
  5. not all BS events are known. (consider that black swans existed but were unknown before their discovery in Australia by early explorers.)

We read daily, material from a number of respected sources and by very smart people. In particular, on Zero Hedge this morning, we read the essay by Michael Snyder of The Economic Collapse blog, titled Dent, Faber, Celente, Maloney, Rogers – What Do They Say Is Coming In 2014? In it he provides quotes from 14 respected economic experts about what they believe is coming in 2014 and just beyond. This got us thinking. The thoughts of 14 of the most astute blind men, taken together, should give us a better understanding of the elephant we live with and perhaps a glimpse of the next black swan.

Italy: A Movement Becomes Part of a Growing Trend

December 11, 2013

Summary

(MARCO BERTORELLO/AFP/Getty Images)

A protester waves an Italian flag during a protest in Turin on Dec. 11.

With Italians increasingly upset over a stagnating economy and rising unemployment, a relatively new protest group has emerged in the national headlines. Since Dec. 9, the Pitchforks Movement has been staging rallies across the country, blocking highways and rail and subway stations and protesting in front of public buildings. The protests are relatively small, comprising a few thousand people in each city, but they are widespread, stretching from Italy’s poor south to its wealthy north.

The Pitchforks Movement is part of a growing trend in Europe. As the unemployment crisis lingers, the traditional representative institutions — political parties and trade unions — are proving incapable of channeling social unrest. In turn, groups that originally represented specific sectors are increasingly receiving support from other parts of the population.

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