Jamie Dimon Says Corporations Will Fund Buybacks With Tax Cuts And That"s "Not A Bad Thing"

For at least half a decade now (How The Fed"s Visible Hand Is Forcing Corporate Cash Mismanagement) we have warned about how the Fed’s flawed approach to monetary policy incentivizes corporations to fund share buybacks with massive amounts of debt...

…While the corporate sector has spent record sums on share buybacks...

Capex has experienced an unprecedented decline...

 

Of course, some Democrats have argued that the Trump tax plan will perpetuate essentially the same incentives as corporate tax rates are slashed and money brought back from overseas is spent on still more buybacks, instead of creating jobs and capital expenditures, like the Republicans argue it will be.

The flimsiness of the GOP’s argument was exposed a few weeks ago during a memorable gaffe involving NEC Chief (and former No. 2 at Goldman Sachs) Gary Cohn, one of two officials managing the tax bill on behalf of the White House – the other being Treasury Secretary Steven Mnuchin, also a former Goldmanite.

During an event for the Wall Street Journal"s CEO Council, an editor at The Wall Street Journal asked the room: "If the tax reform bill goes through, do you plan to increase investment - your company"s investment, capital investment?"

 

He asked for a show of hands.

 

Alas, as the camera revealed, virtually nobody raised their hand.

 

Responding to this "unexpected" lack of enthusiasm to invest in growth, Cohn had one question: "Why aren"t the other hands up?

While Cohn’s dismay at the lack of enthusiasm for his tax plan was obvious and embarrassing (the clip was in heavy rotation on CNBC for much of the next day), the fact that corporations will spend the windfall created by the tax bill isn’t necessarily a bad thing, according to JP Morgan Chase CEO Jamie Dimon.

Of course it wouldn’t be “a bad thing” – for Jamie.

When it comes to the rest of us…well…maybe not so much.

Dimon, who was speaking at a conference in Ann Arbor, Michigan hosted by Axios, according to CNBC.

According to Dimon’s logic, repatriations enabled by the tax plan could swiftly lead to more than $1 trillion being brought back from overseas. It doesn’t matter where that money goes, the point is there will be more capital sloshing around the domestic economy…and that will eventually manifest itself in the form of capex, job creation and higher wages…

"You need a competitive tax system ... companies will retain more capital and start to use it over time," Dimon said Wednesday in response to a moderator question at the Axios Smarter Faster Revolution event in Ann Arbor, Michigan.

 

"Some will raise wages. Some will buy companies. Some may do dividends and buybacks. Don"t act like that is a bad thing. That is their money. Think of it as a QE4. That money gets recirculated in the American system."

Dimon said tax reform "simply needs to be done," and should have happened 15 years ago. And while the benefits aren’t “going to be immediate”, they will accelerate growth “cumulatively over time."

JPMorgan"s Jamie Dimon: Tax reform bill will result in more jobs from CNBC.

 

After the bill passes "probably a trillion dollars will come back from overseas," he added. "Cumulatively over time that will accelerate growth in the American economy." That effect will resemble something like QE4, though we’re not sure that’s the best comparison...

The real question is: Will the tax bill somehow prevent the Federal Reserve from needing to launch QE4 before the end of Trump’s first term. If you believe a recent Treasury Department analysis of the Senate tax plan released earlier this week.

That plan calcuated that the tax cuts would bolster US economic growth to an average rate of 2.9% real growth over the next 10 years...

...which would make the current economic expansion the longest in modern history...

...But then again, if you believe that, then we have some condos for you to buy.

THE BLIND CONSPIRACY: The Gold Market Is Heading Towards A Big Fundamental Change

By The SRSrocco Report,

The gold market is heading towards a big fundamental change that few are prepared.  While many analysts in the alternative media community suggest that the gold price is manipulated due to Fed and Central bank intervention, there is another more obscure rationale that is the likely culprit.  I call it, "The Blind Conspiracy."

But, before I get into the details of this Blind Conspiracy, there are a few very troubling developments in the alternative media community that I would like to discuss first.  The bulk of these concerns has to do with the increasing amount of faulty analysis and misinformation as well as the peddling of lousy conspiracy theories on the internet.

Why is this a big problem?  Because a lot of readers are being misguided as to the true nature of the serious predicament we are facing.  Half of the emails that I receive are from readers who are bringing up doubts based on other analysts" faulty analysis and misinformation.  Thus, it takes a great deal of effort to provide the real facts and data to counteract the damage being done by certain individuals, even those with good intentions.

Furthermore, an increasing number of so-called precious metals analysts have switched over to Bitcoin and other cryptocurrencies, believing that gold and silver will no longer function as monetary metals.  However, some of these analysts suggest that silver will still be valuable because it will be used as critical raw material in advanced products in our new HIGH-TECH WORLD.  I find this idea of a future modern high-tech world quite amusing when we can"t even maintain the failing complex infrastructure we are currently using.

American Society Of Civil Engineers 2017:  U.S. Infrastructure Grade Is...???

According to the Amercian Society Of Civil Engineers, ASCE, they just came out with their grade this year for U.S. infrastructure.  Does anyone want to guess what overall grade we received here in the good ole U.S. of A?  The ASCE gave us a D+:

Well, at least a D+ isn"t an "F" grade.  Here is the ASCE"s Infrastructure Report Card Grading Scale for receiving a "D":

"D" GRADE = POOR, AT RISK
The infrastructure is in poor to fair condition and mostly below standard, with many elements approaching the end of their service life. A large portion of the system exhibits significant deterioration. Condition and capacity are of serious concern with strong risk of failure.

The ASCE U.S. Infrastructure Report also provides separate grades for different aspects of U.S. infrastructure.  For example, the U.S. Energy Infrastructure received a "D+" as well.  This is a brief description of the Energy Infrastructure:

Much of the U.S. energy system predates the turn of the 21st century. Most electric transmission and distribution lines were constructed in the 1950s and 1960s with a 50-year life expectancy, and the more than 640,000 miles of high-voltage transmission lines in the lower 48 states’ power grids are at full capacity.

Moreover, the report states that $4.5 trillion needs to be invested 2016-2025 to raise the U.S. infrastructure to a "B" Grade.  However, only $2.5 trillion has been budgeted.  Thus, we are $2 trillion short of the total amount needed.  Regardless, I doubt we will be able to spend anywhere close to the budgeted $2.5 trillion over the next decade for our infrastructure.  Unfortunately, I see the U.S. Government and private sector running into serious financial trouble by 2020 as the massive amount of debt and derivatives finally take down the system.

So, the question remains.  How are we going to move into a new HIGH-TECH world if we can"t even maintain our current infrastructure?

The notion that we can bring on some new "Energy Technology" fails to consider the tremendous amount of raw materials, manufacturing, transportation, and logistics to repair and maintain our current infrastructure.  You see, we have much bigger problems than just replacing an energy source or technology.  But, to understand that principle, you must look past superficial thinking and "Silver-Bullet energy technologies."

Now, if you hear certain analysts suggesting that gold and silver will no longer be used as money in the future because cryptocurrencies will take over the monetary role in our new high-tech world, you may want to contact them and provide the link to the U.S. Infrastructure D+ Grade Report.

Destroying Once Again.... Certain Myths About The Gold Market

If I collected an ounce of gold for every email that I have received about patently false gold myths and conspiracies; I could buy one hell of a lot of silver....LOL.  Gosh, if I went back to my email folder and added up all the emails on this subject, it would number well over 500 in my ten years publishing articles in the alternative media community.  However, I continue to receive the same type of emails because individuals are still being misled.

Before I begin, let me say that I focus my work on disproving the faulty analysis by other individuals, and not directing anything negative towards the person.  I am adamantly against the idea of "targeting the messenger."  Rather, I like to target the faulty message.  So, there is nothing personal in my attempt to set the record straight.

Let me start off by saying.... THERE AREN"T MILLIONS OF TONS OF HIDDEN GOLD in the world.  Anyone who continues to believe this needs to pay close attention to the following information.

One of my readers sent me the following recent YouTube video by Bix Weir, titled "Vast Gold Riches Hidden In The Grand Canyon":

In the video, Bix quotes a New York Times article published on June 19, 1912, that proclaimed vast gold riches in the Grand Canyon.  According to Bix, this massive gold find is what prompted the starting of the Federal Reserve because billions of ounces of new gold from the Grand Canyon dumped into the market would destroy the monetary system.

While this may sound plausible to the layman, if we carefully read the article and do some additional research, we will come to a much different conclusion than what Mr. Weir is suggesting.

First, Bix makes a grave error during the interview when he states "billions of ounces of gold," rather than "billions of Dollars of gold."  Here is the segment of the article:

There"s a big difference between a billion ounces of gold and a billion dollars worth of gold.  For example, the market price of gold in 1912 was $20.65 an ounce.  If we assume that $2 billion worth of gold was extracted from the Grand Canyon, it would equal approximately 100 million oz of gold.  If we take it a step further and convert it to metric tons, it would equal 3,110 metric tons.... a figure much much lower than one million tons stated by Mr. Weir.

Second, the article provides us with an idea of the very low quality of the gold found in the silt on the banks of the Grand Canyon:

As we can see, the individual in charge of the mining operation in the Grand Canyon stated that the value of gold was worth 50 cents per yard.  When gold miners refer to a "yard," they mean a cubic yard or a volume that equals 1.3 tons.  With an ounce of gold worth $20 in 1912, 50 cents a yard is a tiny amount of gold.  Thus, 50 cents worth of gold in a yard is approximately 0.025 oz or one-fortieth of an ounce of gold.

Let"s compare the supposed vast Grand Canyon gold riches worth 50 cents a yard to the gold mining that took place in Alaska during the same period.  According to the data provided by the U.S. Bureau of Mines in 1912 Report:

This chart represents "Placer" gold mining in Alaska, which was the same type of gold mining that took place on the banks of the Grand Canyon.  Placer gold mining is the process of washing gold from gravel, sand or silt.  Lode mining is extracting gold ores from veins in rock.  Here we can see that the average value of gold recovered in Alaska in 1912 was $2.10 per cubic yard.  Now, why on earth would anyone want to go to the remote location in the Grand Canyon and mine gold for 50 cents a yard when you could receive four times as much in Alaska???  Please, someone forward that information to Mr. Weir.

Third, the notion of extracting Billions of Dollars of gold from the Grand Canyon fails logistics miserably.  Let"s overlook  Mr. Weir"s error in quoting billions of ounces of gold rather than billion dollars of gold and consider the tremendous logistics of mining that amount gold out of the Grand Canyon.  According to the same U.S. Bureau of Mines 1912 Report linked above, Alaska produced a total of 7.4 million oz of gold worth $154 million between 1880 and 1912:

So, in over three decades of mining placer gold in Alaska, the total amount was $154 million.  Furthermore, the value of the gold per yard was likely much higher between 1880-1900.  Regardless, it took a great deal of human resources, energy, and capital to produce the $154 million worth of gold and the most ever produced in one year during that time-period in Alaska, was 1,066,000 oz of gold in 1906 valued at over $22 million.

Which brings us to the next logical conclusion.... was it ever possible for anyone to produce billions of dollars worth of gold valued at 50 cents a yard in the Grand Canyon when a small percentage of that amount ($154 million) took over three decades to produce in Alaska?  Hell, even during the mighty California Gold Rush of 1848, the peak year of 3.9 million ounces in 1852 was only worth $80 million.  However, the average annual gold production for the California gold rush was only 1.3 million ounces per year valued at $26 million.  It would take a great deal of time mining gold during the famous California Gold Rush to equal just $1 billion.

Even at $1 billion, that is only 50 million oz of gold or a measly 1,555 metric tons of gold.  Again, nowhere near the one million tons of gold suggested by Mr. Weir.

Lastly, the supposed vast gold riches in the Grand Canyon came to a dismal end.  That"s correct.  If we spent a few minutes doing a bit of research on the internet, we would find out The Rest Of The Ugly Story.

(American Placer Gold - Spencer Mining Operation 1911, Grand Canyon)

According to Arizona State history of gold mining at Lee Ferry in the Grand Canyon, the American Placer Gold company needed coal to process the gold.  Unfortunately, the only coal seam was 28 miles away.  So, the gold mining investors decided to incorporate a steamboat to transport the coal:

Investors decided a 92-foot steamboat would improve coal transport and gold production; it was ordered and assembled by late February 1912. Dubbed the Charles H. Spencer, the steamboat performed the way it was supposed to, but it burned most of the coal it transported in the process. Spencer also had trouble with his amalgamator and by 1912 his investors had seen enough and shut the project down. Spencer left, and his boat sank to the bottom of the Colorado River. The Charles H. Spencer is now on the National Register of Historic Places as a shipwreck in Arizona.

Just consider for a moment the type of intellectual thought process taken by these investors who couldn"t understand that the steamboat would consume most of the coal during its 28-mile trip.

Thus, the LIFE & DEATH of the Great Vast Gold Riches in the Grand Canyon came to an abrupt end, not because there were billions of ounces of gold that would destroy the global monetary system, but rather due to the typical mistake made by investors.  And that is... the belief that utterly incompetent management and miners could extract low-quality gold that is uneconomical to produce.

So, if we look at the New York Times article that Mr. Weir quotes as his source of billions of ounces of gold, we can logically assume that it was likely written by the company spokesman to get more POOR UNWORTHY INVESTOR SLOBS to purchase the American Placer Gold stock before it went belly-up.  It"s called the PUMP and DUMP.... a shady stock marketing technique that has been going on for hundreds of years.

If we can have an open mind and the ability to discern fact from fiction or lousy conspiracy theories, we can finally put an end to the notion that the world has a Million Tons of Hidden Gold in the world.

THE BLIND CONSPIRACY:  The Gold Market Is Heading Towards A Big Fundamental Change

Now that we have dispensed with certain conspiracies that don"t pass the smell test, there is a real one that very few are aware.  I call it the BLIND CONSPIRACY.  The interesting thing about this conspiracy is that nobody really knows about it.  However, it behaves like a conspiracy because many individuals and parties are manipulating the market which is providing a false sense of security to the average investor.

Thus, investors with a false sense of security, continue to invest in STOCKS, BONDS, and REAL ESTATE at amazing inflated values.  Today, the Dow Jones hit a new record high of 24,272 points:

If you look at this chart of the Dow Jones Index, it is starting to resemble the Bitcoin chart.  However, Bitcoin"s graph is moving up at a level  ten times more insane than the Dow Jones Index:

While the Dow Jones Index increased 4,200 points, or 21% since the beginning of 2017, the Bitcoin price has surged more than $9,000, or a staggering 1,125% increase.  Furthermore, the Bitcoin price doubled in just the past month.  This is completely insane.  Even though a lot of Bitcoin enthusiasts are shouting for $20,000 and $100,000 Bitcoin, if we are ever going to get there, there needs to be a serious correction first.  However, we may have already seen the top of Bitcoin at $11,400.

Folks, nothing goes straight up and then continues even higher.  I would be very cautious about investing in Bitcoin at this time.  Both the stock market and cryptocurrencies are extremely overbought... to say the least.  On the other hand, gold and silver have been selling off over the past several days and are even closer to their lows and cost of production.

Getting back to the Blind Conspiracy and the Big Fundamental Change in the gold market, investors are entirely in the dark about the dire energy predicament we are facing.  I continue to receive emails from individuals in various industries that tell me the "Situation is MUCH WORSE than you realize."  Also, there are good CLUES published in the media if you are IN-TUNE to this information.

According to this jewel, titled Oil Major: 70% Of Crude Can Be Left In The Ground, by Nick Cunnigham:

“A lot of fossil fuels will have to stay in the ground, coal obviously … but you will also see oil and gas being left in the ground, that is natural,” Statoil’s CEO Eldar Saetre told Reuters in an interview. “At Statoil we are not pursuing certain types of resources, we are not exploring for heavy oil or investing in oilsands.

If heavy oil and oil sands are to be left unproduced, then a lot of oil will need to stay in the ground. According to the USGS, about 70 percent of the world’s discovered oil reserves are in the form of heavy oil and bitumen. Much of that comes from Venezuela – one of the last places in the world that an oil company wants to do business in these days – and Canada.

Last year, Statoil abandoned Canada’s oil sands, selling off its assets to Athabasca Oil Corp. But Statoil is hardly alone in the exodus. ConocoPhillips unloaded a whopping $13.3 billion of oil sands assets to Cenovus Energy earlier this year. Shell sold off $4.1 billion in oil sands assets to Canadian Natural Resources. Meanwhile, ExxonMobil wrote off 3.5 billion barrels of oil sands from its book in February, admitting that they were unviable in today’s market.

ConocoPhillips’ CEO said that it would no longer invest in any oil project that needs a breakeven price of $50 or higher, according to the FT.

If the Major Oil Industry believes that upwards of 70% of the oil reserves should be left in the ground, how much do we really have left to produce??  Furthermore, it was quite surprising to see that the ConocoPhillips CEO said they would no longer invest in oil projects with a breakeven above $50.  Folks, there aren"t many oil discoveries available with a price tag less than $50 a barrel.

Again, the clues are all around.  Let me repost the completely awful financial results by the second largest natural gas producer in the United States.  Chesapeake Energy produced the second highest amount of natural gas during the first nine months of 2017 at 2.9 billion cubic feet per day compared to ExxonMobil"s 3.1 billion cubic feet per day.  So, what benefit did Chesapeake receive for producing the country"s second largest amount of natural gas?  Take a look at the Q3 2017 Cash Flow Statement:

After everything was considered, Chesapeake"s operations provided $273 million in cash (shown in the highlighted yellow).  For those who are not familiar with Cash Flow Statements, we subtract capital expenditures from cash from operations to arrive at their FREE CASH FLOW.  Unfortunately for Chesapeake, they spent a staggering $1.6 billion (highlighted in blue) on drilling and completion costs (capital) to produce their natural gas and oil.  Thus, Chesapeake"s Free Cash Flow was a negative $1.3 billion.

That would have been terrible news if it wasn"t for the sale of properties of worth $1,193 million ($1.2 billion.. two lines below the highlighted blue line).  Which means, the financial wizards at Chesapeake used asset sales to help pay for their natural gas drilling capital expenditures.  How long can Chesapeake sell properties to fund their drilling costs??

Are we starting to get a PICTURE here?  Regrettably, even highly trained energy analysts do not understand that the oil and gas industry is cannibalizing itself just to stay alive.  If investors do not understand just how bad our energy situation has become, they are BLINDLY investing in the worst assets (STOCKS, BONDS & REAL ESTATE) that derive their value from the burning of ENERGY.

This is the BLIND CONSPIRACY.  It"s taking place right in front of our eyes, and virtually no one sees it.

We are going to experience a Massive Fundamental Change in the gold market because investors will finally begin to understand what a true store of wealth is versus one that is an ENERGY IOU.  Stocks, Bonds, and Real Estate get their value from burning energy IN THE FUTURE, while a gold or silver coin bought today, received its value from burning energy IN THE PAST.  That is a big difference that investors, even precious metals investors fail to realize.

Lastly, if you want to pay more for precious metals, than I suggest you don"t check out our PRECIOUS METALS INVESTING section or our new LOWEST COST PRECIOUS METALS STORAGE page.

Check back for new articles and updates at the SRSrocco Report.

Elon Musk Pulls An ICO

By Chris at www.CapitalistExploits.at

First up, this beauty received by one of the crew here at HMS Capitalist Exploits:

Marketing an ICO...

Killer!

The Tesla ICO

Speaking of ICOs, last week something amazing, breathtaking, and revolutionary happened. We had another ICO... the very first of its kind.

An Initial Car Offering.

Pundits said it was an unveiling of the Tesla semi truck, but we now all know it was actually a thinly veiled capital raise.

Like many good things in life, this also began with foreplay.

Customers and shareholders are like women ovens - they need to be warmed up first.

So a few weeks before launching the ICO, the oven was dialled up:

Amazingly, I woke up this morning and, though having watched the unveiling, I looked around me and couldn"t notice anything different (though my dog had this strange look in his eyes).

My mind was surprisingly still in my skull and had not been sent into an alternate dimension, which was disappointing as I was quite excited by the prospects of that.

Anyway, so once the engine was warmed, we were treated to the de-robing of this.

I thought at first I"d missed it. Then I watched it again. And no, I hadn"t.

There was zero explanation of how Tesla would get all the dough to build this creature, where it would build it, and how (given the competition all have existing production plants, positive cashflows, dough in their treasuries, and access to credit markets) Tesla miraculously thinks that by the time it gets there it will have all of these things as well as the technology (that does not yet exist) to pull it off.

But then my nerves were calmed when they offered a warranty on the product. Wait, what? A warranty BEFORE they have a product? Killer!

I guess there"s a first time for everything.

But that wasn"t to be all.

No, then came the real showstopper as Elon went a step further in prostituting promoting Tesla. The fastest sports car in the world. And it may even just fly.

The kid in me did backflips. I sooo want a car that flies. Don"t you?

But then I remembered that there was a time when I really wanted the Easter bunny to be real, too.

Now, being older and wiser, I realise that rabbits screw up your lawn and chocolates make you fat, and I want nothing to do with either of them.

What I would like to know is how they found the time to muck around developing both a sports car and a giant truck when they can"t get a little Model 3 out?

Maybe that"s just me being a grouch. Heck, what do I know about cars? Mine"s 5 years old and smells of kids sweaty football socks which are buried in the back there somewhere.

Thankfully, I didn"t have to wait too long to figure out how they intend to fund some of this:

Now, when I saw this I"ll admit to having made the sort of noise a cat would make if fed through a mangle.

I realised then that Tesla was trying to pull off an ICO.

You see, the thing with 99% of ICOs is they"re kinda like the deals on Kickstarter, which means that you don"t actually get anything. It"s more like a donation... or part of a rewards points system. You know, like your air points where you get to trade them for a flight to Greece for a dirty weekend away or to upgrade your flight to first class so you can sit next to all the folks who eat lobsters in their bathrobes.

This works spectacularly well for anyone uneducated in investment markets. And that, my friends, is perfect for Tesla. Because you know what?

That"s about 90% of the population.

For the other 10%, here are some things to consider.

I"ll gladly admit to not really knowing a lot about cars. I like them very much as long as they take me where I want to go and do all the cool things that modern cars do.

But try explain to me about all the ins and outs of the bits inside and my brain does that man thing - it stops working and starts thinking about sex.

But what I do know a thing or two about is numbers and markets. And frankly, when Musk starts talking about these things he may as well be speaking Nepalese and explaining how to cook a yak stew because it"s all complete gibberish.

Tesla by the Colours

Last week when we were staring at Margot Robbie (don"t tell me you didn"t stare), and we said:

It was overconfidence that led the pointy-shoed suits on Wall Street to package subprime mortgages up, believing that a pile of isht when added to other piles of isht through the magic of diversification turns isht into non isht.

Like Margot explained in the Big Short (and bear with me as I"m extrapolating here): If we use Wall Street logic, you take the colour red and add it to more red... much more... you can get green.

So let"s run through Tesla by the colours, and then after that we"ll run through it by the numbers. Sounds fair?

• SolarCity: Red


• Gigafactory: Red


• Model 3: What Model 3?


• Model 3 in full production: Red


• Tax credits: Green... ah isht... no, make it red

Excellent!

So red + red + red + red + red = Green.

Tesla by the Numbers

Let"s take Q3 cashflow and toss in interest charges for 2017 (which is only fair — after all, someone has to pay them).

With that we realise that Tesla burned through about US$1.7bn or about US$500m a month.

Now, let"s be super conservative and say capital expenditures remain at 2017 levels, which is absurd and impossible given the new initial car offering and that semi truck, too (it"ll be far higher).

Anyway, let"s give it to them.

Well, let"s say they can find 1,000 fools buyers to drop a quarter million bucks on a pre-order for a car that they hope to receive some years in the future. Let"s say they can do that.

That"ll put US$250m into Tesla"s treasury, which will buy them less than 3 weeks. Killer!

I"m going to go out on a limb here and say that in the first quarter of 2018 Tesla"s going to lose US$1bn. Crazy, I know. How long for? It"ll go on until it doesn"t.

And here"s something to think about...

Here"s Venezuela"s 5-year sovereign CDS spread:

You may ask, why Chris are you posting this in an article about Tesla?

Well, Venezuela — like Tesla — made promises it couldn"t keep.

What I"d really like to know from you today is this:

Cast your vote here and also see what others think will happen

- Chris

“If you wouldn’t be short a multi-billion-dollar loss-making enterprise in a cyclical business, with a leveraged balance sheet, questionable accounting, every executive leaving, run by a CEO with a questionable relationship with the truth, what would you be short? It sort of ticks all the boxes.” — Jim Chanos

--------------------------------------

Liked this article? Then you"ll probably like my other missives on

this topic as well. Go here to access them (free, of course).

--------------------------------------

The Coming Economic Downturn In Canada

Authored by Deb Shaw via MarketsNow.com,

• Canadian GDP growth has outperformed this year, helping the Canadian dollar


• As GDP growth slows and the Bank of Canada turns neutral, catalysts turning negative


• Crude oil and real estate look set for a downturn, with negative implications for the currency

Given its natural resource-based economy, Canada is a boom and bust kind of place. This year, the country has enjoyed a significant boom. Thanks to a government stimulus program, rising corporate capital expenditures and consumer spending, Canada’s GDP growth has been nothing short of spectacular in 2017. According to Statistics Canada, the latest reading for year-over-year GDP growth is a healthy 3.5% (as of August 2017). While this is stronger than all major developed countries, growth is decelerating from its most recent peak in May 2017 (when GDP growth was an astounding 4.7%). A visual overview of historical GDP growth is shown below for reference:

Turning a corner: Canadian growth comes back down to earth

Source: Statistics Canada

Following the crude oil bust in the second quarter of 2014, Canadian growth rates cratered. While the country avoided a technical recession, the economic outlook was poor until early 2016. After crude oil returned to a bull market in the first quarter of 2016, the fortunes of the country turned. Given limited growth in 2015, the economy had no problem delivering 2%+ year-over-year growth rates in 2016. As a substantial stimulus program ramped up government spending in 2017, growth rates have continued to accelerate this year.

Storm clouds on the horizon: crude oil and real estate

While Canada has delivered exceptional growth in the last two years, the future outlook is much more challenging. Beyond the issue of base effects (mathematically, year-over-year GDP growth will be much tougher next year), key sectors including the oil & gas industry and Canadian real estate look ripe for a downturn.

Crude bull market intact today, but at risk in 2018

As WTI crude strengthens beyond $55, crude oil is clearly in a bull market today. Looking at figures from the International Energy Agency, global demand growth continues to run ahead of supply growth. Thus the ongoing bull market is supported by fundamentals. Thanks to the impact of hurricanes and infrastructure bottlenecks in 2017, US shale hasn’t entirely fulfilled its role as the global ‘swing producer’ this year. The dynamics of supply growth versus demand growth are shown below:

Who invited American shale? US supply ruins the crude oil party

Source: International Energy Agency, forward OPEC supply estimates via US EIA

Unfortunately, the status quo looks set to change as US supply returns with a vengeance. According to estimates from the IEA, supply growth will outstrip demand growth in the first quarter of 2018. Digging deeper into supply estimates, US shale is once again to blame. Our view is that this changing dynamic will lead to a new bear market in crude oil. Looking back at recent history, crude prices formed a long-term top in the second quarter of 2014 once supply growth overtook demand. Similarly, crude prices bottomed in the first quarter of 2016 once supply growth fell below demand in early 2016. Given Canada"s dependence on crude oil exports, a bear market for the commodity is likely to result in a weaker currency.

As China enters its latest real estate downturn, Canada not far behind

While Canadian real estate has enjoyed a great year, the future outlook is much tougher. Similar to its peers in Australia and New Zealand, Canadian real estate prices tend to lag real estate prices in China. This is both because Canada’s economy is deeply intertwined with China, and because the country is a big destination for overseas investment from China. While overseas investors make up a relatively small portion of buyers (around 5% according to government estimates), they serve an important role by acting as the marginal buyer for prime property. A comparison of new house prices in China versus Canada is shown below for reference:

Canadian real estate boom set to run out of steam

Source: Statistics Canada, China National Bureau of Statistics

As Chinese new house prices accelerated significantly in early 2015, Canadian real estate prices followed in 2016. As the Chinese market is now decelerating, negative growth appears to be on the horizon. In March 2015, Chinese house price growth bottomed at -6.1%. While the Canadian bull market continues for now (September new house prices registered at 3.8%), a downturn is likely over the next 6-12 months. As real estate makes up 13% of Canadian GDP, a significant decline in the fortunes of the industry are likely to spill over to the broader economy.

Implications for the Canadian dollar

At the beginning of the year, the Canadian dollar enjoyed a wide number of bullish catalysts including accelerating GDP growth, rising rate hike expectations, a relatively strong crude oil market and speculator sentiment that was at a bearish extreme. These catalysts, and the Bank of Canada’s actions in particular, helped the currency strengthen until late September.

Today, almost every factor that drives the Canadian dollar is working against it. Future GDP growth rates are set to keep decelerating. Looking at the Bank of Canada, its outlook for future rate hikes is now “cautious”. This is a big change from its hawkish tilt earlier this year. While speculator sentiment is no longer at bullish extremes, waning interest in the Canadian dollar is weighing on the currency. The ongoing NAFTA negotiations are another source of potential political risk. Finally, an impending downturn for both crude oil and Canadian real estate further worsen the picture. Thus, our longer term outlook on the Canadian dollar is bearish.

 

WORLD’S LARGEST OIL COMPANIES: Deep Trouble As Profits Vaporize While Debts Skyrocket

By the SRSrocco Report,

The world"s largest oil companies are in serious trouble as their balance sheets deteriorate from higher costs, falling profits and skyrocketing debt.  The glory days of the highly profitable global oil companies have come to an end.  All that remains now is a mere shadow of the once mighty oil industry that will be forced to continue cannibalizing itself to produce the last bit of valuable oil.

I realize my extremely unfavorable opinion of the world"s oil industry runs counter to many mainstream energy analysts, however, their belief that business, as usual, will continue for decades, is entirely unfounded.  Why?  Because, they do not understand the ramifications of the Falling EROI - Energy Returned On Invested, and its impact on the global economy.

For example, Chevron was able to make considerable profits in 1997 when the oil price was $19 a barrel.  However, the company suffered a loss in 2016 when the price was more than double at $44 last year.  And, it"s even worse than that if we compare the company"s profit to total revenues.  Chevron enjoyed a $3.2 billion net income profit on revenues of $42 billion in 1997 versus a $497 million loss on total sales of $114 billion in 2016.  Even though Chevron"s revenues nearly tripled in twenty years, its profit was decimated by the falling EROI.

Unfortunately, energy analysts, who are clueless to the amount of destruction taking place in the U.S. and global oil industry by the falling EROI, continue to mislead a public that is totally unprepared for what is coming.  To provide a more realistic view of the disintegrating energy industry, I will provide data from seven of the largest oil companies in the world.

The World"s Major Oil Companies Debt Explode Since The 2008 Financial Crisis

To save the world from falling into total collapse during the 2008 financial crisis, the Fed and Central Banks embarked on the most massive money printing scheme in history.  One side-effect of the massive money printing (and the purchasing of assets) by the central banks, was that it pushed the price of oil to a record $100+ a barrel for more than three years.  While the large oil companies reported handsome profits due to the high oil price, many of them spent a great deal of capital to produce this oil.

For instance, the seven top global oil companies that I focused on made a combined $213 billion in cash from operations in 2013. However, they also forked out $230 billion in capital expenditures.  Thus, the net free cash flow from these major oil companies was a negative $17 billion... and that doesn"t include the $44 billion they paid in dividends to their shareholders in 2013.  Even though the price of oil was $109 in 2013; these seven oil companies added $45 billion to their long-term debt:

As we can see, the total amount of long-term debt in the group (Petrobras, Shell, BP, Total, Chevron, Exxon & Statoil) increased from $227 billion in 2012 to $272 billion in 2013.  Isn"t that ironic that the debt ($45 billion) rose nearly the same amount as the group"s dividend payouts ($44 billion)?  Of course, we can"t forget about the negative $17 billion in free cash flow in 2013, but here we see evidence that the top seven global oil companies were borrowing money even in 2013, at $109 a barrel oil, to pay their dividends.

Since the 2008 global economic and financial crisis, the top seven oil companies have seen their total combined debt explode four times, from $96 billion to $379 billion currently.  You would think with these energy companies enjoying a $100+ oil price for more than three years; they would be lowering their debt, not increasing it.  Regrettably, the cost for companies to replace reserves, produce oil and share profits with shareholders was more than the $110 oil price.

There lies the rub....

One of the disadvantages of skyrocketing debt is the rising amount of interest the company has to pay to service that debt.  If we look at the chart above, Brazil"s Petrobras is the clear winner in the group by adding the most debt.  Petrobras"s debt surged from $21 billion in 2008 to $109 billion last year.  As Petrobras added debt, it also had to pay out more to service that debt.  In just eight years, the annual interest amount Petrobras paid to service its debt increased from $793 million in 2008 to $6 billion last year.  Sadly, Petrobras"s rising interest payment has caused another nasty side-effect which cut dividend payouts to its shareholders to ZERO for the past two years.

Petrobras Annual Dividend Payments:

2008 = $4.7 billion

2009 = $7.7 billion

2010 = $5.4 billion

2011 = $6.4 billion

2012 = $3.3 billion

2013 = $2.6 billion

2014 = $3.9 billion

2015 = ZERO

2016 = ZERO

You see, this is a perfect example of how the Falling EROI guts an oil company from the inside out.  The sad irony of the situation at Petrobras is this:

If you are a shareholder, you"re screwed, and if you invested funds (in company bonds, etc.) to receive a higher interest payment, you"re also screwed because you will never get back your initial investment.  So, investors are screwed either way.  This is what happens during the final stage of collapsing oil industry.

Another negative consequence of the Falling EROI on these major oil companies" financial statements is the decline in profits as the cost to produce oil rises more than the economic price the market can afford.

Major Oil Companies" Profits Vaporize... Even At Higher Oil Prices

To be able to understand just how bad the financial situation has become at the world"s largest oil companies, we need to go back in time and compare the industry"s profitability versus the oil price.  To find a year when the oil price was about the same as it was in 2016, we have to return to 2004, when the average oil price was $38.26 versus $43.67 last year.  Yes, the oil price was lower in 2004 than in 2016, but I can assure you, these oil companies weren"t complaining.

In 2004, the combined net income of these seven oil companies was almost $100 billion..... $99.2 billion to be exact.  Every oil company in the group made a nice profit in 2004 on a $38 oil price.  However, last year, the net profits in the group plunged to only $10.5 billion, even at a higher $43 oil price:

Even with a $5 increase in the price of oil last year compared to 2004, these oil companies combined net income profit fell nearly 90%.  How about them apples.  Of the seven companies listed in the chart above, only four made profits last year, while three lost money.  Exxon and Total enjoyed the highest profits in the group, while Petrobras and Statoil suffered the largest losses:

Furthermore, the financial situation is in much worse shape because "net income" accounting does not factor in the companies" capital expenditures or dividend payouts.  Regardless, the world"s top oil companies" profitability has vaporized even at a higher oil price.

Now, another metric that provides us with more disturbing evidence of the Falling EROI in the oil industry is the collapse of  the "Return On Capital Employed."  Basically, the Return On Capital Employed is just dividing the company"s earnings (before taxes and interest) by its total assets minus current liabilities.  In 2004, the seven companies listed above posted between 20-40% Return On Capital Employed.  However, this fell precipitously over the next decade and are now registering in the low single digits:

In 2004, we can see that BP had the lowest Return On Capital Employed of 19.68% in the group, while Statoil had the highest at 46.20%.  If we throw out the highest and lowest figures, the average for the group was 29%.  Now, compare that to the average of 2.4% for the group in 2016, and that does not including BP and Chevron"s negative returns (shown in Dark Blue & Orange).

NOTE:  I failed to include the Statoil graph line (Magenta)  when I made the chart, but I added the figures afterward.  For Statoil to experience a Return On Capital Employed decline from 46.2% in 2004 to less than 1% in 2016, suggests something is seriously wrong.

We must remember, the high Return On Capital Employed by the group in 2004, was based on a $38 price of oil, while the low single-digit returns by the oil companies in 2016 were derived from a higher price of $43.  Unfortunately, the world"s largest oil companies are no longer able to enjoy high returns on a low oil price.  This is bad news because the market can"t afford a high oil price unless the Fed and Central Banks come back in with an even larger amount of QE (Quantitative Easing) money printing.

I have one more chart that shows just how bad the Falling EROI is destroying the world"s top oil companies.  In 2004, these seven oil companies enjoyed a combined net Free Cash Flow minus dividends of a positive $34 billion versus a negative $39.1 billion in 2016:

Let me explain these figures.  After these oil companies paid their capital expenditures and dividends to shareholders in 2004, they had a net $34 billion left over.  However, last year these companies were in the HOLE for $39.1 billion after paying capital expenditures and dividends.  Thus, many of them had to borrow money just to pay dividends.

To understand how big of a change has taken place at the oil companies since 2004, here are the figures below:

Top 7 Major Oil Companies Free Cash Flow Figures

2004 Cash From Operations = ............$139.6 billion

2004 Capital Expenditures = .................$67.7 billion

2004 Free Cash Flow = ...........................$71.9 billion

2004 Shareholder Dividends = ..............$37.9 billion

2004 Free Cash Flow - Dividends = $34 billion

2016 Cash From Operations = .................$118.5 billion

2016 Capital Expenditures = ....................$117.5 billion

2016 Free Cash Flow = ................................$1.0 billion

2016 Shareholder Dividends = ...................$40.1 billion

2016 Free Cash Flow - Dividends = -$39.1 billion

Here we can see that the top seven global oil companies made more in cash from operations in 2004 ($139.6 billion) compared to 2016 ($118.5 billion).   That extra $21 billion in operating cash in 2004 versus 2016 was realized even at a lower oil price.  However, what has really hurt the group"s Free Cash Flow, is the much higher capital expenditures of $117.5 billion in 2016 compared to the $67.7 billion in 2004.  You will notice that the net combined dividends didn"t increase that much in the two periods... only by $3 billion.

So, the lower cash from operations and the higher capital expenditures have taken a BIG HIT on the balance sheets of these oil companies.  This is precisely why the long-term debt is skyrocketing, especially over the past three years as the oil price fell below $100 in 2014.  To continue making their shareholders happy, many of these companies are borrowing money to pay dividends.  Unfortunately, going further into debt to pay shareholders is not a prudent long-term business model.

The world"s major oil companies will continue to struggle with the oil price in the $50 range.  While some analysts forecast that higher oil prices are on the horizon, I disagree.  Yes, it"s true that oil prices may spike higher for a while, but the trend will be lower as the U.S. and global economies start to contract.  As oil prices fall to $40 and below, oil companies will begin to cut capital expenditures even further.  Thus, the cycle of lower prices and the continued gutting of the global oil industry will move into high gear.

There is one option that might provide these oil companies with a buffer... and that is a new even larger Fed and Central Bank money printing scheme which would result in severe inflation and possibly hyperinflation.  But, that won"t be a long-term solution, instead just another lousy band-aid in a series of band-aids that have only postponed the inevitable.

The coming bankruptcy of the once mighty global oil industry will be the death-knell of the world economy.  Without oil, the global economy grinds to a halt.  Of course, this will not occur overnight.  It will take time.  However, the evidence shows that a considerable wound has already taken place in an industry that has provided the world with much-needed oil for more than a century.

Lastly, without trying to be a broken record, the peak and decline of global oil production will destroy the value of most STOCKS, BONDS and REAL ESTATE.  If you have placed most of your bests in one of these assets, you have my sympathies.

Check back for new articles and updates at the SRSrocco Report.

Hurricane Harvey Surge-Nado: Auto SAAR Soars To 30-Year High On Hurricane Replacements

Last month, when we reported auto sales data, we noted that this month would be all about replacement demand from Hurricane Harvey and thus largely irrelavant.  Fast forward 30 days and that appears to be exactly what has happened as annualized auto sales for the month of September suddenly surged to a 30-year high of 18.5mm units, up 15.2% sequentially from a 16.0mm run-rate last month.

That is, of course, unless you believe CNBC"s Phil LeBeau who took to the airwaves earlier today to argue that a substantial portion of the sudden surge in auto sales was not necessarily attributable to the fact that a couple hundred thousand cars were destroyed in last month"s hurricanes but rather just a reflection of an abrupt rebound in consumer demand after months of weak data...

...once you"re done with the laughing fit we can continue to review this month"s auto data...

Not surprisingly, almost every OEM, with the exception of Fiat Chrysler, managed to post a significant YoY increase in sales courtesy of Hurricane Harvey.  The only surprising takeaway was just how wrong wall street was in their estimates for the quarter.

Meanwhile, per the charts below from Stone McCarthy, the transition from cars to trucks continued during September with car sales dropping 2.8% YoY versus and 8.1% increase in truck sales. 

All of which likely contributed to Ford"s announcement after the close today suggesting, among other things, a shift in future capital allocation to increased production of SUVs and trucks away from cars...which should be complete right about the same time that oil prices spike back to $100 per barrel rendering those SUVs/Trucks completely unaffordable again.  Here are the highlights from Ford"s press release:

Accelerating the introduction of connected, smart vehicles and services customers want and value. By 2019, 100 percent of Ford’s new U.S. vehicles will be built with connectivity. The company has similarly aggressive plans for China and other markets, as 90 percent of Ford’s new global vehicles will feature connectivity by 2020.

Rapidly improving fitness to lower costs, release capital and finance growth. Ford is attacking costs, reducing automotive cost growth by 50 percent through 2022. As part of this, the company is targeting $10 billion in incremental material cost reductions. The team also is reducing engineering costs by $4 billion from planned levels over the next five years by increasing use of common parts across its full line of vehicles, reducing order complexity and building fewer prototypes.

Allocating capital where Ford can win the future. This starts with the company reallocating $7 billion of capital from cars to SUVs and trucks, including the Ranger and EcoSport in North America and the all-new Bronco globally. Ford also has plans to build the next-generation Focus for North America in China, saving capital investment and ongoing costs. Further, Ford is reducing internal combustion engine capital expenditures by one-third and redeploying that capital into electrification – on top of the previously announced $4.5 billion investment.

Of course, with this non-recurring, one-time surge in demand helping to offset the industry"s pesky inventory crisis (per table below GM was able to reduce inventory MoM by over 70,000 units), the question now becomes whether OEMs will maintain some discipline and restrict production to reflect a normalized SAAR environment or if they"ll just flood dealer lots all over again...we have a guess.

Of course, while today"s results were largely just noise, shareholders still loved the headlines...

How Will The 'GREAT DEFLATION' Impact Gold & The Dollar?

By the SRSrocco Report,

The coming GREAT DEFLATION will impact the value of Gold and the Dollar much differently than what most analysts are forecasting.  Unfortunately, most analysts do not understand the true underlying value of gold or the U.S. Dollar, because they base their forecasts on information that is inaccurate, flawed or imprecise.

This is due to two faulty theories:

monetary science
supply-demand market forces

While some aspects of monetary science and supply and demand forces do impact the prices of goods and services (on a short-term basis), the most important factor, ENERGY, is totally overlooked.  You will never hear Peter Schiff include energy when he talks about the Federal Reserve, Commercial Banks, money printing or debt.  Schiff, like most analysts, is stuck on studying superficial monetary data that does not get to the ROOT OF THE PROBLEM.

Furthermore, the majority of folks who believe in the Austrian School of economics, also fail to incorporate ENERGY into their analysis.  For some strange reason, most analysts believe the world is run by the ENERGY TOOTH FAIRY (term by Louis Arnoux).  Without cheap and abundant energy, monetary science and supply-demand forces are worthless.

That being said, as the debate on whether the world will experience, inflation, hyperinflation or deflation will continue to go on and on, I guarantee we are going to experience the MOTHER of all DEFLATIONS.  Again, this will be due to the disintegrating energy sector and its inability to provide sufficent profitable net energy to the market.

The falling net energy and declining EROI - Energy Returned On Investment, are totally gutting the entire market.  This can be seen quite clearly as the U.S. added $4 of debt for each $1 of GDP growth in 2016.  According to the Zerohedge article, It Took $4 In New Debt To Create $1 In GDP:

As a reminder, according to the latest BEA revision, nominal 2016 GDP was $18.86 trillion, an increase of $632 billion from 2015; the question is how much credit had to be created to generate this growth. Well, according to the Z.1, total credit rose to a new record high $66.1 trillion. This was an increase of $2.511 trillion in the past year. It means that in 2016, it "cost" $4 in new debt to generate just $1 in new economic growth!

As we can see, adding $4 of debt to create $1 of artificially inflated GDP is not a long-term sustainable business model.  I get a laugh hearing "Conspiracy Theorists" explain how the ELITE have been planning this take-over all along and have the markets totally under control.  While conspiracies do indeed take place, the ELITE have been SHOOTING FROM THE HIP and WINGING IT just to keep the entire market from imploding.

For those who believe that the elite want to crush the market to buy assets for pennies on the Dollar, I am here to tell you...  it CHAIN"T gonna happen.  When the Ancient Roman Metropolis collapsed from a population of one million people down to 12,000, I can assure you, the majority of the ELITE were wiped out.... KAPUT.

Real Estate values and revenue streams in Ancient Rome evaporated into thin air.  There was no "RECOVERY" or "PLAN B."  Death had come to the once great Roman Empire... for good.

Regardless, the coming GREAT DEFLATION will destroy the value of most assets shown in the chart below:

Of the $369 trillion in global asset values (2015), gold and silver accounted for $3.1 trillion or 0.8%.  That"s correct, not even 1% of total global assets.  Savills Research, who put together the data shown in the chart above, recently published figures on Global Real Estate Investment:

Now, this chart does not represent total Real Estate values, but rather shows how much money is being invested in the Global Real Estate Market (minus China).  Interestingly, global real estate investment has never regained its previous peak set back in 2008.  Furthermore, the data shows that global real estate investment has rolled over and declined since the first quarter of 2016.  This is not a good sign.

This means, deflationary forces may already be taking place in the global real estate market.

How The "GREAT DEFLATION" Will Impact Gold & The Dollar

To understand how the coming GREAT DEFLATION will impact gold and the U.S. Dollar, we must throw out the window all preconceived notions about economics and money.  Any individual who continues to believe in the standard orthodox economic theory, you might as well also accept that the EARTH IS FLAT and infite GROWTH on a finite planet is possible.

Unfortunately, the U.S. educational system and alternative media continue to misinform the public about the role of MONEY.  So, the blind continue to lead the blind as Rome burns... so to speak.

The GREAT DEFLATION is coming due to the disintegration of the U.S. and global oil industry.  As I mentioned in a precious article, the top three U.S. oil companies slashed their Q1 2017 capital expenditures (CAPEX) by 40%, versus the same period last year.  Furthermore, the world only found 2.4 billion barrels of new oil in 2016 while it consumed 25 billion barrels:

I hate to be a broken record, but precious metals investors better WAKE UP.  How many new barrels of oil do you think the global oil industry will find in 2017 as they continue to slash their CAPEX spending even greater than last year??

Regardless, the Fed and Central Banks are propping up the market with more money printing and asset purchases than ever.  This will not solve our financial and economic problems, however it is a last ditch effort to postpone the inevitable.

To truly understand what will happen with the value of Gold and the U.S. Dollar, we have to grasp the data shown in the chart below:

To produce an ounce of gold in 2016 (top two gold miners - Barrick & Newmont), it took $1,113.  Thus, the top two gold miner"s total production cost was 89% of the gold market price ($1,251).  This is why gold stores wealth.  Stored wealth has always been "STORED ECONOMIC ENERGY."  Gold has been the King Monetary Metal because of its rarity in the earth"s crust and its ability not to corrode or tarnish like many other metals.

On the other hand, the U.S. Treasury Department of Engraving and Printing produced a new $100 bill for a mere 13.4 cents.  Thus, the U.S. Treasury"s $100 bill cost of production was 0.13% of its face value, versus 89% for an ounce of gold.

The production cost figures for the U.S. Federal Reserve Notes came from the U.S. Treasury Department of Engraving and Printing, shown in the table below:

It cost the U.S. Treasury $134.14 per thousand of $100 bill"s printed.  While the U.S. Treasury spent more money to produce the lower denomination bills versus their total face value, 71% of the $213 billion of Federal Reserves Notes printed in 2016 were $100 bills.

If we are able to understand the information presented above and are able to do some "CRITICAL THINKING", then it is easy to understand that the U.S. Dollar will suffer signficantlyu during the GREAT DEFLATION..... not gold.

We also must remember, a "NOTE", as in the "Federal Reserve Note", means an "OBLIGATION" or "DEBT."  Money is not supposed to be an obligation or debt.  Money is supposed to be a store of value and medium of exchange.

Thus, when the GREAT DEFLATION arrives, the value of the U.S. Dollar has a much farther way to fall versus gold.  Why?  Because the value of most things, always reverts back to their COST OF PRODUCTION.  The innate value of a $100 bill is a mere 13.4 cents.... so, its value still has room to fall 99%+.

Again... the innate value of most things are based upon their cost of production, not supply and demand.  What"s the use of being in the business of producing goods at a loss????

Here is one last example.  In 2016, total global gold mine supply was worth $103.6 billion.  This figure was based on the of 3,222 metric tons of gold mine supply (GFMS 2017 World Gold Survey), multiplied by the average spot price of $1,251.  The estimated cost to produce this gold was $92.2 billion:

Here we can see that the gold market price, was based on its cost of production.  On the other hand, the U.S. Treasury was able to print $151.7 billion in $100 bills for the total cost of $235 million ($0.235 billion).  Which means, the U.S. Treasury"s production cost was only 0.13% for the $151.7 billion of new currency (fake money) it issued last year.

People need to realize the U.S. Dollar"s value is backed by U.S. debt, which is being propped up by burning energy.  Thus, ENERGY = MONEY.  The huge increase in U.S. and Global Debt means the quality of energy that runs everything is rapidly declining.  Which means, the more debt that is added, the lower interest rates have to go.  It is a one way street.

Analysts who think interest rates need to normalize to a much higher level, have no idea about ENERGY.... ZIP, NADDA, ZILCH.  They look at the markets as if the ENERGY TOOTH FAIRIES run everything.  There are only a small handful of analysts who understand the energy dynamics.  The rest are the blind leading the blind.

The coming GREAT DEFLATION will destroy the value of most STOCKS, BONDS, REAL ESTATE and PAPER CURRENCIES.  The reason Real Estate prices will plummet below their cost of production is due to their 20-30 year financing and their inability to function during the disintegrating energy environment.  The same will be for automobiles and many other assets and items.

Investors need to understand how ENERGY and the FALLING EROI- Energy Returned On Investment, will impact the value of most assets going forward.  Most assets will collapse in value, while a few will hold or gain in value.  Gold and silver will be two of the few that will hold or gain in value during the GREAT DEFLATION.

Lastly, if you haven"t checked out our new PRECIOUS METALS INVESTING section or our new LOWEST COST PRECIOUS METALS STORAGE page, I highly recommend you do.

Check back for new articles and updates at the SRSrocco Report.