No Such Thing as a Free Phone

01/21/2013 10:15 am EST

Focus: MARKETS

Peter Way

Founder and CIO, Peter Way Associates

It's great to stay on top of the changes that are taking place in the markets, but the only way to profit is to understand what the changes mean to your investments, says Peter Way of Block Traders' Oil & Gold Monitor.

I have grown up in an era (and environment) of advancing consumerism. Its most cherished shibboleth (and deception) is the word "free."

Often, this word's true meaning is only that no cash will change hands at the moment some long-term obligation is undertaken. Sadly, the typical American consumer regularly falls victim to the amazingly well-developed skills of the marketing community.

The best illustration of that is where entertainment and "free" are combined, as in the current consumer compulsion for everyone to have a device in their pocket or purse that allows them to share with all their "friends" (or anyone else who cares to know) the trivia of their lives. And when not doing that, to be able to play solitaire or inane games, or view whatever is being presented on TV, the Internet, or their favorite movie source.

It also, almost accidentally, allows verbal (or text) communications with others, and obviates the need of a wristwatch. The device may be offered "free" as long as the buyer signs up for a multi-year "service" contract. (Let's not call that a long-term lease.)

That connection comes through the likely impact, in one direction, of the consumer's spending habits on the prices of precious metals (in US dollar terms) and, in the other direction, the prices (in world currency terms) of the US dollar, due to the enormous changes now occurring in the energy extraction industry, as started right here in the USA.

Start with the US consumer. Give 'em a buck and they will spend (not save) it. Give 'em some hope that more bucks will come to them in the future, and those too will get spent. Not in the future, but now. They want no recollection of any recent period when the bucks weren't there and weren't coming.

That fact of life is made clear by consumer saving rates that spiked to 8% to 9% for only a few months at the time of the financial crisis caused by widespread fraud in the mortgage-backed securities industry, and the freeze-up of home equity loans, as well as most other forms of personal credit. Since then, the savings rate has returned to the 2% area, even lower than it was before 2007.

It could be argued that savings are down because incomes are down, and that savings will rise when incomes do. Those that make such arguments are usually politicians (and economists) who "know" how to cure the problem: pump money (created by magic) into the public arena by "Quantitative Easing."

The "cure" to the savings rate may come after the public can cover its "essential" spending. But the political "reality program" reveals that the "essential" consumer expenditures are infinitely expandable. Yet the QE money is not being spent because it simply went to the banks, both directly and via corporate savings. So the response to QE is LOL, in the jargon of today.

Now the question is, how is the political establishment here going to provide access to the Federal Money trough to the consumer? Our first clue comes in the Fed's program to expand its "open market" activities to the purchase of mortgages.

That decision, already made and now activated, could be followed by the guarantee to banks that home-equity loans made on such mortgaged properties would be "insured" against loss (to the banks) by Uncle Sugar by some trivial "insurance" payments into a politically traditional mythical "reserve fund" whose contents could in turn be used for any other "important" Federal "need."

Shazam! Now the American consumer can have endless-limit "home equity" credit cards to meet its endless-desire "needs." With no fear of foreclosure or insufficient credit capacity.

The downstream hope for that accomplishment is that a revitalized American consumer may once again demand the imported goods that earlier importantly supported the "emergence" of indigent countries around the world.

Skillful obfuscation by experienced political smoke-blowers, coupled with the concealed promise of worldwide economic resurgence, may keep most foreign nations from screaming "international fraud!" and demanding realistic revaluation of the US dollar in terms of their own currencies.

I used to be apprehensive of the political skills of other governments in recognizing and their demanding realistic international exchange rates. That was before it became apparent that the US balance of trade was in the process of changing dramatically. A change brought about by extensive and dramatic gains in the technology of energy fuels extraction.

Horizontal drilling and hydraulic fracturing (fracking) has now brought about the identification of vast production of both crude oil and natural gas are on a significantly increasing path, and crude oil imports are on the decline. Projections of total import eliminations by the end of this decade may be met earlier.

Coupled with the import source changes are significant cost reduction potentials. Crude now costing $90-plus a barrel is being produced from the new technologies at under $40. That may impact other geographically desirable sources, like Canadian "tar-sands" crude having $50 a barrel costs.

The effect of near-halving of energy costs here in the US has powerful competitive impacts in many industries. In effect, these developments are "money in the bank" when it comes to viewing the US dollar as the world's reserve currency.

No matter what the politicians may do, it looks now like any value crisis over the US dollar is at least a decade or more away. This notion should not be viewed as a political challenge, either here or abroad.

The investment challenge is how to keep up with the rapid changes now going on, company by company, in resources acquisition and development. Alongside that is the evolution of further achievements in the technology of hydraulic fracturing and its effective application.

The efficiency of an open, free-market competitive environment is dramatically revealed in this situation. Those alert and able to move intelligently and decisively are building value rapidly. Those not able to balance appetites with financial resources may risk enormous or even catastrophic losses.

Recognizing our own realistic limitations, we choose to continue to stay on top of industry developments a step behind oil-patch cutting-edge information developments, but well ahead of general public awareness and valuations, by staying up-to-date on the price-range limits seen for stocks and ETFs by the market makers serving big-money fund clients.

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