Ann: Quarterly Report December 2015, page-7

Spec,

I think you are right but the fall won't be related to the oil price falling. Think of it this way.

If you were the Saudis and you'd decided to run a campaign to flood the market with oil to drive out shale you'd obviously be doing it to drive the oil price down. But why drive it down more than you need to?

The question is who is in control of the futures markets in the US?

If I were the Saudis, the minute I'd decided to flood the market with oil I would have already set up my short positions on CME where I can play on margins of about 20 times my investment. With the deep pockets the Saudis have and with those margins they would only be competing with a few US banksters in setting the direction in those markets and the minute those banksters got wind of a Saudi short they'd be falling over themselves to help front run it with the aid of the mainstream financial media. So a Saudi short on CME would not only help accelerate the price down fall (and hence the destruction of the shale industry) it would also make them money on the way down. In a previous post I wrote I'd calculated the lost revenue to OPEC, between $100 and $40 dollar oil, to be about $780 billion. Why not try and hedge some of that loss by running the short on oil as well.

The big question is did the cigar smoking wingback chair whiskey sipping banksters that have the keys to the derivative casino at CME let the Saudis play their shorting game? Well if the US markets are open bastions of free enterprise and commerce then the answer to that question would have to be yes, but if the US markets are only open for business to the banksters and the hoards of speculators on the other sides of the trades that are run around like sheep in a paddock then the answer is no. We will probably only find out in the washout and not before.

If the Saudis are in charge of the current oil short it makes no sense to drive the price lower. Just keep it at a level that breaks the shale market for good. No need to miss out on more revenue than you absolutely have to to break shales back.

If the banksters are in charge of the oil short (which I don't think they are) then it makes little sense to drive the short any deeper. The money they might make doing this pales into insignificance compared to the money they will lose if they drive the marks into a serious meltdown. I've posted before on the "coincidence" of the oil rallies just as the broader markets have been tanking badly. On these occasions I'd expect that the headmistress (Yellen) would have got one of her minions to give the banksters a little rap on the knuckles with a message that they are going to far.

So in my opinion the oil price has bottomed short of one little unintended event occurring.

You've guessed it. When shale busts this year the markets bust along with it. I rate this as an even money chance of occurring unless a secret deal is brokered behind closed doors (including the US) that sees shale allowed to walk away from the hang man's noose. What the US has got to offer to get the Saudis to cut now and save shale and their markets I don't know.

If the markets bust we are looking at a recession in the US and that can't be good for oil can it? Well in my opinion it will make little difference at that stage because shale will be dead and I mean really dead. When a Ponzi scheme breaks there is no one that's going to line up for more trust me (how much for a tulip? You must be kidding). Once shale is dead, the winners (those that have excerpted the greatest military influence in the middle east) will simply turn the taps off in a unilateral deal.

But won't the world go into recession if markets bust and won't the demand for oil fall? Well there is a lot of talk in the US about the Red Ponzi which some claim China is but its different. About two years ago I read a book by a Noble prize winning American economist called The Next Convergence (the future of economic growth in a multispeed world). Well one of the big themes I learnt from that book is about the middle income transition. Put very simply developing economies either make it to the middle income level and keep growing or they stall and don't (middle income is defined as per capita income of between $5,000 and $10,000). Successful (countries that made it in the past) are Japan, Korea, Taiwan, Hong Kong and Singapore. China is trying to enter the middle income along with Brazil and Russia is already there. India is about 10 years behind. What China's strength is is that it is not there yet. Its human capital can be deployed on mass with out fear of falling wages where as in the US sending wages any lower would become a political time bomb. China is just more adaptable so in the end the strength of the US dollar matters little to them. The trade relationship between the US and China has always been a one way street. Dollars one way, goods the other. But in the end what matters to a real economy is not the number of US dollars that circulate in it (you can't support a bridge or lay cables using US dollars) its the goods and services that it can produce, sell and internally consume and the efficiency of the production of those goods and services is what creates real GDP growth. Falling wages in the US hurt it more than falling wages in China which can just mobilise more human capital at lower wages in response. The demand for oil will continue and the old masters will be back in control. The long trade in US dollars is exhausted IMO.

There might be some absolute bargains if the markets bust in a big way but the chance of that happening are even IMO so I need to stick to a middle of the road investment thesis based on a long bear market in the US (but always leaving some powder dry in case of a bust this year).

I'm just starting to wonder which horse would best to be on to ride the oil price back up. I've started accumulating a few STO to diversify but am wondering if its not worth weighing my holdings more towards SXY than DLS/BPT. I like the strength of SXY for the short term with the cash it holds, but the market appeal of DLS/BPT in a rising oil price tide might out weigh the SXY story. Thinking that in the short term it might be beneficial to rotate from DLS/BPT to SXY? Any thoughts.

Eshmun