Correlation Economics Backup

What happens during peak production? Everyone thought the U.S. oil production was going to decline from 1970 onwards. This was the forecast in 2009.    But suddenly in 2009, U.S. oil production surged.   Which resulted in global oil production rising. So no peak oil here... But let's put that aside for now and look at what happened in 1979. Oil rose to the peak in 1979, due to the fact that oil production was declining from 1970 onwards. So during peak production in 1970, oil production in the U.S. started to decline. When the oil production declines, the price of oil skyrocketed till the peak of 1979. The price of oil stopped rising, because peak oil was just a myth at that time, North Sea oil production came into existence and fueled the 1980's boom.     But also that North Sea oil production boom peaked out in 1995, which caused the oil price to rise from 1995 to a peak in 2008.  Then the oil price declined to today's price due to the shale gas boom. Bu...

The silver price has been clobbered in 2015, pushing the metal towards $15/ounce. Investors in silver mining companies need to assess what this means for their earnings. With declining silver prices, the trend today is that the miners are shifting from low grade mining to high grade mining, which is called "high grading". For example, Endeavour Silver (EXK) just announced that they will expand their El Cubo mining operation. By switching to the higher grade ore areas, they will increase capacity at a lower cash cost. This way the company can push down the all-in sustaining cash cost (AISC) from $20/ounce last year to $16/ounce this year. This implementation of cost efficiency was very much needed as silver dropped under $20/ounce. Of course, these actions will shorten mine life in the long run as low grade areas are less viable for mining operations in the future. Today, it's not anymore about how much reserves and resources you have, but at what cost you can mine it fro...

Think of this for a minute. In 2008, gold was at a bottom of $600/ounce and U.S. debt was $9 trillion. Now debt has doubled to $18 trillion, so you would expect a bottom now at double the gold price, which is $1200/ounce. Gold will be bottoming out soon on the condition that U.S. debt will not fall. But I'm certain U.S. debt won't go down as deficits are now starting to crawl upwards. Look at the latest deficit numbers. Since 2014, deficits went uphill, so you can bet that U.S. debt will continue to increase. After the Fed meeting this week, interest rate expectations were lowered in the Fed "dot plot", which led to a surge in precious metals. Gold demand from China is very robust, this week we saw gold buying again at the high end in Shanghai (50 tonnes). Premiums are robust too, with silver at the high end historically. APMEX gold premiums are higher. Oil is starting to bottom out at immense contango. No shale oil company is profitable at this stage, which is also ...

Real estate in Europe hasn't been doing so well last year, with the exception of the U.K. and Germany (see chart below from The Economist ). That will change in 2015. I believe that the tide has turned when the ECB decided to do " whatever it takes " to defend the euro and proposed their expanded quantitative easing strategy in January 2015 . Since 2012 and especially since that announcement in 2015, government bond yields in Europe have been declining at a supernatural rate, especially in Spain (see chart below from Yardeni ). We are now at a point where some maturities have negative bond yields. What is most interesting to note is that bond and bank deposit rates are very low at this moment, while the commercial real estate yields are very high. This translates into a huge spread compared to the historic average and that is why real estate in Europe is a very good place to invest in right now. Read on here .

It's interesting to compare the gold miners versus gold itself in euro terms. Gold miners in euro terms have done nothing since a year already.  But gold has surged in euro terms. The same is true in Canadian dollar and Australian dollar. So if gold is going up in Canada and Australia's currencies, why aren't gold miners going up in these countries? On the asset side the gold is going up, on the liability side, debt is going down because their currencies are dropping. I believe this is an arbitrage opportunity. A possible reason could be that the gold miners are finally starting to go bankrupt after these years. For example Allied Nevada Gold (which was part of the GDX) recently filed for bankruptcy. 

The main reason of today's decline in stock markets is the declining wholesale trade sales and increasing inventory. The inventory to sales ratio is hitting a new high for the year and translates to this. Surging inventories are a leading indicator for declining GDP. And declining GDP equals plunging stock markets. Remember the correlation here ? Inventories can be considered a part of a group of leading indicators of business cycles. Whenever inventories surge, a possible reason could be a decrease in consumer demand. The result is that producers will cut output and sales. This will translate in a lower GDP growth. It is worthy to plot the business inventory to sales ratio against GDP growth. Following chart shows that the blue line is leading the red line. As inventories build up and sales go down (blue chart goes down), GDP growth will follow the trend (red chart goes down).

When stock markets are high, the government receives a lot of tax revenues through capital gains taxes.   There is a very high correlation here. That's also why the government can't let stocks go down in value, because that would mean their tax revenues would decline. The result is that deficits would go up (red chart down) as tax revenues decline (blue chart down). So it would be a nightmare to have a strenghthening dollar (higher debt load), with declining stock markets (lower tax revenue), because that would spiral into a government default. Also interesting to see is that corporate taxes have declined in 2019, while the total tax revenue has made all time highs.