InvestMacro Forex News

By MoneyMorning.com.au

My wife and I recently had our second baby.

Little bubs is thriving.

But six weeks in, the sleep deprivation is really catching up with us!

It’s a big step going from one child to two – definitely more than twice the work! (How my parents raised five of us is beyond me.)

This lack of sleep means double-checking my mental checklist twice to avoid stuff ups. I use checklists religiously for everything. Particularly for keeping my finger on the pulse of the market, analysing stocks, and watching the myriad of data that is released each day. It’s a big market and following it all needs some organisation.

But I use checklists for everything else as well. As a sleep-deprived parent they are more essential than ever at home.

Just yesterday in the supermarket car park, in the chaos of getting our travelling circus into the car, this half-asleep dad failed to notice our two year old had the car keys.

As he hit the remote lock button – thus locking himself in the car – I could feel the blood drain from my face.

And with my face pressed to the window, I pleaded with him to press it again so it would unlock the car.

Negotiating with a two year old is tricky at the best of times. I tried miming pressing the button. He thought this was a great game, started laughing and waved back. As he waved, the keys left his hand, and flew into the foot well.

Standing in the car park with bags of shopping, all our kids’ stuff – and thankfully our six-week-old baby – my wife and I ran through our options. The spares were over a two-hour drive away. So … what to do?

Option 1 – Panic

Option 2 – Smash the window

Option 3 -Take a deep breath, use my head, and phone RACV.

After doing option 1, thinking about option 2, logic stepped in and we went for option 3.

Lucky for us, RACV has a policy of getting their nearest mechanic to drop his job and come straight to you. So just 15 minutes later, a very helpful RACV mechanic arrived. The car was quickly opened, our boy was fine, and the travelling circus was on its way home again.

On the ride home, my wife asked how come I can always be up-to-the-minute with the markets, and keep picking the next commodity moves; yet could somehow manage to let my own son lock himself in the car?!

It’s all down to the checklists! I’m constantly working through lists to make sure I haven’t missed anything important in the market.

Even when I’m exhausted, I’m normally trawling through online newspapers, newsletters, data releases and bulletins.

I’ve got research coming at me from financial contacts all over the world, and it’s one of the things I love most about the job.

And the fact is those late-night feeds are also a great time for sifting through it all, and watching the European and US markets in real time!

An important part of last week’s checklist was China’s Purchasing Managers Index (PMI).

The PMI gives us a good idea of which direction China’s economic growth is heading. It’s been all eyes on China recently as the markets worry about it slowing down.

And right about the time I was trying in vain to get my son to unlock the car, China announced its best PMI in a year. After creeping up for the last few months from contraction territory (sub-50), slightly into expansion territory (above-50), it has now just bounced from 51 to 53.

I was expecting it to rise, as China’s electricity demand has increased, and this is a good sign that industry is picking up again.

This is good news for resource investors, as this jump in PMI is a fair sign that China is not slowing down. Not for now at least. This should see commodity prices have a good bounce, taking resource stock prices with it. The whole market is up 0.6% this morning, and Diggers and Drillers stocks are up 1.2% as I write.

The other set of data that caught my eye yesterday – after we all arrived back at home safely – was a chart showing Saudi oil production for 40 years.

The Saudis are the biggest oil exporters in the world.

They are forever saying that they can step into the market and provide an extra few million barrels a day to make up a shortfall from Iran or anywhere else. But take a look at this chart…

Saudi oil production has never been above 10 million barrels a day in the last 40 years. And now the Saudis are promising 12.5 million barrels a day (red line). They’re dreaming.

Click here to enlarge

Oil prices are soaring right now, and Saudi Arabia is trying to talk the prices DOWN because they don’t want the world to look for alternatives because oil has risen too much. The Saudi Oil Mininster, Ali-Naimi, was actually telling the Financial Times that oil prices were too high.

The Saudis can talk all they want, but the facts are the facts. The supply is not keeping up with demand, and the world will continue to face higher oil prices.

I’ve been tipping oil stocks recently for Diggers and Drillers readers. The first is up 60% in two months, and the second has just got going and is up 25% in six weeks. This is a very hot area of the market right now and we’re just starting to scratch the service with these recommendations.

I have a checklist of things to watch in the market, and oil is right near the top of the list. This list is evolving all the time, and I like the look of other commodities for later in the year. Particularly copper, especially since China’s data last weekend.

The checklists I use for the rest of my life obviously need to be updated too.

And keeping the car keys away from our two year old will go right to the top of the list!

Dr. Alex Cowie
Editor, Diggers & Drillers

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By MoneyMorning.com.au

Reports of a coup have startled many long-time China watchers.

Of course, we’ve seen next to nothing in the Western media about it despite the fact that what is going on behind the scenes now may be the biggest political play we’ve seen in decades.

Call it a Chinese “coup” or a “power play” if you like. Either way, recent events in China suggest the Chinese Communist Party is badly fractured at the very top.

Former Ambassador Jon Huntsman notes that the split may be the most significant since the tumultuous Tiananmen Square era – a sentiment I share based on more than 20 years of involvement with Chinese markets.

Why talk about Chinese politics here? For three good reasons…

The power play we’ve just witnessed – albeit from the fringes – is likely to result in a stronger “order” in China, along with increased spending and a big global expansion from China in the months ahead.

Let me explain.

Behind the Scenes in the Chinese Coup

Western media widely reported that Premier Wen Jiabao, China’s No.2, unceremoniously and very publicly sacked rising star Bo Xilai on March 14.

But nobody went any further, nor did they bother to understand that what’s happening behind the scenes is the real news.

Not only is the way in which this was handled uncharacteristically public, but the sacking itself is unusual. Bo is the son of a revolutionary hero and wildly popular for his anti-corruption initiatives in Chongqing, one of China’s largest megalopolises.

Bo was known to be angling for a seat on China’s standing nine-person politburo working committee, which would make him one of the most powerful men in China. That’s not a problem in and of itself, as many people ultimately want to be on that committee and spend their entire lives working toward that goal.

However, Bo is the only politician to move his agenda independently of Beijing’s ruling elite in nearly 40 years. That makes him – or made him — dangerous because he single-handedly threatened the political status quo.

To call his rise to prominence divisive is an understatement.

Premier Wen Jiabao voted against Bo’s promotion to vice premier. President Hu Jintao is rumoured to dislike his money-grubbing ways.

Yet, none other than Jiang Zemin, the former leader of the Communist Party and the real No.2 in the CCP’s Standing Committee, has helped further Bo Xilai’s career as has Zhou Yongkang, who is also a Standing Committee member and hardliner.

That’s when reports of gunfire, military vehicles and plainclothes police swarming the central government leadership compound of Zhongnanhai in Beijing surfaced.

There were also reports of iron fences on Changan Street nearby and a heavy police presence. Both were verified by business contacts of mine who visited the area in an attempt to get to the bottom of the rumours that were spreading around Beijing like wildfire via chat boards, text messaging and the Internet.

Within hours, all three were shut down or squashed by China’s Internet police.

The Chinese media claimed the extra security involved the protection of a high-level North Korean official who was meeting with Chinese diplomats.

Bo Xilai’s political mentor, political guardian and standing politburo member, Zhou Yongkang, is apparently missing or under house arrest. He was seen briefly meeting with Indonesia’s minister of foreign affairs, Marty Natalegawa, on March 23 but that’s likely scripted by Hu Jintao and Wen Jiabao.

Zhou is China’s spy chief and head of internal security. He would definitely have the means to engineer an overthrow.

Meanwhile, 85-year-old Jiang Zemin is reported to be in a vegetative state. Presumably, he did not participate in recent events. Or, as is probably the case, he did and this story is planted to allow him to save face.

That would normally be the work of the state’s English language mouthpiece, the Global Times. However, that was not to be.

In fact, the Global Times published an unusually blunt editorial asking Beijing’s central leadership for direction on how to deal with rumours of the attempted coup. It also suggests more than a little confusion over who is running China…a fact I find interesting considering that the coup didn’t “officially” happen.

The Aftermath of the Chinese Coup

So now what?

Leadership purges in China happen all the time, but usually at much lower levels in the party. They are usually non-events. But this is much bigger, and there will definitely be follow-on manoeuvring.

Above all else in China, stability is what the government wants. The Chinese military in particular doesn’t want to rock the boat, because any change in the political structure potentially undermines its stranglehold on business and economic development.

You’d think the Chinese military would be more concerned with bombs and bullets, but in actuality, the People’s Liberation Army is highly entrepreneurial and has its hands in everything from airlines to pharmaceuticals. Their operations may encompass as many as 15,000 companies generating revenues of more than $10 billion according to Tai Ming Cheung of Kim Eng Securities.

My read on what’s happening is that this is very different from students rioting in the street. This is the top guys manoeuvring for power in a high-stakes game of chess.

Bo Xilai’s summary dismissal is nothing more than the hammering down of a “nail” – Bo Xilai – who stood up, albeit in a highly and uncharacteristically public fashion.

Using history as our guide, we can expect a few things:

1. The top officials, including Hu Jintao and Wen Jiabao, will make public appearances in the weeks ahead implying that the situation is normal and it’s business as usual. All senior Communist Party officials around China will take similar actions followed by highly scripted loyalty pledges from military and local officials in that order.

2. Behind the scenes, the Communist Party’s Central Commission for Discipline Inspection will be on a witch hunt designed to ferret out anybody who could be a threat and remove them.

3. China’s businesses will go on a renewed growth spurt at Beijing’s explicit direction; this is intended to create an internal distraction for the people and defray international criticism while paving the way for China’s once-in-a-decade power transition later this year.

Keith Fitz-Gerald
Chief Investment Strategist, Money Morning (USA)

Publisher’s Note: This article originally appeared in Money Morning USA.

Secret “Coup” Could Send Chinese Growth Higher

By MoneyMorning.com.au

As I have discussed over the last two years, liquefied natural gas (LNG) is going to be a complete game-changer.

And along the way, a small group of LNG stocks will become the main focus for investors.

Remember, the LNG process cools natural gas to a liquid form, allowing it to be shipped over long distances. Upon arrival, the liquefied gas is returned its original state before being injected into pipeline for delivery to foreign consumers.

Already, the construction of LNG receiving terminals in Asia and Europe is accelerating.

Here’s why.

The European and Asian markets have the biggest need for imports. These markets have a need to meet rising demand and restrain the prices commanded by long-term pipeline-delivered gas.

Luckily, LNG can do both.

Traditionally, natural gas has only been able to develop regional “spot” markets. These are locations where the availability of volume provides an opportunity for traders to execute a price for a quick sale (usually within 72 hours).

This is because the availability of product depends upon the development of import pipelines, which are multi-year, capital-intensive projects.

LNG, on the other hand, can be delivered to a terminal, so it can provide an immediate increase in available local supply.

To the extent that the LNG trade can be sustained, new spot markets are immediately formed around the hubs that develop at the intersection of terminal and delivery pipelines.

And now Qatar – one of the world’s largest producers of conventional gas (that is, from freestanding gas fields) – has banked on LNG being the wave of the future.

Qatar has become the first country to commit all of its production to the LNG trade.

And that is a huge vote of confidence for this market.

Considering the number of new tankers involved, this single decision jolted the global shipbuilding industry into one of the most significant increases in business ever recorded.

The Qatari decision was just the first step…

That’s especially good news for oil and energy investors. LNG stocks are set to take off.

Dr. Kent Moors
Global Energy Strategist, Money Morning (USA)

Publisher’s Note: This is an edited extract of an article that first appeared in Money Morning (USA).

From the Archives…

Why Spain’s Economy is the Next Big Problem for the Eurozone
2012-03-30 – John Stepek

Water: A Long Term Trend to Follow
2012-03-29 – Patrick Vail

How to Avoid the Welfare State Hunger Games
2012-03-28 – Kris Sayce

What Happens When You Put Someone With No Market Experience in the Top Job?
2012-03-27 – Dr. Alex Cowie

The Star Stocks of the Resource Sector
2012-03-26 – Dr. Alex Cowie

LNG Stocks Are Set to Take Off

By Central Bank News
Here's today's Central Bank News link list, click through if you missed the previous central bank news link list.  Remember, if you want to submit links for inclusion in the daily link list, just email them through to us or post them in the comments section below.

By Central Bank News
Following is a list of all the headlines on Central Bank News during the month of March. The most notable developments during the month included a 75 basis point interest rate cut by Brazil, India cutting its reserve ratio by the same amount, several rate cuts in emerging and lesser developed economies, enhancements to the Bank of Japan’s loan program, and the introduction of a new monetary policy rate in Zambia.

Bank of Uganda cutCentral Bank Rate 100bps to 21.00%

Monetary PolicyWeek in Review – 3 March 2012

February 2012Headlines at Central Bank News

BulgarianNational Bank Reduces Base Rate 3bps to 0.15%

Central Bank ofDominican Republic Holds Rate at 6.75%

Reserve Bank ofAustralia Keeps Rate on Hold at 4.25%

Central Bank ofKenya Holds Lending Rate at 18.00%

National Bank ofPoland Keeps Rate on Hold at 4.50%

RBNZ Keeps OCR OnHold At 2.50%

Brazil CentralBank Drops Rate 75bps to 9.75%

ECB MaintainsPolicy Settings, Holds Rate at 1.00%

Bank of KoreaKeeps Repo Rate on Hold at 3.25%

Reserve Bank ofIndia Cuts Reserve Ratio 75bps to 4.75%

National Bank ofSerbia Keeps Rate on Hold at 9.50%

Bank of EnglandHolds Rate at 0.50%, APP at 325B

Central ReserveBank of Peru Keeps Rate at 4.25%

Bank of CanadaKeeps Overnight Interest Rate at 1.00%

Bank NegaraMalaysia Holds Overnight Policy Rate 3.00%

Bank IndonesiaPauses BI Rate at 5.75%

Monetary PolicyWeek in Review – 10 March 2012

The History of thePersonal Check [Infographic]

InternationalJournal of Central Banking – March Issue [BIS]

State Bank ofVietnam Cut Refinancing Rate 100bps to 14%

Central Bank NewsLink List – 13 Mar 2012

Bank of MozambiqueCuts Rate 125bps to 13.75%

Bank of JapanAnnounces 2 trillion yen Enhancement to Loan Program

Central Bank ofRussia Holds Refi Rate at 8.00%

US FOMC HoldsMonetary Policy Settings Unchanged

HKMA Follows Fed,Holds Rate at 0.50%

Central Bank ofSri Lanka Holds Repo Rate at 7.50%

Central Bank NewsLink List – 14 March 2012

Norway CentralBank Cuts Policy Rate 25bps to 1.50%

Reserve Bank ofIndia Holds Repo Rate at 8.50%

Central Bank NewsLink List -15 March 2012

Swiss NationalBank Keeps Monetary, Currency Policy Unchanged

National Bank ofRwanda Holds Interest Rate at 7.00%

Banco Central deChile Holds Rate at 5.00%

Banco de MexicoHolds Interest Rate Target at 4.50%

Monetary PolicyWeek in Review – 17 March 2012

Central BankNews Link List – 18 March 2012

Central Bank NewsWebsite Goes up For Sale

Central Bank NewsLink List – 19 March 2012

Bank of MauritiusCuts Benchmark Rate 50bps to 4.90%

Central BankNews Link List – 20 March 2012

Central Bank ofNigeria Keeps Policy Rate on Hold at 12%

Central Bank ofEgypt Cuts RRR 200bps to 12.00%

Bank of ThailandHolds Interest Rate at 3.00%

Central Bank NewsLink List – 21 March 2012

Central Bank ofIceland Hikes Rate 25bps to 5.00%

Taiwan CentralBank Holds Rate at 1.875%

National Bank ofUkraine Cuts Discount Rate 25bps to 7.5%

Central Bank ofColombia Holds Rate at 5.25%

Monetary PolicyWeek in Review – 24 March 2012

Central Bank NewsLink List – 24 March 2012

Central Bank NewsLink List – 26 March 2012

Bank of IsraelKeeps Interest Rate on Hold at 2.50%

Central Bank ofTurkey Maintains Policy, Repo Rate at 5.75%

Magyar NemzetiBank Keeps Base Rate at 7.00%

Bank al-Maghrib ofMorocco Cut Rate 25bps to 3.00%

National Bank ofBelarus Drops Rate 200bps to 36.00%

National Bank ofKazakhstan Drops Rate 50bps to 6.50%

Central Bank NewsLink List – 29 March 2012

Banca Nationala aRomaniei Cuts Rate 25bps to 5.25%

Bank of AlbaniaCuts Interest Rate 25bps to 4.25%

Georgian CentralBank Holds Refinancing Rate at 6.50%

Ceska NarodniBanka Holds Repo Rate at 0.75%

South AfricanReserve Bank Holds Policy Rate at 5.50%

Banco Central delUruguay Holds Interest Rate at 8.75%

Bank of ZambiaIntroduces New Policy Rate at 9.00%

Monetary PolicyWeek in Review – 31 March 2012

Central BankNews Link List – 31 March 2012

Source: www.CentralBankNews.info

By Alvi Erine

Wondering which is the most effective forex trading software? With thousands of Forex brokers presenting the online services, the most daunting task arises when the individual has to choose the right broker. This is no less than creating a strategy to be successful. With the market being flooded with the trading software, it becomes extremely difficult to analyze and appreciate the features of software. As more and more individuals are getting interested and serious in forex currency trading, it has become important for the brokers to be well equipped with the knowledge of Forex market. However with the advent of technology and internet, the Forex brokers are being replaced with the automated trading software which operates without any human intervention. They are designed in such manner that they work as per a pre-defined algorithm or plan.

Forex trading software can be segmented as per the need of the traders like the personalized trading software or the Commercial trading software. The programmed automation of this software helps the trader in taking discretionary and emotional components out of the trading system. These systems also help the trader save ample amount of time engaged in forex currency trading. Besides this, these systems also present assistance to the novice traders who desire learning the trading mechanism. One key to locate the quality software is to know something about the designers who have designed it. The software is based on the revolutionary systems which present high potential opportunities along with the high potential trading targets.

Additional features:
• Efficient
• Works without any human intervention
• Easy to use

As many novice traders enter the Forex market each year, the most critical decision which they are required to take is the selection of the software, which they should use while trading. Every broker has his own trading platform and choosing the right one makes the difference in the bottom line. The most important factor which the trader has to keep in mind while purchasing trading software is that they should capable of giving the best performance while accepting and executing the trade orders.

It should be noticed and evaluated whether the forex trading software can accept and execute the complex and sophisticated orders. Like if the software receives order which instructs them to purchase the currency pair at a specific price, it subsequently places an order of stop at a particular price when the purchase is made. There is an assortment of software which can easily handle such kind of orders, and the traders should never settle for less. The trader might ask if the trading software offers viewing option while engaging in forex currency trading. This option is most important since it permits the traders to set up a screen thereby making trading most effective. The software turns out be more productive when it helps the trader just put the currency pairs while the entire trading is carried on screen. The broker should permit the traders to download demo software for a trial run.

About the Author

Alvi Erine is an experienced foreign exchange broker and works for YouTradeFX that offers the best forex trading software, strategies, and signals for online forex currency trading. Create a demo or live account here to learn all the tricks and execute a profitable deal. Visit today!

By Alvi Erine

Forex trading can be your road to make big bucks but beginning of this road may not be smooth and it may take you a while to get used to driving your trading accounts and learning to maneuver the bends and pitfalls of the forex market. Forex education process can be an equally expensive if you blindly jump into the market without preparation.

Forex brokers offer you the options of high leverages which can lead to make bad sized risky trades which may ruin your account terribly. The good news is that one can learn forex in a non-detrimental way by using a tool popularly known as Demo Trading Account.

A forex demo account is a feature offered by most brokers. It is a demo account which comes with a fictional account balance. It behaves the same way a real account behaves in terms of market movements, trades and leverages. You can practice and learn about trading using these accounts without the risk of losing out on real money as the money is just virtually there in your account. Let’s see how practicing on a demo account, whether you are starting out or you are an experienced forex player, is always good idea.

Free and easily available

Demo accounts are provided by brokers free of cost. All they need is your name and e mail address .They offer you these trial versions for different durations, a good broker will offer you a demo account for unlimited time. It is always optional for you to register a real account with the same broker so you can try other as many brokers before you decide on one.

Test a trading system or a software tool

Developing a trading system is one of the most important things for forex success. Forex demo accounts offer you to test your trading ideas, strategies and software tools (indicators or robots) without risking your money.

Helps you understand the trading platform

The forex broker provides you with a trading platform but understanding it and learning to use it comfortably can take time. A demo account will help you test all functions and explore all options of the without the risk of losing anything and in case you are not happy with it, you can always change to a broker with a better platform.
Helps you learn risk management

Risk management is the key to good trading.

Demo accounts effectively teach you to manage your risks in the market. They help you make your mind about trade sizes and risk sizes which you want to use for your system with no real money on the line.

Demo accounts can prove effective training grounds, giving you the forex education, the trade practice that you need to become good at forex without learning things the hard way.

About the Author

Alvi Erine is an experienced foreign exchange broker and works for YouTradeFX that offers the best forex education, platforms and tools for online currency trading. Create a forex demo or live account here to learn all the tricks and execute a profitable deal. Visit today!

By MoneyMorning.com.au

Political risk is being blamed for driving up oil prices. The looming threat of Iran, the constant risk of further money-printing by central banks, and concerns over unrest in Saudi Arabia are three that we’ve covered.

However, it’s worth pointing out one political risk that – in the longer run – could end up making crude oil cheaper. We’re talking about Venezuela.

Hugo Chavez is sicker than previously thought. This could force him to stand down – creating a power vacuum. And even if he continues in office, he could lose the election in October.

Chances are, any change in government could result in a major boost for oil production in Venezuela. It might even help to curb the power of both Iran and Saudi Arabia. Here’s why.

A Tale of Two Economies

The experience of Brazil shows how developing countries can take advantage of a commodity boom. In the last decade, Brazil has paid down its debts, becoming a net creditor. It has also invested in roads and ports.

This has led to a virtuous circle of increased economic growth, rising living standards and increased foreign investment. Adjusted for prices, Brazil is now the ninth largest economy in the world. Towards the end of last year, credit rating agency Standard & Poor’s upgraded its debt.

Venezuela has done exactly the opposite. Since Chavez came to power in 1999, he has wasted oil revenue buying votes and supporting countries such as Syria and Cuba. His decision to take 300 private companies into public ownership – many without compensation – has scared investors away.

The oil industry has been hit hard by Chavez’s policies. Not only did he reverse plans to let the private sector have a greater role, he raised production taxes and fired a large number of oil workers for political reasons – starving the state oil company of talent.

The ‘Chavez effect’ on oil production is easy to demonstrate: in 1998, when the price of crude oil hit a low of under $11 a barrel, Venezuela produced 3,167,000 barrels of crude oil a day. Twelve years later, despite record prices, output was only 2,090,000 barrels a day – nearly a third lower.

Could Chavez Step Down?

Despite these economic failures, Chavez was re-elected in 2000 and 2006. He runs what some call a ‘soft dictatorship’. Although the law allows free speech and free elections, these rights do not exist in practice.

Those who speak out against the regime may lose their jobs or have their firms taken over by the state. Critical papers and TV stations have been banned. Voters also face intimidation while the opposition has been heavily divided. This has made it hard to effectively challenge Chavez.

However, these things may be about to change. The opposition has finally united behind a single candidate, Henrique Capriles. Despite high levels of official pressure, huge numbers of people turned out to vote in the opposition primary.

More importantly, Chavez may not make it to the election. Last year doctors found that he had cancer. Ray Walser of the Heritage Institute tips henchmen Diosdado Cabello, Rangel Silva and Adan Chavez – Hugo’s brother – as possible replacements. But Andrew Cawthone of Reuters believes that “none of the figures around him has his charisma, political and rhetorical skills.” Overall, says Walser, “if Chavez dies, I think the chances are good for a reformist. Even if he does not I think we could see the Bolivarian movement self-destruct.”

Of course, even if Chavez dies or loses the election there is a chance that his cronies could still cling to power. In 2002, a popular uprising forced him out of office, only to see pro-Chavez forces remove his successor from power. Since then Chavez has put his supporters in key military positions. He has also devolved power to political militias, and worked with Russia, China and even Iran to arm himself to the teeth. A civil war could stop all output – increasing the price of crude.

It’s All About the Long Run

Even if Chavez goes in October, there will be little short-term impact on oil prices. When he leaves office, the state firm PDVSA is also likely to be sued over the seizure of assets in 2008 and 2009, delaying any investment. Foreign firms are likely to hold back until the political situation has calmed down.

However, the ability of a free Venezuela to lower oil prices in the long run is huge. The US Energy Information Agency (EIA) thinks that Venezuela has the second largest levels of proven reserves in the world. Oil cartel Opec even claims that it could have more crude oil than Saudi Arabia.

A committed private sector player could even find the huge amount of sea oil that is not currently viable. This would bring the total amount up to 513 billion barrels.

Clearly, this isn’t a story that will have an instant impact on investors. But in the long run, Venezuela could be a ‘game-changer’ for oil prices. We’ll be keeping a close eye on it and watching for potential opportunities.

Matthew Partridge

Contributing Editor, MoneyWeek (UK)

Publisher’s Note: This is an edited version of an article that first appeared in MoneyWeek (UK).

From the Archives…

A Better Inflation Bet Than Gold?

2012-03-23 – Kris Sayce

3D Printing: How “Desktop Factories” Will Create the Next $1 Trillion Industry

2012-03-22 – Michael Robinson

How to Invest in the Fastest-Growing Energy Business of the 21st Century

2012-03-21 – Aaron Tyrrell

Why You Should Build Your Wealth Using the Biggest BRICS Possible

2012-03-20 – David Thomas

Oil Getting Ready For Its Next Rally

2012-03-19 – Dr. Alex Cowie

For editorial enquiries and feedback, email [email protected]

How a ‘Venezuelan Spring’ Could Push Down Oil Prices

By MoneyMorning.com.au

It’s not often that I feel sympathy for a politician.

But you have to feel for Spain’s prime minister, Mariano Rajoy. Three months into his government, and he’s facing a general strike from the unions on the one hand, and a potential buyers’ strike from investors on the other.

The unions are striking because they’re fed up with economic reform that might reduce their power. Investors are threatening to stop buying Spanish government debt because they want even more reform.

What’s a prime minister to do? And more importantly, what does his dilemma mean for you?

Spain – The Weakest Link in the Eurozone

Spain’s economy – more so than Italy’s – has always been the major fault-line in the eurozone.

Sure, Greece causes a lot of noise and commotion. There was always the chance that Greece would throw a hissy fit and pull out of the euro unilaterally. Better-behaved small countries like Portugal and Ireland barely warrant a mention in the papers these days.

Even so, people always knew that in terms of size, Greece by itself didn’t matter. It was the knock-on impact that everyone worried about. The big fear was always that the market would say to itself, “If Greece can go bust, maybe it will be someone who matters next time.”

So the point of all the bail-out packages wasn’t so much to save the smaller countries. It was to prevent fears about the small countries from spreading to the “too big to fail” ones.

For a short while, it seemed as if the European Central Bank’s LTRO (Long-Term Refinancing Operation) had done the job on that score. Now it’s starting to look as though that was over-optimistic.

Investors are fretting about Spain again. The government’s cost of borrowing over ten years has risen by around 0.5 percentage points since the start of this month.

The trouble is, Spain missed its 2011 budget deficit target (in other words, it ended up overspending by even more than expected). As a result, it set itself a softer target for 2012.

Markets don’t like to see this sort of target slippage. For now, they don’t care so much when it’s the US or the UK. Those countries have their own currencies and central banks who are prepared to print as much money as it takes to pay off their creditors.

Europe isn’t prepared to do that (although it might be getting closer to doing so). And as private investors in Greek debt have discovered to their cost, there’s no guarantee that a eurozone country with problems will make good on its debts. So naturally, investors are warier of European government debt than perhaps they once were.

Spain’s Big Economic Problems
– Debt and Unemployment

The Spanish economy’s big problem is private sector debt, which might end up on the government’s balance sheet. Spain had a massive property bubble. The fall-out from that bubble continues. Prices haven’t been allowed to fall as far as they really need to. And that means no one can be sure just how much bad debt is still sitting on the banks’ books.

When banks don’t know just how bad a state their balance sheets are in, they stop lending. That makes it even harder to dig an economy out of trouble.

Spain’s economy also has the usual European problem of overly restrictive labour laws that discourage hiring. This is something the government is trying to tackle. The general strike today is partly about an overhaul of labour rules. A new bill passed in February makes it easier to cut wages, reduces the power of the unions, and could cut the cost of firing staff.

Given that unemployment is standing at 23%, and an incredible 50% among young people, you have to wonder who’s left to go on strike. As one Spanish political communications professor tells Bloomberg, the unions “have a lot at stake as Spanish society is very much questioning their role… [They] don’t represent the unemployed.”

This is one of the rarely-appreciated benefits of having a ‘hard currency’ like the euro. When it’s harder to take the easy way out (allowing your currency to weaken) then sometimes you are forced to take genuinely tough measures to change the way your economy works.

Of course, the trouble is that it takes a strong government to cope with the resulting social upheaval. And if your economy is in such a deep hole that people don’t get to see the benefits of reforms, only the pain, then it’s even harder to push reform through.

So What Happens Next for Spain?

Spain’s economy can’t be allowed to go bust. And it won’t be. We’re going to see the usual back and forth about bail-out funds and arguing between the Germans and the rest of Europe. But the most likely outcome still seems to be some form of European quantitative easing. The ECB has already taken a pretty big step in that direction with the LTRO.

But what does all this mean? The short answer is that the future for Europe holds continued loose monetary policy, and a banking system in many countries that’s largely reluctant to lend.

John Stepek

Editor, MoneyWeek (UK)

Publisher’s Note: This is an edited version of an article that first appeared in MoneyWeek (UK).

From the Archives…

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Why You Should Build Your Wealth Using the Biggest BRICS Possible

2012-03-20 – David Thomas

Oil Getting Ready For Its Next Rally

2012-03-19 – Dr. Alex Cowie

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Why Spain’s Economy is the Next Big Problem for the Eurozone

By The Sizemore Letter

I know in advance that I’ll get hate mail for writing this article, but I’m going to do it anyway.   It’s a subject important enough to justify the inevitable abuse.  You bet the wrong way on inflation, and it may cost you your nest egg.

Inflation is one of those topics best not discussed at the dinner table or in polite company.  Like politics and religion, it tends to get a heated response.

In fact, inflation tends to have quite a bit in common with politics and religion.  It’s remarkably hard to prove one’s views on any of the three empirically.  Truth is accepted as an article of faith.  For example, it is accepted as dogma that loose monetary policy causes inflation.  The great prophet Milton Friedman said so himself: “Inflation is always and everywhere a monetary phenomenon.”

Not shockingly, Mr. Friedman’s disciples have been on edge for the past three years, waiting for inflation to come roaring back.  True enough, there has been inflation in energy and food prices—the two consumer segments most global in nature and most subject to increased demands from emerging markets (and in the case of energy, the segment most susceptible to geopolitical risks).  But overall consumer prices have been flat since the onset of the 2008 meltdown, and most retailers find they have little pricing power.  If they want to move the merchandise, they have to keep their prices low.

Don’t expect this to change any time soon.  The Financial Times reported this week that the world’s major banks would be shrinking their balance sheets by a trillion dollars over the next two years.  Yes, “trillion,” with a “t.”

It’s not the amount of money created that causes inflation; it’s the amount of money that actually enters the financial system.  And right now, the banks of Wall Street and London’s City are not particularly interested in getting it there.  In fact, their attempts to shrink their balance sheets have had precisely the opposite effect, actually removing liquidity from the system.

Housing continues to be a drag on money creation as well.  Even though the housing market is showing signs of life, American homeowners are far more interested these days in paying down their mortgages than extracting equity with new debt.  (As an aside, I continue to recommend rental housing as an investment for those readers willing to be patient and get their hands a little dirty; see “Here’s the Catalyst for a Housing Rebound”).

Someday, we will have real inflation again.  But it might take a lot longer than you think.  Japan has struggled with on again / off again deflation for much of the past two decades. (see “Japan’s Endgame” for a longer explanation of Japan’s woes).

Japan had a unique and deadly cocktail of high debt, aging demographics, and bad policy that led to its 20-year stagnation, and the United States is certainly not Japan.  Still, my point stands: even in a modern economy, high inflation is not the inevitable outcome of loose monetary policy.   And given the continued deleveraging of the private sector, inflation in the United States and Europe is likely to be mild at worst.

So, with that said, how should investors position their portfolios?

In recent articles, I’ve had a heavy focus on high-quality, dividend-paying stocks, and I would reiterate that recommendation today.

Consider a company like Wal-Mart (NYSE: $WMT).  At current prices, Wal-Mart sports a dividend yield of 2.6%, materially higher than the 2.2% being paid by 10-Year Treasury notes.

But Wal-Mart, unlike the Treasury note, has a long history of increasing its payout every year.  In March of 2002, Wal-Mart paid a quarterly dividend of $0.075 per share.  In March 2012, ten years later, that same share pays a dividend of $0.398 per share—an increase by a factor of 4.  Not a bad run.

A company like Wal-Mart has the power to wring savings out of its supply chain during periods of mild or flat inflation.  My recommendation is to build a portfolio of rock-solid dividend-paying machines like Wal-Mart.  If I am right about inflation being mild, a conservative dividend-focused portfolio should massively outperform a riskier growth-focused portfolio.  But even if I am wrong and inflation ends up being higher than expected, the growth rate of the dividends should guarantee that you outpace inflation and that your standard of living continues to rise.

Disclosures:  Sizemore Capital does not currently have a position in any security discussed in this article.