Money is pouring from government debt, and not wasting any time bidding up the price of a Joule.
I’m not sure anybody noticed, but the backwardation on 30 year treasury futures, has become more grave over the last month or so, going into expiry of the december contract. Read the tea leaves as you like. Future demand for government paper, is declining.
We saw a surge in the implied volatility of gold, after the FOMC announcements on Wednesday.
(click to enlarge)
FWIW, I’m thinking now is a good time to dump my life savings into 2010 and 2011, bull call spreads on GLD, GVX, amongst other things…talk me out of it.
UPDATE. I wrote this post around 4:30 on sunday. I realized, again, nobody online plots the historic implied volatility of oil and gold. So, I added it to http://www.curvingfutures.com, and by 9:30 PM, I was finished parsing the CBOE data and plotting it. Fun, fun. Check out the Implied volatility page here.
Obama needs cash, like everybody who doesn’t have an oil field in their pocket. One way to raise cash is taxing things. Any tax, will make some people mad, and introduce losses into the market. But, as I’ve tweeted,
Rock | Earth | Hard Spot
So, that’s where Obama’s charm could prevail…even if taxing things is taboo given the state of the economy.
If Obama started by educating the country on where oil dollars actually go (ie the 23 major exporters, which aren’t exactly democracies, who don’t exactly like the US, and who’s people are suppressed – the higher oil prices go) then the American public, might hear him out. And maybe be supportive of a tax on oil/gas.
He could call it, a “Freedom tax”, although don’t get confused – it’s an oil/gas tax, just spun the right way. If Obama said something like:
“In order for America to keep our freedom, we have to buy sustainability. Oil, is an addiction, just like cigarettes and alcohol. So, just like cigarettes and alcohol,we have to kill our dependence on it. Anybody that wants to continue abusing cigarettes, alcohol, or oil - is going to pay a tax to do so.”
He could then argue, that
“with this tax, we could invest in sustainable city projects, to guarantee that our freedom lasts, for generations”.
Invest in sustainable solutions and name the projects with a spin on Freedom – so people see the dollars spent. Americans like freedom, so why wouldn’t they like a light rail in their cities named something like “the Freedom Express”? “The Freedom Flow Water Utilities”? “The Freedom Solar Field”? “Freedom High”? “Freedom Hospital”? Freedom. Freedom. Freedom.
And oil tax would for-sure:
Reduce demand.
Encourage research, entrepreneurs, and innovation of solutions for renewables. Thus reducing the need for solar, wind subsidies.
Put a little money back in America’s pocket + reduce the wealth transfer to OPEC.
Encourage diversification and innovation in OPEC economies, for their own good + sustainability.
If Obama wanted to get real creative, and would like to avoid the implications of the downfall/risk from the tax itself - I have an idea. Tell everybody that he is GOING to tax oil/gas, starting in, say, January 2010 at 20%. Then, say it’s going to grow by 100 bp every quarter. He could then, borrow against that future cashflows – today… and give the long-term market a chance to find a smoother equilibrium, and reduce the risk of somebody launching a missile or two.
Update: A new follower, Wattzon points out, that less than 24 hours ago – Friedman did an op-ed piece on this topic.
Soo…I spent the week, talking to some amazing new friends.
1. An engineer from Jacobs Engineering.
2. A doctor who works at the Aramco compound in Saudi Arabia.
3. An engineer who works here in Toronto in the industrial liquid storage industry -> ie a booming business to be in, if you’ve seen the oil contango curve.
After a very lively discussion from a group of informed people with different market perspectives, I took away, that it is likely that the new American administration eventually taxes oil imports. This is just one theory.
Thoughts?
For those out looking for the best oil proxy…it seems like the Holy Grail. Likely because it is – think about it, you can’t buy oil, without having to pay to store it. Anyway, this pdf should help, in your hunt/decision making/trading.
Keep in mind that PDF is written by the guys that want you to buy their Macro Shares – and those have discount/premium issues as the shares move on supply and demand themselves, which of course they don’t mention. And I laugh at how treasury exposure is treated like an upside somehow. Those funds are going to get ruined when the treasury bubble inevitably implodes on itself. Unless they’ve done something about it, maybe they have, because the correlation between the macro shares and TLT seems to be fading. DBO – my favorite so far, isn’t in the document. I need to figure out, exactly what DBO is doing, right now (not what they were doing when the fund started).
A take away -> Any ETF could have treasury exposure, depending on how they track their various indexes, and what they do with spare cash. Anybody using swaps or other contracts to provide the NAV of their ETF, could literally be boiled down to a simple pile of cash/treasuries AND a pile of contracts. Likely many ETFs are holding cash now, rather than using creation money to buy treasuries – as the people that run these aren’t dumb.
BTW, my new favorite blogger, is Gregor. You can put me firmly in the camp that says oil is going to 3 digits, even if it hits the 20’s first. Especially if it hits the 20’s. Or at least back to a demand destructing level. I know things are shitty out there, I’m staying optimistic ITS A CYCLE and so what we’re seeing in oil’s price action is a summation of more than just falling off demand. We’re seeing: 1. Deflationists who are shorting. 2. Falling Demand (duh!) 3/4. Supply Dumping/Panic. 5. De-leveraging. 6. Momentum traders who are short.
All of these, are temporary, and killing supply projects. The longer it stays low + the lower it goes, the more violent and awesome the upside will be, since cheap oil price is the the best stimulus package the world can have right now. Can’t get that effect in any stock.
If you’ve followed me, you know I rarely buy plain vanilla, I think the oil upside, warrants it. So I have tucked away a few (and will hold even if they go to zero) $70 2011 strikes on USO.
I am an equity/derivatives guy – I think I always will be, but, I KNOW I need to expand my knowledge of how the bond market works, and the signals it gives off. I’ve been reading one of Bill Gross’s book, you know the manager of PIMPCO, “The Peter Lynch of Bonds” according to the cover. He called Treasurys the “most over-valued asset class in the world, bar none” in April of this year. It’s sentiment like this that I’m pretty sure why ProShares created PST, and TBT; leveraged ETFs that short the 7-10 year, and 20+ year, US Treasury Indexes from Lehman brothers. I started learning about the bond market back in ECON 101, but have relatively ignored learning more. I have been smacked in the face with it over the last six months in the news, and ramped up during this recent GSE debacle. From what I can tell, the upside for TBT is much better than the downside, at this point in time. Do you concur, or disagree, why – or why not? Any insight from any expert macro / bond guys would help. I am new, and learning.
Speculation ramped up on Friday, as investors hypothesized that the GSCs would need help, thus hurting credit rating of the U.S. As such, TBT had nearly it’s second highest trading volume since it’s launch. PST actually did set a record for trading volume, since it’s launch.
Interest rates are bound to tick up…I mean, they almost have to.
I have to give a hat tip to Joe Dowling, for pointing these vehicles out on twitter, I didn’t even know they existed before Friday. I did something impulsive and after only an hour or so reading about TBT, Dan Conway can contest, I bought some…early in the day. Every conversation I’ve had with Joe, he has left me with nothing but a good impression of intelligence. Plus, I think he’s likely the second richest guy I’ve ever talked to. So yeah, I have no shame in cherry picking his ideas, making some money, and learning along the way. The way I see it, win or lose, I’ll either pay tuition to the market, or make some money. I’m young, and need to learn. I applied the exact same logic, that new derivative traders should use – you learn allot faster with skin in the game. Maybe this is reckless, I dunno. I know I learned really quick when my first derivative trade fell 100%, and my next one doubled, that was almost 4 years ago – I have no regrets over losing ALL the cash on that first trade.
Disclosure – like this matters…I AM short 20+ year Treasury Index via TBT.