Author: Ritesh Jain

This country has the world’s largest known oil reserves and has been one of the world’s leading exporters of oil. Venezuela was once Latin America’s richest, producing food for export. Just a few years ago this country was famous for having the most lovely women in Latin America, so much money spent on having perfect teeth, plastic surgery and other enhancements, and not to mention natural beauty. Beauty pageants were a favorite national pasttime. Previously an underdeveloped exporter of agricultural commodities such as coffee and cocoa, oil quickly came to dominate exports and government revenues.

TODAY Venezuela has the world’s highest inflation—estimated by the International Monetary Fund to reach 720% this year—making it nearly impossible for families to make ends meet. Since 2013, the economy has shrunk 27%, according to local investment bank Torino Capital; imports of food have plunged 70%.

Hordes of people, many with children in tow, rummage through garbage, an uncommon sight a year ago. People in the countryside pick farms clean at night, stealing everything from fruits hanging on trees to pumpkins on the ground, adding to the misery of farmers hurt by shortages of seed and fertilizer. Looters target food stores. Families padlock their refrigerators.

Three in four Venezuelans said they had lost weight last year, an average of 19 pounds, according to the National Poll of Living Conditions, an annual study by social scientists

Average is over ….. is a book written by Tyler Cowen and if you want only few lines summary then Mr. Cowen believes that America is dividing itself in two. At the top will be 10% to 15% of high achievers, the “Tiger Mother” kids if you like, whose self-motivation and mastery of technology will allow them to roar away into the future. Then there will be everyone else, slouching into an underfunded future of lower economic expectations, shantytowns and an endless diet of beans.

This book is far from all good news,In the eminently readable pages , the economist-blogger outlines a predicted future where technology cleaves society into two disparate classes. The winners will be those whose skills complement those of the new machines. The losers will be, well, everyone else.

HYPER-MERITOCRACY?

Mechanized intelligent analysis means that markets in Cowen’s iWorld are exceptionally accurate at measuring an individual’s economic value. As a result, America will become a “hyper-meritocracy,” where many careers become more demanding as employers will be able to measure economic value with “a sometimes oppressive precision” and “…the self-motivated will find it easier to succeed than ever before.”

Upward mobility will be contingent on self-motivation, not on family background. This means the “slacker twenty-two-year-old with a BA in English, even from a good school” will no longer have a “clear path to the upper-middle-class.”

UNDESIRABLE, BUT PLAUSIBLE

Perhaps most disheartening is the frightening plausibility of the predictions. Cowen notes that the contemporary labor market woes of young workers are “a harbinger of the new world of work to come,” because “lacking the right training means being shut out of opportunities like never before.” The accelerated hollowing-out of the American economy in the wake of the recession bodes poorly for the revival of the middle class. About 60 percent of the jobs lost during the downturn were mid-wage occupations, and 73 percent of the jobs that have been added during the recovery have been low-wage jobs. Political debates are highly polarized, and the political power of the winners in today’s society far outstrips those of the less-fortunate in ways that continue to suggest a vicious circle. For those committed to a more sanguine future, a great deal of work lies ahead

The author points out that we often see the promise of technology long before it delivers. “The advances of genius machines come in an uneven and staggered fashion,” he writes. “For the foreseeable future, you’ll always have to be learning something, reprogramming something, downloading new software, and pushing some buttons, all to have the sometimes dubious privilege of working with these new technological wonders.”

That takes motivation. One of the most interesting sections of Mr. Cowen’s book is his analysis of the future of education. For a select few, he argues, the traditional college experience will still be worth the time and money. They will benefit from close proximity to highly engaged teachers. But for most, a much cheaper model might work better, one in which most of the material is available online and young people are provided with motivators instead of professors—that is, with people who are part drill sergeant and part yoga instructor, able to inspire and put the fear of God into students. No more tweedy snoozers lecturing everyone into oblivion and charging $50,000 a year. Think of college as a gym membership, with trainers to help you make the most of the machines around you.

Education for the masses, writes Mr. Cowen, “will become more like the Marines, full of discipline and team spirit.” This will help the young avoid becoming “threshold earners,” those “content just to get by and who do not push ambitiously for a higher wage or stronger credentials at every step.

In his final chapter, “A New Social Contract?,” Mr. Cowen cruelly lays it all out. “We will move from a society based on the pretense that everyone is given an okay standard of living to a society in which people are expected to fend for themselves much more than they do now.” The top 10% will have it better than ever. The majority will suffer stagnant or falling wages but have more opportunities for cheap education and cheap fun. The rest will fall by the wayside, with government less and less able to take care of them. It will be dazzling at the top, and “meh” to miserable for the rest.

Steve Saville writes ……Governments and central banks have invoked the writings of J.M. Keynes to justify the massive increases in government spending and monetary inflation that have occurred over the past 9 years. However, some of Keynes’s apologists have pointed out that the famous British economist would not have agreed with many of the policy responses for which his work has provided the intellectual justification. They point out, for example, that Keynes only advocated temporary increases in government spending as a means of absorbing shocks to the economy, and that he was dead against currency debasement and the creation of structural deficits. The problem, though, isn’t that Keynes’s theory has been applied to an unreasonable extreme; the problem is that the theory is completely wrong.

For starters, the laws of economics always apply, so if greater government deficit-spending really did act to strengthen the economy during recessions then it would also act to strengthen the economy during the good times. On the other hand, if greater government deficit-spending hurt the economy during the good times then it would also hurt the economy during recessions. The point is that there isn’t one set of laws that applies during periods of growth and another set that applies during periods of contraction.

The value of the crude oil production alone is worth a staggering $1.7 trillion each year. Add downstream fuels and other services to that, and oil is a money-making machine and equal to size of India’s economy.Both companies and governments take advantage of this resource wealth. More of the world’s largest companies work in the oil patch than any other industry. At the same, entire government regimes are kept intact thanks to oil revenues.

The only problem when an industry becomes this lucrative?

Eventually, everybody wants a piece of the pie – and they’ll do anything to get their share.

THE BLACK MARKET IN FUEL THEFT

While pipeline theft in places like Nigeria and Mexico are the most famous images associated with the theft of hydrocarbons, the problem is actually far more broad and systematic in nature.Fuel theft impacts operations at the upstream, midstream, and downstream levels, and it is so entrenched that even politicians, military personnel, and police are complicit in illegal activities. Sometimes, involvement can be traced all the way up to top government officials.

E&Y estimates this to be a $133 billion issue, but it’s also likely that numbers around fuel theft are understated due to deep-rooted corruption and government involvement.

HOW FUEL THEFT ACTUALLY HAPPENS

Billions of dollars per year of government and corporate revenues are lost due to the following activities:

Tapping Pipelines: By installing illicit taps, thieves can divert oil or other refined products from pipelines. Mexican drug gangs, for example, can earn $90,000 in just seven minutes from illegal pipeline tapping.

Illegal Bunkering: Oil acquired by thieves is pumped to small barges, which are then sent to sea to deliver the product to tankers. In Nigeria, for example, the Niger Delta’s infamous labyrinth of creeks is the perfect place for bunkering to go undetected.

Ship-to-Ship Transfers:
This involves the transfer of illegal fuel to a more reputable ship, which can be passed off as legitimate imports. For example, refined crude from Libya gets transferred from ship-to-ship in the middle of the Mediterranean, to be illegally imported into the EU.

Armed Theft (Piracy):
This involves using the threat of violence to command a truck or ship and steal its cargo. Even though Hollywood has made Somalia famous for its pirates, it is the Gulf of Guinea near Nigeria that ships need to be worried about. In the last few years, there have been hundreds of attacks.

Bribing Corrupt Officials:
In some countries – as long as the right person gets a cut of profits, authorities will turn a blind eye to hydrocarbon theft. In fact, E&Y says an astonishing 57.1% of all fraud in the oil an gas sector relates to corruption schemes.

Smuggling and Laundering:
Smuggling oil products into another jurisdiction can help to enable a profitable and less traceable sale. ISIS is famous for this – they can’t sell oil to international markets directly, so they smuggle oil to Turkey, where it sells it at a discount.

Adulteration:
Adulteration is a sneaky process in which unwanted additives are put in oil or refined products, but sold at full price. In Tanzania, for example, adding cheap kerosene and lubricants to gasoline or diesel is an easy way to increase profit margins, while remaining undetected.

Lewis Johnson writes ….China’s annualized steel production in March was a staggering 800 million tons, more than eight times the size of U.S. production and a new all-time high representing nearly half the world’s steel production. The world’s steel markets simply cannot accommodate the full weight of Chinese steel exports seeking higher prices elsewhere. Something’s got to give.

One possibility is falling global steel prices in the face of sustained oversupply from China. In this scenario, Chinese steel flows outward responding to higher prices available elsewhere. Another scenario is the rise of populist driven protectionism that legislates competitive advantage through tariffs and other trade restrictions. Such a policy would elevate prices in protected regions while depressing those without similar protection.

The second approach appears very possible in the United States given that in recent days the Trump Administration announced the unprecedented use of Section 232 (passed in 1962) of the trade code directing the U.S. Department of Commerce to investigate the national security implications of higher U.S. steel imports. Assuming this investigation results in a favorable determination (a fair assumption), we could see tariffs and other such measures create a protective price umbrella under which U.S. steel producers could prosper despite the continuing menace of oversupply from China.

The preconditions for a peak in the inventory cycle are now in place, just as they were in 2008, 2011, and 2014. Will the peak arrive a bit early – now only 33 months from the last peak? Or is our caution premature? Timing is the hardest part of investing. The truth is that no one can see the future

Chief Conclusion: Key leading indicators in the commodity markets support our expectation for a mid 2017 peak in the inventory cycle. Steel offers the best insight into this cycle and the slowdown that we expect to unfold in other markets, such as credit.

What’s that line legendary strategist Don Coxe likes to use? “The most exciting returns are to be had from an asset class where those who know it best, love it least because they have been burnt the worst?”

Grains and other agri commodities have been a vicious bear market in real terms. Technology has caused grain prices to resemble the price decline of a 80386 microprocessor chip. Whether it be from improvements in fertilizer and pesticides, to the introduction of self driving farm equipment, the modern farmer has become dramatically more efficient over these past few decades.

Could this chart simply continue moving infinitely higher? Sure, never say never. Maybe Monsanto will come up with even better super grain seeds to create the fountain of perpetual food. Maybe we will figure out ways to automate the remaining last few jobs left on the farm to squeeze costs even lower.I just don’t buy that progress can continue at this pace. I have no doubt that farmers will continue improving, but I suspect the large gains are behind us. The moves from here will be incrementally smaller.

Great technicians like Peter Brandt are raising the possibility a long term bottom might be forming. And then, shrewd macro traders like Raoul Pal, ( whose article on INDIA i published few days back )are advocating long grain positions from a fundamental perspective.

But few are talking about the real reason that grains offer a compelling risk reward from the long side. If this Central Bank experiment goes off the rails, we could have a return of 1970’s style inflation. That happens to coincide with the last great bull market in grains.

This presentation Howard Marks gave at CFA mumbai chapter last week and as usual a fantastic presentation