| May 23, 2014 | | | | |  | | | Very Smart People Make This Mistake When Talking About QE | | | - After yesterday's rebuttal by Richard Duncan… our own Chris Mayer gets in the last word on QE...
- "Even very smart people get this wrong," says Chris. "The net effect is zero"...
- Plus, Matt Insley explains how production disruptions in the Middle East could send oil prices soaring… guess whom that would be good for? (Hint: It's you, provided you know an opportunity when it's staring at you.)
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| | | | | | | Something I never thought I'd show you…
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May 23, 2014
 Peter Coyne, giving our own Chris Mayer the week's last word...
Stocks are in the green ahead of the long weekend. Gold's down at $1,292. Yesterday, we presented economist Richard Duncan's case for the Fed's QE driving stock prices. We showcased his liquidity gauge -- his preferred method for timing the market (go back to yesterday's issue to study it if you're interested). The day before that, on Wednesday, our own Chris Mayer explained why the QE does not drive stock prices. To wrap up the week, we'll give Chris the last word: "Contra Duncan," says Chris: "QE does not create new lending capacity. Let me put it to you as simply as possible. Reserves are bank assets. Lending is constrained by capital. QE shifts assets but doesn't alter capital. "If the Fed buys $2.6 trillion in Treasuries from the nongovernment sector… the nongovernment sector sells $2.6 trillion in Treasuries to Fed. "Now, how is it that the Fed 'injected' $2.6 trillion in liquidity into the system? "The net effect is zero. "So to say that a bank can go to Goldman and lever up the $2.6 trillion as if it were something new is not correct. They could do that before using Treasury securities as collateral. "The idea that the excess reserves point to future hyperinflation is also absurd. The assumption is that the banking system will somehow 'lend out' those excess reserves. It can't happen. It's impossible. Banks in aggregate cannot lend reserves. Period. I never tire of pointing this out. Even very smart people get this wrong…" Hrmm… Last we spoke to Richard, he was heading home to Thailand. So we'll have to see if he has a substantive response to Chris' point of view. In the meantime, it's Friday of Memorial Day weekend. So we won't keep you from throwing some steaks on the grill and popping open some cold ones. Today's essay, written by Matt Insley, is a nice follow-up to yesterday's geopolitical essay. As the Middle East melts down -- no thanks to U.S. intervention -- oil production is being disrupted in the region -- threatening to send oil prices much higher. Elsewhere too -- in Africa -- Matt sees long-term production and export difficulties factored into crude's price. We won't spoil it for you… but the developments could be a fortunate turnout for one player. Any guess who that could be? Read on for Matt's full analysis and the investment implications... | | | | | | | | | How To Get In Before Stocks Go Public!
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To find out how, and for your shot at the biggest gains, click here now. | | | | | | | | | The Daily Reckoning Presents... Thanks to ongoing conflict in Libya and less-than-anticipated production growth in Iran, the Middle East is facing an unprecedented oil crisis. Heh. Good thing the U.S. is awash in its own wealth of oil. Because if oil prices surge as this conflict intensifies, U.S. oil producers could profit handsomely. Matt Insley explains... ****************************** | | | | A Stealthy Middle Eastern Meltdown | | | | by Matt Insley | | | |  "Targeting oil infrastructure is the easiest way to have demands met," says Amrita Sen, chief oil analyst at Energy Aspects.
Infrastructure… the Middle East… disrupted oil exports… It's all part of a larger story, one that's been relegated to the back pages of the mainstream coverage. I'm talking about Libya. Over the past three years, production and export capacity from the once-strong oil exporter have fallen off a cliff. At current rates, Libya is exporting 220,000 barrels of oil per day -- that represents a mere fifth of the country's total export capacity of around 1.2 million barrels per day (mbd). And there's no real sign of improvement ahead. Since the Libyan uprising began in 2011, clashes between government forces and rebels have led to a tense situation, at the middle of which are the country's coveted oil assets. He who controls the assets wins. Of course, that's much easier said than done in a country that's yet to move forward since the ousting of Muammar Gaddafi. And remember, there's another outcome that's slowly baking into the pie. If conflict continues and tempers erupt, there could be an irreversible destruction of the country's oil infrastructure (in the near term at least). As the rebels hold the coveted oil export terminals (seen on the map below), there's a high degree of "rebel risk premium." Put simply, if things go bad (and let's be honest, it looks like we're headed that way), exports could grind to a complete halt and oil infrastructure could be completely wiped out. It takes only a few rocket-propelled grenades or improvised explosives to wipe out millions of dollars of oil infrastructure -- processing plants, loading facilities, pipelines, etc. And those things don't get built over night. The outlook isn't good, and the stakes are high. Indeed, it could take decades to regain production and export capacity. All of which leads to the next point of discussion… | | | | | | |
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A Florida-based computer expert is breaking an incredible story. Perhaps the biggest political story of the next decade. You can view it for free, right here. | | | | | | | | Using the price of oil as a barometer for the conflict, the market looks to be pricing in a long-term conflict and potential total loss of Libyan crude oil. That's why we're seeing stubbornly high prices -- currently perched at $103. And it's not just Libyan oil disruptions that are having an effect on the market. When you add in Iraq, Nigeria and Iran, we're looking at 3 million barrels per day in "disrupted" oil production. That's a lot of oil off the world market. Iraq is another good example. The country was just last year the great hope of the Middle East. Production was set to skyrocket (on its way to 10 million barrels per day), and exports were soon to rival those of Saudi Arabia. However, that storyline has slowed to a near crawl. Iraq's oil production is growing, but as we've learned over the past 12 months, it won't be a quick ramp-up. I don't know how long it's going to take to get from Iraq's current production of 3.6 mbd to 10 mbd, but it's not coming fast enough to have an effect on oil prices. There's a similar story with Iran. Sanctions are still hampering the production growth from the Islamic Republic, but that's not the only limiting factor. The country needs massive infrastructure and capital investment to keep production heading higher. That said, the current sanctions could be just the beginning of Iran's economic problems. | Sanctions are still hampering the production growth from the Islamic Republic. | And then there's Nigeria. According to the Financial Times, the country is facing its "worst oil crisis in five years," with output dropping below the 2 mbd threshold. Add it all up and the Middle East isn't the growth story it needs to be. In fact, as time goes past, there's more reason to believe that struggles in Libya, Iraq, Iran and Nigeria are all but to be expected from here on out.
You probably know where I'm going with this. Yes. It is a godsend that while havoc slowly rises in the Middle East, the U.S. has seen massive production growth to the tune of some 3 million barrels per day, helping to ameliorate any global oil pinch due to Middle East disruptions. But I'll take it a step further. The major player that we haven't named is Saudi Arabia. Right now all's well with OPEC's largest producer. Production is varying between 8-10 mbd, and for the most part, this "swing" producer has been able to keep the cash rolling in. But that begs the question: Could the plague of disruptions reach the shores of Saudi Arabia? The verdict is still out. But in a world where we're coming to expect the unexpected, OPEC's top dog stands alone. And any disruption in that massive oil flow would send prices skyrocketing…well over oil's recent high-water mark at $147 a barrel. This would be much to the dismay of oil buyers the world over, but much to the delight of well-run U.S. oil producers. Regards, Matt Insley
for The Daily Reckoning P.S. If disruptions in the Middle East don't occur, you could still strike it rich. Take, for example, Rob Danbury, a small-town American real estate broker who now receives six-figure checks in his mailbox each month, which earns him the equivalent of an NBA player's salary. It's crazy," he said. "And I'm small fry. There are literally thousands of people out here who are millionaires, and some who are going to be billionaires." Danbury was no different than you and me. Ordinary guy who simply struck it big. Now you can too -- thanks to one particular shale development within the U.S. (hint: It's soon to be one of the leading oil producers on the planet). Click here to learn all of the details for yourself. | | | | | | | | |  Matt Insley is the managing editor of the Daily Resource Hunter and now the co-editor of Real Wealth Trader and Outstanding Investments. | | | | | | | | | BE SURE TO ADD dr@dailyreckoning.com to your address book.
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