Monday, June 20, 2011

Careers of the Future - Take 1

Trending Sectors - Agriculture (grain stores at multi-decade lows, increasing populations, resource competition), Energy (everyone needs it, possible peak oil, increasing demand), Mining (gold and silver as money, resources to service Asian economies), Manufacturing (with a weak/collapsed currency labor will be cheap and US must export), Water Management (clean water technology especially in emerging economies), Transportation (energy crisis will require restructuring of the transportation system)

Declining Sectors - Finance (worldwide financial meltdown, round 2), Education (public funds decimated/higher education loan defaults), Medical (entitlement and federal funding collapse, baby boomer nest egg bust), Consumer Technology (waning demand unless Asia picks up with consumption), Computer Programming (increasing competition, India and China will be very competitive), Real Estate (until a sound production/manufacturing economy is established real estate will languish)

Engineering Disciplines (maybe a little biased here...)
  • Chemical Engineering - Renewable Energy, Water Management, Process Engineering, Electrochemistry, Nano Material Synthesis, MEMS & Microfabrication processes
  • Mechanical Engineering - Energy, Transportation, Aerodynamics, Manufacturing, Power Systems, MEMs & Microfabrication, Military Technology
  • Civil Engineering - Transportation, Building Energy Efficiency, Power Systems, Electrical Transmission Systems
  • Materials Engineering - Supports other engineering disciplines
  • Industrial Engineering - Supports renewed manufacturing base
  • Electrical Engineering - Power Electronics, Microelectronics (dominated by Asia)
  • Environmental Engineering - Water Treatment, Environmental Monitoring
Scientific Disciplines
  • Physics - I've always had a lot of respect for physicists, but it simply doesn't pay unless you go for the PhD in an applied area. Mechanical and Electrical engineers are generally sought after over physicists. Unless you're pursuing quantum or nuclear physics, don't bother pursuing this degree.
  • Chemistry - This discipline is making a comeback primarily on the backs' of chemical and biomedical engineering. As with any science degree, a PhD is preferred. You simply don't get the applied knowledge otherwise.
    • Finance - Though I expect a general collapse in the financial markets, I believe the international portion will eventually regroup and largely service Asian economies and their periphery resource suppliers, though there may be a period where paper assets collapse in their entirety. If/when this occurs a large portion of the financial sector will be decimated. Good riddance.
    • Management - This one is simple: 1) Be good, in fact, be better than the next guy. 2) Associate with the trending sectors and service or supply them in some way. 3) Be networked.
    Foreign Languages
    • Mandarin Chinese - It's no secret that the Chinese are becoming increasing wealthy and influential as a multipolar world continues to develop. With their increasing political, economic, and military might, an understanding of Chinese culture and language would be advantageous to entrepreneurs,  politicians, or generals depending on how the relationship develops.
    • Spanish - Latin America may become a more prominent player in international affairs through raw material and goods exports. In addition, the Latin population continues to grow at a robust pace.
    Vocational Disciplines
    • Accounting - Accountants servicing trending sectors will be sought after. Those who aren't will be unemployed. Experience and targeting specific sectors will be important aspects due to the relatively low barrier to entry for this discipline.
    • Machining - A good machinist is hard to find and refined skills take time to develop. This presents a natural barrier to entry. In addition, with an increasing manufacturing base machinists can expect to be sought after.
    • Farming - Raw production, renewable, continued demand. The barrier to entry lies in on-the-job training, access to resources, and a general lack of understanding by the general public. Overall, I expect farmers to do quite well, especially if they're producing exportable goods.
    At the end of the day thriving careers will center around things that produce dividends or that can be exported in some way. Individual job security will have a "barrier to entry" component due to high unemployment. This means that there will be a lot of people who want your job, and if they can learn to do it quickly and become more efficient than you, well, your job security will be reduced. The atmosphere will be extremely competitive where innovation and efficiency will be rewarded, assuming government intervention doesn't mute growth altogether. As far as service based careers, your market should encompass individuals who are in the trending sectors. That's where the money will flow from...

    Of course there are exceptions and at the end of the day you can make just about anything work if you do it well. With that said, swimming with the current is always easier than against, but it certainly can be done. 

    Sunday, June 5, 2011

    Silver - Rising Triangle Formation & 50-day SMA

    An updated silver futures chart is provided below with the addition of a bullish ascending triangle formation that terminates near the end of June 2011. Based on the recent dip buying, steady volume, and gold's resilience, I would expect a break upward into the $40s by the end of June. Notice that the top portion of the triangle coincides with the flattening 50-day SMA, which has been acting as resistance. Essentially, we'll have up to three weeks until the trend moves decidedly upward or the triangle formation is broken and we continue to consolidate sideways in time.

    With that said, the next FOMC meeting takes place June 21st-22nd and QE3 expectations will be brought to light within the same 3-week time frame as the ascending triangle develops. Overall, there is the potential for a very strong breakout should the bullish triangle hold, and the continuation of QE is confirmed by the Fed. Even the willingness to continue QE should provide the catalyst for a fast breakout move similar to what was seen in August of 2010.

    Figure 1: Silver Futures, SI_F, daily chart with prevailing "QE trend" (orange), 50-day SMA (purple), 200-day SMA (dotted purple), Fibonacci retracement (cyan), and ascending triangle (bold gray).
    1. Bullish ascending triangle formation, 
    2. 50-day SMA acting as resistance, 
    3. Expect move into $40s by July, 
    4. FOMC meeting June 21st-22nd 2011, 
    5. Gold & Silver options expiry June 27th 2011.

    Price Expectations 
    1. Resistance at roughly $39.00-$39.50,
    2. Lower support at $32.50-$33.00, possible support developing around $35.00-$35.50,
    3. Consolidation in the $33.00-$39.50 range, or breakout into the $40s. Conditions seem to favor breakout into the $40s.

    Overall, the next month will be a defining period for the silver market. Stay tuned...

    -------------------------------------------- Update: 6/9/2011 -------------------------------------------- 

    Figure 2: Silver Futures, SI_F, daily chart with prevailing "QE trend" (orange), 50-day SMA (purple), 200-day SMA (dotted purple), Fibonacci retracement (cyan), and pennant formation (bold gray).

    -------------------------------------------- Update: 6/13/2011 -------------------------------------------

    Figure 3: Silver Futures, SI_F, daily chart with prevailing "QE trend" (orange), 50-day SMA (purple), 200-day SMA (dotted purple), Fibonacci retracement (cyan), and broken pennant formation (bold gray).

    The pennant formation has been broken and we'll have to wait and see if $32.50-$33.00 is the next target. It looks as though we have entered into a shallow downtrend in the short-term, or a consolidation phase around $34-$35.

    Saturday, June 4, 2011

    QE3 - The Discussion

    Fed Chairmen Ben Bernanke: "I'm not crying because
    I'm a failure, really. I just got something in my eye."
    The QE3 debate continues to rage with a few weeks until the scheduled end of QE2, this should get interesting. Of course, the multi-trillion dollar question is: Will the Fed end QE2 on schedule or begin a new iteration of easing (aka QE3/Money Printing)? Scenario 1 was previously discussed and can be found here.

    The FOMC meeting will take place June 21st-22nd 2011. Here are the possible outcomes and  potential ramifications:

    Interest Rates
    The Federal Reserve will most likely reiterate its stance on interest rates saying that they'll keep them low for an extended period of time, but will also indicate its willingness to increase rates at a time in the future. It's possible that the Fed may even hint toward a time in the future that it will consider increasing rates. Of course, the objective will only be to give the impression of a hawkish stance. In reality, rates will be kept low for a very long time.

    Why? There are few calls to modify the Fed rate as it's taking a backseat to the QE discussion. It would be something like putting the cart before the horse. Also, with a weakening economy, an increase in rates would put pressure on lending, deficit spending, the Fed balance sheet, and the economy as a whole. If the Fed raises rates and the economy deteriorates the Fed will be blamed. To summarize, the options are as follows: 
    1. Rate Increase: The economy will slow, the Fed will be blamed, the broken economy will be exposed, further confidence will be lost by the general public, fiscal or monetary stimulus will eventually be called for (especially in an election cycle), commodities, housing, and lending will take a tumble. Essentially, all the 'progress' made thus far will be lost very quickly. Please be aware that I'm using the word 'progress' extremely facetiously. Overall, a rate increase is extremely unlikely.
    2. Rates Unchanged: This is the most likely outcome with the best short-term risk/reward structure, at least in the Fed's eyes. Nothing changes, lending is muted and inflation continues to bleed into the economy at a moderate rate. I expect rates to be unchanged, but accompanied by a somewhat hawkish tone to counter a re-deployment of QE and the inflation expectations that will follow.
    3. Rate Decrease: The Fed can't lower rates any further, hence QE.
    Scenario 1: QE2 Ends on Schedule - No more QE?
    In this scenario the appetite for treasuries will wane and rates will be forced to increase, essentially countering any low rate policy. Eventually this will begin to affect the greater economy, produce a slowdown, and possibly push the US back into recession (at least officially). This, however, is a catch-22 situation. If rates increase the debt levels will also increase as a result of an economic slowdown, which would result in a reduction of gross receipts, an increased deficit, more debt issuance, and of course some entity would be required to buy the new and mounting debt. That entity would likely be the  Fed, and guess what that means...more QE. To recap, the cessation of QE2 makes QE3 certain. With that said, there can be a time lapse between the two programs and that's really the only question.

    Now for the caveat. A crisis causing a flight to the dollar (war/terrorism) or a game changing technology have the ability to boost treasury demand (for the former) or produce organic growth (for the latter). The crisis card has been played before, but its effectiveness has significantly deteriorated over the years and any crisis would likely support gold rather than the dollar. In addition, a flight to the dollar would only be a temporary phenomenon without underlying fundamentals supporting it. This is where organic growth would have to take hold by way of a game-changing technological innovation that can be brought to market rapidly. Unfortunately this doesn't look likely with the state of the economy and no technology that fits the bill.

    Overall, ceasing QE2 guarantees QE3, barring organic growth brought on by game-changing technology and economic restructuring. With that said, there may be a time lapse between the two programs.

    Scenario 2: QE2 Ends, QE3 Begins...QE to Infinity
    If QE3 is initiated completely above-board and immediately following QE2 there is a real risk of stoking runaway inflation expectations. This would be met by a loss of confidence in the dollar (at least what's left) and a widespread move into real assets, especially gold and silver. With that said, expectations can be managed to a degree by rhetoric, program size, and program duration. In addition, the exchanges have recently shown that they can and are willing to affect commodity prices by implementing margin increases and squeezing liquidity out of the futures market. Of course, the effect is always short-lived as the fundamentals inevitably catch up.

    Overall, the Fed is expected to implement QE3. The parameters that they can play with are: program size, duration, timing, and name (call it something else). The Fed may also be willing to lean on exchanges to manage commodity prices.

    Likely Scenarios: QE3 Lite or QE3 Late

    Possible FOMC Statement #1 (Mostly Cut & Paste): 
    The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period.
    The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase a further $XXX billion of longer-term Treasury securities, at a pace of about $XX billion per monthThe Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted. 
    Synopsis: Rates are kept low, immediate program continuation and a small initial program with short-duration expectations.

    Possible FOMC Statement #2:
    The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period.
    As previously announced, the Federal Reserve’s purchases of $600 billion of Treasury securities will be completed by the end of June 2011The Committee will gradually slow the pace of these purchases in order to promote a smooth transition in markets and anticipates that they will be executed by the end of the third quarter of 2011. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. 
    Synopsis: Rates are kept low while the program winds-down with an option to continue later in year.

    Thursday, June 2, 2011

    The Great Economic Shift

    World economies are in the process of restructuring, especially in the United States which will experience a seismic shift in its economic structure. The great consumption based economy will eventually give way to raw production and manufacturing. The transition may occur gradually or by waterfall collapse, but it will occur. Right now the gradual approach is being attempted by governments and central banks, but this isn't sustainable and the gradual slide will inevitably become a catastrophic slip.

    The result of this 'slip' will involve the US dollar losing its reserve currency status and a significant amount of its purchasing power. At the same time the Chinese currency will be forced to appreciate or inflation will destroy the country. China must manage unrest due to inflation by revaluing their currency, it's that simple. With the US currency depreciating and the Chinese currency appreciating, we will see a transfer of purchasing power from the US to China. As everyone knows, China is a resource hungry country and with a stronger currency they will be able to purchase raw materials at a much lower cost. This will increase competition for commodities and the US will no longer have the luxury of cheap oil, metals, or any other imported goods. The US will be forced to export real items (rather than inflation), and this is where the new economy begins. Business of the future will be forced to serve this new order, or they'll languish.

    Now for the caveat, this is one of the best case scenarios. Large scale shifts in power rarely occur without major wars or devastating economic upheavals. With the world economies so intricately intertwined it's conceivable that we'll all slip together, at least initially. At that point the question becomes: who will be the first to claw their way out of the abyss? It'll most likely be the people with  free markets, sound money, abundant resources, established infrastructure and motivated people.

    Wednesday, June 1, 2011

    Quick Note: The Gold/Cropland Ratio

    Again, it appears that the average price of U.S. cropland has been increasing over the past decade, but this is only when priced in U.S. dollars. The data can be seen in Figure 1, which also presents the average price of gold. Notice that the price of gold is accelerating upward, whereas the price of cropland is flattening out. This indicates that there will be a time when the trend changes and cropland will become a prime buying opportunity. The timing can be deduced from Figure 2, when the gold/cropland ratio reaches a minimum. We are still waiting for this to occur...

    Figure 1: USDA data on the average U.S. cropland price and the average yearly price of gold in dollars.
    Figure 2 shows that the price of cropland is decreasing at an average rate of -0.375 oz Au/year, or it costs 0.375 ounces less each year to buy the same acreage. Note that the last few data points seem to indicate an accelerating downward trend, but we'll have to wait and see if this holds. With the recent double dip in housing officially confirmed we may see an accelerated rate of descent for the gold/cropland ratio.
    Figure 2: Ounces of gold required to purchase an acre of US cropland.