Keystone Aftermath Arrives: Canada Pledges To Sell Oil To Asia, As US Becomes Source Of “Uncertainty” Zero Hedge

Zerohedge reports that Canadian Prime Minister Stephen Harper has indicated to the United States, “Canada will continue to work to diversify its energy exports.”

History books study catastrophic events such as wars or the collapse of empires and try to determine what were the causes and factors that led up to the disaster.  What will the future history books say about the collapse of the American hegemony in the global economy?  Here are four possible factors:

(1) The leadership did not secure cheap and safe energy from Canada, starving the nation of the resources that they needed to secure the economy.

(2) The leadership refused to reign in spending at all levels of government, leading to a debt-death spiral and to default of the nation finances and the collapse of the dollar.

(3) The leadership overextended itself militarily around the globe, which had at best a dubious, if not a negative, return on investment.

(4) The leadership refused to change arcane tax laws that made it impossible for Americans to set up shop in foreign countries to foster exports and trade of made-in-America products.

Future history books may see Stephen Harper’s statement to the United States as indeed a pivotal moment.  Harper is saying, Fine!  If you don’t want our energy, we can find other buyers.

Why are manufactured goods cheap in the United States?

I enjoy reading Kevin Graham’s blog, because he often has observations that disagree completely with my own.  Recently, he’s blogged that inflation has increased the standard of living.  Kevin and a certain Joel got into an interesting conversation about it.  But here is the picture that Kevin got from Carpe Diem from the 1964 Sears Catalog:

Kevin’s point is that big screen HDTVs today are hardly more expensive in nominal dollars, and far cheaper in inflation adjusted dollars.  But furthermore, the actual TV product is superior.

Now, I encourage readers to read both Joel and Kevin to see the two sides of the coin.  I interjected myself with a couple of comments that I wish to record here:

@Joel, thanks for your thoughtful responses to Kevin’s stimulating post. I would like to add one point, which is crucial in this whole picture. The 1964 TV is American made in factors in the United States with US workers; back then, TVs were likely exported to other countries. The 2012 TV is made in China. The reason it is cheap is because the Chinese sell their products in exchange for the United States fiat dollars, which the Chinese can then use on world markets either to invest or to buy the raw materials that they need. The United State has a three-decade trade deficit. All that means is that the United States has been able to export its own currency receiving manufactured goods in return, currency which it costs virtually nothing to make–particularly when it is created electronically and not printed. Now the United States by inflating its currency over this period has been a big winner in global trade. And those TVs and such are indeed cheap. But I defy you to go to a country which is not able to export its currency to China. Say a poor African country. There, people still fix, e.g., 30 year old refrigerators, because the cost of labour and parts is still much, much cheaper than replacing the unit. All this means is that it is possible for the United States to overdo it–I think inevitable at this point. Then the rest of the world will reject the US dollar and there will be completely new dynamic, where the cheap money is unable to chase real goods. This is an unprecedented situation in the world today; to my knowledge, no fiat currency has ever enjoyed the ascendency of the dollar, and so no such currency has ever fallen from such a pinnacle. When it does, watch out. It will be the end of the global economy as we know it.

By the way, Kevin, did you take into consideration that that TV you picture is in a fine piece of crafted wood furniture? I know the TV cabinet is out of style, but if you were able to purchase something comparable in quality and materials, say a buffet cabinet without the hutch, it would cost starting  at around $2000, and that is without a the TV. How does that figure into your calculations about the benefits of inflation?

Whose shares are lent out to short sellers?

Does anyone know the answer to this question?  A short seller must borrow shares at a fee, and so I wonder whose shares they borrow.  The other day I was reading at Stockhouse that bullboarder had put a sale order on his shares of Petrobakken @$30 per share  in order to prevent his brokerage from lending out his shares.  Does this mean that my shares are among those which may be lent out?

My friend “Just Me” sent me an article this morning about the subject of short-selling, A not-so-short story, at the Economist which deals with Patrick Bryne’s fight against the short-sellers who harmed his online-retail company.  But there were a few lines that caused me to wake up to the practice of shortselling:

The failure to deliver shares (and thus to settle trades) that goes hand-in-hand with naked shorting is more than just a plumbing problem: a buyer who does not receive his share cannot technically vote it.

What if my brokerage lends out to short seller, who sells them and then my shares are actually delivered.  We have the following scenario.

Stockholder A has 100 shares long.

Stockholder B sells short A’s shares.

Stockholder C buys 100 shares on open market and receives delivery on settlement date.

Now the problem is that if a brokerage can rent out A’s shares at a fee to B, and C receives them, then 100 fictional shares now exist in the market and these are non-voting shares (because only real shares can vote).  So only A or C can vote but not both.  But if C receives fictional shares, then only A can vote.

I reported that I never received ballots for my shares of SKW at Beating the Index.  I wonder if it was because my shares were the fictional ones and that the real ones were borrowed.  Does anyone know the answer to this question?

Given the meltdown of MF Global, I think we should all be concerned.  Perhaps we should go back to the system of my grandfather’s day when you received the stock certificates upon settlement and you kept them in safety deposit box.  Finally, if my brokerage is lending out my shares, I should be told and I should receive part of the fee that the brokerage receives from the short seller.  Has anyone else experienced not receiving ballots for important votes, such as the election of officers?

Be careful, please, of investing in the United States

I wrote to fellow blogger Kevin Graham the following warning after his repeated insistence that Wells Fargo is very safe and cheap:

Kevin: Are you aware of the consequence of the FATCA legislation and how it will affect investments in the United States? As a Canadian you can easily protect yourself from these consequences by pulling your investments out of the United States. I am involved in a group blog, the Isaac Brock Society, which is dealing with the questions of US persons abroad and the attempt of the United States to crack down on alleged tax evaders living abroad, including Canada.

I say this because you promote Wells Fargo, and not a few other US equities as “safe”. I am not sure that anything in the United States can be deemed “safe” and I recommend all investors to get out before the meltdown of the economy there. The other issue of course, is that the United States debt has no surpassed 100% of GDP. This seems to me to be a reason to be extremely cautious.

Kevin and I had a good time going back and forth over Petrobakken last year, when PBN hit its nadir.  I was the bull; he was bear, even when PBN was at $6.50; Petrobakken achieved its year end exit production guidance and thus is on its way to a full recovery (which I think will be above $24).  It didn’t hurt that Sinopec bought Daylight Energy, a company which had a similar debt issues to Petrobakken, but Daylight was arguably less attractive because it was more weighted towards natural gas than Petrobakken, but it did give us an opportunity to see what an outside buyer would pay for a mature intermediate oil and gas company, and it was double the then-current market price of Daylight. I took tender for my shares of Daylight and I am happy to say that I have, as of today,  received into my brokerage accounts.

Unfortunately, Kevin’s recommends US bank after US bank.  But he is apparently unaware of FATCA and the likely damage that it will do as a result of the exodus of foreign investment in the United States.  Furthermore, I consider American banks black boxes.  Who can possibly know what they are worth when they have so many derivative contracts that nobody understands?  I consider the banks bad risk since the time that I learned that many of them (e.g., Scotiabank) have large short positions in gold through their sale of unallocated gold certificates.

One might ask why I bother checking Kevin’s blog.  Well, I like reading some blogs that look at the world in a totally different way than I do.  I also like to challenge them.  Then, if they can muster cogent responses, it makes me think about my position.  I can’t say that Kevin has ever succeed in convincing me of anything though.  Each time that he talks about a company being safe (like Sears), I get the urge to add to my Spam collection.

My Spam collection

Mainstream media: stuck on stupid

Dollar Demise Refuted With 13% Gain Since 2008 – as compared to what?  Other currencies?  Or as compared to gold, oil or other commodities?

The Year U.S. Debt Beat Gold, shows 10-year treasury notes with 16.7% gain.  But this is unfair since the face value of these notes is 1.91% at year end.  That is you can only get 16.7% if you are trader in these notes.  Holders of US debt notes vs. holders of gold is a different story.  If you held gold over 2011, you outperformed treasuries.  Gold ended the year at $1,566.40 vs. $1421 at the end of last year.  That’s a 10% gain which is better than U.S. debt.