Historically, this is not unprecedented as John Pierpont Morgan’s bank single handedly “rescued” virtually the entire US banking industry by simply buying up all of the distressed banks that threatened collapse as a result of the “Panic of 1907.” To us, this is outrageous stuff that belongs into the realm of fables and conspiracy theories. To “them”, this is how they do business.

Carlyle and the SemGroup-Scoop

I have hinted in the last few articles that I suspect oil may the new policy tool of the runaway elites. As such, it has several advantages over so-called blunt tools like interest rate policy – the effectiveness of which is fast approaching zero at this point.

Assuming for the moment that oil is in fact being used as a policy tool, it has the following advantages:

a. Everybody is scared of endlessly rising oil. If you want to make the masses “feel better” about the economy, just drop its price and you get a relief rally in stocks;

b. The dollar’s rapid fall has forced to sheiks to constantly raise the price of oil;

c. Therefore, falling oil supports the dollar in five ways:

1. It lessens the need for further price hikes;

2. It lessens the need for the Fed to hike rates as a result;

3. It bumps the stock markets because they see the Fed as less likely to hike rates;

4. It has a calming effect on price inflation since it decreases the pass-through costs of higher energy prices;

5. It tends to lower the attractiveness of gold in most knee-jerk investors minds, eliminating that competition to the dollar’s 'supremacy'.

All of this is now possible without the usual “printing” of new money, which is the normal way of doing things when it comes to helping the stock markets and the economy, and without raising rates and putting all of that in jeopardy when it comes to preventing a complete dollar collapse.

Yet, this tool is only effective because the price of oil was first driven to the current, abominable heights. It is therefore simply a short term, stopgap tool of quasi-monetary policy. That is its big limitation.

When I read Ted Butler’s recent article on SemGroup’s unbelievable $3.2 billion (most press accounts state $2.4 billion) trading loss (forwarded to me by an astute Monitor subscriber) a couple of really bright red flags went up in my head.

It makes sense for an oil storage and pipeline company to use some oil hedging to cushion against possible surprise price shocks to the downside, but it absolutely makes no sense for such a company to short its own product to the tune of billions of dollars. Hedges are usually a fraction of the thing hedged in order to minimize risk.

What oil company or oil services company executive would bet against the rising price of oil in such huge amounts if his intention was only to hedge? I’ll answer that for you: Nobody would!

Tom Kivisto, Semgroup’s CEO, is a very experienced trading professional. According to Forbes, he headed the oil trading arm of Koch Industries in the early 90’s to start his own trading outfit called “Eaglwing”. In 2000 he secured a loan of $90 million from an Oklahoma bank to “add physical assets to his trading operations” and founded Semgroup. Seven years later, the company was the twelfth largest privately owned US company and had $13.2 billion in revenues.

I don’t care how good you are, but that doesn’t happen without help from high places. Looks like Kivisto got exactly that. One of the top investors in Semgroup is the infamous Carlyle Group. The other is Blackstone Group. The world’s number one and number ten private equity firms together own a controlling share of the miracle company.

The press explains this whole thing as Kivisto and the other Semgroup Traders just having bet the wrong way when oil hit $100/bbl, thinking that it “must” come down soon, and that “stubbornness” caused them to keep increasing their bets until they could no longer hang on and had to go long oil to cover their accumulated shorts.

Ted Butler theorizes that the oil price was artificially gunned when Kivisto and pals were forced to keep buying oil contracts to cover their short bets gone wrong. When the company finally collapsed and was forced to stop covering its shorts and take the losses, the oil price collapsed.

Makes sense. What doesn’t make sense is for ultra- experienced professional oil trader Kivisto to have engaged in this silly bet in the first place – unless someone fed him false 'insider information' that the oil price would soon collapse. Who could credibly be the possessor of such alleged inside information? Carlyle Group, with its super-connectivity to the Arab oil sheiks and the House of Bush/Saud.

Another thing is that the Carlyle guys know how to cover themselves. Wanna bet that their investment in SemGroup has the highest priority level when it comes to repayment out of the sale of the companies assets currently under way as part of its Chapter 11 reorganization?

Here is another point: SemGroup was a big fish in the oil patch. Many smaller oil and oil services companies did business with this fast-growing giant, and many of those are now owed money by SemGroup or simply lost whatever revenue they once derived from doing business with it.

I wonder if Carlyle gang will step in and by these small fish at fire sale prices once they go under. The group seems to specialize in buying out distressed businesses and then selling them at huge profit margins after turning them around. What better way to turn a business around than by knowing exactly why it became distressed and then removing the distressing factor after its acquisition?

The bottom line is that there is this dual transfer of US productive capacity going on. Regular capacity is transferred to state control - the Chinese state – while oil productive capacity is transferred to private hands – but only top elitist private hands. The people, the American middle class, lose out in the process, and so does freedom.

Time to Short Oil?

Now, how can smalltime investors like you and me make money off of this knowledge?The question is, how low will the price of oil go? Does it now make sense to short the oil market?

It probably does. When the rest of the market figures this out, the entire trading dynamic will reverse itself. Profit-starved investors will try to get in on the game. Demand destruction will do its part to keep the momentum going. For as long as stock markets remain weak, expect the trend to be continued from the ‘official’ circles as well.

The only drawback to shorting oil is Iran, of course. Today, news that Iran will not comply with the international demands for cessation of uranium enrichment didn’t help to support the market enough to drive it into positive territory, so anything short of an actual attack on Iraq will probably have little effect from here on out, unless Ahmadinejad comes out with some really stupid remarks to stay in the limelight where he likes it so much.

For those who are experienced in trading, shorting oil with relatively tight trailing stop losses on the upside would probably make sense. I think the environment is ripe for that.

Does the Government Hate Lower Oil Prices?

Here is another gem on the nanny state and how well it looks out for its charges.

The Federal Energy Regulatory Commission, or FERC, has initiated several legal actions against companies and individuals “caught” in manipulative short selling of oil. FERC’s explanation for why it pursues these actions?

No such action has been forthcoming by the CFTC against manipulative short sellers of gold and silver. Are we to conclude from this that the government hates the outcome of manipulative short selling only when it has the effect of driving the price of energy products down, but not when it has the effect of driving precious metals prices down?

Isn’t the government supposed to be “happy” when oil or gas gets cheaper so that inflation is lessened and consumers feel better? Likewise, isn’t the government supposed to be “happy” when people’s wealth position improves, regardless of what it is they invest in?

Not so, it seems.

Update on Brazil:

Last month, Brazil still looked like a good area to invest in although clouds were moving in on the picture. Now, things don’t look so good anymore, except on the government bond market – but that is closed to foreign investors.

The BOVESPA has spent all of July below its 200-DMA and has been in a tight downtrend channel since the beginning of June that was broken only to the downside once. What’s more, the Brazilian stock market is absolutely dominated by its oil giant, PetroBrazil, and the recent breakdown of oil prices hasn’t helped the index any. In fact, while the turn of oil has helped virtually all other world stock indexes find a temporary ledge on which to rest, the date of July 14th marks the beginning of an even more serious deterioration of the BVSP, as can be seen on this comparison chart.

Inflation is running rampant in Brazil at 4.5 percent, and the central bank’s economists expect it to reach 6.5 percent, so the bank raised its policy interest rate by .75 percent to a whopping 13 percent. Too bad government bonds are closed to outsiders. That move will undoubtedly keep the Brazilian real well supported, but it will only help to further suppress the stock market. Since oil prices are likely to continue dropping except if Iran gets attacked, it’s better to stay away from investing there.

United States of South America?

The left-leaning South American countries of Argentina, Bolivia, Brazil, Ecuador, Paraguay, Venezuela and Uruguay are working at lightning speed to create a Union of South American Nations (USAN) modeled after the European Union. The heads of state of Bolivia and Ecuador, meanwhile, are calling for the institution of a South American currency, and Venezuela’s Chavez piped in that South America should pool their central bank reserves and should stop “financing” the United States. By that he apparently meant the countries should stop supporting the dollar by accepting it in international trade settlement.

The USAN movement was only created in 2005. It had its third meeting of the respective heads of state in May this year and seems poised to move forward at the same rapid pace it has employed since its inception.

It is unclear whether this should be seen as a positive development or not. On the one hand it appears to be pursued in opposition to US-led efforts at creating a hemispheric trade union under the FTAA. On the other, there is nothing that would prevent the simultaneous efforts of the US with Canada and Mexico to form a North American Union under the SPP or “Security and Prosperity Partnership” from coming to fruition, and once that is accomplished, a merger could easily follow, especially since such a North American Union would occur with two other left-leaning governments.

The Bush administration, meanwhile, has done all it can to forever give so-called right-leaning governments and administrations a bad name, which undoubtedly will lead to an Obama victory and a following inevitable left-lurch of the US as a country. (Thais will of course happen even if McCain should win, as he is a ‘conservative’ only by his calling card and only for as long as it suits him – i.e., until he gets elected, if he can.

Prospects for Liberty in America are therefore exceedingly dim. It seems as if there will have to be night before it can become day again. Americans have long since forgotten what freedom means. They may need a stark reminder before they will remember. It seems that reminder is now close at hand, and it will likely come both in the form of a war with Iran and a serious economic depression here at home.

The only way out of this is for Americans to wake up to the fact that they absolutely have the unquestioned power to change the outcome and prevent any of this from happening. The only problem is that, in order to do this, they need to both inform themselves and then ACT on the information they have by systematically voting to remove all political incumbents from their offices at every election. The only time an incumbent should be allowed to remain in office is if he has proven by his voting pattern that he indeed understands and respects the law he swore to uphold – the Constitution.

If Americans don’t take that responsibility upon themselves, they have no one to complain to and nothing to complain about. The fun thing is that it is even easy to do. Very easy. All you have to do is to push the other button on your precinct’s voting machine, not the one next to the incumbent, at each and every election. The rest is just a matter of telling all the people in your periphery to do the same.

Whether or not others will follow suit is not really a concern. They certainly won’t if you don’t do it, so all you have to do is start with ‘number one.’ There are a thousand ‘reasons’ why others probably won’t follow suit — but so what? All it takes is a single decision, a single action, and those thousand ‘reasons’ will be of no consequence at all!

How Low Will Oil Go – and Will the Metals Follow?

The recent downturn in energy prices has taken on its own momentum, and that momentum is accelerating. The question is, how low will it all go?

As to the first part of the question, two main factors come into play: (a) Actual demand and supply interaction and (b) consumer/trader/investor sentiment.

Here is an instructive quote from one AP article today entitled “Commodities Plummet on Falling Crude Oil Prices”:

Oil initially turned lower after the Commerce Department reported that consumer spending fell in June as shoppers dealt with higher prices for gasoline, food and other items. That bolstered analysts' arguments that a U.S. economic slowdown is forcing Americans to scale back on energy use.

Well, it’s not the slowdown that forces Americans to scale back, but the higher energy prices, themselves. So, the question becomes: how far do energy prices need to fall before Americans can resume the level of spending they were at before the oil price bump and before May’s government welfare check?

The second question is: will whatever spending level that is or was be enough to bring the economy back out of its recession track so as to avoid a depression?

The last question is, how big of an ‘overshoot’ will investor sentiment cause in the downward spiral of oil prices?

The final question is: how far will gold and silver prices follow oil down before they rebound and resume their upward trend?

I will discuss these questions in turn, but I wanted to upload and send out this part of the August Monitor first, because it will take me a day or so to get the job done in any kind of halfways intelligible fashion.

Please remember that it would be a bad idea to sell your gold, silver, or gold/silver ETF holdings or mining stock mutual funds, if you currently own any. The coming weeks, and maybe even months, will be a hair-raising experience for precious metals investors, and many weak hands will have their metal shaken out of them - but the bull will continue.