Jun 262017
 
 June 26, 2017  Posted by at 11:49 am Finance Tagged with: , , , , , , , , , ,  


Paul Klee Ghost of a Genius 1922

 

The Automatic Earth has written many articles on the topic of EROEI (Energy Return on Energy Invested) through the years, there’s a whole chapter on it in the Automatic Earth Primer Guide 2017 that Nicole assembled recently, which contains 17 different articles.

Still, since EROEI is the most important energy issue there is at present, and not the price of oil or some new gas find or a set of windmills or solar panels or thorium, it can’t hurt to repeat it once again, in someone else’s words and from someone else’s angle. This one comes from Brian Davey on his site CredoEconomics, part of his book “Credo”.

It can’t hurt to repeat it because not nearly enough people understand that in the end everything, the survival of our world, our way of life, is all about the ‘quality’ of energy, about what we get in return when we drill and pump and build infrastructure, what remains when we subtract all the energy used to ‘generate’ energy, from (or at) the bottom line.

Anno 2017, our overall ‘net energy’ is nowhere near where it was for the first 100 years or so after we started using oil. And there’s no energy source that comes close to -conventional- oil (and gas) when it comes to what we are left with once our efforts are discounted, in calories or Joules.

The upshot of this is that even if we can ‘gain’ 10 times more than we put in, in energy terms, that won’t save our complex societies. To achieve that, we would need at least a 15:1 ratio, a number straight from our friend Charlie Hall, which is probably still quite optimistic. And we simply don’t have it. Not anymore.

Also, not nearly enough people understand that it has absolutely nothing to do with money. That you can’t go out and buy more or better energy sources. Which is why we use EROEI instead of EROI (Energy Return on Investment), because the latter leaves some sort of financial interpretation open that doesn’t actually exist, it suggests that a financial price of energy plays a role.

First, here’s Nicole from the Automatic Earth Primer Guide 2017. Below that, Brian Davey’s article.

 

 

Nicole Foss: Energy is the master resource – the capacity to do work. Our modern society is the result of the enormous energy subsidy we have enjoyed in the form of fossil fuels, specifically fossil fuels with a very high energy profit ratio (EROEI). Energy surplus drove expansion, intensification, and the development of socioeconomic complexity, but now we stand on the edge of the net energy cliff. The surplus energy, beyond that which has to be reinvested in future energy production, is rapidly diminishing.

We would have to greatly increase gross production to make up for reduced energy profit ratio, but production is flat to falling so this is no longer an option. As both gross production and the energy profit ratio fall, the net energy available for all society’s other purposes will fall even more quickly than gross production declines would suggest. Every society rests on a minimum energy profit ratio. The implication of falling below that minimum for industrial society, as we are now poised to do, is that society will be forced to simplify.

A plethora of energy fantasies is making the rounds at the moment. Whether based on unconventional oil and gas or renewables (that are not actually renewable), these are stories we tell ourselves in order to deny that we are facing any kind of future energy scarcity, or that supply could be in any way a concern. They are an attempt to maintain the fiction that our society can continue in its current form, or even increase in complexity. This is a vain attempt to deny the existence of non-negotiable limits to growth. The touted alternatives are not energy sources for our current society, because low EROEI energy sources cannot sustain a society complex enough to produce them.

 

 

Using Energy to Extract Energy – The Dynamics of Depletion

 

Brian Davey: The “Limits to Growth Study” of 1972 was deeply controversial and criticised by many economists. Over 40 years later, it seems remarkably prophetic and on track in its predictions. The crucial concept of Energy Return on Energy Invested is explained and the flaws in neoclassical reasoning which EROI highlights.

The continued functioning of the energy system is a “hub interdependency” that has become essential to the management of the increasing complexity of our society. The energy input into the UK economy is about 50 to 70 times as great as what the labour force could generate if working full time only with the power of their muscles, fuelled up with food. It is fossil fuels, refined to be used in vehicles and motors or converted into electricity that have created power inputs that makes possible the multiple round- about arrangements in a high complex economy. The other “hub interdependency” is a money and transaction system for exchange which has to continue to function to make vast production and trade networks viable. Without payment systems nothing functions.

Yet, as I will show, both types of hub interdependencies could conceivably fail. The smooth running of the energy system is dependent on ample supplies of cheaply available fossil fuels. However, there has been a rising cost of extracting and refining oil, gas and coal. Quite soon there is likely to be an absolute decline in their availability. To this should be added the climatic consequences of burning more carbon based fuels. To make the situation even worse, if the economy gets into difficulty because of rising energy costs then so too will the financial system – which can then have a knock-on consequence for the money system. The two hub interdependencies could break down together.

“Solutions” put forward by the techno optimists almost always assume growing complexity and new uses for energy with an increased energy cost. But this begs the question- because the problem is the growing cost of energy and its polluting and climate changing consequences.

 

The “Limits to Growth” study of 1972 – and its 40 year after evaluation

It was a view similar to this that underpinned the methodology of a famous study from the early 1970s. A group called the Club of Rome decided to commission a group of system scientists at the Massachusetts Institute of Technology to explore how far economic growth would continue to be possible. Their research used a series of computer model runs based on various scenarios of the future. It was published in 1972 and produced an instant storm. Most economists were up in arms that their shibboleth, economic growth, had been challenged. (Meadows, Meadows, Randers, & BehrensIII, 1972)

This was because its message was that growth could continue for some time by running down “natural capital” (depletion) and degrading “ecological system services” (pollution) but that it could not go on forever. An analogy would be spending more than one earns. This is possible as long as one has savings to run down, or by running up debts payable in the future. However, a day of reckoning inevitably occurs. The MIT scientists ran a number of computer generated scenarios of the future including a “business as usual” projection, called the “standard run” which hit a global crisis in 2030.

It is now over 40 years since the original Limits to Growth study was published so it is legitimate to compare what was predicted in 1972 against what actually happened. This has now been done twice by Graham Turner who works at the Australian Commonwealth Scientific and Industrial Research Organisation (CSIRO). Turner did this with data for the rst 30 years and then for 40 years of data. His conclusion is as follows:

The Limits to Growth standard run scenario produced 40 years ago continues to align well with historical data that has been updated in this paper following a 30-year comparison by the author. The scenario results in collapse of the global economy and environment and subsequently, the population. Although the modelled fall in population occurs after about 2030 – with death rates reversing contemporary trends and rising from 2020 onward – the general onset of collapse first appears at about 2015 when per capita industrial output begins a sharp decline. (Turner, 2012)

So what brings about the collapse? In the Limits to Growth model there are essentially two kinds of limiting restraints. On the one hand, limitations on resource inputs (materials and energy). On the other hand, waste/pollution restraints which degrade the ecological system and human society (particularly climate change).

Turner finds that, so far it, is the former rather than the latter that is the more important. What happens is that, as resources like fossil fuels deplete, they become more expensive to extract. More industrial output has to be set aside for the extraction process and less industrial output is available for other purposes.

With signficant capital subsequently going into resource extraction, there is insufficient available to fully replace degrading capital within the industrial sector itself. Consequently, despite heightened industrial activity attempting to satisfy multiple demands from all sectors and the population, actual industrial output per capita begins to fall precipitously, from about 2015, while pollution from the industrial activity continues to grow. The reduction of inputs produced per capita. Similarly, services (e.g., health and education) are not maintained due to insufficient capital and inputs.

Diminishing per capita supply of services and food cause a rise in the death rate from about 2020 (and somewhat lower rise in the birth rate, due to reduced birth control options). The global population therefore falls, at about half a billion per decade, starting at about 2030. Following the collapse, the output of the World3 model for the standard run (figure 1 to figure 3) shows that average living standards for the aggregate population (material wealth, food and services per capita) resemble those of the early 20th century.(Turner, 2012, p. 121)

 

Energy Return on Energy Invested

A similar analysis has been made by Hall and Klitgaard. They argue that to run a modern society it is necessary that the energy return on energy invested must be at least 15 to 1. To understand why this should be so consider the following diagram from a lecture by Hall. (Hall, 2012)

eroei

The diagram illustrates the idea of the energy return on energy invested. For every 100 Mega Joules of energy tapped in an oil flow from a well, 10 MJ are needed to tap the well, leaving 90 MJ. A narrow measure of energy returned on energy invested at the wellhead in this example would therefore be 100 to 10 or 10 to 1.

However, to get a fuller picture we have to extend this kind of analysis. Of the net energy at the wellhead, 90 MJ, some energy has to be used to refine the oil and produce the by-products, leaving only 63 MJ.

Then, to transport the refined product to its point of use takes another 5 MJ leaving 58MJ. But of course, the infrastructure of roads and transport also requires energy for construction and maintenance before any of the refined oil can be used to power a vehicle to go from A to B. By this final stage there is only 20.5 MJ of the original 100MJ left.

We now have to take into account that depletion means that, at well heads around the world, the energy to produce energy is increasing. It takes energy to prospect for oil and gas and if the wells are smaller and more difficult to tap because, for example, they are out at sea under a huge amount of rock. Then it will take more energy to get the oil out in the first place.

So, instead of requiring 10MJ to produce the 100 MJ, let us imagine that it now takes 20 MJ. At the other end of the chain there would thus, only be 10.5MJ – a dramatic reduction in petroleum available to society.

The concept of Energy Return on Energy Invested is a ratio in physical quantities and it helps us to understand the flaw in neoclassical economic reasoning that draws on the idea of “the invisible hand” and the price mechanism. In simplistic economic thinking, markets should have no problems coping with depletion because a depleting resource will become more expensive. As its price rises, so the argument goes, the search for new sources of energy and substitutes will be incentivised while people and companies will adapt their purchases to rising prices. For example, if it is the price of energy that is rising then this will incentivise greater energy efficiency. Basta! Problem solved…

Except the problem is not solved… there are two flaws in the reasoning. Firstly, if the price of energy rises then so too does the cost of extracting energy – because energy is needed to extract energy. There will be gas and oil wells in favourable locations which are relatively cheap to tap, and the rising energy price will mean that the companies that own these wells will make a lot of money. This is what economists call “rent”. However, there will be some wells that are “marginal” because the underlying geology and location are not so favourable. If energy prices rise at these locations then rising energy prices will also put up the energy costs of production. Indeed, when the energy returned on energy invested falls as low as 1 to 1, the increase in the costs of energy inputs will cancel out any gains in revenues from higher priced energy outputs. As is clear when the EROI is less than one, energy extraction will not be profitable at any price.

Secondly, energy prices cannot in any case rise beyond a certain point without crashing the economy. The market for energy is not like the market for cans of baked beans. Energy is necessary for virtually every activity in the economy, for all production and all services. The price of energy is a big deal – energy prices going up and down have a similar significance to interest rates going up or down. There are “macro-economic” consequences for the level of activity in the economy. Thus, in the words of one analyst, Chris Skrebowski, there is a rise in the price of oil, gas and coal at which:

the cost of incremental supply exceeds the price economies can pay without destroying growth at a given point in time.(Skrebowski, 2011)

This kind of analysis has been further developed by Steven Kopits of the Douglas-Westwood consultancy. In a lecture to the Columbia University Center on Global Energy Policy in February of 2014, he explained how conventional “legacy” oil production peaked in 2005 and has not increased since. All the increase in oil production since that date has been from unconventional sources like the Alberta Tar sands, from shale oil or natural gas liquids that are a by-product of shale gas production. This is despite a massive increase in investment by the oil industry that has not yielded any increase in “conventional oil” production but has merely served to slow what would otherwise have been a faster decline.

More specifically, the total spend on upstream oil and gas exploration and production from 2005 to 2013 was $4 trillion. Of that amount, $3.5 trillion was spent on the “legacy” oil and gas system. This is a sum of money equal to the GDP of Germany. Despite all that investment in conventional oil production, it fell by 1 million barrels a day. By way of comparison, investment of $1.5 trillion between 1998 and 2005 yielded an increase in oil production of 8.6 million barrels a day.

Further to this, unfortunately for the oil industry, it has not been possible for oil prices to rise high enough to cover the increasing capital expenditure and operating costs. This is because high oil prices lead to recessionary conditions and slow or no growth in the economy. Because prices are not rising fast enough and costs are increasing, the costs of the independent oil majors are rising at 2 to 3% a year more than their revenues. Overall profitability is falling and some oil majors have had to borrow and sell assets to pay dividends. The next stage in this crisis has then been that investment projects are being cancelled – which suggests that oil production will soon begin to fall more rapidly.

The situation can be understood by reference to the nursery story of Goldilocks and the Three Bears. Goldilocks tries three kinds of porridge – some that is too hot, some that is too cold and some where the temperature is somewhere in the middle and therefore just right. The working assumption of mainstream economists is that there is an oil price that is not too high to undermine economic growth but also not too low so that the oil companies cannot cover their extraction costs – a price that is just right. The problem is that the Goldilocks situation no longer describes what is happening. Another story provides a better metaphor – that story is “Catch 22”. According to Kopits, the vast majority of the publically quoted oil majors require oil prices of over $100 a barrel to achieve positive cash flow and nearly a half need more than $120 a barrel.

But it is these oil prices that drag down the economies of the OECD economies. For several years, however, there have been some countries that have been able to afford the higher prices. The countries that have coped with the high energy prices best are the so called “emerging non OECD countries” and above all China. China has been bidding away an increasing part of the oil production and continuing to grow while higher energy prices have led to stagnation in the OECD economies. (Kopits, 2014)

Since the oil price is never “just right” it follows that it must oscillate between a price that is too high for macro-economic stability or too low to make it a paying proposition for high cost producers of oil (or gas) to invest in expanding production. In late 2014 we can see this drama at work. The faltering global economy has a lower demand for oil but OPEC, under the leadership of Saudi Arabia, have decided not to reduce oil production in order to keep oil prices from falling. On the contrary they want prices to fall. This is because they want to drive US shale oil and gas producers out of business.

The shale industry is described elsewhere in this book – suffice it here to refer to the claim of many commentators that the shale oil and gas boom in the United States is a bubble. A lot of money borrowed from Wall Street has been invested in the industry in anticipation of high profits but given the speed at which wells deplete it is doubtful whether many of the companies will be able to cover their debts. What has been possible so far has been largely because quantitative easing means capital for this industry has been made available with very low interest rates. There is a range of extraction production costs for different oil and gas wells and fields depending on the differing geology in different places. In some “sweet spots” the yield compared to cost is high but in a large number of cases the costs of production have been high and it is being said that it will be impossible to make money at the price to which oil has fallen ($65 in late 2014). This in turn could mean that companies funding their operations with junk bonds could find it difficult to service their debt. If interest rates rise the difficulty would become greater. Because the shale oil and gas sector has been so crucial to expansion in the USA then a large number of bankruptcies could have wider repercussions throughout the wider US and world economy.

 

Renewable Energy systems to the rescue?

Although it seems obvious that the depletion of fossil fuels can and should lead to the expansion of renewable energy systems like wind and solar power, we should beware of believing that renewable energy systems are a panacea that can rescue consumer society and its continued growth path. A very similar net energy analysis can, and ought to be done for the potential of renewable energy to match that already done for fossil fuels.

eroei-renewables

Before we get over-enthusiastic about the potential for renewable energy, we have to be aware of the need to subtract the energy costs particular to renewable energy systems from the gross energy that renewable energy systems generate. Not only must energy be used to manufacture and install the wind turbines, the solar panels and so on, but for a renewable based economy to be able to function, it must also devote energy to the creation of energy storage. This would allow for the fact that, when the wind and the sun are generating energy, is not necessarily the time when it is wanted.

Furthermore, the places where, for example, solar and wind potential are at this best – offshore for wind or in deserts without dust storms near the equator for solar – are usually a long distance from centres of use. Once again, a great deal of energy, materials and money must be spent getting the energy from where it is generated to where it will be used. For example, the “Energie Wende” (Energy Transformation) in Germany is involving huge effort, financial and energy costs, creating a transmission corridor to carry electricity from North Sea wind turbines down to Bavaria where the demand is greatest. Similarly, plans to develop concentrated solar power in North Africa for use in northern Europe which, if they ever come to anything, will require major investments in energy transmission. A further issue, connected to the requirement for energy storage, is the need for energy carriers which are not based on electricity. As before, conversions to put a current energy flux into a stored form, involve an energy cost.

Just as with fossil fuels, sources of renewable energy are of variable yield depending on local conditions: offshore wind is better than onshore for wind speed and wind reliability; there is more solar energy nearer the equator; some areas have less cloud cover; wave energy on the Atlantic coasts of the UK are much better than on other coastlines like those of the Irish Sea or North Sea. If we make a Ricardian assumption that best net yielding resources are developed first, then subsequent yields will be progressively inferior. In more conventional jargon – just as there are diminishing returns for fossil energy as fossil energy resources deplete, so there will eventually be diminishing returns for renewable energy systems. No doubt new technologies will partly buck this trend but the trend is there nonetheless. It is for reasons such as these that some energy experts are sceptical about the global potential of renewable energy to meet the energy demand of a growing economy. For example, two Australian academics at Monash University argue that world energy demand would grow to 1,000 EJ (EJ = 10 18 J) or more by 2050 if growth continued on the course of recent decades. Their analysis then looks at each renewable energy resource in turn, bearing in mind the energy costs of developing wind, solar, hydropower, biomass etc., taking into account diminishing returns, and bearing in mind too that climate change may limit the potential of renewable energy. (For example, river flow rates may change affecting hydropower). Their conclusion: “We nd that when the energy costs of energy are considered, it is unlikely that renewable energy can provide anywhere near a 1000 EJ by 2050.” (Moriarty & Honnery, 2012)

Now let’s put these insights back into a bigger picture of the future of the economy. In a presentation to the All Party Parliamentary Group on Peak Oil and Gas, Charles Hall showed a number of diagrams to express the consequences of depletion and rising energy costs of energy. I have taken just two of these diagrams here – comparing 1970 with what might be the case in 2030. (Hall C. , 2012) What they show is how the economy produces different sorts of stuff. Some of the production is consumer goods, either staples (essentials) or discretionary (luxury) goods. The rest of production is devoted to goods that are used in production i.e. investment goods in the form of machinery, equipment, buildings, roads, infrastracture and their maintenance. Some of these investment goods must take the form of energy acquisition equipment. As a society runs up against energy depletion and other problems, more and more production must go into energy acquisition, infrastructure and maintenance. Less and less is available for consumption, and particularly for discretionary consumption.

hall

Whether the economy would evolve in this way can be questioned. As we have seen, the increasing needs of the oil and gas sector implies a transfer of resources from elsewhere through rising prices. However, the rest of the economy cannot actually pay this extra without crashing. That is what the above diagrams show – a transfer of resources from discretionary consumption to investment in energy infrastructure. But such a transfer would be crushing for the other sectors and their decline would likely drag down the whole economy.

Over the last few years, central banks have had a policy of quantitative easing to try to keep interest rates low. The economy cannot pay high energy prices AND high interest rates so, in effect, the policy has been to try to bring down interest rates as low as possible to counter the stagnation. However, this has not really created production growth, it has instead created a succession of asset price bubbles. The underlying trend continues to be one of stagnation, decline and crisis and it will get a lot worse when oil production starts to fall more rapidly as a result of investment cut backs. The severity of the recessions may be variable in different countries because competitive strength in this model goes to those countries where energy is used most efficiently and which can afford to pay somewhat higher prices for energy. Such countries are likely to do better but will not escape the general decline if they stay wedded to the conventional growth model. Whatever the variability, this is still a dead end and, at some point, people will see that entirely different ways of thinking about economy and ecology are needed – unless they get drawn into conflicts and wars over energy by psychopathic policy idiots. There is no way out of the Catch 22 within the growth economy model. That’s why degrowth is needed.

Further ideas can be extrapolated from Hall’s way of presenting the end of the road for the growth economy. The only real option as a source for extra resources to be ploughed into changing the energy sector is from what Hall calls “discretionary consumption” aka luxury consumption. It would not be possible to take from “staples” without undermining the ability of ordinary people to survive day to day. Implicit here is a social justice agenda for the post growth – post carbon economy. Transferring resources out of the luxury consumption of the rich is a necessary part of the process of finding the wherewithal for energy conservation work and for developing renewable energy resources. These will be expensive and the resources cannot come from anywhere else than out of the consumption of the rich. It should be remembered too that the problems of depletion do not just apply to fossil energy extraction coal, oil and gas) but apply across all forms of mineral extraction. All minerals are depleted by use and that means the grade or ore declines over time. Projecting the consequences into the future ought to frighten the growth enthusiasts. To take in how industrial production can hit a brick wall of steeply rising costs, consider the following graph which shows the declining quality of ore grades mined in Australia.

mining-australia

As ores deplete there is a deterioration of ore grades. That means that more rock has to be shifted and processed to refine and extract the desired raw material, requiring more energy and leaving more wastes. This is occurring in parallel to the depletion in energy sources which means that more energy has to be used to extract a given quantity of energy and therefore, in turn, to extract from a given quantity of ore. Thus, the energy requirements to extract energy are rising at the very same time as the amount of energy required to extract given quantities of minerals are rising. More energy is needed just at the time that energy is itself becoming more expensive.

Now, on top of that, add to the picture the growing demand for minerals and materials if the economy is to grow.

At least there has been a recognition and acknowledgement in recent years that environmental problems exist. The problem is now somewhat different – the problem is the incredibly naive faith that markets and technology can solve all problems and keep on going. The main criticism of the limits to growth study was the claim that problems would be anticipated in forward markets and would then be made the subject of high tech innovation. In the next chapter, the destructive effects of these innovations are examined in more depth.

 

 

Oct 222016
 
 October 22, 2016  Posted by at 7:29 am Finance Tagged with: , , , , , , ,  Comments Off on Why The Global Economy Will Disintegrate Rapidly


Pamir, Last Commercial Sailing Ship To Round Cape Horn 1949

 

We have written little on the topic of energy lately, other than related to oil prices going up and down, empty OPEC ‘promises’ to cut oil production, and the incredible debt load threatening to crush US -and Canadian- unconventional oil and gas. It’s a logical outcome of focusing more on finance than energy, because we feel the former has a shorter timeline than the latter. Something that harks back to our Oil Drum days.

But that doesn’t mean that the idea and/or principle of peak oil has disappeared, or that we have completely forgotten it. It has just been snowed under by the financial crisis (and by unconventinal oil and gas). And while we continue to find that the financial world will dump us into a bigger crisis sooner than energy will, it’s useful to look at oil et al from time to time.

Please note: we don’t wish to deny that oil depletion has its own dynamics, but in our view those dynamics will be hugely affected by the financial crisis that is looming big and will strike first. A crisis that, by the way, will affect not just oil and gas, but solar and wind just as much. You can get only as much ‘alternative’ energy as you can pay for, and that is before we even mention solar and wind’s EROEI (Energy Return On Energy Investment).

What the world needs to do, but we very much doubt it will voluntarily, is not to look for other forms of energy to replace oil and gas, but to look for ways to use much less energy (90% or so) while still maintaining societies that function as best they can. We doubt this because man is no more made to volunteer for downsizing than any other species.

The interview below with Louis Arnoux by the SRSrocco Report, combined with an article Louis wrote in July on the site of our old friend Ugo Bardi (is Florence really 6 years ago already?), is an excellent opportunity to catch up on energy issues.

The discussion of energy relative to finance will no doubt continue, and Louis doesn’t seem to have the exact same view as us, but that’s fine, or at least it shouldn’t deter us from listening. This graph from his work, for instance, contains a great depiction of what EROEI really means, and how it works out, and that is important to know.

And yes, we are aware of the contradiction between the provocative title of this post (borrowed from SRSrocco Report) and our own view that it’s not energy that will bring the economy down; the internal dynamics of finance don’t need any help on their way towards crashing the system. But it’s a great title nonetheless.

 

 

First, here’s the SRSrocco Report interview, below it you’ll find the article. Note: this is part 1, links to parts 2 and 3 are provided.

 

 

 

Louis Arnoux: Some reflections on the Twilight of the Oil Age – part I:
Alice looking down the end of the barrel

 

 

This three-part post was inspired by Ugo’s recent post concerning Will Renewables Ever ReplaceFossils? and recent discussions within Ugo’s discussion group on how is it that “Economists still don’t get it”?  It integrates also numerous discussion and exchanges I have had with colleagues and business partners over the last three years.

Introduction


Since at least the end of 2014 there has been increasing confusions about oil prices, whether so-called “Peak Oil” has already happened, or will happen in the future and when, matters of EROI (or EROEI) values for current energy sources and for alternatives, climate change and the phantasmatic 2oC warming limit, and concerning the feasibility of shifting rapidly to renewables or sustainable sources of energy supply.  Overall, it matters a great deal whether a reasonable time horizon to act is say 50 years, i.e. in the main the troubles that we are contemplating are taking place way past 2050, or if we are already in deep trouble and the timeframe to try and extricate ourselves is some 10 years. Answering this kind of question requires paying close attention to system boundary definitions and scrutinising all matters taken for granted.

It took over 50 years for climatologists to be heard and for politicians to reach the Paris Agreement re climate change (CC) at the close of the COP21, late last year.  As you no doubt can gather from the title, I am of the view that we do not have 50 years to agonise about oil.  In the three sections of this post I will first briefly take stock of where we are oil wise; I will then consider how this situation calls upon us to do our utter best to extricate ourselves from the current prevailing confusion and think straight about our predicament; and in the third part I will offer a few considerations concerning the near term, the next ten years – how to approach it, what cannot work and what may work, and the urgency to act, without delay.

Part 1 – Alice looking down the end of the barrel


In his recent post, Ugo contrasted the views of the Doomstead Diner‘s readers  with that of energy experts regarding the feasibility of replacing fossil fuels within a reasonable timeframe.  In my view, the Doomstead’s guests had a much better sense of the situation than the “experts” in Ugo’s survey.  To be blunt, along current prevailing lines we are not going to make it.  I am not just referring here to “business-as-usual” (BAU) parties holding for dear life onto fossil fuels and nukes.  I also include all current efforts at implementing alternatives and combating CC.  Here is why.   

The energy cost of system replacement


What a great number of energy technology specialists miss are the challenges of whole system replacement – moving from fossil-based to 100% sustainable over a given period of time.  Of course, the prior question concerns the necessity or otherwise of whole system replacement.  For those of us who have already concluded that this is an urgent necessity, if only due to CC, no need to discuss this matter here.  For those who maybe are not yet clear on this point, hopefully, the matter will become a lot clearer a few paragraphs down.

So coming back for now to whole system replacement, the first challenge most remain blind to is the huge energy cost of whole system replacement in terms of both the 1st principle of thermodynamics (i.e. how much net energy is required to develop and deploy a whole alternative system, while the old one has to be kept going and be progressively replaced) and also concerning the 2nd principle (i.e. the waste heat involved in the whole system substitution process).  The implied issues are to figure out first how much total fossil primary energy is required by such a shift, in addition to what is required for ongoing BAU business and until such a time when any sustainable alternative has managed to become self-sustaining, and second to ascertain where this additional fossil energy may come from. 

The end of the Oil Age is now


If we had a whole century ahead of us to transition, it would be comparatively easy.  Unfortunately, we no longer have that leisure since the second key challenge is the remaining timeframe for whole system replacement.  What most people miss is that the rapid end of the Oil Age began in 2012 and will be over within some 10 years.  To the best of my knowledge, the most advanced material in this matter is the thermodynamic analysis of the oil industry taken as a whole system (OI) produced by The Hill’s Group (THG) over the last two years or so (https://www.thehillsgroup.org). 

THG are seasoned US oil industry engineers led by B.W. Hill.  I find its analysis elegant and rock hard.  For example, one of its outputs concerns oil prices.  Over a 56 year time period, its correlation factor with historical data is 0.995.  In consequence, they began to warn in 2013 about the oil price crash that began late 2014 (see: https://www.thehillsgroup.org/depletion2_022.htm).  In what follows I rely on THG’s report and my own work.
Three figures summarise the situation we are in rather well, in my view.
Figure 1 – End Game
For purely thermodynamic reasons net energy delivered to the globalised industrial world (GIW) per barrel by the oil industry (OI) is rapidly trending to zero.  By net energy we mean here what the OI delivers to the GIW, essentially in the form of transport fuels, after the energy used by the OI for exploration, production, transport, refining and end products delivery have been deducted. 
However, things break down well before reaching “ground zero”; i.e. within 10 years the OI as we know it will have disintegrated. Actually, a number of analysts from entities like Deloitte or Chatham House, reading financial tealeaves, are progressively reaching the same kind of conclusions.[1]

The Oil Age is finishing now, not in a slow, smooth, long slide down from “Peak Oil”, but in a rapid fizzling out of net energy.  This is now combining with things like climate change and the global debt issues to generate what I call a “Perfect Storm” big enough to bring the GIW to its knees.

In an Alice world


At present, under the prevailing paradigm, there is no known way to exit from the Perfect Storm within the emerging time constraint (available time has shrunk by one order of magnitude, from 100 to 10 years).  This is where I think that Doomstead Diner’s readers are guessing right.  Many readers are no doubt familiar with the so-called “Red Queen” effect illustrated in Figure 2 – to have to run fast to stay put, and even faster to be able to move forward.  The OI is fully caught in it.

Figure 2 – Stuck on a one track to nowhere

The top part of Figure 2 highlights that, due to declining net energy per barrel, the OI has to keep running faster and faster (i.e. pumping oil) to keep supplying the GIW with the net energy it requires.  What most people miss is that due to that same rapid decline of net energy/barrel towards nil, the OI can’t keep “running” for much more than a few years – e.g. B.W. Hill considers that within 10 years the number of petrol stations in the US will have shrunk by 75%…  

What people also neglect, depicted in the bottom part of Figure 2, is what I call the inverse Red Queen effect (1/RQ).  Building an alternative whole system takes energy that to a large extent initially has to come from the present fossil-fuelled system.  If the shift takes place too rapidly, the net energy drain literally kills the existing BAU system.[2] The shorter the transition time the harder is the 1/RQ.  

I estimate the limit growth rate for the alternative whole system at 7% growth per year.  

In other words, current growth rates for solar and wind, well above 20% and in some cases over 60%, are not viable globally.  However, the kind of growth rates, in the order of 35%, that are required for a very short transition under the Perfect Storm time frame are even less viable – if “we” stick to the prevailing paradigm, that is.  As the last part of Figure 2 suggests, there is a way out by focusing on current huge energy waste, but presently this is the road not taken.

On the way to Olduvai


In my view, given that nearly everything within the GIW requires transport and that said transport is still about 94% dependent on oil-derived fuels, the rapid fizzling out of net energy from oil must be considered as the defining event of the 21st century – it governs the operation of all other energy sources, as well as that of the entire GIW.  In this respect, the critical parameter to consider is not that absolute amount of oil mined (as even “peakoilers” do), such as Million barrels produced per year, but net energy from oil per head of global population, since when this gets too close to nil we must expect complete social breakdown, globally. 

The overall picture, as depicted ion Figure 3, is that of the “Mother of all Senecas” (to use Ugo’s expression).   It presents net energy from oil per head of global population.[3]  The Olduvai Gorge as a backdrop is a wink to Dr. Richard Duncan’s scenario (he used barrels of oil equivalent which was a mistake) and to stress the dire consequences if we do reach the “bottom of the Gorge” – a kind of “postmodern hunter-gatherer” fate.

Oil has been in use for thousands of year, in limited fashion at locations where it seeped naturally or where small well could be dug out by hand.  Oil sands began to be mined industrially in 1745 at Merkwiller-Pechelbronn in north east France (the birthplace of Schlumberger).  From such very modest beginnings to a peak in the early 1970s, the climb took over 220 years.  The fall back to nil will have taken about 50 years.

The amazing economic growth in the three post WWII decades was actually fuelled by a 321% growth in net energy/head.  The peak of 18GJ/head in around 1973, was actually in the order of some 40GJ/head for those who actually has access to oil at the time, i.e. the industrialised fraction of the global population.

Figure 3 – The “Mother of all Senecas”

In 2012 the OI began to use more energy per barrel in its own processes (from oil exploration to transport fuel deliveries at the petrol stations) than what it delivers net to the GIW.  We are now down below 4GJ/head and dropping fast.

This is what is now actually driving the oil prices: since 2014, through millions of trade transactions (functioning as the “invisible hand” of the markets), the reality is progressively filtering that the GIW can only afford oil prices in proportion to the amount of GDP growth that can be generated by a rapidly shrinking net energy delivered per barrel, which is no longer much.  Soon it will be nil. So oil prices are actually on a downtrend towards nil. 

To cope, the OI has been cannibalising itself since 2012.  This trend is accelerating but cannot continue for very long.  Even mainstream analysts have begun to recognise that the OI is no longer replenishing its reserves.  We have entered fire-sale times (as shown by the recent announcements by Saudi Arabia (whose main field, Ghawar, is probably over 90% depleted) to sell part of Aramco and make a rapid shift out of a near 100% dependence on oil and towards “solar”.

Given what Figure 1 to 3 depict, it should be obvious that resuming growth along BAU lines is no longer doable, that addressing CC as envisaged at the COP21 in Paris last year is not doable either, and that incurring ever more debt that can never be reimbursed is no longer a solution, not even short-term.  
Time to “pull up” and this requires a paradigm change capable of avoiding both the RQ and 1/RQ constraints.  After some 45 years of research, my colleagues and I think this is still doable.  Short of this, no, we are not going to make it, in terms of replacing fossil resources with renewable ones within the remaining timeframe, or in terms of the GIW’s survival.
Next: 

Part 2 – Enquiring into the appropriateness of the question

Part 3 – Standing slightly past the edge of the cliff

 

 

Bio: Dr Louis Arnoux is a scientist, engineer and entrepreneur committed to the development of sustainable ways of living and doing business.

 

 

Dec 152015
 
 December 15, 2015  Posted by at 9:53 am Finance Tagged with: , , , , , , , ,  Comments Off on Debt Rattle December 15 2015


Unknown No Dog Biscuits Today

Stephen Roach: China Is The Biggest Commodities Story Since WWII (BBG)
Fitch Warns Of Effects Of Sharp China Slowdown (CNBC)
Rio Tinto CEO Says Iron Ore Rivals ‘Hanging on by Their Fingernails’ (BBG)
Miners Shoveling Furiously Prop Up Aussie GDP as Iron Ore Melts (BBG)
US Natural-Gas Prices Plunge Toward A 14-Year Low (MarketWatch)
Never Mind $35, The World’s Cheapest Oil Is Already Close to $20 (BBG)
Junk Rated Stocks Flashing Same Signal as High-Yield Bond Market (BBG)
Big Banks In Europe And US Announced 100,000 New Job Cuts This Year (FT)
Yahoo Told: Cut 9,000 Of Your 10,700 Staff (AP)
Economic Pain In US Heartland As Likely Fed Hike Nears (Reuters)
The Mystery of Missing Inflation Weighs on Fed Rate Move (WSJ)
Are Negative Rates Fueling Deflation? (Martin Armstrong)
Fedpocalypse Now? (Jim Kunstler)
Throwing Out Granny: Abe Wants Elderly Japanese To Move To Countryside (BBG)
Absolute Good -Us- vs Absolute Evil -Them- (Crooke)
EU To Offer Turkey No Guarantee On Taking In Refugees (Reuters)
Where The Dream Of Europe Ends (Gill)
EU Backs Housing Scheme For Migrants And Refugees In Greece (AP)
Three Of Six Missing Migrants Confirmed Drowned (Kath.)

“The Bloomberg Commodity Index, a measure of returns for 22 raw materials, closed at the lowest in 16 years on Monday..”

Stephen Roach: China Is The Biggest Commodities Story Since WWII (BBG)

Commodities are at risk of extending declines as China’s slowdown hurts demand and the world’s largest user shifts its economic model away from raw materials, according to Stephen Roach, who said some producers haven’t yet faced up to the change. “The China factor can’t be emphasized enough,” Roach, a senior fellow at Yale University, said in a Bloomberg Television interview in Hong Kong on Tuesday. China “has been the most commodities-intensive story that the world economy has seen in the post-WWII period. Now China is shifting the model to more of a commodity-light, services-led economy.”

Raw materials sank to the lowest level since 1999 this week as China’s slowest expansion in a quarter of a century cut demand in a reversal of the pattern seen a decade ago, when booming growth in Asia fueled a surge across commodity prices that was dubbed the super-cycle. Continued concern about China, coupled with a rising dollar as the Federal Reserve raises rates, will make it difficult for commodities to rebound, according to Roach, a former non-executive chairman for Morgan Stanley in Asia. “Commodities are, after a super-cycle, obviously going the other way, big time,” Roach said. Some companies “are in denial that China is changing its character, its structure. It’s going to take a while for that to sink in, and until it sinks in, there’s still downward pressure on commodity markets and prices.”

The Bloomberg Commodity Index, a measure of returns for 22 raw materials, closed at the lowest in 16 years on Monday as supplies of everything from oil to copper outstripped demand. Base metals and crude oil fell on Tuesday, with copper trading 0.6% lower at $4,645 a metric ton in London, down 26% this year. The best way to heal lower prices are lower prices, as that takes supply out of the system, according to Roach. Metals companies in China including producers of copper, aluminum, zinc and nickel have all announced cuts to supply or plans to rein in capacity growth to stem the price rout. Outside China, Glencore pared copper production from mines in Africa, while Alcoa has curbed aluminum output.

Read more …

A test run that puts China GDP growth at 2.3%. A number picked by accident?

Fitch Warns Of Effects Of Sharp China Slowdown (CNBC)

A sharp slowdown in the world’s second largest economy China would hit global growth hard, according to a report by Fitch ratings agency, which warned of “significant knock-on effects” for the rest of the world. In its report published Tuesday, Fitch warned that a sharp slowdown in China’s GDP growth rate to 2.3% during 2016-2018 “would disrupt global trade and hinder growth, with significant knock-on effects for emerging markets and global corporates. In turn, this would keep short-term interest rates and commodity prices lower for longer.” Global GDP growth is currently expected to be 3.1% in 2017, according to Oxford Economics’ global economic model which was used by Fitch to frame its “shock” China scenario. But if a slowdown of such a magnitude materialized in China, Fitch said global GDP growth would slow to 1.8% in 2017.

As a result, any rise in U.S. and euro zone short-term interest rates would be postponed, and oil prices would remain under pressure, Fitch said. ‘Lower-for-longer in terms of growth, interest rates and commodity prices, could be the defining mantra of this decade for the major advanced economies if a Chinese shock scenario materializes,’ Bill Warlick, senior director of Macro Credit Research at Fitch, noted in the study. While Fitch emphasized that this hypothetical scenario did not reflect its current expectations for China’s growth, it was “designed to test credit connections between China and the rest of the world.”

In terms of these “credit connections”, a China slowdown would “impair” the credit profiles of many companies globally, particularly commodity-dependent ones in oil and gas, steel, and mining, Fitch said. “Shipping companies would also suffer, as commodities account for a significant portion of freight volume. The global technology, heavy manufacturing and automotive sectors would also feel increased credit pressure due to a slowdown in Chinese demand,” the agency warned. [..] Within Fitch’s rated portfolio, 25 percent of oil and gas companies and 52 percent of other commodities companies are already sub-investment grade. If the slowdown scenario materialized, it could create ripple effects through the high-yield bond market, the agency said.

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They should have checked his hands, too.

Rio Tinto CEO Says Iron Ore Rivals ‘Hanging on by Their Fingernails’ (BBG)

The iron ore collapse has pushed producers to the brink of survival, according to the head of the world’s second-biggest mining company. “There are a lot of producers that we believed would leave the market that are hanging on by their fingernails,” Sam Walsh, chief executive officer of Rio Tinto Group, said in an interview with Bloomberg TV. “They are burning up cash reserves of their shareholders.” Iron ore’s 45% retreat this year has left the industry on the precipice of an unprecedented shake-out as higher-cost suppliers are slowly forced to exit the market. Prices are continuing to fall as the largest companies, including Vale, Rio Tinto and BHP Billiton, expand production and grab market share. Iron ore fell below $39 a metric ton last week, a record low in daily prices dating back to 2009. That’s down from near $190 in 2011, when Chinese demand was booming.

“I suspect that right now, even at a price of $39 a ton, there are people that are suffering pretty loudly,” Walsh said. “Sooner or later the adjustment will take place.” The slump has hurt miners’ shares. Rio stock has lost 28% in Sydney this year, dropping to A$40.39 on Dec. 9, the lowest price since 2009, while BHP has fallen 40%. In Brazil, Vale has dropped 49%. Rio and its rivals have been criticized by analysts, competitors and governments for pursuing a strategy of expanding lower-cost mines even as prices fell amid a global glut. Walsh said it would be abnormal for his company to consider withholding supply given that Rio is the lowest cost producer. Rio and BHP are in an “imaginary world” because their strategy hurts themselves as much as their competitors, Lourenco Goncalves, the CEO of Cliffs Natural Resources, the biggest U.S. iron ore producer, said last month. Prices below $50 are “not comfortable to anyone,” he said.

Read more …

It’s same all over commodities: overproduce to stay alive. Run and still move backwards.

Miners Shoveling Furiously Prop Up Aussie GDP as Iron Ore Melts (BBG)

The price of Australia’s top export has been almost slashed in half this year. That makes it all the more surprising economists increasingly see iron ore propping up growth as they assemble their 2016 forecasts. The reason: Australian producers are making up for the price destruction by doubling down on volume, in the process worsening a global supply glut. There’s even a new entrant to the market – Gina Rinehart, Australia’s richest person, last week oversaw her company’s first shipment of iron ore to South Korea. The surging exports are also papering over a massive drag on the economy from collapsing mining investment and could account for most of next year’s growth, according to Citigroup and Goldman Sachs.

Still, the fall in commodity prices will hurt fiscal revenue, making it more difficult for the government to pare back a deficit and reach its goal for a surplus by the end of the decade. “We’re running faster to stand still when it comes to national income,” said James McIntyre at Macquarie in Sydney. Australia is forecasting an 8% rise in the volume of iron ore exports next year to 824 million metric tons, which would be almost double the amount the country shipped five years earlier. Goldman Sachs estimates that the country’s net exports will contribute 2 percentage points to growth next year without which the economy would stall.

Read more …

It’s everywhere. NatGas could bounce back a little if winter sets in.

US Natural-Gas Prices Plunge Toward A 14-Year Low (MarketWatch)

The winter heating season has begun, but natural-gas prices have plunged toward levels they haven’t seen since January 2002. Natural gas for January delivery fell 10.9 cents, or 5.5%, to trade at $1.881 per million British thermal units Monday. It suffered a weekly loss of nearly 11% last week. Prices traded as low as $1.862 and based on the most active contracts, prices haven’t seen an intraday level this low since January 2002, according to FactSet data. A settlement around the current level would be the lowest since September 2001. The price drop comes amid a glut in supply. Domestic natural-gas supplies in storage topped out just above 4 trillion cubic feet the week of Nov. 20, the largest storage level on record, based on U.S. government data.

There is “too much natural gas, not enough demand—that is even with the shutdown of coal facilities,” said Richard Gechter, Jr., principal and president of Richard W. Gechter Natural Gas Consulting. “Supply has increased beyond anyone’s expectations.” The winter season historically runs from November to March of the following year. Supplies in storage stood at 3.88 trillion cubic feet as of Dec. 4, and the U.S. Energy Information Administration expects inventories will finish the end of the winter season at 1.862 trillion cubic feet. That would be a smaller drawdown than what’s typically seen in the winter. “Strong inventory builds, continuing production growth and expectations for warmer-than-normal winter temperatures have all contributed to low natural-gas prices,” the EIA said.

Read more …

“It’s really a dramatic situation that really cannot continue for a very long time for many producers.”

Never Mind $35, The World’s Cheapest Oil Is Already Close to $20 (BBG)

As oil crashes through $35 a barrel in New York, some producers are already living with the reality of much lower prices. A mix of Mexican crudes is already valued at less than $28, an 11-year low, according to data compiled by Bloomberg. Iraq is offering its heaviest variety of oil to buyers in Asia for about $25. In western Canada, some producers are selling for less than $22 a barrel. “More than one-third of the global oil production is not economical at these prices,” Ehsan Ul-Haq at KBC Advanced Technologies said. “Canadian oil producers could have difficulty in covering their operational costs.” Oil has slumped to levels last seen in the global financial crisis in 2009 amid a global supply glut.

While the prices of benchmarks West Texas Intermediate and Brent hover in the $30s, they represent a category of crude – light and low in sulfur – that is more highly valued because it’s easier to refine. Some producers of thicker, blacker and more sulfurous varieties have suffered heavier losses and are already living in the $20s. A blend of Mexican crude has plunged 73% in 18 months to $27.74 on Dec. 11, its lowest level since 2004, according to data compiled by Bloomberg. Venezuela is experiencing similar lows. Western Canada Select, which is heavy and sulfurous, has slumped 75% to $21.82, the least in seven years. Other varieties including Ecuador’s Oriente, Saudi Arabia’s Arab Heavy and Iraq’s Basrah Heavy were selling below $30, the data show.

Crudes of this type trade at a discount to lighter varieties because to process them “refiners have to invest in upgrading facilities such as coking plants, which are very expensive,” KBC’s Ul-Haq said. “Most places in the world, a lot of the producers they don’t really get the Brent price, and they don’t get the WTI price,” Torbjoern Kjus at DNB ASA in Oslo said. “It’s really a dramatic situation that really cannot continue for a very long time for many producers.”

Read more …

Interconnected.

Junk Rated Stocks Flashing Same Signal as High-Yield Bond Market (BBG)

Think equity investors have been blind to warning signs coming from junk bonds? Not quite. For most of the year pessimists have warned that equity markets were missing signals in high-yield credit, where losses snowballed even as gauges like the Standard & Poor’s 500 Index remained relatively stable. While true, most of that is an illusion of index composition – not evidence of complacency. As one of the broadest share gauges, the S&P 500 has companies that span the credit spectrum from junk to investment grade – or have no debt at all. From that perspective, it’s less surprising that the full index wouldn’t mimic the plunge in junk bonds themselves, where annual losses for related exchange-traded funds exceed 10%. And that’s what happened: until Friday, the equity gauge was virtually flat for the year.

What if you look at stocks that are representative of the high-yield universe? A basket compiled by Bloomberg of below investment-grade companies, including Chesapeake and Cliffs Natural Resources, has dropped a lot more – 51% in 2015. The slump in stocks with the lowest credit quality reflects the same concern gripping the debt market, that the commodity selloff and the Federal Reserve’s plan to start raising interest rates will jeopardize solvency. While near record cash and the resilience in large technology firms have sheltered the S&P 500 from deeper losses, junk-rated stocks are vulnerable to a credit contagion with a smaller size and a tilt toward commodities. “It’s really the same kind of signal,” Curtis Holden at Tanglewood Wealth Management, which oversees about $840 million, said. “The market is saying through how well the S&P 500 is holding up on a relative basis, ‘Look for quality. Don’t look for junk companies.”’

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They would like you to believe this is due to “robots and regulation”.

Big Banks In Europe And US Announced 100,000 New Job Cuts This Year (FT)

Big banks in Europe and the US announced almost 100,000 new job cuts this year, and thousands more are expected from BNP Paribas and Barclays early next year, as the wave of lay-offs that began in 2007 shows no sign of abating. The 2015 cuts – which exclude the impact of major asset sales — amount to more than 10% of the total workforce across the 11 large European and US banks that announced fresh lay-offs, according to analysis by the Financial Times. The most recent came last week, as workers at Dutch lender Rabobank learnt of 9,000 cuts across their bank the day after Morgan Stanley announced 1,200 lay-offs, including at its ailing fixed income division.

Barclays and BNP Paribas, two of Europe’s biggest banks, will unveil job cuts when they announce strategies that are designed to strip out 10 to 20% of the costs at their investment banks, people familiar with the situations said. At Barclays, the axe will fall on March 1 when chief executive Jes Staley unveils a fresh strategy with the bank’s annual results. The announcement will include Barclays’ plans to move more quickly to shrink its investment bank, which employs about 20,000 people. BNP Paribas’s new corporate and institutional banking chief Yann Gérardin will announce a new cost cutting plan in February. The French bank has already said it is planning to cut more than 1,000 jobs in its Belgian retail network.

Banks have found that they have been carrying too many staff, as they suffer falls in revenues from a combination of tougher post-crisis regulation, ultra-low interest rates and sluggish activity among clients. Those under new leadership — such as Deutsche Bank, Credit Suisse and Barclays — have been under particular scrutiny, as incoming chief executives try to turn the ailing banks they inherited into the more profitable companies demanded by investors.

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Good by and thanks for all the fish.

Yahoo Told: Cut 9,000 Of Your 10,700 Staff (AP)

Yahoo is facing shareholder pressure to pursue other alternatives besides a complex spin-off of its internet operations while chief executive Marissa Mayer struggles to revive the company’s revenue growth. The demands from SpringOwl Asset Management and Canyon Capital Advisors reflect shareholders’ frustration with Ms Mayer’s inability to snap the company out of a financial downturn after three-and-half years in the top job. Ms Mayer hoped to placate investors with last week’s announcement of a revised spin-off, but the company’s shares have slid 6pc since then. The shares fell 32 cents to close at $32.59 on Monday. SpringOwl, a New York hedge fund, has sent a 99-page presentation to Yahoo’s board that calls for the company to lay off 9,000 of its 10,700 workers and eliminate free food for employees to help save $2bn annually.

Canyon Capital, a Los Angeles investment firm, wants Yahoo to sell its internet business instead of spinning it off. Yahoo has warned the spin-off could take more than a year to complete, a time frame that Canyon Capital called “simply unacceptable” after Yahoo spent most of 2015 preparing to hive off its $31bn stake in China’s Alibaba in an attempt to avoid paying taxes on the gains from its initial investment of $1bn. Yahoo scrapped the Alibaba spin-off after another shareholder, Starboard Value, threatened an attempt to overthrow the board if the company stuck to that plan. Starboard and other investors were worried the Alibaba stake would be taxed at a cost of more than $10bn after the Internal Revenue Service declined to guarantee it would qualify for an exemption.

Now that two more shareholders expressing their dismay with Yahoo’s direction, Ms Mayer’s fate could be tied to a cost-cutting reorganisation that she has been working on for the past two months. Ms Mayer, who is on a brief maternity leave after giving birth to twins last week, says the overhaul will jettison Yahoo’s least profitable products – a shake-up that could lay off a large number of workers.

Read more …

The truth is slipping through the cracks of propaganda. American recovery my…

Economic Pain In US Heartland As Likely Fed Hike Nears (Reuters)

America’s heartland, the vast area in the middle of the country that produces much of the nation’s food and energy and is home to many of its traditional manufacturers, is sending warning signals that all is not well with the economy. From agriculture to heavy equipment and small business lending, farmers, manufacturers and transport companies that serve them are taking hits from a stronger dollar or plunging prices for farm commodities and oil. Industry executives worry that the expected move by the U.S. Federal Reserve to raise interest rates on Wednesday – which would be the first hike in a decade – could put more jobs at risk.

“Many of the companies that we do business with are hurting and some have already gone away,” said Bill Hickey, president of Chicago-based steel company Lapham-Hickey Steel, which has seven mills across the country and supplies processed steel to car makers and construction firms. He worries banks could start cutting off credit to troubled industrial companies. The Thomson Reuters/PayNet Small Business Lending Index fell 5% in October from the previous month and was flat on the year, marking only the second time it had failed to rise since February 2010. Weakness in the manufacturing, farm and transport sectors likely will not deter a rate increase by the Fed, economists say. There is “no doubt that manufacturing weakness is costing growth,” said Harm Bandholz at UniCredit Research.

However, the sector only accounts for about 12% of the U.S. economy and some areas like automotive are performing well. “You can’t say that everything is perfect,” he said. “But the United States is not doing so bad anymore that we need 0% interest rates.” The downbeat indicators from heartland industries illustrate the economy’s lumpiness. Preliminary data show that November U.S. orders for heavy, over-the-road trucks fell 59% from a year earlier – the worst November since 2009, according to transportation analysis firm FTR. Freight at the U.S. major railroads was off 1.9% for the year through Dec. 5. Coal accounts for much of the decline. But shipments of consumer goods by container – or intermodal shipments – were only up 1.6%. “The numbers are as bad as I’ve seen them,” said Anthony Hatch, an independent railroad analyst.

Farmers are under pressure from declining crop prices and weak demand. U.S. farm incomes are expected to drop 38% for all of 2015, the steepest year-on-year drop since 1983. Nathan Kauffman, an economist with the Kansas City Fed, said higher rates would create “the potential for more financial stress.”

Read more …

Set a target, make a prediction, see both fail miserably, rinse and repeat.

The Mystery of Missing Inflation Weighs on Fed Rate Move (WSJ)

Federal Reserve officials this week are expected to raise interest rates for the first time in nine years on the expectation that employment and inflation will hit targets reflecting a healthy U.S. economy. But Fed officials face a troubling question: Jobs are on track, but inflation isn’t behaving as predicted and they don’t know why. Unemployment has fallen to 5%, a figure close to estimates of full employment, while inflation remains stuck at less than 1%, well below the Fed’s 2% target. Central bank officials predict inflation will approach their target in 2016. The trouble is they have made the same prediction for the past four years. If the Fed is again fooled, it may find it raised rates too soon, risking recession.

Low inflation—and low prices—sound beneficial but can stall growth in wages and profits. Debts are harder to pay off without inflation shrinking their burden. For central banks, when inflation is very low, so are interest rates, leaving little room to cut rates to spur the economy during downturns. The Fed’s poor record of predicting inflation has set off debate within the central bank over the economic models used by central bank officials. Fed Chairwoman Janet Yellen, in a 31-page September speech on the subject, acknowledged “significant uncertainty” about her prediction that inflation would rise. Conventional models, she said, have become “a subject of controversy.”

Ms. Yellen faces dissent from Fed officials who want to keep interest rates near zero until there is concrete evidence of inflation rising, voices likely to try to put a drag on future rate increases. While the job market is near normal, “I am far less confident about reaching our inflation goal within a reasonable time frame,” Charles Evans, president of the Chicago Fed, said in a speech this month. “Inflation has been too low for too long.” For a generation, economists believed central banks had control over the rate of inflation and could use it as a policy guide: If inflation was too low, then lower interest rates could boost the economy; high inflation could be checked by raising rates.

Read more …

If the Fed would just listen to Martin Armstrong… (or the Automatic Earth, for that matter) “..lowering interest rates is DEFLATIONARY, not inflationary, for it reduces disposable income.”

Are Negative Rates Fueling Deflation? (Martin Armstrong)

Those in power never understand markets. They are very myopic in their view of the world. The assumption that lowering interest rates will “stimulate” the economy has NEVER worked, not even once. Nevertheless, they assume they can manipulate society in the Marxist-Keynesian ideal world, but what if they are wrong? By lowering interest rates, they ASSUME they will encourage people to borrow and thus expand the economy. They fail to comprehend that people will borrow only when they BELIEVE there is an opportunity to make money. Additionally, they told people to save for their retirement. Now they want to punish them for doing so by imposing negative interest rates (tax on money) to savings. They do not understand that lowering interest rates, when there is no confidence in the future anyhow, will not encourage people to start businesses and expand the economy.

It wipes out the income of savers and then the only way to make and preserve money becomes ASSET investment, as in the stock market — not creating business startups. So lowering interest rates is DEFLATIONARY, not inflationary, for it reduces disposable income. This is particularly true for the elderly who are forced back to work to compete for jobs, which increases youth unemployment. Since the only way to make money has become ASSET INFLATION, they must withdraw money from banks and buy stocks. Now, they are in the hated class of the “rich” who are seen as the 1% because they are making money when the wage earner loses money as taxation rises and the economy declines. As taxes rise, machines are replacing workers and shrinking the job market, which only fuels more deflation.

Then you have people like Hillary who say they will DOUBLE the minimum wage, which will cause companies to replace even more jobs with machines. Democrats, in particular, are really Marxists. They ignore Keynes who also pointed out that lowering taxes would stimulate the economy. Keynes, in all fairness, did not advocate deficit spending year after year nor never paying off the national debt. Keynes wrote regarding taxes: “Nor should the argument seem strange that taxation may be so high as to defeat its object, and that, given sufficient time to gather the fruits, a reduction of taxation will run a better chance, than an increase, of balancing the budget.” Keynes obviously wanted to make it clear that the tax policy should be guided to the right level as to not discourage income.

Keynes believed that government should strive to maximize income and therefore revenues. Nevertheless, Democrats demonized that as “trickle-down economics.” Keynes explained further: “For to take the opposite view today is to resemble a manufacturer who, running at a loss, decides to raise his price, and when his declining sales increase the loss, wrapping himself in the rectitude of plain arithmetic, decides that prudence requires him to raise the price still more–and who, when at last his account is balanced with nought on both sides, is still found righteously declaring that it would have been the act of a gambler to reduce the price when you were already making a loss.

Read more …

“There is something in the air like a gigantic static charge, longing for release.”

Fedpocalypse Now? (Jim Kunstler)

If ever such a thing was, the stage is set this Monday and Tuesday for a rush to the exits in financial markets as the world prepares for the US central bank to take one baby step out of the corner it’s in. Everybody can see Janet Yellen standing naked in that corner — more like a box canyon — and it’s not a pretty sight. Despite her well-broadcasted insistence that the economic skies are blue, storm clouds scud through every realm and quarter. Equities barfed nearly four% just last week, credit is crumbling (nobody wants to lend), junk bonds are tanking (as defaults loom), currencies all around the world are crashing, hedge funds can’t give investors their money back, “liquidity” is AWOL (no buyers for janky securities), commodities are in freefall, oil is going so deep into the sub-basement of value that the industry may never recover, international trade is evaporating, the president is doing everything possible in Syria to start World War Three, and the monster called globalism is lying in its coffin with a stake pointed over its heart.

Folks who didn’t go to cash a month ago must be hyperventilating today. But the mundane truth probably is that events have finally caught up with the structural distortions of a financial world running on illusion. To everything there is a season, turn, turn, turn, and economic winter is finally upon us. All the world ‘round, people borrowed too much to buy stuff and now they’re all borrowed out and stuffed up. Welcome to the successor to the global economy: the yard sale economy, with all the previously-bought stuff going back into circulation on its way to the dump. A generous view of the American predicament might suppose that the unfortunate empire of lies constructed over the last several decades was no more than a desperate attempt to preserve our manifold mis-investments and bad choices.

The odious Trump has made such a splash by pointing to a few of them, for instance, gifting US industrial production to the slave-labor nations, at the expense of American workers not fortunate enough to work in Goldman Sachs’s CDO boiler rooms. Readers know I don’t relish the prospect of Trump in the White House. What I don’t hear anyone asking: is he the best we can come up with under the circumstances? Is there not one decent, capable, eligible adult out there in America who can string two coherent thoughts together that comport with reality? Apparently not.

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The Ballad of Narayama. 1983 version is a great movie. Don’t think I ever saw the 1958 one.

Throwing Out Granny: Abe Wants Elderly Japanese To Move To Countryside (BBG)

Mayor Yukio Takano has a problem. Since 1980, the number of children in his Tokyo ward has halved while the elderly population has doubled – and he’s running out of space to build more nursing homes in the Japanese capital’s most densely populated borough. A possible solution: Relocate his older constituents to the countryside. It’s an audacious idea, and it’s none other than Prime Minister Shinzo Abe who is pushing it. His government sees an exodus of elderly to rural precincts as the best way of coping with Tokyo’s rapidly aging population and shrinking numbers elsewhere. Then again, asking seniors to decamp to the countryside may also be unpopular.

“For sure, people are going to say this is like throwing out your granny, or pushing out people out who don’t want to go, but that’s not the case,” says Takano who is surveying residents of his Toshima ward on such a plan before moving ahead. “Japan is doomed if people in Tokyo can’t co-exist, and we can’t get the countryside reinvigorated.” For many in Japan, the idea of moving seniors to the countryside rekindles the legend of “ubasuteyama,” meaning granny-dumping mountain. Legend has it that old people in ancient times were carried off to the hills and left to die. There’s even a mountain named after the folk story in Nagano, central Japan. Abe put tackling Japan’s declining population at the top of his agenda in September in a revamp of his economic policies known as Abenomics. The government is trying to reverse two unwelcome trends.

A surge in Tokyo’s elderly population over the next 10 years may overwhelm urban healthcare systems; while depopulation and stagnant economies in rural Japan are set to leave nursing homes and hospitals half-empty. Eighty minutes by express train from Takano’s ward is the mountain town of Chichibu where the population has been decreasing since 1975. While the town’s center is lined with shuttered businesses and abandoned buildings, it does have plenty of empty nursing-home beds and underused medical facilities. [..] Japan’s population is set to drop by more than 700,000 a year on average between 2020 and 2030, when a almost third of the population will be 65 or older, according to the National Institute of Population and Social Security Research. At the same time, the government’s ability to extend financial incentives to spur population growth is limited, according to Ishiba, with central government debt at more than double that of GDP.

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“It’s the old apocalyptic tale: God’s people versus Satan’s.”

Absolute Good -Us- vs Absolute Evil -Them- (Crooke)

We all know the narrative in which we (the West) are seized. It is the narrative of the Cold War: America versus the “Evil Empire.” And, as Professor Ira Chernus has written, since we are “human” and somehow they (the USSR or, now, ISIS) plainly are not, we must be their polar opposite in every way. “If they are absolute evil, we must be the absolute opposite. It’s the old apocalyptic tale: God’s people versus Satan’s. It ensures that we never have to admit to any meaningful connection with the enemy.” It is the basis to America’s and Europe’s claim to exceptionalism and leadership. And “buried in the assumption that the enemy is not in any sense human like us, is [an] absolution for whatever hand we may have had in sparking or contributing to evil’s rise and spread.

How could we have fertilized the soil of absolute evil or bear any responsibility for its successes? It’s a basic postulate of wars against evil: God’s people must be innocent,” (and that the evil cannot be mediated, for how can one mediate with evil). Westerners may generally think ourselves to be rationalist and (mostly) secular, but Christian modes of conceptualizing the world still permeate contemporary foreign policy. It is this Cold War narrative of the Reagan era, with its correlates that America simply stared down the Soviet Empire through military and – as importantly – financial “pressures,” whilst making no concessions to the enemy. What is sometimes forgotten, is how the Bush neo-cons gave their “spin” to this narrative for the Middle East by casting Arab national secularists and Ba’athists as the offspring of “Satan”: David Wurmser was advocating in 1996, “expediting the chaotic collapse” of secular-Arab nationalism in general, and Baathism in particular.

He concurred with King Hussein of Jordan that “the phenomenon of Baathism” was, from the very beginning, “an agent of foreign, namely Soviet policy.” Moreover, apart from being agents of socialism, these states opposed Israel, too. So, on the principle that if these were the enemy, then my enemy’s enemy (the kings, Emirs and monarchs of the Middle East) became the Bush neo-cons friends. And they remain such today – however much their interests now diverge from those of the U.S. The problem, as Professor Steve Cohen, the foremost Russia scholar in the U.S., laments, is that it is this narrative which has precluded America from ever concluding any real ability to find a mutually acceptable modus vivendi with Russia – which it sorely needs, if it is ever seriously to tackle the phenomenon of Wahhabist jihadism (or resolve the Syrian conflict).

What is more, the “Cold War narrative” simply does not reflect history, but rather the narrative effaces history: It looses for us the ability to really understand the demonized “calous tyrant” – be it (Russian) President Vladimir Putin or (Ba’athist) President Bashar al-Assad – because we simply ignore the actual history of how that state came to be what it is, and, our part in it becoming what it is. Indeed the state, or its leaders, often are not what we think they are – at all. Cohen explains: “The chance for a durable Washington-Moscow strategic partnership was lost in the 1990 after the Soviet Union ended. Actually it began to be lost earlier, because it was [President Ronald] Reagan and [Soviet leader Mikhail] Gorbachev who gave us the opportunity for a strategic partnership between 1985-89.

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Then Turkey will simply have to ask for more billions.

EU To Offer Turkey No Guarantee On Taking In Refugees (Reuters)

The European Union will set no minimum on the number of Syrian refugees its member states are willing to take from Turkey in a resettlement scheme to be unveiled on Tuesday, a senior EU official said on Monday. The European Commission, the bloc’s executive, will present the proposal following an agreement with Ankara two weeks ago that European leaders hope can help stem the flow of refugees and economic migrants reaching the EU from Turkey via Greece. It will mention no number, the official said, in its plan for deserving cases to be flown directly from Turkey to the EU – an omission that could disappoint Turkish leaders. Nor will there be any system to send them to certain states – rather, EU countries can volunteer to take part in the scheme.

Germany under Chancellor Angela Merkel has led efforts for an EU agreement on taking in substantial numbers of the 2.3 million Syrians now sheltering in Turkey as a way of cutting back on people risking their lives in chaotic migration by sea. But few other states have been so enthusiastic, particularly following bitter rows inside the bloc in recent months caused by a German-backed push to impose mandatory quotas on governments to take in asylum seekers from frontier states Italy and Greece. An agreement among EU states in the summer to take in up to 22,000 refugees, mainly from the Middle East, has yet to become fully operational. The same is true for schemes to relocate up to 160,000 asylum seekers already inside the EU. Some countries argue against more schemes until capacity is reached in others.

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They open the door and then close it. Just like that.

Where The Dream Of Europe Ends (Gill)

Macedonia has shut its borders to all but three nationalities and the backlog has been returned to Athens where they wonder what to do next. Idomeni, the small Greek village that represents the final Greek frontier and the doorway to Europe for refugees fleeing war and poverty in their countries, was strangely empty on Wednesday night. After days of a stalemate when Macedonia closed its border to everyone except refugees from Syria, Afghanistan and Iraq, Greek authorities took measures to transport around 2,000 refugees back to Athens where they will be accommodated at Elaionas camp and, most recently, the Tae Kwon Do stadium, built for when Athens hosted the Olympic games in 2004 and converted into a temporary shelter.

Most refugees arriving in Greece want to move onward, heading through Macedonia mainly towards the promised lands of Germany, the Netherlands or Sweden. When the border shut, a backlog of desperate people became stranded at Idomeni in freezing conditions and with little food and water. These were people mainly from Iran, Pakistan, Eritrea, Sudan and other countries deemed non eligible by the Macedonian authorities. Back in Athens, their time is running out. At Victoria Square in central Athens, brothers Saif Ali, 18 and Ali 15 from Lahore in Pakistan were pondering their next move after reluctantly returning to Athens the previous day. Having wasted their money on an unsuccessful trip to Idomeni, they are currently staying at Elaionas camp, which is now full.

“We knew when we paid to take a bus to Idomeni that the border was closed, but we decided to take the risk. They didn’t let us pass, they beat us with sticks. They sent us back. Our money got wasted. “We were stuck there for five days, it was so cold.” said Saif Ali. “We tried to pass through with everyone else, they check your papers one by one. People had fake papers, and I saw some people borrow the papers of Afghanis, show them to the guards and then slip them back to the owners.”

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Crazy.

EU Backs Housing Scheme For Migrants And Refugees In Greece (AP)

The European Union has pledged to spend €80 million on a housing scheme for migrants and asylum speakers stranded in Greece. Kristalina Georgieva, the EU Commissioner for Budget and Human resources, signed an agreement Monday for a rent subsidy program due to launch next year. Thousands of stranded refugees are currently housed in old venues from the 2004 Olympics or are sleeping in tents pitched in city squares and parks in Athens. More than 750,000 migrants and refugees have crossed through Greece this year, hoping to travel to central and northern Europe, but Macedonia and other Balkan countries last month toughened border rules, restricting crossings to nationals from Syria, Iraq and Afghanistan. Under the scheme, migrants will receive hotel vouchers or checks to live in vacant apartments.

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And why not drown some more people.

Three Of Six Missing Migrants Confirmed Drowned (Kath.)

Greek coast guard officers recovered the bodies of three of the six people who were reported missing after their boat capsized off the coast of Kastelorizo as they tried to reach Greece from Turkey on Tuesday morning. The authorities said three of the passengers were confirmed drowned as the search continued for the other three. Greek coast guards were alerted by their Turkish counterparts after the latter rescued 12 migrants who had managed to swim to a small islet off Turkey’s coast and another five people from the sea. The nationality of the passengers was not clear.

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Jun 032015
 
 June 3, 2015  Posted by at 10:06 am Finance Tagged with: , , , , , , , , , ,  


Harris&Ewing Childs Restaurant, Washington, DC 1918

IMF Economists Say Some Countries Can ‘Just Live With’ High Debt (Reuters)
Fed Mouthpiece Jon Hilsenrath Furious “Stingy” US Consumers Don’t Spend (ZH)
Goldman Sachs to Companies: Stop Buying Back Your Stock (Bloomberg)
Pension Payments Are Starving Basic City Services (SacBee)
Europe and Greece: The Damage Is Done (Bloomberg)
Greek Standoff Takes Another Twist as Dueling Plans Are Drafted (Bloomberg)
Tsipras To Meet EU’s Juncker As Greece Debt Deadline Looms (AFP)
Take It Or Leave It: Will Greece Accept Deal? (CNBC)
China After the Bubble (Bloomberg)
Is China Repeating Korea’s Mistakes? (Pesek)
China Stocks Stumble As Hanergy Debt Debacle Looms Over All The 500%-Club (ZH)
Big Oil’s Plan to Become Big Gas (Bloomberg)
OECD Warns Lack Of Investment To Prompt New Global Slowdown (Guardian)
More Older Americans Are Being Buried By Housing Debt (AP)
What Australia PM Abbott Doesn’t Get About The Housing Market (BSpectator)
WikiLeaks Announces $100,000 Crowd-Sourced Reward For TPP Text (Politico)
Twenty-Three Geniuses (Jim Kunstler)
Crazyland (Dmitry Orlov)
Record Fall In UK Fresh Food Prices Drives Retail Deflation (Guardian)
Children Trapped In Poverty By UK Government’s ‘Dysfunctional System’ (Guardian)
The Meaninglessness of Ending ‘Extreme Poverty’ (Bloomberg)

Losing their religion.

IMF Economists Say Some Countries Can ‘Just Live With’ High Debt (Reuters)

Some countries with high public debt levels might be able to “just live with it,” because cutting back carries its own risks, three IMF officials said in a paper that disputes decades of dogma about the benefits of austerity. The euro zone and other advanced economies have struggled with ballooning debt in the wake of the 2007-09 global financial crisis. Some have faced pressure to satisfy markets through fast fiscal consolidation. The IMF has already cautioned that cutting back on spending or raising taxes too quickly after the crisis could hurt growth. Now, IMF economists Jonathan Ostry, Atish Ghosh and Raphael Espinoza take that advice a step further, arguing that countries able to fund themselves in markets at reasonable costs should avoid the harmful economic impact of austerity.

“A radical solution for high debt is to do nothing at all,” they write in a blog accompanying a Staff Discussion Note, which does not represent the IMF’s official position, but could help shape its policies. “Debt is bad for growth … but it does not follow that paying down debt is good for growth. This is a case where the cure may be worse than the disease: paying down the debt would require further distorting the economy, with a corresponding toll on investment and growth.” Instead, countries can wait for their debt ratios to fall through higher economic growth or a boost in tax revenues over time. The austerity debate has become a hot political topic in countries such as the United Kingdom and Greece as voters protest the pain of budget cuts.

Greece’s Syriza government swept to power in January promising an end to austerity, but now faces pressure for more cuts in exchange for cash from international lenders. The IMF economists did not mention many specific countries, but cited a 2014 chart from Moody’s Analytics that put most advanced economies, including the United States, United Kingdom and Germany, solidly in the “green zone” of ample fiscal space, meaning there is no rush to cut back debt. France, Spain, Ireland should be cautious about debt, while Portugal faces “significant risk.” Japan, Italy, Greece and Cyprus face “grave risk,” meaning they must cut back, according to the chart.

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Note: as I wrote recently, the savings rate includes debt payments. Which makes it highly misleading. There is no savings glut.

Fed Mouthpiece Jon Hilsenrath Furious “Stingy” US Consumers Don’t Spend (ZH)

No commentary necessary on this piece originally posted on the Wall Street Journal by Jon Hilsenrath (the same ad hoc, trial ballooning Fed mouthpiece whose work as it relates to the Federal Reserve has to be precleared by the Federal Reserve itself as we first reported five years ago). And no, to our best knowledge, this is not the WSJ transforming into the Onion.

from HILSENRATH’S TAKE: A LETTER TO STINGY AMERICAN CONSUMERS

Dear American Consumer,

This is The Wall Street Journal. We’re writing to ask if something is bothering you. The sun shined in April and you didn’t spend much money. The Commerce Department here in Washington says your spending didn’t increase at all adjusted for inflation last month compared to March. You appear to have mostly stayed home and watched television in December, January and February as well. We thought you would be out of your winter doldrums by now, but we don’t see much evidence that this is the case. You have been saving more too. You socked away 5.6% of your income in April after taxes, even more than in March. This saving is not like you. What’s up?

We know you experienced a terrible shock when Lehman Brothers collapsed in 2008 and your employer responded by firing you. We know stock prices collapsed and that was shocking too. We also know you shouldn’t have taken out that large second mortgage during the housing boom to fix up your kitchen with granite countertops. You’ve been working very hard to pay off this debt and we admire your fortitude. But these shocks seem like a long time ago to us in a newsroom. Is that still what’s holding you back? Do you know the American economy is counting on you? We can’t count on the rest of the world to spend money on our stuff. The rest of the world is in an even worse mood than you are. You should feel lucky you’re not a Greek consumer. And China, well they’re truly struggling there just to reach the very modest goal of 7% growth.

The Federal Reserve is counting on you too. Fed officials want to start raising the cost of your borrowing because they worry they’ve been giving you a free ride for too long with zero interest rates. We listen to Fed officials all of the time here at The Wall Street Journal, and they just can’t figure you out.

Please let us know the problem. You can reach us at any of the emails below. Sincerely,

The Wall Street Journal’s Central Bank Team -By Jon Hilsenrath

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“.. the last time buybacks were this high was in 2007, right before equities crashed during the financial crisis..”

Goldman Sachs to Companies: Stop Buying Back Your Stock (Bloomberg)

It looks like Goldman Sachs doesn’t agree with Carl Icahn on at least one big issue: share buybacks. While the billionaire activist investor has continued to push Apple to purchase more of its stock, Goldman has published a note recommending companies stop spending their cash on buying back their overpriced shares and instead use those overpriced shares to buy other companies’ equity. As the bank puts it, “U.S. equity valuations look expensive on most metrics,” with the typical stock in the S&P 500 now trading at a price equal to more than 18 times forward earnings.

In the note, “What managements should do with their cash (M&A) and what they will do (buybacks),” Goldman strategists led by David Kostin argue that the current price to earnings (P/E) expansion phase has lasted 43 months and will likely end when the Federal Reserve starts raising interest rates, which the bank now expects will happen in September. As a firm, you would much rather buy back your stock when it’s trading at lower P/E multiples and get a better price. But as it turns out, corporate managers (much like investors) are pretty bad at timing the stock market. Using history as a guide, the last time buybacks were this high was in 2007, right before equities crashed during the financial crisis, Goldman notes.

Exhibiting poor market timing, buybacks peaked in 2007 (34% of cash spent) and troughed in 2009 (13%). Firms should focus on M&A rather than pursue buybacks at a time when P/E multiples are so high.

However, Goldman doesn’t expect companies to listen to its advice. The temptation to give investors what they seem to want is just too much.

We forecast buybacks will surge by 18% in 2015 exceeding $600 billion and accounting for nearly 30% of total cash spending. We recognize activist investors often advocate for firms to return excess cash to shareholders via buybacks.Tactically, repurchases may lift share prices in the near term, but in our view it is a questionable use of cash at the current time when the P/E multiple of the market is so high. In our view, acquisitions – particularly in the form of stock deals – represent a more compelling strategic use of cash than buybacks given the current stretched valuation of US equities.

Companies in the S&P 500 have so far spent a whopping $2 trillion repurchasing their shares over the past five years.

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Rotting from the bottom.

Pension Payments Are Starving Basic City Services (SacBee)

The Governmental Accounting Standards Board is implementing new rules that require governments, for the first time, to report unfunded pension liabilities on their 2015 balance sheets. This sticker shock should create new urgency for meaningful pension reform. A recent study put the unfunded pension liability for all state and local governments at $4.7 trillion. For too long, pension fund officials and politicians have increased payouts and low-balled contributions. As a result, they now have insufficient funds to pay the promised benefits. Accounting gimmicks have hidden the true cost from the public, who are now on the hook to make up the difference between pension promises and assets.

Illinois and New York have unfunded pension debts north of $300 billion each, while New Jersey, Ohio and Texas exceed $200 billion apiece. But nowhere is the problem worse than in California, which accounts for $550 billion to $750 billion of the total, depending on the calculation. The Golden State reveals the damage from long-term financial mismanagement of pension systems. For example, Ventura County’s pension costs have gone from $45 million in 2004 to $162 million in 2013. Overall from 2008 through 2012, California local governments’ pension spending increased 17% while tax revenue grew only 4%. As a result, a larger share of budgets goes to pensions, crowding out spending on core services such as police.

In San Jose, the police department budget increased nearly 50% from 2002 through 2012, yet staffing fell 20%. More money has been consumed by police pensions, leaving less money to hire and retain officers. In Oakland, police officers were given the option in 2010 to contribute 9% of their salary into their pensions and save 80 police jobs, or keep paying nothing into their pensions and see 80 jobs eliminated. The police union voted to continue paying nothing. Now the department refuses to respond to 44 different crimes because of the staffing cutbacks. Any pension system that forces this trade-off is immoral by threatening life and property.

Skyrocketing pension costs also crowd out other quality-of-life services. Public libraries, parks and recreation centers are shortening their hours or closing. Potholes go unfilled, sidewalks unrepaired and trees untrimmed. A new pension rate hike for California’s local governments will cost the city of Sacramento $12 million more a year – the equivalent of cutting 34 police officers, 30 firefighters and 38 other employees. California’s vested rights doctrine locks local governments into pension benefits for life on the day they hire an employee. They cannot modify pensions, forcing them to cut core services or declare bankruptcy, as happened in Vallejo, Stockton and San Bernardino.

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“Europe’s economic crisis was an opportunity to show financial markets that the euro is to Greece as the dollar is to, say, West Virginia. Whatever happens next, we now know different.”

Europe and Greece: The Damage Is Done (Bloomberg)

With both sides said to be drawing up final proposals, and a definitive debt crunch thought to be imminent, the months of brinkmanship over Greece may at last be drawing to a close. But who knows, really? You might think making this shambles any worse would challenge even these principals. I don’t know. I think they’re up to it. Whatever happens, take a moment to reflect on the damage already done during the stalemate — damage that will persist even if the brink isn’t crossed, and a deal is done to avoid a Greek default plus exit from the euro system. First, Greece’s economic situation, which was bad to begin with, has deteriorated further. Savers have been withdrawing deposits from Greek banks. Investors have hammered the stock market.

Under these conditions, few businesses choose to invest or expand. Despite cheap oil and a weaker euro, the Greek economy has fallen back into recession. Second, as a result, the country’s bad fiscal situation is now worse. Whatever fiscal targets are eventually agreed to — assuming that happens — will be harder to meet. A deal sufficient, four months ago, to stabilize Greece’s public finances and restore growth might no longer work. Greece already has two failed bailout programs to its name. The stalemate makes the failure of the next program, if there is one, more likely. Third, the world has learned that exit from the euro system is not just thinkable but has actually been advocated, as a kind of disciplinary measure, by officials in Germany and other countries.

It’s widely understood that if Greece leaves the euro system or is forced out, attention will turn, sooner or later, to the question of who’s next. Every serious economic setback will raise that question. Less widely understood is that much of this damage to the euro zone’s foundations has already been done, and is irreversible. Once you think the unthinkable — debate the pros and cons, start to plan for it — there’s no going back.

In his celebrated (if belated) intervention in 2012, ECB President Mario Draghi said he would do whatever it took to keep the euro system intact; Europe’s economy rallied. Whatever happens this week or next regarding Greece, Europe’s leaders have reneged on that promise: They might do whatever it takes, but they’ll need to think about it first. Europe’s economic crisis was an opportunity to show financial markets that the euro is to Greece as the dollar is to, say, West Virginia (no disrespect to that fine state). Whatever happens next, we now know different.

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They knew the Greek proposal was coming. And they didn’t even look at it?!

Greek Standoff Takes Another Twist as Dueling Plans Are Drafted (Bloomberg)

The impasse over Greece’s future lingered as both sides worked on rival proposals for the conditions of a financial lifeline with debt payments looming. Greek Prime Minister Alexis Tsipras said his government submitted a new plan, while officials from the country’s creditors were said to be finalizing what would be a final offer to avoid the country defaulting. While the euro rallied on optimism over a deal, Dutch Finance Minister Jeroen Dijsselbloem, who leads the euro-area finance ministers’ group, said institutions are still far from any agreement. “As long as it doesn’t meet economic conditions, we can’t come to an agreement,” he told RTL television. “It’s not right to think that we can meet half way.”

After four months of antagonism and extended deadlines, there’s evidence now of greater urgency in efforts to break the deadlock and decide Greece’s fate. At the same time, there were mixed messages over how final any offer might be and whether any agreement can be reached in coming days. While Greece says it can make a debt repayment to the IMF on Friday, it’s the smallest of four totaling almost €1.6 billion this month. The timing coincides with the expiration of a euro-region bailout by the end of June. The deputy parliamentary leader of German Chancellor Angela Merkel’s party, Ralph Brinkhaus, described the negotiating situation as “very confused.”

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It’s up to Juncker now to save his precious ‘union’,

Tsipras To Meet EU’s Juncker As Greece Debt Deadline Looms (AFP)

Greek Prime Minister Alexis Tsipras will meet European Commission President Jean-Claude Juncker Wednesday for make-or-break bailout talks with a deadline looming for Athens to make a critical repayment. Greece and its international creditors have exchanged proposals to reach a deal to unlock €7.2 billion to help Athens make Friday’s repayment, but months of fractious talks have been deadlocked over creditors’ insistence that Athens undertake greater reforms which Greece’s anti-austerity government has refused to match. Meanwhile there are fears that Greece could default, possibly setting off a chain reaction that could end with a messy exit from the eurozone.

Jeroen Dijsselbloem, the head of the Eurogroup which is comprised of the eurozone’s 19 members, has said he was unimpressed with progress made in the debt talks, after Athens claimed its plan was a «realistic» one. His remarks come with Tsipras due to meet Juncker in Brussels on Wednesday evening, a government source said. Tsipras on Tuesday raised hope of a breakthrough, with the leader of Greece’s left-wing Syriza government telling reporters: «We have made concessions because a negotiation demands concessions, we know these concessions will be difficult.” In Brussels, the European Union called the exchange of documents a positive step, but stopped short of saying a deal was imminent.

“Many documents are being exchanged between the institutions and the Greek authorities… The fact that documents are being exchanged is a good sign,» European Commission spokeswoman Annika Breidthardt said. Asked about the possibility of a deal, she added: «We’re not there yet.”

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I don’t see Syriza rolling over.

Take It Or Leave It: Will Greece Accept Deal? (CNBC)

The Greek Prime Minister is expected to come under pressure on Wednesday to reach a much-needed deal with the country’s international creditors, who have reportedly drafted an agreement – although Greece denies that it has seen the proposals yet. On Tuesday, the Troika drafted the broad lines of an agreement to put to the Greek government, according to Reuters, in a bid to resolve months of tense negotiations over Greek reforms and debt. It comes after the German and French leaders, Angela Merkel and Francois Hollande, held emergency talks with the creditors on Monday night and urged them to find a solution. A Greek government official told CNBC Wednesday that Greece hadn’t yet seen the proposals, however.

“They have not submitted the text and this is what has surprised us. We think it is very odd,” the official, who did not want to be named due to the sensitive nature of the ongoing discussions, told CNBC. The source confirmed that Prime Minister Alexis Tsipras was due to travel to Brussels to meet with the Commission’s President, Jean-Claude Juncker, later in the day. “We’re going to use this evening’s meeting as a basis to discuss our own proposals, which are full and concrete plans and include a final review of our existing bailout program,” the official added. “We have very good ideas about a growth plan and have a set of proposals that will take any thoughts of a ‘Grexit’ (a Greek exit from the euro zone) off the table.”

Any offer of a deal from creditors puts the ball firmly in Greece’s court, although the consequences of it rejecting an agreement could be dire. Athens faces a €300 million payment to the IMF on Friday, but there are doubts that the country can honor the debt without further financial aid. In something of a pre-emptive strike, Greece submitted its own reform proposals to its European counterparts earlier this week, but they were deemed – not for the first time – “insufficient.” Michael Hewson, chief market analyst at CMC Markets, said Wednesday that given the tense negotiations between Greece and its lenders over the last four months, a quick agreement was unlikely.

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“.. local governments have borrowed as much as $4 trillion, mostly through shadowy off-balance-sheet financing vehicles; around $300 billion of that debt matures this year.”

China After the Bubble (Bloomberg)

Chinese Premier Li Keqiang says that rebalancing China’s economy will be as painful as “taking a knife to one’s own flesh.” That may not be much of an exaggeration. The news on China’s economy is bad. Growth has slowed to a little over 5% (quarter on quarter, at an annual rate); prices are falling; consumer confidence is weak; corporate and local-government debts remain dangerously high. Even now, a well-managed exit from the country’s credit binge may be possible, but an entirely painless one is not. Trying too hard to delay the inevitable will end up making things worse. What scares the government most is the prospect of a wave of corporate and municipal defaults.

According to Mizuho Securities Asia, local governments have borrowed as much as $4 trillion, mostly through shadowy off-balance-sheet financing vehicles; around $300 billion of that debt matures this year. Plunging property prices and declining land sales – as well as slower manufacturing investment as companies focus on paying down debt – are worsening the problem by squeezing demand and holding back growth. Several economists expect China to have difficulty meeting its target of 7% growth in gross domestic product this year. Slower growth will make it even harder for local governments to make their payments. Beijing is leading an effort to restructure the borrowing and make it more transparent – but the plan envisioned won’t cover all the debts coming due this year.

China’s State Council recently admitted as much, telling banks to roll over some of the obligations. The directive was understandable; even so, forcing banks to prop up local governments means throwing good money after bad. The problem isn’t solved, and the day of reckoning, when it comes, will be worse. Meanwhile, applying much the same logic, the government has talked up a stock market that now looks wildly inflated. Since last summer, it has been urging households to invest, and official reassurance follows every market setback. Even after a 6.5% plunge on May 28, the Shanghai Composite is still up 127% over the past year, despite the slowing economy and falling profits. On the tech-heavy Shenzhen Composite Index, price-to-earnings ratios in excess of 100 aren’t uncommon.

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“Why would the government want to risk the possibility hundreds of millions of aggrieved day traders heading onto the streets with protest banners?”

Is China Repeating Korea’s Mistakes? (Pesek)

Many observers assume that China is on a path to become the next Japan – a major economy mired in a multiyear deflationary funk that deflates its global clout. And it’s certainly true that the way that Beijing has been downplaying its debt problems is eerily reminiscent of Tokyo’s public relations strategy from the 1990s. But take a closer look at China’s situation, and you’ll realize a better analogy is South Korea. China’s expanding effort to pile debt risks on individual investors is straight out of Seoul’s playbook. South Korea’s economy crashed in 1997 under the weight of debts compiled by the country’s family-owned conglomerates. The government’s strategy for dealing with the fallout consisted of shifting the debt burden to consumers.

With a blizzard of tax incentives and savvy PR, Korea shrouded the idea of amassing household debt to boost growth in patriotic terms. That push still haunts Korea. Today, the country’s household debt as a ratio of gross domestic product is 81%. That far exceeds the ratios in U.S., Germany and, at least for the moment, China. As a result, Korea has been particularly susceptible to downturns in the global economy, which is why the country is now veering toward deflation. Is China repeating Korea’s mistakes? Granted, the specific of Beijing’s economic strategy vary greatly and China’s $9.2 trillion economy is seven times bigger than Korea’s. But the Chinese government’s efforts to prod households to buy stocks and assume greater financial risks are highly reminiscent of Korean policy.

Beijing has been encouraging everyone in the country, from the richest princelings to the poorest of peasants, to buy stocks. And China’s markets have been booming as a result: Over the past 12 months, the Shanghai exchange is up 141%, and the Shenzhen exchange is up 188%. Margin trading, which has fueled these rallies, seems to have jumped another 45% in May, to a total of $484 billion. [..] But who will suffer when stocks inevitably swoon? Beijing is making a risky bet, by assuming Chinese savers will be capable of dealing with the burden of a stock market downturn. This strategy is morally questionable – it’s another instance of Chinese savers being set up to take the fall for government policy, as they were during the hyperinflation of the 1940s, and in modern times, when they faced strict limits on deposit rates.

Moreover, it would be far easier for Beijing to bail out a handful banks and dispose of bad loans that are concentrated at a few dozen companies, than deal with debts that are distributed to households across the country. Increasingly, there are signs that a reckoning will soon be in the offing. On May 28 alone, Shanghai lost $550 billion in market value – a reminder stocks can’t surge 10% a week forever, not even in China. Why would the government want to risk the possibility hundreds of millions of aggrieved day traders heading onto the streets with protest banners?

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They borrowed money from umpteen different sources.

China Stocks Stumble As Hanergy Debt Debacle Looms Over All The 500%-Club (ZH)

If one sentence sums up the farce that the hyper-speculative ponzifest that is the 500% club in China it is “Hanergy Group was basically using the listed company as a means to produce collateral in the form of shares that it could then pledge to secure financing.” While the stock has been cut in half, lenders remain mired in opacity as they try to figure out, as Bloomberg reports, which of Chinese billionaire Li Hejun’s many creditors risk losing every yuan they put into his company? Shenzhen and CHINEXT indices are lower out of the gate today after a 14% and 18% surge in the last 2 days as a group of 11 lenders (ranging from large banks to small asset managers) ask for a meeting to discuss various loans with various Hanergy entities… and whatever they find in Hanergy is bound to have been repeated manifold across China’s manic markets.

As investors grow a little weary of “the opacity about parent finances and billings,” in Hanergy and across numerous other names we are sure. As Bloomberg reports, a plethora of Chinese lenders are exposed to Hanergy Thin Film and its parent company, including Industrial and Commercial Bank of China, which is owed tens of millions of dollars.

“The interesting thing with Hanergy is that so much is happening with the parent company that investors know nothing about,” said Charles Yonts, an analyst with CLSA Asia-Pacific Markets in Hong Kong. “The opacity about parent finances and billings is extraordinary.” A Bloomberg examination of debt held by Hanergy Thin Film and its closely held parent, Hanergy Holding Group Ltd., show Li has tapped a variety of financing sources since the Hong Kong unit’s stock started surging last year. They include policy-bank lending, short-term loans from online lenders with interest rates of more than 10% and partnerships with local governments.

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Anything for a subsidy.

Big Oil’s Plan to Become Big Gas (Bloomberg)

Oil companies that have pumped trillions of barrels of crude from the ground are now saying the future is in their other main product: natural gas, a fuel they’re promoting as the logical successor to coal. With almost 200 nations set to hammer out a binding pact on carbon emissions in December, fossil-fuel companies led by Shell and Tota say they’re refocusing on gas as a cleaner alternative to the cheap coal that now dominates electricity generation worldwide. That’s sparked a war of words between the two industries and raised concern that Big Oil is more interested in grabbing market share than fighting global warming “Total is gas, and gas is good,” Chief Executive Officer Patrick Pouyanne said Monday, in advance of this week’s World Gas Conference in Paris.

His remarks echoed comments two weeks earlier by Shell CEO Ben Van Beurden, who said his company has changed from “an oil-and-gas company to a gas-and-oil company.” Shell began producing more gas than oil in 2013 and Total the following year. Exxon Mobil ’s output rose to about 47% of total production last year from 39% six years ago. Companies are pushing sales in China, India and Europe. Coal from producers led by Glencore and BHP Billiton produces about 40% of the world’s electricity. Shell, Total, BP and other oil companies said Monday in a joint statement that they’re banding together to promote gas as more climate friendly than coal. “The enemy is coal,” Pouyanne said Monday. He vowed to pull out of coal mining and said Total may also halt coal trading in Europe.

A key strategy for gas producers to push this agenda is asking governments to levy a price on carbon emissions from power plants. That creates an economic incentive to switch from coal, the top source of greenhouse gases, to cleaner options. BP CEO Bob Dudley called for a carbon price at the company’s shareholder meeting April 16, while Exxon head Rex Tillerson on May 27 reiterated support for a carbon tax if consensus emerges in the U.S. Even without carbon pricing, gas has been displacing coal in the U.S., Tillerson said in Paris today. “Natural gas use in the U.S. has reduced carbon dioxide emissions to levels not seen since the 1990s,” he said in a speech. “And the U.S. has no comprehensive cost of carbon policy.”

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Too late.

OECD Warns Lack Of Investment To Prompt New Global Slowdown (Guardian)

A dearth of investment by governments and business has left the global economy vulnerable to a renewed slowdown, a leading thinktank has warned as it slashed its forecasts for the United States. The Organisation for Economic Cooperation and Development (OECD) said the recovery since the global financial crisis had been unusually weak, costing jobs, raising inequality and knocking living standards. In its latest outlook, it saw global growth gradually strengthening but not until late 2016 will it return to the average pace of pre-crisis years. The Paris-based thinktank noted a slowdown for many advanced economies in the opening months of 2015 and singled out a sharp dip for the US, the world’s biggest economy.

It cut its projection for US economic growth to 2% this year from a forecast of 3.1% made in March. For 2016, US growth is seen at 2.8%, down from the previous 3% forecast. The OECD is cautious, despite hoping that the weakness in the first quarter of this year was down to temporary factors, such as unusually harsh weather in the US. “The world economy is muddling through with a B-minus average, but if homework is not done and with less-than-average luck, a failing grade is all too possible,” said OECD chief economist Catherine Mann. “On the other hand, how to get the A is known and within reach,” she added, highlighting the need for more investment.

On the upside, the OECD expected growth to be shared more evenly across regions of the world and says labour markets continue to heal in advanced economies while risks of deflation have receded. “Yet, we give the global economy only the barely-passing grade of B-,” said Mann. The dissatisfaction is not just down to an “inauspicious” starting point after a weak first quarter, she added.

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The number of over-75’s who still carry a mortgage has tripled.

More Older Americans Are Being Buried By Housing Debt (AP)

Of all the financial threats facing Americans of retirement age — outliving savings, falling for scams, paying for long-term care — housing isn’t supposed to be one. But after a home-price collapse, the worst recession since the 1930s and some calamitous decisions to turn homes into cash machines, millions of them are straining to make house payments. The consequences can be severe. Retirees who use retirement money to pay housing costs can face disaster if their health deteriorates or their savings run short. They’re more likely to need help from the government, charities or their children. Or they must keep working deep into retirement.

“It’s a big problem coming off the housing bubble,” says Cary Sternberg, who advises seniors on housing issues in The Villages, a Florida retirement community. “A growing number of seniors are struggling with what to do about their home and their mortgage and their retirement.” The baby boom generation was already facing a retirement crunch: Over the past two decades, employers have largely eliminated traditional pensions, forcing workers to manage their retirement savings. Many boomers didn’t save enough, invested badly or raided their retirement accounts. The Consumer Financial Protection Bureau’s Office for Older Americans says 30% of homeowners 65 and older (6.5 million people) were paying a mortgage in 2013, up from 22% in 2001.

Federal Reserve numbers show the share of people 75 and older carrying home loans jumped from 8% in 2001 to 21% in 2011. What’s more, the median mortgage held by Americans 65 and older has more than doubled since 2001 — to $88,000 from $43,400, the financial protection bureau says. In markets hit hardest by the housing bust, a substantial share of older Americans are stuck with mortgages that exceed their home’s value. In Atlanta, it’s 23% of homeowners 50 and older, according to the real-estate research firm Zillow. In Las Vegas, it’s 26%.

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It eats away profits elsewhere.

What Australia PM Abbott Doesn’t Get About The Housing Market (BSpectator)

Prime Minister Tony Abbott doesn’t understand the housing market, doesn’t care about housing affordability, and is therefore poorly versed on the issues facing Australia’s non-mining sector. The housing market and the business sector are intrinsically and unavoidably linked. Neither operates in a vacuum; developments – good and bad – in one market inevitably spill over into the other. The business sector, for example, pays our wages, which many of us obviously use to pay down our mortgages. Meanwhile, land prices are a considerable cost for most businesses – they need floor space to sell their goods or new land to build or expand a factory. If you are prime minister of a country you need to understand how this works.

It’s basic economics and yet there is clear evidence that Abbott simply doesn’t get it. His comments yesterday on the property market and housing affordability were a case in point. “As someone who, along with the bank, owns a house in Sydney I do hope our housing prices are increasing,” Abbott said during question time yesterday. “I do want housing to be affordable, but nevertheless I also want house prices to be modestly increasing.” I am sure that many readers will agree with this sentiment. But Abbott is charged with acting in the public interest; that is the standard by which he is judged. Unfortunately, rising house prices – particularly the type of growth experienced in Sydney – are neither in the public interest nor in the broader interest of Australian businesses.

High land prices are a crippling barrier for many Australian corporations. It’s a key reason – along with high wages – why Australian manufacturing continues to retreat. It hurts shopkeepers and department stores; any business that requires a physical location to operate is hampered by elevated land prices. High land prices make it difficult to produce a sufficient quantity to get fixed costs down to competitive levels. Unfortunately, it’s too costly to buy new land and build a new factory, which means too many Australian businesses fall short of their potential.

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Nice idea.

WikiLeaks Announces $100,000 Crowd-Sourced Reward For TPP Text (Politico)

WikiLeaks announced an effort Tuesday to crowd-source a $100,000 reward for the remaining chapters of the Trans-Pacific Partnership trade deal, after the organization published three draft chapters of the deal in recent years. “The transparency clock has run out on the TPP. No more secrecy. No more excuses. Let’s open the TPP once and for all,” WikiLeaks founder Julian Assange said in a statement.

Critics say that the deal being negotiated by the United States and other Pacific Rim countries would hurt American workers and the economy, while proponents argue that it would help the United States establish a stronger economic foothold in the region with regard to China. The three chapters that WikiLeaks has already published include sections on intellectual property rights, published in November 2013, the environment, published in January 2014, and investment, published this March. The $100,000 reward marks the beginning of a new program for the organization, in which users can pledge funding to get the chapters they want the most.

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“This must be what comes of viewing the world through your cell phone.”

Twenty-Three Geniuses (Jim Kunstler)

If there is a Pulitzer Booby Prize for stupidity, waste no time in awarding it to The New York Times’ Monday feature, The Unrealized Horrors of Population Explosion. The former “newspaper of record” wants us to assume now that the sky’s the limit for human activity on the planet earth. Problemo cancelled. The article and accompanying video was actually prepared by a staff of 23 journalists. Give the Times another award for rounding up so many credentialed idiots for one job. Apart from just dumping on Stanford U. biologist Paul Ehrlich, author of The Population Bomb (1968), this foolish “crisis report” strenuously overlooks virtually every blossoming fiasco around the world. This must be what comes of viewing the world through your cell phone.

One main contention in the story is that the problem of feeding an exponentially growing population was already solved by the plant scientist Norman Borlaug’s “Green Revolution,” which gave the world hybridized high-yielding grain crops. Wrong. The “Green Revolution” was much more about converting fossil fuels into food. What happens to the hypothetically even larger world population when that’s not possible anymore? And did any of the 23 journalists notice that the world now has enormous additional problems with water depletion and soil degradation? Or that reckless genetic modification is now required to keep the grain production stats up?

No, they didn’t notice because the Times is firmly in the camp of techno-narcissism, the belief that the diminishing returns, unanticipated consequences, and over-investments in technology can be “solved” by layering on more technology — an idea whose first cousin is the wish to solve global over-indebtedness by generating more debt. Anyone seeking to understand why the public conversation about our pressing problems is so dumb, seek no further than this article, which explains it all. Climate change, for instance, is only mentioned once in passing, as though it was just another trashy celebrity sighted at a “hot” new restaurant in the Meatpacking District. Also left out of the picture are the particulars of peak oil (laughed at regularly by the Times, which proclaimed the US “Saudi America” some time back), degradation of the ocean and the stock of creatures that live there, loss of forests, the political instability of whole regions that can’t support exploded populations, and the desperate migrations of people fleeing these desolate zones.

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Being monitored was a notion fit for crazies not long ago; now it’s a certainty for everyone.

Crazyland (Dmitry Orlov)

A long time ago—almost a quarter of a century—I worked in a research lab, designing measurement and data acquisition electronics for high energy physics experiments. In the interest of providing motivation for what follows, I will say a few words about the job. It was interesting work, and it gave me a chance to rub shoulders (and drink beer) with some of the most intelligent people on the planet (though far too fixated on subatomic particles). The work itself was interesting too: it required a great deal of creativity because the cutting edge in electronics was nowhere near sharp enough for our purposes, and we spent our time coming up with strange new ways of combining commercially available components that made them perform better than one had the right to expect.

But most of my time went into the care and feeding of an arcane and temperamental Computer Aided Design system that had been donated to the university, and, for all I know, is probably still there, bedeviling generations of graduate students. With grad students just about our only visitors, the atmosphere of the lab was rather monastic, with the days spent twiddling knobs, pushing buttons and scribbling in lab notebooks. And so I was quite pleased when one day an unexpected visitor showed up. I was busy doing something quite tedious: looking up integrated circuit pin-outs in semiconductor manufacturer’s databooks and manually keying them into the CAD system—a task that no longer exists, thanks to the internet.

The visitor was a young man, earnest, well-spoken and nervous. He was carrying something wrapped in a black trash bag, which turned out to be a boombox. These portable stereos that incorporated an AM/FM radio and a cassette tape player were all the rage in those days. He proceeded to tell me that he strongly suspected that the CIA was eavesdropping on his conversations by means of a bug placed inside this unit, and he wanted me to see if it was broadcasting on any frequency and to take it apart and inspect it for any suspicious-looking hardware.

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Interesting as data, but lousy as analysis. Retail deflation is a nonsense misleading term.

Record Fall In UK Fresh Food Prices Drives Retail Deflation (Guardian)

Prices in British shops have moved into their third year of decline as a result of widespread supermarket discounting and cheaper fresh food , according to new industry figures. The British Retail Consortium (BRC) said shop prices in May were down 1.9% on last year’s levels, unchanged from April’s rate of decline and the 25th straight month of deflation. The fall will reinforce expectations that the broader official measure of inflation in the UK will remain low for some months to come after turning negative in April. The BRC found food prices again fell 0.9% in May while non-food deflation held at 2.5%.

Within those categories, fresh food fell at a record pace of 1.9% thanks to meat, milk, cheese and eggs all being cheaper than a year ago, according to the BRC report with market research company Nielsen. Comparable records began in December 2006. The latest BRC-Nielsen Shop Price Index shows prices fell 1.9% in May from a year ago. It was the 25th consecutive month of falling shop prices. Falling non-food prices are now in their third year and food prices have been in deflationary territory for five straight months. “Retailers continue to use price cuts and promotions to stimulate sales which is helping to maintain shop price deflation, and we see little evidence to suggest that prices will rise in the near future,” said Mike Watkins, Nielsen’s head of retailer and business insight.

He predicted that discounting will help keep the official consumer price index (CPI) measure of inflation low for some time. “With many food retailers still using price cuts to attract new shoppers, this is lowering the cost of the weekly shop and so the overall CPI figure in the UK. Deflation and price led competition will continue to be a key driver of sales growth for some time yet,” added Watkins.

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What a country.

Children Trapped In Poverty By UK Government’s ‘Dysfunctional System’ (Guardian)

Thousands of children in the UK, many of them British, are living in dangerous, squalid conditions well below the poverty line as a result of rapid changes to government immigration and benefit policies, a report by the Centre on Migration, Policy and Society at the University of Oxford warned on Wednesday. Children are the “collateral damage” of “a dysfunctional system in which they are the ultimate losers” according to the authors of the Compas report, which estimates that 3,391 families and 5,900 children were supported under local authorities’ Section 17 Children Act 1989 duties in 2012/13. Two thirds of families who were supported by local authorities for up to two years or more – at a cost of £28m for the year – were waiting for a decision from the Home Office; of the cases looked at by the study, 52% were granted leave to remain.

Charities seeing an increase in the numbers forced into destitution – with some families living on as little as £1 per person per day – argue it is only a matter of time before a tragedy on the scale of Victoria Climbié occurs to a child from a family who has “no recourse to public funds” (NRPF), a criterion for many attempting to regulate their immigration status. Victoria Climbié, an eight-year-old, was tortured and murdered by her guardians in 2000. Her death led to a public inquiry and produced major changes in child protection policies in the United Kingdom. NRPF families – including those on visas, overstayers and those applying for British citizenship who cannot work or claim benefits – were being abandoned by the Home Office while their status applications were being processed, leaving cash-strapped local authorities struggling to cope with the burden of caring for children whom they had a legal obligation to protect from destitution.

“There is a real tension between the desire to keep these people out of the welfare state and the legal obligation that falls on local authorities,” said co-author Jonathan Price. “There is a question to be asked about the long-term impact on children of living on subsistence rates that are well below welfare rates.” The report, funded by the Nuffield Foundation, found that support from local authorities varied wildly. Families were grateful for any support they received, but subsistence payments “in all cases were well below support for destitute asylum seekers and hard case support rates”, said the report. One authority provided £23.30 per child per week and nothing for parents: for a family with two parents and one child, a little over £1 per person per day.

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You can’t eat shifting goalposts.

The Meaninglessness of Ending ‘Extreme Poverty’ (Bloomberg)

This September, the world’s leaders will converge on the United Nations to declare a new set of Sustainable Development Goals for planetary progress over the next 15 years. Their first target will be to “eradicate extreme poverty for all people everywhere, currently measured as people living on less than $1.25 a day.” That’s a heady vision, one already embraced both by U.S. President Obama and Jim Kim, president of the World Bank—the organization that set the $1.25 poverty line back in 2005. There’s just one problem: According to the World Bank, extreme poverty isn’t what it used to be. It turns out that the technique the bank has used in the past to set the extreme poverty line essentially guarantees we won’t wipe out extreme poverty by 2030—or ever.

To save face, the World Bank’s economists are likely to change the method to one that creates a definition of extreme poverty that can be eradicated. But in doing so, they’ll set a poverty line that will move further and further away from anyone’s actual idea of what it is to be poor. Ask people what level of income would make them poor and they tend to come up with a number that’s relative to their income. In the U.S., people are surveyed as to the amount of income necessary for a family of four to “get along.” In 1950, the answer was $48 a week, or around 75% of household mean income that year. More than half a century later in 2007, the average answer was $1,000 a week—or around 77% of mean income. Given that most people define poverty using a relative approach, it isn’t surprising that most governments tend to come up with national poverty lines that are explicitly or implicitly relative to average incomes.

The U.S. is an exception: It has a poverty line that is explicitly absolute—you are poor if your income is lower than the cost of a food basket, plus an allowance for nonfood expenditures like rent. This standard was set in the 1960s and has been updated only to reflect inflation. As a proportion of U.S. median household income, the poverty line has fallen from one-half to below one-quarter since 1963. But the European Union uses a poverty line that is explicitly relative—you are poor if you live in a household with an income that is below 60% of mean household income. And it turns out that while most developing countries purport to use an absolute poverty line, in practice they implement a relative approach.

Most commonly, the poverty line is officially set using a basket of goods meant to reflect basic needs. But as countries get richer, the basic needs bundle gets more generous. Food costs start to include meat and fish alongside grains and vegetables, for example. And nonfood costs add utilities and transport alongside rent. That’s why China doubled its (supposedly absolute) poverty line in 2011 after years of strong economic growth. And it’s why there is a strong positive relationship between GDP per capita and the value of the poverty line across countries.

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Jan 152015
 
 January 15, 2015  Posted by at 11:30 am Finance Tagged with: , , , , , , , , , ,  


Unknown Marin-Dell dairy truck, San Francisco Mar 1 1945

US Retail Sales Down Sharply, Likely Cuts to Growth Forecasts Ahead (Bloomberg)
US Retail Sales Drop Most Since June 2012 – It’s Not Gas Prices (Zero Hedge)
The December Retail Report: “Disappointing” Isn’t The Half Of It (Stockman)
Swiss Franc Jumps 30% As Central Bank Abandons Ceiling Versus Euro (Reuters)
What, Us Worry? Economists Stay Upbeat as Markets See Trouble (Bloomberg)
Here’s Why Wall Street Is Wrong About Oil Stocks (MarketWatch)
Increased US Output Bolsters Oil Glut Fears Sending Prices Back Down (Bloomberg)
US Oil Output Advances To Record Even as Prices Decline (Bloomberg)
Iraq to Double Exports of Kirkuk Crude Amid Oil Surplus (Bloomberg)
Big Oil Cuts Back As Analysts Slash Forecasts (CNBC)
Gravy Train Derails for Oil Patch Workers Laid Off in Downturn (Bloomberg)
Oil Price Crash Threatens The Future Of The North Sea Oilfields (Guardian)
Qatar, Shell Scrap $6.5 Billion Project After Oil’s Drop (Bloomberg)
Europe’s Imperial Court Is A Threat To All Our Democracies (AEP)
ECB Stimulus Already Priced Into Market (CNBC)
Deflation Risk Renders Czech Koruna’s Euro Cap Irrelevant (Bloomberg)
Germany Gets Walloped By Its Own Austerity (Bloomberg)
Weak Capex Spending Spells Trouble For Japan (CNBC)
Market Madness Started With End Of Fed’s QE (CNBC)
Russia to Shift Ukraine Gas Transit to Turkey as EU Cries Foul (Bloomberg)
Russia to Dip Into Wealth Fund as Ruble Crisis Pressures Economy (Bloomberg)
China’s Credit Growth Surges; Shadow Banking Stages a Comeback (Bloomberg)
Asian Central Banks Should Focus On Deflation Not Inflation (Bloomberg)
Specter Of Fascist Past Haunts European Nationalism (Reuters)
Rate Of Sea-Level Rise ‘Far Steeper’ (BBC)

What on earth happened to holiday sales?

US Retail Sales Down Sharply, Likely Cuts to Growth Forecasts Ahead (Bloomberg)

The optimism surrounding the outlook for U.S. consumers was taken down a notch as retail sales slumped in December by the most in almost a year, prompting some economists to lower spending and growth forecasts. The 0.9% decline in purchases followed a 0.4% advance in November that was smaller than previously estimated, Commerce Department figures showed today in Washington. Last month’s decrease extended beyond any single group as receipts fell in nine of 13 major retail categories. While disappointing, the drop followed large-enough gains at the start of the quarter that signaled consumer spending accelerated from the previous three months as the job market strengthened and gasoline prices plunged. Continued improvement in hiring that sparks more wage growth will be needed to ensure customers at retailers such as Family Dollar Stores also thrive.

“Maybe the optimism a month ago got a little too heated,” said Guy Berger, U.S. economist at RBS. “It’s a weak number but it follows some really strong ones and I don’t think it changes my general feeling on how the economy and consumers are doing.” Treasury yields and stocks fell as a deepening commodities rout and the drop in sales spurred concern global growth is slowing. The Standard & Poor’s 500 Index retreated 0.6% to 2,011.27 at the close in New York. The 30-year Treasury bond yielded 2.47% after declining earlier to a record-low 2.39%. Electronics merchants, clothing outlets, department stores and auto dealers were among those posting sales declines in December, today’s report showed. Cheaper fuel helped push receipts at gasoline stations down by the most in six years. T

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But but but indeed.

US Retail Sales Drop Most Since June 2012 – It’s Not Gas Prices (Zero Hedge)

But but but… US retail advanced sales dropped a stunning 0.9% MoM (massively missing expectations of a 0.1% drop). The last time we saw a bigger monthly drop was June 2012. Want to blame lower gas prices – think again… Retail Sales ex Autos and Gas also fell 0.3% (missing an exuberantly hopeful expectation of +0.5% MoM) and the all-important ‘Control Group’ saw sales fall 0.4% (missing expectations of a 0.4% surge). Boom goes the narrative. Advance Retail Sales massively missed For Dec…

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“.. no economy can thrive for long – especially one already at “peak debt” – based on consumer “spending” that is 100% dependent upon borrowed funds.”

The December Retail Report: “Disappointing” Isn’t The Half Of It (Stockman)

Today’s 0.9% decline in December retail sales apparently came as a shock to bubblevision’s talking heads. After all, we have had this giant “oil tax cut”, and, besides, the US economy has “decoupled” from the stormy waters abroad and is finally on its way to “escape velocity”. The Wall Street touts and Keynesian economic doctors have been saying that for months now – while averring that all the Fed’s massive money printing is finally beginning to bear fruit. So today’s retail report is a real stumpe – –even if you embrace Wall Street’s sudden skepticism about government economic reports and ignore the purported “noise” in the seasonally maladjusted numbers for December. All right then. Forget the December monthly numbers. Why not look at the unadjusted numbers in the full year retail spending report for 2014 compared to the prior year.

Recall that the swoon from last winter’s polar vortex overlapped both years, and was supposed to be a temporary effect anyway – a mere shift of consumer spending to a few months down the road when spring arrived on schedule. On an all-in basis, total retail sales in 2014 rose by $210 billion or a respectable 4.0%. But 58% of that gain was attributable to two categories – auto sales and bars&restaurants – which accounted for only 28% of retail sales in 2013. And therein lies a telling tale. New and used motor vehicle sale alone jumped by $86 billion in CY2014 or nearly 9%. Then again, during the most recent 12 months auto loans outstanding soared by $89 billion. Roughly speaking, therefore, consumers borrowed every dime they spent on auto purchases and took home a few billion extra in spare change.

The point here is that no economy can thrive for long – especially one already at “peak debt” – based on consumer “spending” that is 100% dependent upon borrowed funds. Yet that has been the essence of the retail sales rebound since the Great Recession officially ended in June 2009. Auto sales, which have been heavily financed by borrowing, are up by about 70%; the balance of non-auto retail sales, where consumer credit outstanding is still below the pre-crisis peak, has gained only 22%. Stated differently, the only credit channel of monetary policy transmission which is still working is auto credit. Yet as indicated earlier this week, that actually amounts to a proverbial “accident” waiting to happen. On the margin, the boom in auto loans, which are now nearing $1 trillion in outstandings, is on its last leg. The latest surge of growth has been in “subprime” credit based on the foolish assumption that vehicle prices never come down; and that the junk car loan boom led by fly-by-night lenders is nothing to worry about since loans are “collateralized”.

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Wow!

Swiss Franc Jumps 30% As Central Bank Abandons Ceiling Versus Euro (Reuters)

Switzerland’s franc soared by almost 30% in value against the euro on Thursday after the Swiss National Bank abandoned its three-year old cap at 1.20 francs per euro. In a chaotic few minutes on markets after the SNB’s announcement, the franc broke past parity against the euro to trade at 0.8052 francs per euro before trimming those gains to stand at 88.00 francs. It also gained 25% against the dollar to trade at 74 francs per dollar.

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Huh? ” ..looking at economic data, “we’re certainly not seeing anything that’s unnerving us.”

What, Us Worry? Economists Stay Upbeat as Markets See Trouble (Bloomberg)

The U.S. consumer, that dynamo of the global economy, just took a step back. Relax. It’s not that bad, economists say. News Wednesday that U.S. retail sales unexpectedly declined in December reverberated through financial markets, but few economists read the report as a sign of trouble for the nation’s economy. In fact, many economists say the U.S. economy is doing just fine. So why did the markets react the way they did? The answer, in part, is that the report added to a wall of worry confronting investors. Topping the 2015 angst-list are the plunge in oil and other commodities, as well as slowdowns in China and Europe.

“It feels like a global recession when you look at the markets,” said David Hensley, director of global economics for JPMorgan. But looking at economic data, “we’re certainly not seeing anything that’s unnerving us.” For the moment, the 0.9% decline in December retail sales reported by the Commerce Department has pushed back market expectations for when the Federal Reserve will start raising interest rates. It also has bond investors betting that inflation will stay low. Forecasts change all the time. But before anyone panics over one economic number, here are four reasons to stay optimistic about the U.S. economy, which is still in the driver’s seat of global growth.

• December sales figures aside, U.S. consumers aren’t running scared. Yes, last month’s decline was the biggest in a year. But consumer spending probably rose at an annual rate of more than 4% during the fourth quarter as a whole, according to Ted Wieseman at Morgan Stanley. The first quarter of this year is looking just as good, Wieseman wrote in a note today to clients.

• The U.S. jobs market is perking up. Less than a week ago, investors were cheering news of another big rise in U.S. payrolls. In all, the economy added about 3 million jobs last year. “The U.S. is doing great relative to the rest of the developed world,” said Jim O’Sullivan at High Frequency Economics.

• The plunge in oil and other commodities is mostly good news for consumers. Cheaper oil means cheaper fuel. And most economists say that’s good for global growth. The plunge in oil, for example, largely reflects an increase in supply, from shale and the like, rather than a decrease in demand. U.S. production of crude oil rose to 9.19 million barrels a day last week, the highest in Energy Information Administration weekly estimates going back to 1983.

• Bond yields are hitting new lows, but that doesn’t necessarily mean the entire world is about to sink into a deflationary spiral in which prices, wages and output fall in tandem. In fact, many economists predict wages in the U.S. will finally start rising this year. “It’s just a matter of time before wage growth picks up,” said Mohamed El-Erian.

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“The Street’s estimates are based on a price of roughly $75 a barrel for oil ..”

Here’s Why Wall Street Is Wrong About Oil Stocks (MarketWatch)

Most Wall Street analysts are basing their 2015 earnings estimates for oil companies on a questionable number: the price of oil itself. Exxon Mobil, which has, by far, the largest market value of any oil producer, illustrates this point perfectly. The consensus among sell-side analysts polled by FactSet is for the company to earn $5.18 a share this year, down 40% from an estimated $7.27 in 2014. The expected decline in earnings springs from the crash in oil prices amid slowing demand, increased U.S. supply and OPEC’s strategy of defending its market share by refusing to cut production. But Oppenheimer analyst Fadel Gheit, who’s based in New York, has diverged wildly from his peers, predicting a 2015 EPS estimate of only $2.65 for Exxon Mobil.

“The Street’s estimates are based on a price of roughly $75 a barrel for oil,” which is where the analysts think oil will end up after recovering from its drop. Oppenheimer’s estimates are updated every Friday, based on current oil prices, not on where the firm’s analysts think the price may eventually settle. Gheit’s estimates from Friday were based on prices of $51.68 a barrel for West Texas crude and $55.20 for Brent crude. Based on the consensus 2015 estimate and Tuesday’s closing stock price of $90, Exxon Mobil would trade for 17.4 times this year’s earnings. That’s not an outrageously high valuation. However, based on Gheit’s estimate, which in turn is based on what’s actually going on in the oil market, the stock would trade for about twice as much: 34 times earnings.

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What do they expect?

Increased US Output Bolsters Oil Glut Fears Sending Prices Back Down (Bloomberg)

Oil resumed its decline after the biggest gain since June 2012 as U.S. crude production increased, bolstering speculation a global supply glut that spurred last year’s price collapse may persist. Futures dropped as much as 1.3% in New York. U.S. output surged to 9.19 million barrels a day last week, the fastest pace in weekly records dating back to January 1983, the Energy Information Administration reported yesterday. Crude may fall below a six-month forecast of $39 a barrel and rallies could be thwarted by the speed at which lost shale production can recover, according to Goldman Sachs. Oil slumped almost 50% last year, the most since the 2008 financial crisis, as OPEC resisted cutting output even amid the U.S. shale boom, exacerbating a surplus estimated by Kuwait at 1.8 million barrels a day.

Prices rose yesterday as a relative strength index rebounded after more than two weeks below 30, a level that typically signals the market is oversold. “You tend to arrive at points every now and then in major trends like this where you just see a little bit of short covering and profit taking,” Ric Spooner at CMC Markets in Sydney, said. “Supply is still the general theme.” Oil is leading this week’s slide in commodities after a decade-long bull market led companies to boost production and a stronger dollar diminished their allure to investors. The Bloomberg Commodity Index of 22 energy, agriculture and metal products decreased to the lowest level since November 2002 on Jan. 13, extending a 17% loss last year.

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“.. output rose in November as the number of new wells coming online fell by 73%.”

US Oil Output Advances To Record Even as Prices Decline (Bloomberg)

Drillers that unlocked the shale oil boom in the U.S. are finding it hard to shut off the nozzle. U.S. crude production rose even as prices slumped to the lowest in more than five years and the number of rigs targeting oil decreased. In North Dakota’s prolific Bakken shale formation, output rose in November as the number of new wells coming online fell by 73%. The increases illustrate how improvements in horizontal drilling and hydraulic fracturing technology may prop up U.S. crude production even as companies cut spending, idle rigs and lay off thousands of workers with oil prices down more than 50% since June. “We have an oversupply of crude,” Michael Hiley, head of energy OTC at LPS Partners said yesterday.

“Production keeps going up. There is not a great correlation between the rig count and production because drilling has gotten more efficient over the last several years.” Output climbed to 9.19 million barrels a day last week, the most in Energy Information Administration weekly estimates going back to 1983. Strong production helped push crude inventories to a seasonal record, EIA data showed. Crude has slumped 9% in 2015 after declining 46% in 2014 as shale oil lifted U.S. supply and OPEC maintained production. Last week, U.S. oil rigs declined by the most since 1991. Producers including Continental and ConocoPhillips say they will cut spending.

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“.. in the coming few weeks,”

Iraq to Double Exports of Kirkuk Crude Amid Oil Surplus (Bloomberg)

Iraq will double exports within weeks from its northern Kirkuk oil fields and continue boosting output further south amid a global market glut that’s pushed prices to their lowest level in more than five and a half years. Crude shipments will rise to 300,000 barrels a day from the Kirkuk oil hub, where authorities are also upgrading pipelines between fields, Fouad Hussein, at Kirkuk provincial council’s oil and gas committee, said. “There is a need to install a new pipeline network” to increase exports from the area, Hussein said. Kirkuk, which currently exports about 150,000 barrels a day, will boost shipments to 250,000 barrels a day and then to 300,000 “in the coming few weeks,” he said. Iraq, holder of the world’s fifth-largest crude reserves, is rebuilding its energy industry after decades of wars and economic sanctions.

The country exported 2.94 million barrels a day in December, the most since the 1980s, Oil Ministry spokesman Asim Jihad said Jan. 2. The exports, pumped mostly from fields in southern Iraq, included 5.579 million barrels from Kirkuk in that month, he said. [..] State-owned Missan Oil plans to boost its production to 1 million barrels a day in 2017 from an average output of 257,000 barrels a day in 2014, according to Director-General Adnan Sajet. Output exceeded 93 million barrels in 2014, up 10 million barrels from the previous year, he said yesterday. Iraq’s government also awarded a contract to an unspecified international company to more than double the capacity of the southern Basra oil refinery to 300,000 barrels a day, according to an e-mailed statement from the office of Deputy Prime Minister Rowsch Nuri Shaways. The refinery can currently process about 140,000 barrels a day.

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“U.K.-based Tullow Oil has painted a bleak outlook for the years ahead. The firm announced earnings Thursday, with write offs of $2.3 billion ..” “Premier Oil also announced an estimated $300-million impairment charge for the second half of this year ..”

Big Oil Cuts Back As Analysts Slash Forecasts (CNBC)

The ongoing rout in oil markets is putting high-profile industry names on the back foot, with Shell announcing major changes to operations this week – and BP expected to follow suit. BP is expected to announce significant job cuts across the 20 oil fields in owns in the North Sea – just off the coast of the U.K. – on Thursday, according to media reports. It currently employs 4,000 workers in the area. Meanwhile, Anglo–Dutch multinational Royal Dutch Shell announced that it had decided to shelve the construction of a new petrochemicals complex in Qatar, was due to be a tie-up with the country’s state-owned oil firm.

In the exploration sector – the first to be hit by falling oil prices – U.K.-based Tullow Oil has painted a bleak outlook for the years ahead. The firm announced earnings Thursday, with write offs of $2.3 billion, and warned there had been “major steps taken to strengthen the business to adapt to current market conditions.” Rival exploration firm Premier Oil also announced an estimated $300-million impairment charge for the second half of this year on Wednesday, with delays and cost-cutting plans expected in the development of some of its new oil fields. Weak global demand and booming U.S. shale oil production are seen as two key reasons behind the price plunge, as well as OPEC’s reluctance to cut its output. Both WTI and Brent crude prices have crashed by around 60% since mid-June last year and oil stocks have been crushed, underperforming the wider benchmarks.

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“As of November, oil and gas companies employed 543,000 people across the U.S., a number that’s more than doubled from a decade ago ..”

Gravy Train Derails for Oil Patch Workers Laid Off in Downturn (Bloomberg)

The first thing oilfield geophysicist Emmanuel Osakwe noticed when he arrived back at work before 8 a.m. last month after a short vacation was all the darkened offices. By that time of morning, the West Houston building of his oilfield services company was usually bustling with workers. A couple hours later, after a surprise call from Human Resources, Osakwe was adding to the emptiness: one of thousands of energy industry workers getting their pink slips as crude prices have plunged to less than $50 a barrel. “For the oil and gas industry, it’s scary,” Osakwe said in an interview after he was laid off last month from a unit of Halliburton, which he joined in September 2013. “I was blind to the ups and downs associated with the industry.”

It’s hard to blame him. The oil industry has been on a tear for most of the past decade, with just a brief timeout for the financial crisis. As of November, oil and gas companies employed 543,000 people across the U.S., a number that’s more than doubled from a decade ago, according to data kept by Rigzone, an employment company servicing the energy industry. Stunned by the sudden plunge in the price of oil, energy companies have increasingly resorted to layoffs to cut costs since Christmas, shocking a new generation of workers, like Osakwe, unfamiliar with the industry’s historic boom and bust cycles. Workers who entered the holiday season confident they had secure employment in one of the country’s safest havens now find themselves in shrinking workplaces with dimming prospects. [..]

There’s no firm number yet on how many oil industry workers are losing their jobs, or how many more cuts might be coming. Halliburton said last month it was laying off 1,000 staff in the Eastern Hemisphere alone as it adapted to a shrinking business. Suncor, a Canadian oil company, said this week it will cut 1,000 jobs in 2015, a day after Shell said it would cut 300 in the region. Other companies have announced layoffs, but many are making the cuts without public fanfare. The effects are being felt beyond the oil companies as cutbacks trickle down to suppliers and other companies that thrived along with $100 oil. The biggest drilling states – Texas, North Dakota, Louisiana, Oklahoma, Colorado – are expected to feel the most pain. The Dallas Federal Reserve estimates 140,000 jobs directly and indirectly tied to energy will be lost in Texas in 2015 because of low oil prices.

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“North Sea oilfields could be shut down if the oil price fell by just a few more dollars ..”

Oil Price Crash Threatens The Future Of The North Sea Oilfields (Guardian)

The potential impact of the oil price slump on Scotland was underlined as a leading energy expert warned on Wednesday that North Sea oilfields could be shut down if the oil price fell by just a few more dollars. The rising sense of crisis about the plummeting price – which has fallen 60% in the last six months – prompted the Scottish government to promise an emergency taskforce to try to preserve jobs in the offshore energy sector. Meanwhile, Mark Carney, the governor of the Bank of England warned that the Scottish economy was heading for a “negative shock”. The oil industry consultancy Wood Mackenzie said that at the current price for Brent blend, of $46 a barrel, some UK production was already failing to break even, and further falls could endanger output.

Robert Plummer, a research analyst with the firm, said that at $50 a barrel oil production was costing more than its value in 17 countries, including the US and UK. Plummer told Scottish Energy News: “Once the oil price reaches these levels producers have a sometimes complex decision to continue producing, losing money on every barrel produced, or to halt production, which will reduce supply.” Concern about cutbacks was heightened Wednesday when Shell announced it was scrapping a $6.4bn (£4.2bn) energy project in the Middle East because it was no longer commercial, with oil prices falling to six-year lows. Plummer said that if oil prices fell to $40, a small but significant part of global supply would become “cash negative”, although some operators would choose to keep producing oil at a loss rather than stop production.

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So many projects will be shelved.

Qatar, Shell Scrap $6.5 Billion Project After Oil’s Drop (Bloomberg)

Qatar Petroleum and Royal Dutch Shell called off plans to build a $6.5 billion petrochemical plant in the emirate, saying the project is no longer commercially feasible amid the upheaval in global energy markets. The companies formed a partnership for the al-Karaana project in 2011 and planned to operate it as a joint venture, with state-run QP owning 80% and Shell the remaining 20%. They decided not to proceed after evaluating quotations from bidders for engineering and construction work, the companies said yesterday in a joint statement. The expected capital cost of the petrochemical complex planned in Ras Laffan industrial city “has rendered it commercially unfeasible, particularly in the current economic climate prevailing in the energy industry,” they said.

Al-Karaana is the second petrochemical project in Qatar to be canceled in recent months due to unfavorable economics. Industries Qatar, the state-controlled petrochemical and steel producer, halted plans to build a $6 billion plant in September. Qatar, an OPEC member and the world’s biggest exporter of liquefied natural gas, is seeking like other energy producers in the Persian Gulf to diversify its economy away from oil and gas exports and building factories to make petrochemicals, aluminum and steel. “The region is beginning to reduce its capital expenditure for petrochemical and hydrocarbon expansion, and that is expected given that oil prices have plunged,” John Sfakianakis, Middle East director at Ashmore Group Plc, said in a phone interview.

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“This would be a fundamental transformation of the EU from a treaty organisation, which depends on the democratic assent of the sovereign states, into a supranational entity.”

Europe’s Imperial Court Is A Threat To All Our Democracies (AEP)

The European Court of Justice has declared legal supremacy over the sovereign state of Germany, and therefore of Britain, France, Denmark and Poland as well. The ECJ’s advocate-general has not only brushed aside the careful findings of the German constitutional court on a matter of highest importance, he has gone so far as to claim that Germany is obliged to submit to the final decision. “We cannot possibly accept this and they know it,” said one German jurist close to the case. The matter at hand is whether the European Central Bank broke the law with its back-stop plan for Italian and Spanish debt (OMT) in 2012. The teleological ECJ – always eager to further the cause of EU integration – did come up with the politically-correct answer as expected. The ECB is in the clear.

The opinion is a green light for quantitative easing next week, legally never in doubt. The European Court did defer to the Verfassungsgericht in Karlsruhe on a few points. The ECB must not get mixed up with the EU bail-out fund (ESM) or take part in Troika rescue operations. But these details are not the deeper import of the case. The opinion is a vaulting assertion of EU primacy. If the Karlsruhe accepts this, the implication is that Germany will no longer be a fully self-governing sovereign state. The advocate-general knows he is risking a showdown but views this fight as unavoidable. “It seems to me an all but impossible task to preserve this Union, as we know it today, if it is to be made subject to an absolute reservation, ill-defined and virtually at the discretion of each of the Member States,” he said.

In this he is right. “This Union” – meaning the Union to which EU integrationists aspire – is currently blocked by the German court, the last safeguard of our nation states against encroachment. This is why the battle is historic.”His opinion is a direct affront to the German court. It asserts that the EU court has the final say in defining and creating the EU’s own powers, without any national check,” said Gunnar Beck, a German legal theorist at the University of London. “This would be a fundamental transformation of the EU from a treaty organisation, which depends on the democratic assent of the sovereign states, into a supranational entity.” Germany’s judges have never accepted the ECJ’s outlandish claims to primacy.

Their ruling on the Maastricht Treaty in 1993 warned in thunderous terms that the court reserves the right to strike down any EU law that breaches the German Grundgesetz or Basic Law. They went further in their verdict on the Lisbon Treaty in July 2009, shooting down imperial conceits. The EU is merely a treaty club. The historic states are the “masters of the Treaties” and not the other way round. They set limits to EU integration. Whole areas of policy “must forever remain German”. If the drift of EU affairs erodes German democracy – including the Bundestag’s fiscal sovereignty – the country must “refuse further participation in the European Union”.

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“In the U.S., 18% of bank assets are stuck at the Fed, dead money. So it’s not really a good move for Europe that’s going to cause stimulus.”

ECB Stimulus Already Priced Into Market (CNBC)

The markets have already priced in the quantitative easing that the European Central Bank is expected to do next week and he doesn’t think it will be very powerful, David Malpass, president of Encima Global, told CNBC Wednesday. Therefore, he believes the markets are entering a phase of global rebalancing. “People will get tired of just being in the U.S. and will take a look at some of the emerging markets, oil, the euro and so on,” Malpass said in an interview with “Closing Bell.” David Hale, chairman of David Hale Global Economics, agrees the market has been discounting the anticipated QE for several weeks.

“Bond yields in Europe are at record low levels. Leaving aside the last few days, stock markets have been resilient. So I do think the expectation of this happening is now broadly in the market because of both comments by [ECB President Mario] Draghi and other members of the monetary policy council.” The European Central Bank meets next Thursday, and Draghi has said the bank is ready to start full-blown quantitative easing. Hale expects a “decent” amount of QE but said he doesn’t think it will work well enough to be stimulative. “The bond yields are already low, and remember the ECB is going to finance all those bond purchases with bank financing,” he said. “In the U.S., 18% of bank assets are stuck at the Fed, dead money. So it’s not really a good move for Europe that’s going to cause stimulus.”

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Sort of like Switzerland. Only, the koruna will plummet, not rise.

Deflation Risk Renders Czech Koruna’s Euro Cap Irrelevant (Bloomberg)

Currency traders are taking aim at the Czech Republic amid speculation that policy makers will have little choice but to weaken the koruna as it seeks to avert deflation. A measure of volatility jumped this month by the most among 31 major peers as the koruna fell to a six-year low of 28.5 per euro. The exchange rate is so far away from the 27-per-euro cap imposed by the central bank more than a year ago when inflation was the bigger threat that Goldman Sachs says it’s now “odds on” that the ceiling gets adjusted to 30 per euro. “I expect the koruna to tumble much further,” Bernd Berg, director of emerging-market strategy at SocGen, said. “The economy is on the brink of deflation. This has increased the likelihood of a dovish monetary-policy reaction.”

While neighboring Poland and Hungary have room to cut interest rates to curb deflation, the Czech Republic’s options are limited because its borrowing costs are already close to zero at 0.05%. Central-bank Governor Miroslav Singer entered the debate yesterday, seeking to play down the prospect of a lower currency limit by saying it may only become necessary if there were a “long-term increase in deflation pressures.” Singer’s comments in a blog on the Czech National Bank’s website helped the koruna rally late in the trading day, though it’s still 1.5% lower against the euro this year, the biggest loss among 31 major currencies after Russia’s ruble.

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“.. their business environment is getting worse, they’re reluctant to invest, and no matter how much cheap money the European Central Bank tries to steer their way, they’re not interested in borrowing to expand.”

Germany Gets Walloped By Its Own Austerity (Bloomberg)

The euro region is suffering from austerity fatigue, exemplified by polls showing Greece on the verge of dumping its government for one with less enthusiasm for spending cuts. Germany has been the principal architect of fiscal rectitude and the main opponent to any relaxation of deficit rules. What’s happening in the heartland of German industry, however, suggests it’s not just Germany’s neighbors who are threatened by its economic intransigence. The backbone of the German economy is formed by about 3.7 million small- and medium-sized enterprises, defined as those with annual sales no greater than 50 million euros ($60 million) and known as the Mittelstand. It turns out their business environment is getting worse, they’re reluctant to invest, and no matter how much cheap money the European Central Bank tries to steer their way, they’re not interested in borrowing to expand.

That’s the unavoidable conclusion of a report published by the German Savings Banks Association yesterday. The association polled more than 330 of the country’s 416 savings banks in October, and examined more than a quarter of a million SME balance sheets. For German companies that did invest last year, only 19.7% cited “expansion” as their motivation, down from 27.5% in 2013 and the lowest outcome since 2010. More than half of the companies instead were replacing old machinery. Investment itself remains stagnant, stuck at about 340 billion euros or 11.7% of gross domestic product. For small and medium-sized enterprises, this weakness of investment was not due to a lack of external financing or insufficient equity. The continuing economic difficulties experienced by many partner countries in the Monetary Union as well as geopolitical crises have reinforced the wait-and-see attitude of many enterprises.

Only 16% of the business managers at the banks said their customers’ businesses got better in 2014, less than half the number who said a year earlier that they were seeing improvements. Some 18% said things had gotten worse, versus just 4.6% in 2013. Companies in the west of Germany, which are typically the most dependent on exports, were worse hit than those in the eastern federal states, the association said. In response, companies are retrenching. Some 46% of the bank respondents said they provided less investment financing for their customers last year, with just 16% upping their credit allocations. By contrast, more than 64% of companies expanded their equity bases, adding to 59% in both 2012 and 2013.

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What goes for Germany goes for Japan: “Many Japanese corporations don’t want to invest because they don’t think they can make any money in Japan ..”

Weak Capex Spending Spells Trouble For Japan (CNBC)

The majority of Japanese companies appear unwilling to spend, latest government data showed on Wednesday, adding to doubts over the economy’s ability to recover amid slowing growth across the world, particularly in China. Core machinery orders, a leading indicator of capex spending, grew 1.3% on-month in November, a reversal from October’s 6.4% decline, but well below expectations for a 5.0% rise in a Reuters poll. Year-on-year, machinery orders dropped 14.6%, below the Reuters poll estimate of a 5.8% decline. At the same time, the Cabinet Office cut its assessment of machinery orders, citing signs that the economic recovery is stalling, Reuters reported.

“Many Japanese corporations don’t want to invest because they don’t think they can make any money in Japan,” said Taro Saito, director of economic research at NLI Research Institute. “The trend to hoard cash rather than invest is not good for the wider Japanese economy.” Still, he reckons capital spending is on a modest recovery trend now that the second consumption tax hike initially scheduled for October 2015 was shelved until April 2017. The first hike from 5% to 8% in April 2014 was too brutal, he said. Japan’s economy contracted in the two quarters following April’s tax hike, tipping the country into a technical recession.

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We are just leaving the madness. “The fuel for the fire over the last several years has been stock repurchases, and that has been fueled for the most part by the zero interest rate environment.”

Market Madness Started With End Of Fed’s QE (CNBC)

For nearly six years running, the U.S. stock market has withstood a myriad of body blows, from a stuttering economic recovery to a debt crisis in Europe to massive political instability in Washington. Underpinning each move higher was the knowledge that the Federal Reserve would keep the printing presses running, with aggressive quantitative easing programs that sent market confidence high and asset prices soaring. Now, though, comes a shock that has Wall Street reeling: The Black Swan-like collapse in oil prices that has provided a stern test of whether equity markets can survive nearly free of Fed hand-holding. So far, with volatility spiking, traditional correlations breaking down and the bad-news-is-good-news theme no longer in play, the early results are not particularly reassuring. “Stuff happens when QE ends,” said Peter Boockvar, chief market analyst at The Lindsey Group.

“It’s no coincidence that the market started going into a higher volatility mode, it’s no coincidence that the decline in commodity prices accelerated, it’s no coincidence that the yield curve started flattening when QE ended.” Indeed, the increase in volatility and its effect on prices across the capital market spectrum was closely tied to the Fed ending the third round of QE in October. That month marked a momentary collapse in bond yields on Oct. 15, a day that also saw the Dow Jones industrial average plunge some 460 points at one juncture before slicing its losses. The day, and the general tenor of markets as the Fed ended QE amid a global Ebola and economic growth scare, helped make October the most volatile month of 2014.

In second place for monthly volatility was December, according to a Tabb Group analysis, as investors pondered the meaning of “patient” in a Fed statement on when it planned to raise rates and waited for a Santa Claus rally that failed to materialize. January has proven to be an even bumpier month as investors evaluate an oil plunge that sent a gallon of gasoline below $2 in some locations but has raised question about longer-term effects on corporate bottom lines and business investment. Then came Wednesday’s disappointing retail sales numbers, all of which raised concerns about whether Wall Street is capable of negotiating its way through rough times with only zero-bound short-term interest rates as a backstop. “The assumption that low energy prices were unambiguously good was called into question with December retail sales,” said Art Hogan at Wunderlich Securities. “I think it’s all connected, but I’d be hard-pressed to tie it just to monetary policy.”

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Threat to the EU.

Russia to Shift Ukraine Gas Transit to Turkey as EU Cries Foul (Bloomberg)

Russia plans to shift all its natural gas flows crossing Ukraine to a route via Turkey, a surprise move that the European Union’s energy chief said would hurt its reputation as a supplier. The decision makes no economic sense, Maros Sefcovic, the European Commission’s vice president for energy union, told reporters today after talks with Russian government officials and the head of gas exporter, Gazprom, in Moscow. Gazprom, the world’s biggest natural gas supplier, plans to send 63 billion cubic meters through a proposed link under the Black Sea to Turkey, fully replacing shipments via Ukraine, Chief Executive Officer Alexey Miller said during the discussions. About 40% of Russia’s gas exports to Europe and Turkey travel through Ukraine’s Soviet-era network.

Russia, which supplies about 30% of Europe’s gas, dropped a planned link through Bulgaria bypassing Ukraine amid EU opposition last year. Russia’s relations with the EU have reached a post-Cold War low over President Vladimir Putin’s support for separatists in Ukraine. Sefcovic said he was “very surprised” by Miller’s comment, adding that relying on a Turkish route, without Ukraine, won’t fit with the EU’s gas system. Gazprom plans to deliver the fuel to Turkey’s border with Greece and “it’s up to the EU to decide what to do” with it further, according to Sefcovic. “We don’t work like this,” he said. “The trading system and trading habits – how we do it today – are different.”

Sefcovic said he arrived in the Russian capital to discuss supplies to south-eastern EU countries after Putin scrapped the proposed $45 billion South Stream pipeline. The region, even if Turkey is included, doesn’t need the volumes Gazprom is planning for a new link, he said. Ukraine makes sense as a transit country given its location in Europe and the “very clear specified places of deliveries” in Gazprom’s current long-term contracts with EU customers, Sefcovic said. “I believe we can find a better solution,” Sefcovic said.

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They’ll be fine.

Russia to Dip Into Wealth Fund as Ruble Crisis Pressures Economy (Bloomberg)

Russia will unseal its $88 billion Reserve Fund and use it to acquire rubles, the government’s latest effort to stem the country’s worst currency crisis in almost 17 years and limit its effects on the ailing economy. “Together with the central bank, we are selling a part of our foreign-currency reserves,” Finance Minister Anton Siluanov said in Moscow today. “We’ll get rubles and place them in deposits for banks, giving liquidity to the economy.” Russian officials are running out of options to stem the ruble’s plunge as oil prices below $50 a barrel and sanctions imposed over the conflict in Ukraine push the country to the brink of recession. Policy makers have already raised interest rates by the most since 1998 and introduced a 1 trillion-ruble ($15 billion) bank recapitalization plan. The risk for policy makers is that using the reserves to fight the ruble’s slide will worsen its standing with investors.

Economy Minister Alexei Ulyukayev said today there’s a “fairly high” risk that the country’s credit rating will be cut below investment grade for the the first time in a decade. “This should be viewed just as the continuation of the desire to present a united front in dealing with events in the foreign-currency market,” Ivan Tchakarov, chief economist at Citigroup in Moscow, said. Russia may convert the equivalent of as much as 500 billion rubles from one of the government’s two sovereign wealth funds to support the national currency, Siluanov said, calling the ruble “undervalued.” The Finance Ministry last month started selling foreign currency remaining on the Treasury’s accounts. The entire 500 billion rubles or part of the amount will be converted in January-February through the central bank, according to Deputy Finance Minister Alexey Moiseev. The Bank of Russia will determine the timing and method of the operation.

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“Some of the jump in shadow-banking credit might have been related to the anticipation of new restrictions on borrowing by local-government financing vehicles”

China’s Credit Growth Surges; Shadow Banking Stages a Comeback (Bloomberg)

China’s shadow banking industry staged a comeback in December as equity investors and local governments contributed to a surge in credit, underscoring challenges for a central bank trying to revive growth without exacerbating risks. Aggregate financing was 1.69 trillion yuan ($273 billion), the People’s Bank of China said in Beijing today, topping the 1.2 trillion yuan median estimate in a Bloomberg survey. While new yuan loans missed economists’ forecasts, shadow lending rose to the highest in monthly records that began in 2012. With economic growth headed below 7%, the central bank cut interest rates for the first time in two years in November. While manufacturing and factory-gate deflation have worsened, the main stock market index surged about 30% since the rate reduction was announced on Nov. 21.

“This highlights the dilemma for the PBOC: the real economy is still weak, and loan demand is weak, but speculative activity is rampant in the stock market, and local governments need funding,” said Shen Jianguang, Hong Kong-based chief Asia economist at Mizuho Securities Asia Ltd. “I believe the PBOC will further postpone rate and RRR cuts, and instead will resort to targeted measures of injecting liquidity.” New yuan loans, which measure new lending minus loans repaid, were 697.3 billion yuan, missing the median estimate of 880 billion yuan. The M2 gauge of money supply rose 12.2% from a year earlier, compared with the median estimate of 12.5%. December’s entrusted loans increased to about 458 billion yuan, according to PBOC data compiled by Bloomberg — the most on record for the company-to-company credits that are brokered by banks.

Trust loans increased to 210 billion yuan, the most since March 2013. The contrast between new yuan loans and aggregate financing “shows that financial liquidity is not sufficient to support economic activity,” said Lu Ting, Bank of America Corp.’s head of Greater China economics in Hong Kong. “IPOs have been active, and shadow banking is reviving.” The outstanding balance of margin-trading loans on the Shanghai and Shenzhen stock exchanges rose to a then-record 1.02 trillion yuan on Dec. 30, according to data compiled by Bloomberg. That was up from 757 billion yuan on Nov. 21. Some of the jump in shadow-banking credit might have been related to the anticipation of new restrictions on borrowing by local-government financing vehicles.

Read more …

“.. Raghuram Rajan shocked India today by unexpectedly slashing the benchmark repurchase rate to 7.75% from 8%.”

Asian Central Banks Should Focus On Deflation Not Inflation (Bloomberg)

After months of preaching monetary discipline to fend off inflation, Raghuram Rajan shocked India today by unexpectedly slashing the benchmark repurchase rate to 7.75% from 8%. Close observers shouldn’t have been surprised. India’s central banker, who famously predicted the 2008 global crisis, warned in an op-ed just yesterday that several of the world’s major economies were “flirting with deflation,” with dire implications for emerging markets like his. The threat of global “secular stagnation” – combined with lower prices in India – no doubt prompted him to act. The question is why Rajan’s peers across the region don’t appear to appreciate the danger. Just today, South Korea’s central bank courted its own deflationary funk by holding benchmark interest rates steady at 2%, even as consumer prices advance at the slowest pace since 1999.

While energy costs in Indonesia are rising due to the lifting of fuel subsidies, economist Daniel Wilson of ANZ warns that prices overall are set to slow or fall: “Disinflation synchronisation is in sight and it will be severe,” he says. From Beijing to Bangkok, Asian central banks seem too blinded by longstanding inflation fears to recognize the trends inexorably pushing prices downward. In a world of plunging commodity prices and weakening global demand, Asian economies that have traditionally depended on exports are going to have to do all they can to gin up growth. Since most of the tools available to governments – increasing spending, lowering trade barriers, loosening labor markets – can’t have an immediate impact, the burden falls on central banks to act. That’s the only sure way to ease strains in credit markets, relieve hard-pressed borrowers and boost investments.

So why aren’t they? An overly doctrinaire fear of inflation explains much of the reluctance. Take the Philippines, where consumer prices are rising just 2.7% and the economy is growing 5.3%. On Dec. 12, central bank Governor Amando Tetangco said cheaper oil gave him “some scope” to leave interest rates unchanged. Since then, Brent crude has fallen to about $48 a barrel, the World Bank has downgraded its 2015 global growth forecast to 3% from 3.4% and Europe has neared a new crisis. Last week, the Philippines government sold $2 billion of 25-year debt at a record-low yield of 3.95%. Markets aren’t always right, but it sure seems time for Tetangco to move the benchmark rate below 4%.

Read more …

“.. whether Le Pen’s stances – and those of other nationalist leaders in Europe – qualify as fascist is questionable.” Well, better be careful then?!

Specter Of Fascist Past Haunts European Nationalism (Reuters)

When up to a dozen world leaders and roughly 1.5 million people gathered in Paris on Sunday to mourn the murder of 10 editors and cartoonists of the satirical newspaper Charlie Hebdo and seven other people by three French-born Islamic radicals, they wanted to demonstrate that Europe will always embrace liberal and tolerant values. But the more telling event may turn out to be a counter-rally that took place at a 17th-century town hall in Beaucaire, France, that was led by Marine Le Pen, the leader of the far-right National Front. In Beaucaire, the crowd ended Le Pen’s rally by singing the French national anthem and chanting, “This is our home.” Le Pen is at the forefront of a European-wide nationalist resurgence – one that wants to evict from their homelands people they view as Muslim subversives.

She and other far-right nationalists are seizing on some legitimate worries about Islamic militancy – 10,000 soldiers are now deployed in France as a safety measure – in order to label all Muslims as hostile to traditional European cultural and religious values. Le Pen herself has likened their presence to the Nazi occupation of France. Le Pen herself espouses an authoritarian program that calls for a moratorium on immigration, a restoration of the death penalty and a “French first” policy on welfare benefits and employment. Long after World War Two, fascism is a specter that still haunts the continent. But whether Le Pen’s stances – and those of other nationalist leaders in Europe – qualify as fascist is questionable. The borderline between the kind of populism they espouse and the outright fascism of the 1920s and 1930s, when Adolf Hitler and Benito Mussolini espoused doctrines of racial superiority, is a slippery one.

Scholars continue to debate whether Mussolini was even fascist – or simply an opportunistic nationalist. The real aim of today’s would-be authoritarians – politicians who appeal to the public’s desire for an iron hand – is to present themselves as legitimate leaders who are saying what the public really thinks but is afraid to say. And these far-right leaders are indeed increasingly popular. The card they are playing is populism presented as an aggrieved nationalism. They depict Europeans as victims of rapacious Muslim immigrants. Le Pen, Britain’s Nigel Farage of the U.K. Independence Party and others aim to come across as reasonable and socially acceptable, while sounding dog whistles to their followers about immigrant social parasites who are either stealing jobs from “real” Europeans or living off welfare.

Read more …

“This new acceleration is about 25% higher than previous estimates ..”

Rate Of Sea-Level Rise ‘Far Steeper’ (BBC)

The rate at which the global oceans have risen in the past two decades is more significant than previously recognised, say US-based scientists. Their reassessment of tide gauge data from 1900-1990 found that the world’s seas went up more slowly than earlier estimates – by about 1.2mm per year. But this makes the 3mm per year tracked by satellites since 1990 a much bigger trend change as a consequence. It could mean some projections for future rises having to be revisited. “Our estimates from 1993 to 2010 agree with [the prior] estimates from modern tide gauges and satellite altimetry, within the bounds of uncertainty. But that means that the acceleration into the last two decades is far worse than previously thought,” said Dr Carling Hay from Harvard University in Cambridge, Massachusetts.

“This new acceleration is about 25% higher than previous estimates,” she told BBC News. Dr Hay and colleagues report their re-analysis in this week’s edition of the journal Nature. Tide gauges have been in operation in some places for hundreds of years, but pulling their data into a coherent narrative of worldwide sea-level change is fiendishly difficult. Historically, their deployment has been sparse, predominantly at mid-latitudes in the Northern Hemisphere, and only at coastal sites. In other words, the instrument record is extremely patchy. What is more, the data needs careful handling because it hides all kinds of “contamination”. Scientists must account for effects that mask the true signal – such as tectonic movements that might force the local land upwards – and those that exaggerate it – such as groundwater extraction, which will make the land dip.

Read more …

Jan 072015
 
 January 7, 2015  Posted by at 11:25 am Finance Tagged with: , , , , , , ,  


DPC Oyster luggers along Mississippi, New Orleans 1906

Another ‘guest post’ by Euan Mearns at Energy Matters. I thought that, given developments in oil prices, we can do with some good solid numbers on production.

Euan Mearns: This is the first in a monthly series of posts chronicling the action in the global oil market in 12 key charts.

  • The oil price crash of 2014 / 15 is following the same pace of the 2008 crash. The 2008 crash was demand driven and began 2 months ahead of the broader market crash.
  • The US oil rig count peaked in October 2014, is down 127 rigs from peak and is falling fast.
  • Production in OPEC, Russia and FSU, China and SE Asia and in the North Sea are all stable to falling slowly. The bogey in the pack is the USA where a production rise of 4 Mbpd in 4 years has upset the global supply dynamic.
  • It is unreasonable for the OECD IEA to expect Saudi Arabia to cut production of cheap oil in order to create market capacity for expensive US oil [1].
  • There are likely both over supply and weak demand factors at play, weighted towards the latter.

Figure 1 Daily Brent and WTI prices from the EIA, updated to 29 December 2014. The plunge continues at a similar speed to the 2008 crash. The 2008 oil price crash began in early July. It was not until 16th September, about 10 weeks later, that the markets crashed. The recent highs in the oil price were in mid July but it was not until WTI broke through $80 at the end of October that the industry became alert to the impending price crisis. As I write, WTI is trading at $48 and Brent on $51.

Figure 2 Oil and gas rig count for the USA, data from Baker Hughes up to 2 January 2015. The recent top in operating oil rigs was 1609 rigs on 10 October 2014. On January second the count was down 127 to 1482 units. US oil drilling is clearly heading down and a crash of similar magnitude, if not worse, to that seen in 2008 is to be expected. Gas drilling has not yet been affected with about 340 units operational.

Figure 3 US oil production stood as 12.35 Mbpd in November, up 140,000 bpd from October. In September 2008, US production crashed over 1 million bpd to 6.28 Mbpd. That production crash was short lived as shale oil drilling got underway. US oil production has doubled since the September 2008 low. C+C+NGL = crude oil + condensate + natural gas liquids.

Figure 4 Only Saudi Arabia has significant spare production capacity that stood at 2.79 Mbpd in November 2014 representing 22.5% of total capacity that stands at 12.4 Mbpd. Total OPEC spare capacity was 3.86 Mbd in November, up 250,000 bpd on October. While OPEC spare capacity may be showing signs of turning up, Saudi Arabia is adamant that production will not be cut.

Figure 5 OPEC production plus spare capacity (Figure 4) in grey. The chart conveys what OPEC could produce if all countries pumped flat out and there are signs that OPEC production capacity is descending slowly which casts a different light on the current glut. OPEC countries have skilfully raised and lowered production to compensate for Libya that has come and gone in recent years, and for fluctuations in global supply and demand. But with OPEC production broadly flat for the last three years, all production growth to meet increased demand has come from elsewhere, namely N America. Total OPEC production was 30.32 Mbpd in November down 320,000 bpd from October.

Figure 6 Relatively small adjustments to Saudi production has maintained order in the oil markets for many years. It is important to understand that the rapid price recovery in 2009 (Figure 1) came about because Saudi Arabia and other OPEC countries made deep production cuts. Saudi production stood at 9.61 Mbpd in November and total production capacity stood at 12.4 Mbpd. I believe it is significant that US production stood at 12.35 Mbpd. In an excellent post on Monday, Steve Kopits made the point that it was no longer viable for the OECD IEA to call on OPEC to cut production and these numbers illustrate this point [1]. Saudi Arabia already has 2.79 Mbpd withheld. It is clearly no longer acceptable for them to cut production further in order that the USA can produce more. NZ = neutral zone which is neutral territory that lies between Saudi Arabia and Kuwait and shared equally between them.

Figure 7 Russia remains one of the World’s largest producers with 10.95 Mbpd in November 2014, more than Saudi Arabia. Together with the FSU, production in this block reached a plateau in 2010 and has since been stable and has not contributed to the turmoil in the oil markets.

Figure 8 In 2002, European production touched 7 Mbpd but it has since halved and the region is no longer a significant player on the global production stage. The cycles are caused by annual offshore maintenance schedules where production dips every summer. The decline of the North Sea was probably a significant factor in the oil price run since 2002 as Europe had to dip deeper into global markets. It is also evident that the long term decline has now been arrested on the back of several years with record high oil prices and investment. With several new major projects in the pipeline North Sea production was expected to rise in the years ahead. The current price rout is bound to have an adverse impact.

  • Norway Nov 2013 = 1.90 Mbpd; Nov 2014 = 1.85 Mbpd
  • UK Nov 2013 = 0.87 Mbpd; Nov 2014 = 0.95 Mbpd
  • Other Nov 2103 = 0.60 Mbpd; Nov 2014 = 0.58 Mbpd

Figure 9 China is a significant though not huge oil producer and has been producing on a plateau since 2010. Production was 4.13 Mbpd in November up 50,000 bpd from October. This group of S and E Asian producers have been declining slowly since 2010. This, combined with rising demand from this region will eventually lead to renewed upwards pressure on the oil price.

Figure 10 N American production is dominated by the USA (Figure 3). Canadian production has been flat for a year and Mexican production is in slow decline.

Figure 11 Total liquids = crude oil + condensate + natural gas liquids + refinery gains + biofuel. The chart reveals surprisingly little about the current low price crisis with a barely perceptible blip above the trend line. Most areas of the world have either stable or slowly falling production. The bogey in the pack is the USA that has seen production sky rocket by 4 Mbpd in 4 years.

Figure 12 To understand this important chart you need to read my earlier posts [2, 3]. The data are a time series and the pattern describes production capacity, demand and price. There are undoubtedly both supply and demand factors driving the current price rout. The last time this happened, OPEC cut production thereby preserving global production capacity. This time the Saudi plan is to see global production capacity reduced by low oil prices.

Data

Getting up to date data on global oil production is frustratingly difficult. While this report is titled “January 2015″, only the rig count data are for this month, the production data is all from November 2014, the most recent available.

Owing to budget cuts, the EIA are months behind. Their most recent reports are for September 2014 when WTI was still over $90 / bbl. The EIA are however up to date with daily oil price information reported in Figure 1.

The JODI oil production data are more up to date but the global data set is still incomplete. Crude + condensate are reported separately to NGL and overall this source does not yet provide a coherent production time series.

The IEA OMR, used here, is I believe the best source. Published monthly, the mid-December report has data for November. However, the most recent months are always revised in subsequent reports. One snag, to get the full report mid-month you have to pay €2,200, and even then I doubt the IEA would be very pleased if I published their data before it became public domain. The data becomes available to all in two weeks, at the beginning of the following month. The other benefit from the IEA is they report OPEC spare capacity which I view as an important indicator (Figure 4).

The most up to date source of key data is the Baker Hughes rig count which is updated weekly providing a useful indicator for action in the US oil industry (Figure 2).

References

[1] Steve Kopits Scrap “The Call on OPEC”
[2] Energy Matters The 2014 Oil Price Crash Explained
[3] Energy Matters Oil Price Scenarios for 2015 and 2016

Dec 232014
 
 December 23, 2014  Posted by at 11:01 am Finance Tagged with: , , , , , ,  


John Vachon Hull-Rust-Mahoning pit, largest open pit iron mine in the world, Hibbing, Minnesota Aug 1941

This is another entry by our friend Euan Mearns, orginally posted at Energy Matters.

Euan: A few commenters have mentioned peak oil recently. I am cautious about making forecasts and predictions and prefer instead to observe and document the data as the peak oil story unfolds. I have in fact published a couple of charts recently illustrating aspects of peak oil, one showing a possible peak in the rest of the world that excludes N America and OPEC (Figure 1). The other showing the undulating plateau in conventional crude + condensate that has persisted since 2005 (Figure 2). In my last post on oil price scenarios two of those showed global oil production capacity 1 to 2 Mbpd lower in 2016 than 2014. If that comes to fruition, will we have passed peak oil but does it matter?

Figure 1 Global oil production has been split into three geo-political categories: 1) USA and Canada, 2) OPEC and 3) the Rest of the World (RoW). RoW production bears the hallmarks of having peaked in the period 2005 to 2010 and this has consequences for oil prices, demand and prosperity in parts of the world, especially the OECD. Most of the growth in oil supply has been in the USA and Canada where the market has been flooded with expensive oil. Data are crude oil + condensate + natural gas liquids (C+C+NGL) and exclude biofuels and refinery gains that are included by the IEA in their total liquids number.

The current “low oil price crisis” is providing a clear and new perspective on the nature of the peak oil problem. If low price does indeed destroy high cost production capacity then this will raise the question if the high cost sources can ever be brought back? IF low price kills the shale industry can it come back from the dead?

Figure 2 Conventional crude oil + condensate production has been on an undulating plateau just over 73 million barrels per day (Mbpd) since May 2005, that is for almost 10 years and despite record high oil prices! Note that chart is not zero scaled in order to amplify details. Click chart for large version.

The response of the oil price to scarcity in the period 2002 to 2008 was for it to shoot up. And the response of the energy industries to scarcity and high price was to develop high cost sources of energy – shale oil and gas and renewables. The longevity and permanence of these new initiatives has always been dependent upon our ability and willingness to pay. Of course, most of us who have cars continued to use them but have perhaps subliminally modified our behaviour through driving less or buying more fuel efficient vehicles. OECD oil consumption has at any rate been in decline and robust economic growth has been elusive. Is this due to the peak oil story unfolding?

The global finance and energy system is unfortunately rather more complex than that. The creation and expansion of debt is of course central to creating demand for oil and other energy sources. Without QE the global economy may have died in 2009 and demand for oil with it. Gail Tverberg produced an interesting chart that may illustrate this point (Figure 3). However, back in 2008 / 09 OPEC trimmed 4 Mbpd from their production and this equally explains why the price rebounded so strongly then. The end of QE3 may have contributed to the recent fall in demand, but the price has fallen so precipitously because OPEC has not compensated by reducing production.

Figure 3 QE appears to have impacted demand for oil and may have created the lines of credit enabling energy companies to produce high cost gas and oil at a loss. But the oil price has been equally controlled by OPEC controlling supply. Chart by Gail Tverberg.

The big picture is made even more complex by climate concern and a growing raft of energy policies in Europe and the USA designed to reduce CO2 emissions while singularly failing to do so meaningfully. And so at a time when clear engineering thinking was required on how to tackle the potential impacts on society of energy scarcity in the global economy we got instead ‘Green Thinking’. Future generations will look back on this era with bewilderment.

Against this backdrop, I will now move on to the main topic of this post which is the concept of broken markets and Hubbert’s peak. For those who do not know, Hubbert’s peak is peak oil by another name and while wise guys may want to invent a multitude of definitions I will stick to the simple definition of the month or year when global oil production reached a maximum volume or mass and thereafter went into inexorable decline. The impact of this on Mankind is normally expected to be negative since oil is the lifeblood of the global economy. The reason for this happening could be because we discovered something better than oil that substituted oil out of existence (that wouldn’t be bad) or because of scarcity oil became too expensive to produce (perhaps where we are now) or because Greens in government like Ed Davey and Barack Obama set out to undermine the fossil fuel industries which just a few years ago I would have found impossible to believe. We live in interesting times.

The world economy as we know it runs on fossil fuels and in particular a relatively small number of truly gigantic fossil fuel reserves such as the Ghawar oil field in Saudi Arabia, the Black Thunder coal field in Wyoming and the Groningen gas field in The Netherlands. Both Ghawar and Groningen are showing signs of age, along with the hundreds of other super giant fossil fuel deposits. The stored energy in these deposits flows out at enormous rate and at little financial or energy cost. It is these vast energy supplies and surpluses that provide the global economy with economic surplus. It is indeed the lifeblood. But the world has run out of these super giant deposits to exploit and we are finding it increasingly difficult to find large enough numbers of their smaller cousins to keep the wheels of the global economy well oiled ;-)

The focus has thus turned to low grade resource plays. The resource plays offer near infinite amounts of energy but require large amounts of effort to gather that energy. The ERoEI is lower than what went before, perhaps much lower, but for so long as the energy return is positive, we have indeed learned that Man’s inventiveness and commitment can exploit these resources. One of the main questions I want to pose here is, is it possible for these resource plays to participate in the global economic system as it has existed for many decades that has become known to us as capitalism?

The first example of broken energy markets I want to look at is wind power. Both onshore and in particular offshore wind are expensive forms of intermittent electricity. Wind advocates will argue that the intermittency does not matter and will point gleefully to the low electricity prices achieved when the wind blows strongly across Europe resulting in over-supply that dumps the price. Wait a minute though, high cost and low price is a toxic mix that does not jive with capitalism. The more wind resource installed on the system the greater the size the unusable surplus and economic penalty becomes.

Why have the wind producers not gone out of business? It’s because the markets are rigged such the wind producers are given priority to market and receive a guaranteed price. This is a monopoly! The consumers don’t benefit because they have to pay the guaranteed price to the wind monopoly. The losses end up in the hands of the traditional generators who see their prices dumped and need to chew on the losses whilst providing the invaluable balancing services for free.

Providing back up services for when the wind doesn’t blow is another problem newly addressed in the UK with the new “capacity market”. The government is calling this a ‘market’ while it is in fact a component part of the wind monopoly. Companies are being paid to maintain generating capacity on stand by to cover periods when the wind doesn’t blow. Again the consumer has to foot the bill. One day quite soon, UK and other European governments are going to have to explain to their electorates why they have distorted the electricity market so badly, delivering a monopoly to wind producers, destroying the traditional market participants with the bill being met by the consumer who receives zero benefits. This can only be explained if it is underlain by rampant corruption or sheer stupidity.

The second example of a broken energy market I want to explore is the US shale industry. This shares certain characteristics with the wind industry in that it is a high cost but potentially very large resource. But the mechanism for integration of this resource into the market is rather different. The problem with shale gas is that over-supply has resulted in the US gas price being dumped below the level where many shale operators can make a profit. Consumers in this case benefit through getting both secure and low priced gas. But the shale operators have reportedly racked up large losses that have been covered by expanding debt. These losses may yet come home to roost with the consumer if debt defaults result in a new credit crunch where the debts are socialised via government bailouts of the banking sector.

If it were possible to produce shale gas at $1 / million btus then everyone would be happy. Consumers would be getting secure and cheap energy and producers would be making handsome profits to distribute to shareholders. That is how capitalism is supposed to work. The system as it has operated seems broken.

US Light tight oil (LTO) production appears now to have created the same problem for the liquids plays where the entrance of expensive liquids in the market have contributed to the crash in the oil price. This has created risks for the LTO operators. It remains to be seen if the LTO sector sees mass insolvencies and default on loans that may socialise these losses. The introduction of high cost LTO has also undermined the whole of the higher cost component of the conventional oil sector. If LTO could be produced in large quantities for $20 / bbl then there would be no problem since this source would go on to substitute for the higher cost conventional sources of supply. But with costs closer to $60-$80 this is not going to happen. The conundrum for capitalism is the introduction of large quantities of higher cost energy to the system.

At this point I have to admit that nuclear power may be subject to similar limitations. It is difficult to view the Hinkley Point new nuclear build in the UK as a triumph for the consumer or the country. A better way to manage such enormous capital expenditure on vital infrastructure is via the state. The costs may eventually be socialised to the tax payer, but at least the energy is reliable and amongst the safest forms of power generation ever developed and the taxation system distributes costs in an equitable way.

A form of society could undoubtedly exist powered by nuclear, wind and shale gas. But it would be a society supported by the state with far larger numbers working in the energy industries than now, producing lower surpluses, the energy production part perhaps running at a perennial loss. Those losses have to be covered by either higher price or via the taxation system. Either way, the brave new world that awaits us will be characterised as the time of less that will be in stark contrast to the time of plenty many of us enjoyed during the 20th Century.

Nov 262014
 
 November 26, 2014  Posted by at 11:11 am Finance Tagged with: , , , , , , , , , , ,  


Arthur Rothstein Oregon or Bust, family fleeing South Dakota drought Jul 1936

Banking’s Toxic Culture ‘Will Take A Generation To Clean Up’ (Guardian)
Consumer Confidence in US Unexpectedly Dropped in November (Bloomberg)
Case Shiller Reports “Broad-Based Slowdown For Home Prices” (Zero Hedge)
BEA Revises 3rd Quarter 2014 US GDP Growth Upwards to 3.89% (CMI)
Refinancing Boom Exposing Risks in US Property Bonds (Bloomberg)
Abe Sales Tax Backfiring With More Debt Not Less (Bloomberg)
Japan Is Running Out of Options (Bloomberg)
Eurozone ‘Major Risk To World Growth’: OECD (CNBC)
Do German Bonds Face Japanification? (CNBC)
UK Housing Market Cools Rapidly (Guardian)
Commodity Exporters Like Cheaper Currencies (A. Gary Shilling)
On This Day, 138 Years Ago, The Idea Of QE Was Born (Art Cashin)
A Bearish Hedge Fund Bets Against the Bulls and Still Profits (NY Times)
Saudi Arabia Says No One Should Cut Output, Oil Will Stabilize
Pre-OPEC Producer Meeting Fails to Deliver Oil Output Cut (Bloomberg)
The Unbearable Over-Determination Of Oil (Ben Hunt)
Who Will Wind Up Holding the Bag in the Shale Gas Bubble? (Naked Capitalism)
US Oil Producers Can’t Kick Drilling Habit (FT)
The Environmental Downside of the Shale Boom (NY Times)
Obama Climate Envoy: Fossil Fuels Will Have To Stay In The Ground (Guardian)
Cracks Form in Berlin Over Russia Stance (Spiegel)
Europe Looks ‘Aged And Weary’: Pope Francis (CNBC)

Why should it? Just regulate the heebees out of them or close them down.

Banking’s Toxic Culture ‘Will Take A Generation To Clean Up’ (Guardian)

Overhauling the broken culture of high street banking will take a generation to achieve, according to a report that found UK banks have received 20m customer complaints since the financial crisis. The report, by the thinktank New City Agenda, calculated that in the last 15 years the retail operations of banks had incurred £38.5m in fines and redress for mistreatment of customers. Andre Spicer, a professor at Cass Business School and the report’s lead author, said: “Most people we spoke to told us that real change will take at least five years. “There was some uncertainty as to how these changes were being translated into good practice at the customer coalface. Many culture change initiatives are fragile, and their success is not ensured. It’s clear to us that much work still needs to be done.”

The report concluded that it will take a generation to end a sales culture exposed by the 2008 crisis. It said UK banks did not address cultural change until the eruption of the Libor scandal in 2012, having failed to act after the emergence of mis-selling debacles such as the payment protection insurance scandal. “A toxic culture, decades in the making, will take a generation to clean up,” said the founders of New City Agenda, who are Labour peer Lord McFall, Conservative MP David Davis, and Liberal Democrat peer Lord Sharkey. They added: “Some frontline staff told us they still feel under significant pressure to sell. Complaints continue to rise and trust remains extremely low. Most of the people we talked to believed that real change, and as a consequence the better treatment of customers, will take some time to achieve.”

Read more …

Will they ever stop using the word ‘unexpectedly’? It’s certainly a favorite over at Bloomberg, and not just there.

Consumer Confidence in US Unexpectedly Dropped in November (Bloomberg)

Consumer confidence unexpectedly declined in November to a five-month low as Americans became less upbeat about the economy and labor market. The Conference Board’s index fell to 88.7 this month from an October reading of 94.1 that was the strongest since October 2007, the New York-based private research group said today. The figure last month was weaker than the most pessimistic estimate in a Bloomberg survey of economists. The decline this month interrupts a steady pickup in sentiment since the middle of the year and shows attitudes about the economy would benefit from bigger wage gains. While confidence slipped, buying plans picked up, indicating spending will be sustained on the heels of stronger job growth and lower fuel costs.

The drop this month “doesn’t change our view that the trend in consumer confidence is moving upwards,” said David Kelly, chief global strategist at JPMorgan Funds in New York. “Gasoline prices are down, the unemployment rate is down, home prices are gradually rising, and stock prices are certainly rising.” The median forecast of 75 economists in the Bloomberg survey called for a reading of 96, with estimates ranging from 93.5 to 99 after a previously reported October index of 94.5. The Conference Board’s measure averaged 96.8 during the last expansion and 53.7 during the recession that ended in June 2009.

Read more …

I’m wondering how this squares with that GDP revision.

Case Shiller Reports “Broad-Based Slowdown For Home Prices” (Zero Hedge)

While the just revised Q3 GDP surprised everyone to the upside, the Case Shiller index for September which was also reported moments ago, showed yet another month of what it called a “Broad-based Slowdown for Home Prices.” The bad news: the 20-City Composite gained 4.9% year-over-year, compared to 5.6% in August. However, this was modestly above the 4.6% expected. However, what was more troubling is that on a sequential basis, the Top 20 Composite MSA posted a modest -0.03% decline, the first sequential drop since February. And from the report itself: “The National Index reported a month-over-month decrease for the first time since November 2013. The Northeast region reported its first negative monthly returns since December 2013 and its worst annual returns since December 2012 due to weaknesses in Washington D.C. and Boston.”

Read more …

Some useful details.

BEA Revises 3rd Quarter 2014 US GDP Growth Upwards to 3.89% (CMI)

In their second estimate of the US GDP for the third quarter of 2014, the Bureau of Economic Analysis (BEA) reported that the economy was growing at a +3.89% annualized rate, up +0.35% from their first estimate for the 3rd quarter but still down some -0.70% from the 4.59% annualized growth rate registered during the second quarter. The modest improvement in the headline number masks substantial changes in the reported sources of the annualized growth. The previously reported significant inventory draw-down almost vanished completely (dropping to a mere -0.12% impact on the headline number). Improving fixed investments added +0.23% to the headline, with nearly all of that improvement from spending for commercial equipment. Consumer spending for goods was also reported to be growing 0.27% in this report, while consumer spending for services was essentially unchanged (+0.02%).

Offsetting those upside revisions was a significant erosion in the previously reported export growth, which subtracted -0.38% from the headline. The contribution from imports in the headline number also weakened, taking the annualized growth down another -0.17%. Governmental spending was also revised down slightly, knocking another -0.07% from the headline. Nearly all of that downward revision to governmental spending was from reduced state and local investment in infrastructure. Despite the increased consumer spending, households actually took a disposable income hit in this revision – losing $146 in annualized per capita disposable income (now reported to be $37,525 per annum). This is down $344 per year from the 4th quarter of 2012. The spending growth reported above came exclusively from reduced household savings, which dropped a full 0.5% in this report.

As mentioned last month, softening energy prices play a major role in this report, since during the 3rd quarter dollar-based energy prices were plunging (and have continued their dive since). US “at the pump” gasoline prices fell from $3.68 per gallon to $3.32 during the quarter, a 9.8% quarter-to-quarter decline and a -33.8% annualized rate – pushing most consumer oriented inflation indexes into negative territory. During the third quarter (i.e., from July through September) the seasonally adjusted CPI-U index published by the Bureau of Labor Statistics (BLS) was actually mildly dis-inflationary at a -0.10% (annualized) rate, and the price index reported by the Billion Prices Project (BPP — which arguably reflected the real experiences of American households) was slightly more dis-inflationary at -0.18% (annualized).

Yet for this report the BEA effectively assumed a positive annualized quarterly inflation of 1.40%. Over reported inflation will result in a more pessimistic growth data, and if the BEA’s numbers were corrected for inflation using the appropriate BLS CPI-U and PPI indexes the economy would be reported to be growing at a spectacular 5.42% annualized rate. If we were to use just the BPP data to adjust for inflation, the quarter’s growth rate would have been an astounding 5.52% annualized rate.

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The smell of volatility on the morning.

Refinancing Boom Exposing Risks in US Property Bonds (Bloomberg)

A $40 million penalty wasn’t enough to keep the owner of San Francisco’s Parkmerced apartment complex from the chance to lock in record-low interest rates and take advantage of the property’s $1.5 billion value. While a landlord willing to pay almost 63 times the average fee to refinance early is a bullish sign for commercial real estate, it’s less so for bond investors facing $295 billion of mortgages that come due during the next three years. That’s because the securities are increasingly tied to the market’s weakest properties, many of them financed during the peak of the real-estate boom in 2007, as the strongest are paid off. More property owners are jumping on a drop in financing costs and loosening terms to pay off their mortgages. That helped shrink the amount of debt maturing before the end of 2017 from $332 billion at the start of 2014, according to Bank of America data.

“If you’re a well-capitalized entity, you’re going to do it,” Richard Hill, a debt analyst at Morgan Stanley, said. That could leave commercial-mortgage bond investors “holding the bag on a bunch of lower-quality loans.” Properties such as skyscrapers, shopping malls, hotels and apartment complexes are attracting investors from sovereign wealth funds to insurance companies as they seek higher-yielding assets amid six years of Federal Reserve policies to hold short-term interest rates near zero. Wall Street banks are on pace to issue $100 billion of securities backed by commercial real estate this year after issuance doubled to $80 billion in 2013, according to data compiled by Bloomberg. Sales, which peaked at $232 billion in 2007, are poised to climb to $140 billion in 2015, Credit Suisse Group AG analysts led by Roger Lehman forecast in a Nov. 21 report.

Sales of the securities also are being fueled by rules that will require banks to retain some portion of loans that are sold to investors as securities, according to Morgan Stanley’s Hill. That may increase financing costs when they take effect in 2016. Ray Potter, founder of R3 Funding, a New York-based firm that arranges financing for landlords and investors, said he’s advising clients not to wait to refinance as economists forecast the Fed will raise rates next year for the first time since 2006. There has been a surge in borrowers looking to refinance in the past couple of months, Potter said. “If you like that coupon, lock it in for 10 years,” he said. While the interest rate could dip even lower, it’s not worth the risk because “when it moves higher it moves fast,” he said.

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“Japan remains doomed by its demographics and, of course, by its horrible debt.”

Abe Sales Tax Backfiring With More Debt Not Less (Bloomberg)

What started as a plan to reduce Japan’s debt is turning into a reason to issue more bonds. Prime Minister Shinzo Abe’s administration implemented a higher sales tax in April to boost revenue as government liabilities ballooned to 1 quadrillion yen ($8.5 trillion), more than double the nation’s yearly economic output. Consumption plunged and the economy fell into a recession, prompting companies including Mirae Asset Global Investments Co. and High Frequency Economics to predict even more sovereign debt sales to revive growth. “The government’s policies have failed,” Will Tseng, a money manager in Taipei at Mirae Asset, which manages about $62 billion, said in an e-mail Nov. 20. “They’re still issuing more debt and printing more money to try to help the economy. They’re in a really bad cycle.” He said he’s staying away from Japanese bonds.

The cost of protecting Japan’s debt from default surged for eight straight days and the yen tumbled to a seven-year low as Abe called a snap election and delayed plans to further increase the sales tax by 18 months. Bank of Japan Governor Haruhiko Kuroda on Oct. 31 boosted the amount of government bonds he plans to buy to as much as 12 trillion yen a month, a record. Japan will go back to its routine of borrowing more to fund plans to spur growth, said Carl Weinberg, the chief economist at High Frequency Economics in Valhalla, New York. What it needs to do is allow immigration to keep the population from shrinking, he said Nov. 18 on the “Bloomberg Surveillance” radio program. “The population and the economy are contracting, and the debt is growing, and that’s an unsustainable trend,” Weinberg said. “Japan remains doomed by its demographics and, of course, by its horrible debt.”

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” .. Kuroda now has a budding mutiny on his hands. Many of his staffers think the central bank has already gone too far to weaken the yen and buy virtually every bond in sight.”

Japan Is Running Out of Options (Bloomberg)

The New York Times recently lit up the Japanese Twittersphere with a cartoon that was a little too accurate for comfort. In it, a stretcher marked “economy” is loaded into an ambulance with “Abenomics” painted on the side; the vehicle lacks tires and sits atop cinder blocks. Prime Minister Shinzo Abe looks on nervously, holding an IV bag. The image aptly sums up Japan’s failure to gain traction in its push to end deflation. The Bank of Japan’s unprecedented stimulus and Abe’s pro-growth reforms have yet to spur a recovery in inflation and gross domestic product growth, and the country is yet again in recession. Worse, BOJ Governor Haruhiko Kuroda is rapidly running out of weapons in his battle to eradicate Japan’s “deflationary mindset.”

Minutes from the central bank’s Oct. 31 board meeting, at which officials surprised the world by expanding an already massive quantitative-easing program, show that Kuroda now has a budding mutiny on his hands. Many of his staffers think the central bank has already gone too far to weaken the yen and buy virtually every bond in sight. That’s a problem for Kuroda and Abe in two ways.

First, board members warned that the costs of further monetary stimulus outweigh the benefits. We already knew that Kuroda had only won approval for his shock-and-awe announcement by a paper-thin 5-4 margin, and that Takahide Kiuchi dissented when the BOJ boosted bond sales to about $700 billion annually. But the minutes suggest Kuroda came as close to any modern BOJ leader ever has to defeat on a policy move. Cautionary voices like Kiuchi’s worry that the BOJ could be “perceived as effectively financing fiscal deficits.” I’d say it’s too late for that. Of course the BOJ is acting as the Ministry of Finance’s ATM, just as Abe intended when he hired Kuroda. Still, the fact is that Kuroda’s odds of getting away with yet another Friday surprise are nil at best.

Second, maintaining stability in the bond market just got harder. The only way Kuroda can stop 10-year yields – currently 0.44% – from spiking as he tries to generate 2% inflation is by making ever bigger bond purchases. But fellow BOJ board members will be giving Kuroda less latitude to cap market rates. Japan is lucky in one way: Given that more than 90% of public debt is held domestically, Tokyo can the avoid wrath of the “bond vigilantes.” Kuroda further neutralized these activist traders by saying there’s “no limit” to what he can do to make Abenomics work. The fact that so many of his colleagues are skeptical of the policy, however, undermines Kuroda’s credibility. If markets begin to doubt his staying power, yields are sure to rise.

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The entire world is a risk to world growth.

Eurozone ‘Major Risk To World Growth’: OECD (CNBC)

The eurozone poses a serious danger for global growth, with the world’s economy already “in low gear”, the Organisation for Economic Co-operation and Development (OECD) said on Tuesday. “The euro area is grinding to a standstill and poses a major risk to world growth, as unemployment remains high and inflation persistently far from target,” the OECD said in the 96th edition of its Economic Outlook. The euro zone’s fledgling recovery—which started at the end of 2013—has been a cause for concern over recent months, with gross domestic product (GDP) rising only 0.2% quarter-on-quarter between July and September. Policymakers are also battling with very low inflation and high unemployment—around one-quarter of Spaniards and Greek remain without jobs.

The OECD sees euro zone economic growth at 0.8% this year. This is better than the economic contraction the currency union suffered in 2012 and 2013, but below average growth of 1.1% between 2002 and 2011. By comparison, the OECD expects the world’s economy to expand by 3.3% this year. As with the euro zone, this is an improvement on 2012 and 2013, but below the 2002-2011 average of 3.8%.”A moderate improvement in global growth is expected over the next two years, but with marked divergence across the major economies and large risks and vulnerabilities,” the OECD said.

A euro zone analyst at the Economist Intelligence Unit said the risks to the world economy posed by the euro zone were even larger than the OECD forecast.”The euro zone’s fundamental institutional deficiencies are now exacting a damaging price, by hampering the formulation and implementation of policy responses to the ongoing slump,” said Aengus Collins in a research note emailed after the OECD report.”In addition, the OECD overlooks political risk, which is rising sharply in line with voter disaffection.” Major countries expected to post solid growth include the U.S., which the OECD predicts will expand by 2.2% this year and 3.1% next. China, meanwhile, is seen growing by an impressive 7.3% in 2014, before slowing to 7.1% in 2015.

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More interestingly, where will that leave Spanish and Italian bonds?

Do German Bonds Face Japanification? (CNBC)

The euro zone’s long disinflation has spurred fears it will tumble all the way to Japan-style deflation, with some concerned yields on the continent’s safe-haven bond, the German bund, could remain depressed for the long haul. “While we are still not convinced that the euro zone is the new Japan, despite the many similarities in their economic predicaments, we are increasingly of the view that the 10-year Bund yield will remain exceptionally low for at least the next couple of years,” John Higgins, chief markets economist at Capital Economics, said in a note Wednesday. The 10-year bund is yielding around 0.75%, around all-time lows, compared with the 10-year Japanese government bond (JGB) at around 0.45% after a decades-long downtrend.

Japan’s central bank cut its benchmark interest rate to 0.5% in 1995, a move that pushed the 10-year JGB yield below 1% after three years, Higgins noted. “Investors did not know in 1998 that Japan’s key policy rate would remain near zero for the next 16 years (and counting). But the prospect of it remaining there for the foreseeable future was enough to keep the 10-year yield quite firmly anchored,” he said. “We see no reason why a similar outcome couldn’t happen in Germany,” as the bund yield fell below 1% after the ECB cut its main rate to 0.5% in mid-2013.

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” .. new mortgage approvals hit a 17-month low of 37,076 in October. That total was down nearly a quarter from January’s 76-month high of 48,649. It was also down 16% year on year ..”

UK Housing Market Cools Rapidly (Guardian)

Britain’s housing market is cooling rapidly as a result of tougher Bank of England mortgage market requirements, high prices and the uncertainty caused by the coming general election. The prospect of higher interest rates at some point in 2015 is also dampening demand. Figures from the British Bankers’ Association showed a sharp slowdown in mortgage approvals, while Nationwide building society has reported a drop in lending volumes. The BBA said that new mortgage approvals hit a 17-month low of 37,076 in October. That total was down nearly a quarter from January’s 76-month high of 48,649. It was also down 16% year on year. However, a house price crash is unlikely, according to new forecasts. Halifax’s forecasts for 2015 point to a further rise in values of 3% to 5% next year, despite uncertainty about the general election. Earlier this month Halifax reported that house prices fell during October and recorded their smallest quarterly increase in nearly two years.

The October survey by the Royal Institution of Chartered Surveyors found that buyer inquires shrank for the fourth month running. Half-year results from Nationwide building society added to the gathering evidence of a weakening market, with net lending down by £2bn to £3.6bn in the six months to 30 September – although lending to landlords rose slightly. The society, which reported a doubling in pre-tax profits and higher savings inflows, said part of the reason net lending was down was tougher competition from other major mortgage providers, such as Halifax and Santander. “The BBA data add to now pretty widespread and compelling evidence that the housing market has come well off the boil,” said Howard Archer, an economist at IHS Insight. “The fact that mortgage approvals are substantially below their January peak levels – and falling – after lenders have got to grips with the new mortgage regulations points to an underlying moderation in housing market activity.”

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“The Canadian, Australian and New Zealand dollars as well as the Brazilian real, Russian ruble and other emerging economies are all playing this game. Those countries want weaker currencies to offset declining commodity exports ..”

Commodity Exporters Like Cheaper Currencies (A. Gary Shilling)

The U.S. dollar is strengthening for reasons that go beyond deliberate devaluations of the euro and yen. Major commodity exporters are also purposely pushing down their currencies as commodity prices drop. The Canadian, Australian and New Zealand dollars as well as the Brazilian real, Russian ruble and other emerging economies are all playing this game. Those countries want weaker currencies to offset declining commodity exports. In the past year, the head of the Reserve Bank of Australia has expressed sympathy for a weaker Aussie in view of soft mineral exports and a moderately growing economy.

Recently, the head of the Reserve Bank of New Zealand said that, even with the drop in the New Zealand dollar, the kiwi is at “unjustifiable” levels and isn’t reflecting the weakness in the global commodity market. Earlier, the kiwi was propelled by strong meat and dairy exports to China and robust prices for milk, which have plunged. New Zealand’s economic growth is in jeopardy. The Bank of Canada recently left its benchmark interest rate unchanged at 1% and expects inflation to be near its 2% target. But a decline in energy and other commodity prices has hurt the Canadian economy, which is growing at the same slow 2% rate as the U.S. The commodity bubble in the early 2000s prompted producers of industrial commodities, such as copper, zinc, iron ore and coal, to increase production. New output resulted just in time for the price collapse in the 2007 to 2009 recession.

The subsequent rebound didn’t hold and commodity prices have been falling since early 2011, no doubt due to excess supply of industrial commodities and slower growth in China, the world’s biggest commodity user. The price decreases are also due to sluggish expansions in developed countries and, in the case of agricultural products, good weather and more acreage being planted. So far this year, grain prices are falling, as are industrial commodity prices. Crude oil prices rose until mid-June, but have since dropped 25% and now are the lowest in six years. Spurred by fracking, U.S. oil output is exploding as economic softness in Europe and China and increased conservation have curtailed consumption. Copper, which is used in everything from plumbing fixtures to computers, is dropping in price as supply leaps and demand lags.

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“Several months earlier, the stock market had begun to plunge violently. Soon there were layoffs and business closings and the economy was having a tough time getting back in gear.”

On This Day, 138 Years Ago, The Idea Of QE Was Born (Art Cashin)

On this day in 1876, a group of influential, yet irate, Americans met in Indianapolis. Their primary purpose was to send a message to Washington on how to get the economy moving again. America at the time was going through a difficult and unusual period. Several months earlier, the stock market had begun to plunge violently. Soon there were layoffs and business closings and the economy was having a tough time getting back in gear. And for months now, strange things were happening, the money supply seemed not to be growing, real estate values were stagnant to slipping, and commodity prices were heading lower. (How unusual.)

So this group decided that what was needed was re-inflation (put more money in everyone’s hands, you see). The method they proposed was to issue more and more money. Cynics called them “The Greenback Party”. And on this day, the Greenbacks challenged Washington by running an independent for President of the United States. His name was Peter Cooper. He lost but several associate whackos were elected to Congress. To celebrate stop by the “Printing Press Lounge”. (It’s down the block from the Fed.) Tell the bartender to open the tap and just keep pouring it out till you say stop. Reassure the guy next to you (while you can still talk) that now we have more enlightened people in Washington. Try not to spill your drink if he falls off the stool laughing. There wasn’t much raucous laughter on Wall Street Monday, but the bulls were beaming with smiles as they managed to continue their string of bull runs.

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” .. the stimulus policies of the Federal Reserve and other central banks have the power to drive stocks higher. But they will ultimately be self-defeating ..”

A Bearish Hedge Fund Bets Against the Bulls and Still Profits (NY Times)

The stock market has been rising for years, hitting new highs almost every week. So how is it that one of Wall Street’s most bearish investors can claim to have profited strongly over this period? Universa Investments, a hedge fund founded by Mark Spitznagel, is one of the few firms that is set up with the aim of making money in an economic and financial collapse. In the market turmoil of 2008, Mr. Spitznagel earned large returns. Large pessimistic bets usually lose a lot of money when stocks are rising, as they have ever since 2009. But Universa is saying that its investment strategy has been able to produce consistent gains since then, including a 30% return last year, according to firm materials that were reviewed by The New York Times.

In comparison, the benchmark Standard & Poor’s 500-stock index in 2013 had a return of 32% with dividends reinvested. Insurance policies that pay out after disasters do not produce big returns when the catastrophe fails to occur. But since 2008, some investors have been looking for ways to ride the market higher while having bets in place that will notch up huge gains if the system teeters on the brink once again. At Universa, Mr. Spitznagel’s strategy stems from his skepticism toward government efforts to revive the economy. He acknowledges that the stimulus policies of the Federal Reserve and other central banks have the power to drive stocks higher. But they will ultimately be self-defeating, he contends.

This theory holds that another crash will occur when the Fed stops being able to stoke the economy. Universa’s strategy seeks to profit when confidence in the central banks is strong — and when it evaporates. “The Fed has created a trap in this yield-chasing environment,” Mr. Spitznagel said in an interview, during which he gave an overview of Universa’s approach. “It allows you to be long, but it gets you in position to be short when it’s all over,” he said.

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Beggar thy neighbor, oil edition.

Saudi Arabia Says No One Should Cut Output, Oil Will Stabilize

Saudi Arabia’s oil minister said tumbling crude prices will stabilize and there’s no need for producing nations to cut output. “No one should cut and market will stabilize itself,” Ali Al-Naimi told reporters a day before OPEC meets in Vienna. “Why Saudi Arabia should cut?The U.S. is a big producer too now. Should they cut?” Oil ministers from the 12 nations in the Organization of Petroleum Exporting Countries meet tomorrow in Vienna to discuss their combined production at a time when prices have fallen 30 percent since June. Crude fell in part on speculation that Saudi Arabia and other OPEC states wouldn’t take the necessary measures to curb a surplus. Venezuela’s Foreign Minister Rafael Ramirez met with officials from Saudi Arabia, Mexico and Russia yesterday. While they agreed to monitor prices, they made no joint commitment to lower their supplies.

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It’s not going to happen. They are in too much distress.

Pre-OPEC Producer Meeting Fails to Deliver Oil Output Cut (Bloomberg)

Nations supplying a third of the world’s oil failed to pledge output cuts after meeting in Vienna today. Russia can withstand prices even lower than they are now, the country’s biggest producer said. Officials from Venezuela, Saudi Arabia, Mexico and Russia said only that they would monitor prices. Crude futures sank to a four-year low in New York. OPEC meets in two days, with analysts split evenly over whether the group will lower output in response to the crash in prices. Crude fell into a bear market this year amid the highest U.S. production in 31 years and speculation that Saudi Arabia and other members of OPEC won’t do enough to curb a surplus. Prices are below what nine of group’s 12 members need to balance their national budgets, data compiled by Bloomberg show.

“All these countries are significantly affected by lower prices and want to see cuts, but it is a big step between having these talks and taking actual coordinated action to achieve this,” Richard Mallinson, geopolitical analyst at Energy Aspects, said by phone today. “The key is going to be what happens amongst OPEC members.” Brent, the global benchmark, fell as much as 2.1% in London, having gained 1% before the four-way meeting concluded. It settled at $78.33 a barrel. West Texas Intermediate sank 2.2% to $74.09, the lowest since Sept. 21, 2010. The discussions didn’t result in any joint commitment to reduce supplies, Rafael Ramirez, Venezuela’s Foreign Minister and representative to OPEC, told reporters after the meeting. All parties said they were worried about the oil price, he said.

“There is an overproduction of oil,” Igor Sechin, Chief Executive of OAO Rosneft, Russia’s largest oil company, said after the meeting. “Supply is exceeding demand, but not critically” and Russia wouldn’t need to cut production immediately even if oil fell below $60 a barrel, he said. Russia, Saudi Arabia, Mexico and Venezuela between them produced 27.8 million barrels a day of oil last year, according to data from BP Plc. Total global output was 86.8 million barrels daily, the oil company’s figures show. OPEC, which meets to discuss output in Vienna on Nov. 27, pumped 30.97 million barrels a day last month, according to data compiled by Bloomberg.

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Too many opinions, too many variables.

The Unbearable Over-Determination Of Oil (Ben Hunt)

You know you’re in trouble when the Fed’s Narrative dominance of all things market-related shows up in the New York Times crossword puzzle, the Saturday uber-hard edition no less. It’s kinda funny, but then again it’s more sad than funny. Not a sign of a market top necessarily, but definitely a sign of a top in the overwhelming belief that central banks and their monetary policies determine market outcomes, what I call the Narrative of Central Bank Omnipotence. There is a real world connected to markets, of course, a world of actual companies selling actual goods and services to actual people. And these real world attributes of good old fashioned economic supply and demand – the fundamentals, let’s call them – matter a great deal. Always have, always will. I don’t think they matter nearly as much during periods of global deleveraging and profound political fragmentation – an observation that holds true whether you’re talking about the 2010’s, the 1930’s, the 1870’s, or the 1470’s – but they do matter.

Unfortunately it’s not as simple as looking at some market outcome – the price of oil declining from $100/bbl to $70/bbl, say – and dividing up the outcome into some percentage of monetary policy-driven causes and some percentage of fundamental-driven causes. These market outcomes are always over-determined, which is a $10 word that means if you added up all of the likely causes and their likely percentage contribution to the outcome you would get a number way above 100%. Are recent oil price declines driven by the rising dollar (a monetary policy-driven cause) or by over-supply and global growth concerns (two fundamental-driven causes)? Answer: yes. I can make a case that either one of these “explanations” on its own can account for the entire $30 move. Put them together and I’ve “explained” the $30 move twice over. That’s not very satisfying or useful, of course, because it doesn’t help me anticipate what’s next.

Should I be basing my risk assessment of global oil prices on an evaluation of monetary policy divergence and what this means for the US dollar? Or should I be basing my assessment on an evaluation of global supply and demand fundamentals? If both, how do I weight these competing explanations so that I don’t end up overweighting both, which (not to get too technical with this stuff) will have the effect of sharply increasing the volatility of my forward projections, even if I’m exactly right in the ratio of the relative contribution of the potential explanatory factors. Here’s the short answer. I can’t.

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Note: this is shale gas, not oil. That’s another bubble, and just as big.

Who Will Wind Up Holding the Bag in the Shale Gas Bubble? (Naked Capitalism)

We’ve been writing off and on about how the sudden fall in gas prices has been expected to put a lot of shale gas development on hold. In fact, quite a few analysts believe that one of the big Saudi aims in refusing to support oil prices was to dent the prospects for competitive energy sources, not just renewables like wind and hydro power, but shale gas. Even though OilPrice reported that US rig count had indeed fallen as oil prices plunged, John Dizard at the Financial Times (hat tip Scott) gives a more intriguing piece of the puzzle: the degree to which production is still chugging along despite it being uneconomical. The oil majors have been criticized for levering up to continue developing when it is cash-flow negative; they are presumably betting that prices will be much higher in short order. But the same thing is happening further down the food chain, among players that don’t begin to have the deep pockets of the industry behemoths: many of them are still in “drill baby, drill” mode. Per Dizard:

Even long-time energy industry people cannot remember an overinvestment cycle lasting as long as the one in unconventional US resources. It is not just the hydrocarbon engineers who have created this bubble; there are the financial engineers who came up with new ways to pay for it.

And while the financial engineers will as always do just fine, lenders are another matter:

By now, though, there is an astonishing amount of debt that continues to build up on the smaller E&P companies’ balance sheets. According to Gavekal, the research group, even before the oil price plunge, aggregate debt-to-equity ratios in the smaller publicly traded energy companies are now at 93%, up from around 70% in 2012 and 2013, and around 50% between 2005 and 2011. This in a highly cyclical industry that used to go through periodic banker-driven shakeouts and even bankruptcies.

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John Dizard from last Friday: the debt boom can’t stop without wreaking havoc across the industry.

US Oil Producers Can’t Kick Drilling Habit (FT)

You would think, what with the recent oil price crash, the people who finance US oil and gas producers would have learnt their lesson. But not yet. For the past several years, and despite the once again widening gap between capital spending and cash flow, Wall Streeters have stepped in like an overindulgent parent to pay for the producers’ drilling habit. “Isn’t he cute!” they exclaim, as an exploration and production boy crashes another budget. “So talented! Did you see how many frac stages he can do now, and how tight his well spacing is?” Of course the exploration and production companies and their lenders have been to expensive accounting therapy sessions, where the concerned Wall Street family, accompanied by the sullen E&P operators, are told that they have to make a really sincere effort to match finding, drilling and completion expenditures to internally generated cash flow.

Everyone promises the accountant that that irresponsible land purchase or midstream commitment was the last mistake. From now on, cash flow break-even. Right. By now, though, there is an astonishing amount of debt that continues to build up on the smaller E&P companies’ balance sheets. According to Gavekal, the research group, even before the oil price plunge, aggregate debt-to-equity ratios in the smaller publicly traded energy companies are now at 93%, up from around 70% in 2012 and 2013, and around 50% between 2005 and 2011. This in a highly cyclical industry that used to go through periodic banker-driven shakeouts and even bankruptcies.

Particularly in the gas and natural gas liquids drilling directed sector, every operator (and their financier) is waiting for every other operator to stop or slow their drilling programmes, so there can be some recovery in the supply-demand balance. I have been hearing a lot of buzz about cutbacks in drilling budgets for 2015, but we will not really know until the companies begin to report in January and February. Then we will find out if they really are cutting back, using their profits on in-the-money hedge programmes to keep their debt under control, and taking impairment charges on properties that did not really pay off.

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Nasty report.

The Environmental Downside of the Shale Boom (NY Times)

Since 2006, when advances in hydraulic fracturing — fracking — and horizontal drilling began unlocking a trove of sweet crude oil in the Bakken shale formation, North Dakota has shed its identity as an agricultural state in decline to become an oil powerhouse second only to Texas. A small state that believes in small government, it took on the oversight of a multibillion-dollar industry with a slender regulatory system built on neighborly trust, verbal warnings and second chances. In recent years, as the boom really exploded, the number of reported spills, leaks, fires and blowouts has soared, with an increase in spillage that outpaces the increase in oil production, an investigation by The New York Times found. Yet, even as the state has hired more oil field inspectors and imposed new regulations, forgiveness remains embedded in the Industrial Commission’s approach to an industry that has given North Dakota the fastest-growing economy and lowest jobless rate in the country. [..]

Continental Resources hardly seems likely to walk away from its 1.2 million leased acres in the Bakken. It has reaped substantial profit from the boom, with $2.8 billion in net income from 2006 through 2013. But the company, which has a former North Dakota governor on its board, has been treated with leniency by the Industrial Commission. From 2006 through August, it reported more spills and environmental incidents (937) and a greater volume of spillage (1.6 million gallons) than any other operator. It spilled more per barrel of oil produced than any of the state’s other major producers. Since 2006, however, the company has paid the Industrial Commission $20,000 out of $222,000 in assessed fines.

Continental said in a written response to questions that it was misleading to compare its spill record with that of other operators because “we are not aware other operators report spills as transparently and proactively as we do.” It said that it had recovered the majority of what it spilled, and that penalty reductions came from providing the Industrial Commission “with precisely the information it needs to enforce its regulations fairly.” What Continental paid Mr. Rohr, the injured driller, is guarded by a confidentiality agreement negotiated after a jury was impaneled for a trial this September. His wife, Winnie, said she wished the trial had gone forward “so the truth could come out, but we just didn’t have enough power to fight them.”

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You wish.

Obama Climate Envoy: Fossil Fuels Will Have To Stay In The Ground (Guardian)

The world’s fossil fuels will “obviously” have to stay in the ground in order to solve global warming, Barack Obama’s climate change envoy said on Monday. In the clearest sign to date the administration sees no long-range future for fossil fuel, the state department climate change envoy, Todd Stern, said the world would have no choice but to forgo developing reserves of oil, coal and gas. The assertion, a week ahead of United Nations climate negotiations in Lima, will be seen as a further indication of Obama’s commitment to climate action, following an historic US-Chinese deal to curb emissions earlier this month. A global deal to fight climate change would necessarily require countries to abandon known reserves of oil, coal and gas, Stern told a forum at the Center for American Progress in Washington.

“It is going to have to be a solution that leaves a lot of fossil fuel assets in the ground,” he said. “We are not going to get rid of fossil fuel overnight but we are not going to solve climate change on the basis of all the fossil fuels that are in the ground are going to have to come out. That’s pretty obvious.” Last week’s historic climate deal between the US and China, and a successful outcome to climate negotiations in Paris next year, would make it increasingly clear to world and business leaders that there would eventually be an expiry date on oil and coal. “Companies and investors all over are going to be starting at some point to be factoring in what the future is longer range for fossil fuel,” Stern said.

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Merkel has problems keeping her stance.

Cracks Form in Berlin Over Russia Stance (Spiegel)

Within the European Union, the interests of the 28 member states are diverging in what are becoming increasingly clear ways. Taking a tough stance against Russia is generally less important to southern Europeans than it is to eastern Europeans. In the past, the German government had sought to serve as a bridge between the two camps. But in Berlin itself these days, significant differences in the assessment of the situation are starting to emerge within the coalition government pairing Merkel’s conservative Christian Democrats and the center-left Social Democrats (SPD). It’s one that pits Christian Democrat leaders like Merkel and Horst Seehofer, who heads the CDU’s Bavarian sister party, the Christian Social Union (CSU), against Foreign Minister Frank-Walter Steinmeier of the SPD and Social Democratic Party boss Sigmar Gabriel, who is the economics minister.

“The greatest danger is that we allow division to be sown between us,” the chancellor said last Monday in Sydney. And it’s certainly true to say that this threat is greater at present than at any other time since the crisis began. Is that what the Russian president has been waiting for? Last week, German Foreign Minister Steinmeier traveled to Moscow to visit with his Russian counterpart Sergey Lavrov. With Steinmeier standing at his side, the Russian foreign minister praised close relations between Germany and Russia. “It’s good my dear Frank-Walter that, despite the numerous rumors of recent days, you hold on to our personal contact.” Steinmeier reciprocated by not publically criticizing contentious issues like Russian weapons deliveries to Ukrainian separatists. Afterwards, Vladimir Putin received him, a rare honor. It was a prime example of just how the Russian strategy works.

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Don’t want to be a prick, and I like the man, but so does he a bit.

Europe Looks ‘Aged And Weary’: Pope Francis (CNBC)

Pope Francis has warned European politicians and policymakers that Europe is becoming less of a protagonist in the world as it looks “aged and weary.” Addressing the European Parliament in Strasbourg on Tuesday, Pope Francis, the spiritual leader of one billion Catholics worldwide, suggested that Europe risks becoming irrelevant. “Europe gives the impression of being aged and weary,feeling less and less a protagonist in a world which frequently looks on itwith aloofness, distrust and even, at times, suspicion…As a grandmother, no longer fertile and lively,” he said. “The great ideas that once inspired Europe…seem to have been replaced by the bureaucratic technicalities of Europe’s institutions.” Speaking at the plenary session of the parliament, he told lawmakers that they had the task of protecting and nurturing Europe’s identity “so that its citizens can experience renewed confidence in the institutions of the (European) Union and its project of peace and friendship that underlies it.”

Pope Francis’ visit to the European Parliament is the first by a pontiff since Pope John Paul II’s visit in 1988. He is also visiting the Council of Europe – the region’s human rights body – later on Tuesday. “I encourage you to work so that Europe rediscovers the best of its health,” he added. The pope also spoke about the importance of education and work. On the question of migration, a hot topic in Europe, Pope Francis said there needed to be a “united response.” “We cannot allow the Mediterranean to become a large graveyard,” he said, referring to the number of migrants who die during their attempts to cross the sea and reach Europe. “Rather than adopting policies that focus on self-interest which increase and feed conflicts, we need to act on the causes (for migration) and not only on the effects,” he added.

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Nov 142014
 
 November 14, 2014  Posted by at 12:13 pm Finance Tagged with: , , , , , , , , , ,  


DPC St. Catherine Street, Montréal, Québec 1916

Most US Cities Unaffordable For Average Americans To Live In (MarketWatch)
US Wealth Inequality: Top 0.1% Worth As Much As The Bottom 90% (Guardian)
US Foreclosure Filings Climb 15% In October (MarketWatch)
Sub-$2-a-Gallon Gasoline Futures Hand US Motorists Gift (Bloomberg)
Albert Edwards: USDJPY 145, “Tidal Wave Of Deflation Westward” (Zero Hedge)
Oil, Other Commodities Will Be In The Dumps For Another Decade (MarketWatch)
Oil Price Rout To Deepen Amid Supply Glut, Warns IEA (Telegraph)
Keystone Left Behind as Canadian Oil Pours Into US (Bloomberg)
Putin Stockpiles Gold As Russia Prepares For Economic War (Telegraph)
It May Be Too Late for Japan PM to Fix World’s Third Largest Economy (TIME)
Europe’s Debt Fight May Undermine Push for Growth Deal (Bloomberg)
Cold Comfort As France, Germany Eke Out Tiny Q3 Growth (Reuters)
Italy’s Slump Enters Fourth Year, Complicating Renzi’s Plans (Bloomberg)
World Outlook Darkening as 89% in Poll See Europe Deflation Risk (Bloomberg)
China Busts Underground Banks Linked to $23 Billion Transactions (Bloomberg)
Stock Market Fear, Stress And Tensions Climbing (MarketWatch)
Apple Could Swallow Whole Russian Stock Market (Bloomberg)
Fracking Boom Spurs Demand for Sand and Clouds of Dust (Bloomberg)
Massive OW Bunker Bankruptcy: Questions Of Governance And Oversight (SeaTrade)
Aboriginals Decry G-20 Host Australia as Leaders Gather (Bloomberg)

This is what we’ve come to, and it’s hardly surprising. Where are the raised voices, though?

Most US Cities Unaffordable For Average Americans To Live In (MarketWatch)

Most big American cities are no longer affordable for the average worker. Home buyers earning a median income can only afford a median-priced home in 10 of the 25 largest metropolitan areas in the U.S., according to a survey by personal finance site Interest.com. That’s still a slight improvement on last year when only 8 of those metropolitan areas were affordable, but still lower than 2012 when 14 of those 25 areas were affordable for people on a median income in those regions. Being priced out of buying a home in the country’s major cities means more multi-family buildings in big cities and more people moving into second-tier cities and rural areas, says Stuart Gabriel, director of UCLA’s Richard S. Ziman Center for Real Estate.

“The consequences are large,” he says, “and they’re not just about affordability. It affects economic growth and economic viability of our major metropolitan areas.” While some people will find ways to work from home, for instance, spiraling housing costs also hurt people who need to work in cities. “Teachers, firefighters and police, these are people who are absolutely essential to the functioning of our urban areas, are priced out of those areas and have to commute long distances to get to work,” Gabriel says. “It’s certainly true here in L.A.” Sacramento had the biggest drop in home affordability over the past 12 months, falling to No. 18 this year from No. 12 in 2013. But it’s still more affordable than the other three California metro areas on the list: Los Angeles (No. 22), San Diego (No. 24) and San Francisco (No. 25) where the median income is 46% less than what is required to buy a median-priced home here. New York is No. 23 on the list.

The cheapest areas are Minneapolis, Atlanta, St. Louis and Detroit. “Low mortgage rates are helping home affordability to some extent, but the key ingredient — which has been missing to this point — is substantial income growth,” says Mike Sante, managing editor of Interest.com. “Millennials, in particular, are struggling to overcome their student loans and save enough money for a down payment.” The Interest.com survey reflects a broader trend: 52% of Americans have made at least one major sacrifice to cover their rent or mortgage over the last three years, according to research commissioned by the nonprofit John D. and Catherine T. MacArthur Foundation released earlier this year. These sacrifices include getting a second job, deferring saving for retirement and cutting back on health care.

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Here’s why Americans can’t afford their own cities anymore.

US Wealth Inequality: Top 0.1% Worth As Much As The Bottom 90% (Guardian)

Wealth inequality in the US is at near record levels according to a new study by academics. Over the past three decades, the share of household wealth owned by the top 0.1% has increased from 7% to 22%. For the bottom 90% of families, a combination of rising debt, the collapse of the value of their assets during the financial crisis, and stagnant real wages have led to the erosion of wealth. The research by Emmanuel Saez and Gabriel Zucman [pdf] illustrates the evolution of wealth inequality over the last century. The chart shows how the top 0.1% of families now own roughly the same share of wealth as the bottom 90%. The picture actually improved in the aftermath of the 1930s Great Depression, with wealth inequality falling through to the late 1970s. It then started to rise again, with the share of total household wealth owned by the top 0.1% rising to 22% in 2012 from 7% in the late 1970s. The top 0.1% includes 160,000 families with total net assets of more than $20m (£13m) in 2012.

In contrast, the share of total US wealth owned by the bottom 90% of families fell from a peak of 36% in the mid-1980s, to 23% in 2012 – just one percentage point above the top 0.1%. The growing indebtedness of most Americans is the main reason behind the erosion of the wealth share of the bottom 90%, according to the report’s authors. Many middle-class families own their homes and have pensions, but too many have higher mortgage repayments, higher credit card bills, and higher student loans to service. The average wealth of bottom 90% jumped during the stock market boom of the late 1990s and the housing bubble of the early 2000s. But it then collapsed during and after the most recent financial crisis. Since then, there has been no recovery in the wealth of the middle class and the poor, the authors say. The average wealth of the bottom 90% of families is equal to $80,000 in 2012— the same level as in 1986. In contrast, the average wealth for the top 1% more than tripled between 1980 and 2012.

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No surprise here either.

US Foreclosure Filings Climb 15% In October (MarketWatch)

The pace of new foreclosures picked up last month as more troubled properties were pushed through the system, according to data released Thursday. In October, there were default notices and other foreclosure filings reported on more than 123,000 U.S. homes, up 15% from September — the largest monthly growth since foreclosure activity peaked in early 2010, online foreclosure marketplace RealtyTrac reported. Last month’s pop was driven by seasonal factors — banks were trying to “get ahead of the usual holiday foreclosure moratoriums,” said Daren Blomquist, vice president at RealtyTrac.

October’s spike narrowed the year-over-year contraction in foreclosure filings to 8%, the slowest annual drop since May 2012. “Distressed properties that have been in a holding pattern for years are finally being cleared for landing at the foreclosure auction,” Blomquist said. Despite October’s increase in filings, the pace of the foreclosure-related notices is trending closer to levels seen before the U.S. housing bubble burst. In 2006, as home prices were near their peak, there were average monthly foreclosure filings on 105,000 properties. October’s 123,000 foreclosure filings were down about 66% from a peak of 367,000 hit in 2010.

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Not going to boost holiday sales.

Sub-$2-a-Gallon Gasoline Futures Hand US Motorists Gift (Bloomberg)

U.S. drivers will have some extra money in their pockets this holiday season as gasoline futures tumbling below $2 a gallon mean lower prices at the pump. “The drop in futures is eventually going to translate into further declines at the pump,” Tim Evans, an energy analyst at Citi Futures Perspective in New York, said by phone yesterday. “There will be a little extra discretionary spending that consumers can use somewhere else this holiday season.” The nation’s largest motoring club says retail prices “have a very good chance” of being the lowest for the Nov. 28 Thanksgiving holiday in five years. Motorists are already paying the least since 2010 after crude oil tumbled more than 20% in the past four months. Gasoline futures added 0.7 cent, or 0.3%, to $2.0085 a gallon in electronic trading at 12:12 p.m. Singapore time.

Yesterday the contract closed at the lowest since September 2010. The average retail price for regular gasoline fell 0.6 cent to $2.917 a gallon on Nov. 12, the least since December 2010, according to Heathrow, Florida-based AAA. Based on the drop in the futures market, pump prices could fall to $2.70 or thereabouts, Michael Green, a Washington-based spokesman for AAA, said by telephone yesterday. “At this point, the market refuses to stabilize, the price of crude oil continues to fall and refiners are making more gasoline. There’s no end in sight.” Almost one-fourth of filling stations in the U.S. are selling gasoline for less than $2.75 a gallon, Green said. Less than 1% are under $2.50, he said. “We’re still a long way from getting down to $2,” Green said. “But I didn’t think it was going below $3, and here we are.”

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Edwards is one scary guy. Because he’s mostly right.

Albert Edwards: USDJPY 145, “Tidal Wave Of Deflation Westward” (Zero Hedge)

Less than two months ago, Albert Edwards presented “The Most Important Chart For Investors” in which he predicted, correctly, that the real action will come not in the Euro but the Japanese Yen, and at a time when the USDJPY was trading around 108, Edwards forecast a sharp move to 120. A month later, Abe’s just as shocking “all in” bet on boosting QE to a level where it matches the Fed’s peak monthly POMO despite an economy that is a third the size of the US, proved Edwards correct and has since sent the USDJPY some 800 pips higher and just 400 pips shy of Edwards’ 120 forecast. At this rate, the 120 target may be taken out within weeks not months. So what happens next? Here, straight from the horse’s mouth that got the first part of the rapid Yen devaluation so right, is the answer.

As Edwards updates with a note from this morning, “the yen is set to follow the US dollar DXY trade-weighted index by crashing through multi-decade resistance – around ¥120. It seems entirely plausible to me that once we break ¥120, we could see a very quick ¥25 move to ¥145, forcing commensurate devaluations across the whole Asian region and sending a tidal wave of deflation westwards.” Edwards, never one to beat around the bush, slams strategists who are at best willing to get the direction of a given move, if not the magnitude. So he will be the outlier:

… in the foreign exchange (FX) world, extreme volatility is often readily apparent but seldom ever predicted. We explained recently that investors were overly focusing on the euro/US$ when a further round of Japanese QE would make the yen the dominant currency story. I expect the key ¥120/$ support level to be broken soon and the lows of June 2007 (¥124) and Feb 2002 (¥135) to be rapidly taken out. If you want a target to reflect historic volatility, think about the Y145 low of August 1998 (see chart). That is my Q1 forecast.

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I see little value in predicting anything 10 years out today. The US dollar looks strongest, stocks definitely do not, they’re way too overvalued. in 2024, who says there’ll be much of any financial markets remaining? But hey, someone has to lose all that money going forward. Might as well this guy.

Oil, Other Commodities Will Be In The Dumps For Another Decade (MarketWatch)

Remember the commodities supercycle, that seemingly endless 2000s commodities boom? It drove oil, gold, copper and other commodities to record levels. The supercycle was driven by exploding demand from China and other emerging countries, supply bottlenecks caused by years of not developing wells and mines, and rock-bottom interest rates that inflated demand for hard assets all around the world. But now gold, oil and other commodities are well off their peaks, so far off, in fact, and for so long that they can only be described as in a supercycle in reverse, or a secular bear market. If that’s true – and I’m pretty sure it is – investors who piled in to commodities are in for a bruising decade ahead unless they take profits or cut their losses.

Meanwhile, stocks, which run counter to commodities, may well go much higher, along with the U.S. dollar. “We believe that we are in the initial years of a secular down cycle in commodities,” wrote Shawn Driscoll, manager of the natural resource-focused T. Rowe Price New Era Fund in the fund’s most recent semiannual report. “Commodity cycles are very long on the way up and the way down,” he told me in a phone interview. They last around 13 to 15 years, because it takes that long for fundamentals of supply and demand to go to extremes. When the most recent supercycle began in 1998, Driscoll said, commodities prices had plummeted, so producers shuttered old mines and wells and hadn’t opened new ones in a while. But when demand revived, it took years for producers to catch up. Ultimately, companies built too much capacity just in time for the next peak.

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“With this key level out of the way a move towards $75 now looks likely as the hunt for a real floor in oil prices goes on.” WTI at $74 this morning, Brent at $78.

Oil Price Rout To Deepen Amid Supply Glut, Warns IEA (Telegraph)

The rout which has sent oil prices to a four-year low is expected to deepen, the International Energy Agency warned in its latest monthly market report. The Paris-based watchdog said Friday: “While there has been some speculation that the high cost of unconventional oil production might set a new equilibrium for Brent prices in the $80 to $90 range, supply/demand balances suggest that the price rout has yet to run its course.” Against a backdrop of weakening demand, oil supply in October increased adding further downward pressure on prices, the IEA said in its monthly market report. According to the watchdog, global oil supply inched up by 350,000 barrels per day (bpd) in October to 94.2m bpd.

However, in London Brent crude bounced at the open up almost 1pc at around $78 per barrel after heavy losses overnight in the US saw West Texas Intermediate blend crude fall to $74 per barrel. “Crude prices are enduring another hefty move lower, with Brent shifting below $80 for the first time since late 2010,” said Chris Beauchamp, Market Analyst, IG. “With this key level out of the way a move towards $75 now looks likely as the hunt for a real floor in oil prices goes on.” The supply glut will add to pressure on the Organisation of Petroleum Exporting Countries to sharply cut back on production at their meeting on November 27. However, the group’s major producers may be reluctant to do so due to the risk of losing more market share to shale oil drillers in the US.

The IEA’s warning on prices follows the US Energy Department, which this week pared back its forecasts for prices in 2015. The US Energy Information Administration (EIA) – part of the Department of Energy – has slashed its price forecasts for 2015. The EIA now expects US crude blends to average $77.75 per barrel next year, down from a previous forecast of $97.72, and Brent to average $83.42 in 2015, down from its old estimate of $101.67. The EIA has also revised down its global demand forecast by 200,000 barrels per day (bpd) to average 92.5m bpd in 2015, based on weaker global economic growth prospects for next year.

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The US doesn’t produce enough domestically yet, or so I guess.

Keystone Left Behind as Canadian Oil Pours Into US (Bloomberg)

Delays of the Keystone XL pipeline are providing little obstacle to Western Canadian oil producers getting their crude to the U.S. Gulf Coast, with shipments set to more than double next year. The volume of Canadian crude processed at Gulf Coast refineries could climb to more than 400,000 barrels a day in 2015 from 208,000 in August, according to Jackie Forrest, vice president of Calgary-based ARC Financial. The increase comes as Enbridge’s Flanagan South and an expanded Seaway pipeline raise their capacity to ship oil by as much as 450,000 barrels a day. Canadian exports to the Gulf rose 83% in the past four years.

The expansion shows Canadians are finding alternative entry points into the U.S. while the Keystone saga drags on. In the latest chapter, a Democratic senator and a Republican representative are seeking votes in their chambers to set the project in motion. The two are squaring off in a runoff election for a Senate seat from Louisiana, a state where support for the project is strong. “Keystone is kind of old news,” Sandy Fielden, director of energy analytics at Austin, Texas-based consulting company RBN Energy, said Nov. 12 in an e-mail. “Producers have moved on and are looking for new capacity from other pipelines.” TransCanada’s Keystone XL, which would transport Alberta’s heavy oil sands crude to refineries on the Gulf, has been held up for six years, awaiting Obama administration approval.

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Over the top headline and commentary. Russia buys gold because sanctions make access to dollar markets harder.

Putin Stockpiles Gold As Russia Prepares For Economic War (Telegraph)

Russia has taken advantage of lower gold prices to pack the vaults of its central bank with bullion as it prepares for the possibility of a long, drawn-out economic war with the West. The latest research from the World Gold Council reveals that the Kremlin snapped up 55 tonnes of the precious metal – far more than any other nation – in the three months to the end of September as prices began to weaken. Vladimir Putin’s government is understood to be hoarding vast quantities of gold, having tripled stocks to around 1,150 tonnes in the last decade. These reserves could provide the Kremlin with vital firepower to try and offset the sharp declines in the rouble. Russia’s currency has come under intense pressure since US and European sanctions and falling oil prices started to hurt the economy.

Revenues from the sale of oil and gas account for about 45pc of the Russian government’s budget receipts. The biggest buyers of gold after Russia are other countries from the Commonwealth of Independent States, led by Kazakhstan and Azerbaijan. In total, central banks around the world bought 93 tonnes of the precious metal in the third quarter, marking it the 15th consecutive quarter of net purchases. In its report, the World Gold Council said this was down to a combination of geopolitical tensions and attempts by countries to diversify their reserves away from the US dollar. By the end of the year, central banks will have acquired up to 500 tonnes of gold during the latest buying spell, according to Alistair Hewitt, head of market intelligence at the World Gold Council.

“Central banks have been consistently adding to their gold holdings since 2009,” Mr Hewitt told the Telegraph. In the case of Russia, Mr Hewitt said that the recent increases in its gold holdings could be a sign of greater geopolitical risk that has arisen since it seized Crimea sparking a dispute with Ukraine and the West. Overall, the World Gold Council said that global demand for gold was down 2pc year-on-year to 929 tonnes in the third quarter amid signs that buying in China, one of the main markets, had tailed off. Jewellery demand in the quarter ending in September was down 39pc to 147 tonnes, signalling weaker consumer sentiment in the world’s second-largest economy.

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After 2.5 years, and countless comments at TAE about Abe’s inevitable failure, mainstream America is catching on. Even a jibe at Krugman here.

It May Be Too Late for Japan PM to Fix World’s Third Largest Economy (TIME)

Tokyo is abuzz with speculation that Prime Minister Shinzo Abe is about to dissolve the Diet, as the country’s legislature is known, and call a snap election. He by no means has to take such action. It has only been two years since his Liberal Democratic Party, or LDP, swept to power in a massive landslide, and the opposition is in such disarray that there is little doubt Abe would be returned to office in a new election. Nevertheless, Abe apparently feels the need for another vote of confidence from the public, likely in part to bolster support for his radical program to revive Japan’s economy, nicknamed Abenomics. The problem is that it could already be too late. Abenomics is a failure, and Abe isn’t likely to fix it, no matter how many seats his party holds in parliament.

When Abe first introduced Abenomics, many economists – most notably, Nobel laureate Paul Krugman – believed the unconventional program would finally end the economy’s two-decade slump. The plan: the Bank of Japan (BOJ), the country’s central bank, would churn out yen on a biblical scale to smash through the economy’s endemic and destructive cycle of deflation, while Abe’s government would pump up fiscal spending and implement long-overdue reforms to the structure of the economy. Advocates argued that Abenomics was just the sort of bold action to jump-start growth and fix a broken Japan, and we all had reason to hope that it would work. Japan is still the world’s third largest economy, and a revival there would add another much-needed pillar to hold up sagging global economic growth.

However, I had my concerns from the very beginning. In my view, Japan’s economy doesn’t grow because there is a lack of demand. Pumping more cash into the economy, therefore, will not restart growth. Only deep reform to raise the potential of the economy can do that — by improving productivity and unleashing new economic energies. Unless Abe changed the way Japan’s economy works — and I doubted he would — all of the largesse from the BOJ would at best come to nothing. In a worst-case scenario, Abe’s program could turn Japan into an even bigger economic mess than it already is.

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The G20 is the most useless gathering on the planet. They see one thing only, growth, whether it’s there or not.

Europe’s Debt Fight May Undermine Push for Growth Deal (Bloomberg)

Europe’s infighting over debt rules may be the biggest challenge to its ambitions for a new commitment to growth at the Group of 20 summit in Australia. World leaders have already expressed their frustration with the European Union’s German-mandated obsession with budget deficits. When they sit down in Brisbane this weekend to consider the 28-nation bloc’s call for a “comprehensive” growth strategy that seeks to boost private investment and rein in fiscal excess, the G-20 group will include France and Italy, the euro nations that have most publicly fought the EU view. Germany and its allies say the debt rules are essential for the EU’s credibility yet the euro area’s six-year slump has already weakened the bloc’s reputation for economic management, regardless of whether the 18 euro members can eventually wrestle their budget deficits under control.

As global growth wanes, the rest of the world’s capacity to keep indulging Europe’s budget focus is narrowing too. “Europe has, from a global perspective, been too tight for years,” said Jacob Funk Kirkegaard, senior fellow at the Peterson Institute for International Economics in Washington. Even if the euro area relaxes its stance somewhat, “the global economy is growing slower now, so any undershoot matters more.” Behind the united facade European leaders will present in Brisbane, France and Italy are straining at the budget limits they’ve been set, spurred on by calls from European Central Bank President Mario Draghi for nations to supplement his “whatever it takes” monetary policy stance.

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A big relief, was the announcement. So why are EU stocks falling?

Cold Comfort As France, Germany Eke Out Tiny Q3 Growth (Reuters)

European stocks were flat on Friday after gross domestic product numbers showed both France and Germany grew marginally in the third quarter, while the dollar rose further against the yen on expectations of a snap election in Japan. The European data confirmed that the outlook for much of the world economy still looks much shakier than for the United States, although France beat expectations. Asian stocks fell following the latest signs that growth in China is slowing. Energy stocks were depressed as crude oil hovered near a four-year low in an oversupplied market and the Russian ruble, hammered in recent weeks as world oil prices fell, was again testing record lows around 48 rubles per dollar. Germany’s economy eked out growth of 0.1% on the quarter, while France – generally seen as in deeper trouble than its neighbor – grew by 0.3%. Overall euro zone data was due later. “The German number is slightly positive in line with expectations but it’s still soft,” said Patrick Jacq, a rate strategist at BNP Paribas in Paris.

“The (French) growth in Q3 is only driven by inventories. It’s just a one-off positive figure in a very weak environment and therefore this is not something which could lead the market to think that the economic situation is improving in France.” A Reuters poll showed Japanese companies overwhelmingly want Prime Minister Shinzo Abe to delay or scrap a planned tax increase, a move expected to come along with a decision, expected by many, to call a new election. The yen, down more than 3% against a stronger dollar this month, fell another half% to a seven-year low of 116.385 yen per dollar. “The argument is that delaying the sales tax hike means the impulse to CPI inflation will start to drop,” said Alvin Tan, a currency strategist at French bank Societe Generale in London. “If there’s no additional sales tax hike, the impulse to higher inflation starts to fade away quite rapidly. So in order to push inflation higher, which is what everybody wants, you need the currency to weaken a lot more.”

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All those years lost for growth that will never come. Renzi is not a smart guy.

Italy’s Slump Enters Fourth Year, Complicating Renzi’s Plans (Bloomberg)

Italy’s economy shrank in the third quarter pushing the nation into a fourth year of a slump that has complicated Prime Minister Matteo Renzi’s efforts to revive growth and keep public finances in check. Gross domestic product fell 0.1% from the previous three months, when it declined 0.2%, the national statistics institute Istat said in a preliminary report in Rome today. That matched the median forecast in a Bloomberg survey of 22 economists. Output was down by 0.4% from a year earlier. GDP in the euro region’s third-biggest economy has fallen in all but two of the last 13 quarters as the jobless rate rose to the highest on record.

Renzi is relying on estimated 0.6-percent growth next year to rein in a public debt of more than €2 trillion ($2.50 trillion) and preserve a tax rebate to low-paid employees aimed at reviving consumer demand. The Bank of Italy said yesterday in a report that the country needs to avoid a “recessionary demand spiral” due to the “persistence of economic difficulties, which have been exceptional in terms of duration and depth.” Italians rallied in Rome last month to protest an overhaul of labor market rules tha Renzi proposed to make it easier for businesses to hire and fire workers. The premier has repeatedly said the plan is a way to attract investments and that its framework will get parliamentary approval by year’s end before being fully implemented in 2015.

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Finally a Bloomberg poll that gets something right?

World Outlook Darkening as 89% in Poll See Europe Deflation Risk (Bloomberg)

The world economy is in its worst shape in two years, with the euro area and emerging markets deteriorating and the danger of deflation rising, according to a Bloomberg Global Poll of international investors. A plurality of 38% of those surveyed this week described the global economy as worsening, more than double the number who said that in the last poll in July and the most since September 2012, when Europe was mired in a recession. Much of the concern is again focused on the euro area: Almost two-thirds of those polled said its economy was weakening while 89% saw disinflation or deflation as a greater threat there than inflation over the next year. Respondents said the European Central Bank and the region’s governments are making the situation worse by pursuing too-tight policies, and fewer expressed confidence in ECB President Mario Draghi and German Chancellor Angela Merkel.

“The euro-zone economy has deteriorated and will get worse if there are no fiscal policy actions from core European countries, mainly Germany,” poll participant Sanwook Lee, a senior portfolio manager at Shinhan Bank in Seoul, said in an e-mail. Europe isn’t the only source of concern in the global economy, according to the quarterly poll of 510 investors, traders and analysts who are Bloomberg subscribers. More than half of those contacted said conditions in the BRIC economies – Brazil, Russia, India and China – are getting worse, compared with 36% who said so in July.

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China is filled to its credit boom with this kind of shady deals.

China Busts Underground Banks Linked to $23 Billion Transactions (Bloomberg)

Beijing police raided and shut down more than 10 underground banks that were involved in 140 billion yuan ($23 billion) of transactions over the past few years. The banks were raided on Sept. 18, with 59 people arrested and 264 bank accounts frozen, Beijing Municipal Public Security Bureau said in a statement today. The investigation started in February when Beijing police found that a man with surname Yao had transferred more than $5 million abroad in a year, according to the statement. Yao, who had a number of bank accounts, frequently bought $50,000 of foreign exchange, the police said. That’s the most overseas currency that a Chinese citizen can buy annually. The underground banks, most of which are family-run and operating out of homes, use online and mobile payment devices to buy or sell foreign exchange and illegally transfer funds abroad, according to the statement. Beijing police said they would continue to crackdown on crimes that threaten China’s economic and financial security.

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Investors are clueless and befuddled. Ideal patsies.

Stock Market Fear, Stress And Tensions Climbing (MarketWatch)

What happens if we get another melt-up, maybe to 18,000 on the Dow Jones Industrial Average before we see 17,000 again? I’m in a less aggressive mode for now, but feet to fire, if this bubble-blowing bull market is to keep on blowing, why not a total melt-up into and above 18,000 before year-end? Stranger things have happened. I often ask, who’s more scared right now, the bulls or the bears because when there’s an overwhelming consensus in the answer to that question, it’s often time for the markets to put on a big contrarian move opposite that sentiment. Are you a bull or one of the few bears remaining? Are you scared right now? Do you think most bulls are scared right now?

Fear, stress and tensions have been climbing along with the markets, which isn’t what you’d expect, is it? I’ve noticed throughout this week that tensions have been very high on Latest Scuttles and that’s a reflection of the stress felt by most traders and investors right now. There’s likely a lot of money managers who missed this last leg higher from the Ebola lows and now find themselves drastically behind their market benchmarks with just 45 days to go into year-end. That kind of technical setup into year-end could be a catalyst for the winners to keep their momentum heading higher. I personally am not trying and wouldn’t suggest trying to game the next market move, but it’s something to think about.

And what if you’ve missed this bull run over the last five years and still aren’t in the markets or even if you just find yourself like the aforementioned money managers and feel underinvested here? Like I said, I don’t think the continuing bubble-blowing bull market that I’ve predicted would play out like this is over yet. I wouldn’t be aggressive, but if you don’t think you own enough stocks (or any for that matter) then I do suggest scaling into some of the best stocks you can find, including some of the very best, most revolutionary growth stocks you can find.

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The take-away: Apple is an 800-pound bubble.

Apple Could Swallow Whole Russian Stock Market (Bloomberg)

If you owned Apple Inc., and sold it, you could purchase the entire stock market of Russia, and still have enough change to buy every Russian an iPhone 6 Plus. The CHART OF THE DAY shows the total market capitalization of all public companies in the world’s largest country slipped below that of the world’s most-valued company for the first time on record. The gap, at $121 billion on Nov. 12, is about the price of 143 million contract-free 64-gigabyte iPhones, based on Apple Store prices. The value of Russian equities has slumped $234 billion to $531 billion this year, while Apple gained $147 billion to $652 billion, according to data compiled by Bloomberg.

The technology company’s innovation and brand value attract investors, while Russia’s political conflicts, sanctions and the threat of economic stagnation next year make them nervous, according to Vadim Bit-Avragim, a portfolio manager who helps oversee about $4 billion at Kapital Asset Management LLC in Moscow. “Apple works with shareholders to maximize returns and is based where property is protected by law,” Bit-Avragim said. “In Russia, the legislative protection for property is not as good, most state-run companies have poor corporate governance, resources are concentrated in state hands and borrowing costs are shooting up. After all this, when you get involved in conflicts with your neighbors, it becomes very hard to persuade investors from all over the world to invest here.”

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Destruction is our middle name.

Fracking Boom Spurs Demand for Sand and Clouds of Dust (Bloomberg)

A little sand mine down the road didn’t seem like a big deal 17 years ago, when Alphonse Dotson picked the site for a vineyard in the Texas Hill Country. Today he’s surrounded by four mines blasting sand from the earth, filling the air with a fine dust that drifts across acres of sensitive grape vines. A fifth will open soon, and he says he’s worried. “I don’t want us to be smothered to death,” he said. Add sand mining to the list of industries transformed by the U.S. oil boom. The tiny grains of silica are what keep frackers fracking, propping open cracks punched into rock so oil and natural gas can flow. As drilling surged, so has demand for sand. Sand production has more than doubled in the U.S. over the past seven years. By the end of 2016, oil companies in North America will be pumping 145 billion pounds (66 billion kilograms) of it down wells annually. That’s enough to fill railcars stretching from San Francisco to New York – and back.

That’s triggering complaints from local communities, according to a Grant Smith, senior energy policy adviser at the Civil Society Institute. Dust from sand can penetrate deep into lungs and the bloodstream; mines consume massive amounts of water; sand-laden trucks are damaging roads; and property values can be affected. The surge in mining is a “little-understood danger of the fracking boom,” Smith said in a September call with reporters. Energy companies are paying 6% more for sand this year at a time when oil prices are plunging. While low prices may slow down drilling, that won’t make up for a supply bottleneck, said Samir Nangia, a principal at the Houston-based research company PacWest Consulting Partners. Fracking companies are struggling to get enough sand because there aren’t enough trucks and railcars to deliver it. Higher transportation costs are eating into profits at oil-services companies like Schlumberger, Halliburton and Baker Hughes.

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A company that had revenues of $17 billion in 2013 just topples over, and no-one pays attention, because it happened to be in Denmark and SIngapore.

Massive OW Bunker Bankruptcy: Questions Of Governance And Oversight (SeaTrade)

The rapid collapse into bankruptcy of OW Bunker just 48 hours after it revealed a $125m fraud at Singapore subsidiary Dynamic Oil Trading, as well as $150m in risk management losses announced at the same time, leaves an awful lot of unanswered questions. OW Bunker was not a two-bit marine fuel supplier, it had revenues of $17bn in 2013 and claimed a 7% share of the global marine fuel supply market. In March this year its IPO on Copenhagen’s NASDAQ exchange valued the company at DKK5.33bn ($900m), making it one of Denmark’s largest IPOs in recent years. In May this year OW Bunker made Forbes list of top 2,000 list of the world’s biggest public companies. As it stands just seven months on the from the IPO some 20,000 investors will have lost everything they put into the company, based on the statement when it filed for in-court restructuring of its main operating subsidiaries that it “must be assumed that the group’s equity is lost”.

Suppliers and sub-contractors will find themselves with large unpaid bills, something which P&I insurers Skuld have warned shipowners about. And more than 600 employees of the group worldwide face a very uncertain future. Trading is a risky business, and anyone investing in it needs to understand this, but this is also why corporate governance and oversight are so important. It is worth noting that according to reports in the Danish media the company did not actually uncover the fraud at Dynamic itself; one of its senior executives flew to Denmark and tearfully confessed to it. How long it would have gone on if this had not happened we can only speculate. Two employees have since been reported to the Danish police as OW Bunker filed for bankruptcy. What fraud was actually committed we do not know, although we do know it was over a six month period, so its open to question whether it was actual embezzlement or the hiding of losses as the market turned against the executives involved.

Certainly the recent sharp falls in the oil and bunker price point to the latter as a possibility. The case bears certain parallels to then Singapore-based, British national, rogue trader Nick Leeson who caused the collapse of Barings Bank in 1995 having run up losses on speculative trades that eventually totaled in the region of $1.4bn. Indeed the BBC is reporting the fraud at Dynamic could be one of Singapore’s largest financial scandals in the last 10 years, joining what is already a huge scandal in Denmark. The fraud revelations came on top of the $150m in risk management losses that resulted in the firing of OW Bunker head of risk management and evp Jane Dahl Christensen. The full extent of the fallout of OW Bunker’s sudden bankruptcy will most likely take years to unravel. However, lessons do need to be learned on corporate governance and oversight for the benefit of all going forward.

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That Tony Abbott is one dumb f*ck: “Sydney before British settlement was “nothing but bush.”

Aboriginals Decry G-20 Host Australia as Leaders Gather (Bloomberg)

Across the Brisbane River from where some of the world’s biggest leaders will soon gather, a group of 200 indigenous Australians is seeking to present another side to the country’s image as host and regional power. “We want to talk to the people of the world,” said twenty-seven-year-old Meriki Onus, who joined the Aboriginal people protesting in a city park after a two-day, 1,100-mile bus ride to the Queensland state capital. “The police system here is racist, the government systems here are racist and we’ve used the G-20 as an opportunity to tell the world that it’s not OK.” Australia’s first inhabitants – who lived on the continent at least 40,000 years prior to British settlement in 1788 and now make up about 3% of the population – are among groups using the draw of leaders like U.S. President Barack Obama at the Group of 20 meetings to highlight their causes.

The indigenous people gathered in the subtropical city, where police outnumber the 7,000 delegates and media, say the system of government has entrenched poverty. “This country is occupied by force, like what happened in Poland and France during War War II, but for us this has been going on for more than two centuries,” Wayne Wharton, spokesman for the Brisbane Aboriginal Sovereign Embassy, said today at the park protest. “Our people want our rightful place in the world, and that means economic benefits, social benefits, responsibility and services.” Speaking at a business breakfast today in Sydney with U.K. Prime Minister David Cameron, Australia’s leader Tony Abbott, a self-declared prime minister for Aborigines and host of this weekend’s G-20 summit, said Sydney before British settlement was “nothing but bush.”

“As we look around this glorious city, as we see the extraordinary development, it’s hard to think that back in 1788 it was nothing but bush and that the marines and the convicts and the sailors that straggled off those 12 ships just a few hundred yards from where we are now must have thought they’d come almost to the moon,” Abbott said. Daubed with “mourning paint” across his face and torso to highlight indigenous deaths in police custody, Wharton said the G-20 won’t help his people or other Aboriginal races throughout the world because it’s designed to make rich nations wealthier at the expense of the poor. “It all comes back to having the ability to accumulate and then distribute wealth – my people have never had that,” he said.

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 November 11, 2014  Posted by at 7:24 pm Finance Tagged with: , , , , ,  


Marjory Collins Window of Jewish religious shop on Broome Street, New York Aug 1942

There are things in this world which simply look plain stupid, and then there are those that at closer examination prove to be way beyond stupid. How about this one:

1) G20 taxpayers (you, me) subsidize the fossil fuel industry. That in itself is crazy enough, and it should stop as per last week; industry participants must be able to fend for themselves, or fold. That they don’t, speaks to a very unhealthy level of power in and over our political systems. Subsidizing coal and oil is as insane as bailing out Wall Street banks. It’s money that defies gravity, by flowing from the bottom to the top, from the poor to the rich.

2) Then there’s the huge amount of the subsidies: $88 billion a year. That could solve a lot of misery for a lot of people. It adds up to well over $1 trillion in this century alone. Next time you feel good about prices at the pump, please add that number, it should set you straight.

3) But that’s just the start. Those $88 billion go towards exploration for new oil, gas and coal resources which, according to the UN’s IPCC climate panel, can never even be ‘consumed’ lest we go way beyond our – minimum – goals for CO2 concentrations and a global 2ºC warming limit.

4) And it keeps getting better. For who do you think pays for the research conducted for the IPCC reports? That’s right, the same G20 taxpayer. As in: you and me. We pay for both ends of the divine tragedy. We got it al covered. We pay for exploratory drilling in the Arctic, the Gulf of Mexico and all other ever harder to find, riskier and more polluting resources.

If this were not about us, we’d undoubtedly declare ourselves stark raving mad. Since it does directly involve us, though, we of course favor a more nuanced approach. Like sticking our heads in the sand.

I got that $88 billion a year number from a new report by British thinktank the Overseas Development Institute (ODI) and Washington-based analysts Oil Change International, The Fossil Fuel Bailout: G20 Subsidies For Oil, Gas And Coal Exploration. The Guardian has a few more juicy tidbits:

Rich Countries Subsidising Oil, Gas And Coal Companies By $88 Billion A Year

Rich countries are subsidising oil, gas and coal companies by about $88bn (£55.4bn) a year to explore for new reserves, despite evidence that most fossil fuels must be left in the ground if the world is to avoid dangerous climate change.

The most detailed breakdown yet of global fossil fuel subsidies has found that the US government provided companies with $5.2bn for fossil fuel exploration in 2013, Australia spent $3.5bn, Russia $2.4bn and the UK $1.2bn. Most of the support was in the form of tax breaks for exploration in deep offshore fields.

The public money went to major multinationals as well as smaller ones who specialise in exploratory work, according to British thinktank the Overseas Development Institute (ODI) and Washington-based analysts Oil Change International.

Britain, says their report, proved to be one of the most generous countries. In the five year period to 2014 it gave tax breaks totalling over $4.5bn to French, US, Middle Eastern and north American companies to explore the North Sea for fast-declining oil and gas reserves. A breakdown of that figure showed over $1.2bn of British money went to two French companies, GDF-Suez and Total, $450m went to five US companies including Chevron, and $992m to five British companies.

Britain also spent public funds for foreign companies to explore in Azerbaijan, Brazil, Ghana, Guinea, India and Indonesia, as well as Russia, Uganda and Qatar, according to the report’s data, which is drawn from the OECD, government documents, company reports and institutions.

The figures, published ahead of this week’s G20 summit in Brisbane, Australia, contains the first detailed breakdown of global fossil fuel exploration subsidies. It shows an extraordinary “merry-go-round” of countries supporting each others’ companies. The US spends $1.4bn a year for exploration in Columbia, Nigeria and Russia, while Russia is subsidising exploration in Venezuela and China, which in turn supports companies exploring Canada, Brazil and Mexico.

“The evidence points to a publicly financed bail-out for carbon-intensive companies, and support for uneconomic investments that could drive the planet far beyond the internationally agreed target of limiting global temperature increases to no more than 2C,” say the report’s authors.

“This is real money which could be put into schools or hospitals. It is simply not economic to invest like this. This is the insanity of the situation. They are diverting investment from economic low-carbon alternatives such as solar, wind and hydro-power and they are undermining the prospects for an ambitious UN climate deal in 2015,” said Kevin Watkins, director of the ODI.

“The IPCC [UN climate science panel] is quite clear about the need to leave the vast majority of already proven reserves in the ground, if we are to meet the 2C goal. The fact that despite this science, governments are spending billions of tax dollars each year to find more fossil fuels that we cannot ever afford to burn, reveals the extent of climate denial still ongoing within the G20,” said Oil Change International director Steve Kretzman.

The report further criticises the G20 countries for providing over $520m a year of indirect exploration subsidies via the World Bank group and other multilateral development banks (MDBs) to which they contribute funds.

That’s right, as you see in the graph we pay more towards Big Oil’s future profits then the companies do themselves. Without getting shares in those companies, mind you. We pay Big Oil and coal to produce more fossil fuels, and at the same time we pay the UN to publish reports demanding they produce less of them. Feel crazy yet?

Did you have any idea that your government sponsors oil companies with your money, which they don’t need, and certainly shouldn’t? Aren’t we supposed to at least take a serious look at alternative energy sources, and more importantly, use less energy, whether it’s coal or solar? If only to show we do indeed understand the 2nd law of thermodynamics?!

Big Oil, like Wall Street banks, should be, and can, take care of themselves, and very well. May I suggest you try and find out who in your respective government has given the thumbs up to these crazy handouts, and when you do, make sure they’re fired.