Jan 122015
 
 January 12, 2015  Posted by at 10:14 pm Finance Tagged with: , , , , , ,  11 Responses »


DPC Chicago & Alton Railroad, Joliet, Illinois 1901

Boy, did the ‘experts’ and ‘analysts’ drop the ball on this one, or what’s the story. Only today, Goldman’s highly paid analysts admitted they’ve been dead wrong from months, that their prediction that OPEC would cut production will not happen, and that therefore oil may go as low as $40. Anyone have any idea what that miss has cost Goldman’s clients? And now of course other ‘experts’ – prone to herd behavior – ‘adjust’ their expectations as well.

They all have consistently underestimated three things: the drop in global oil demand, the impact QE had on commodity prices, and the ‘power’ OPEC has. Everyone kept on talking, over the past 3 months, as oil went from $75 – couldn’t go lower than that, could it? – to today’s $46, about how OPEC and the Saudis were going to have to cut output or else, but they never understood the position OPEC countries are in. Which is that they don’t have anything near the power they had in 1973 or 1986, but that completely escaped all analysts and experts and media. Everyone still thinks China is growing at a 7%+ clip, but the only numbers that sort of thing is based on come from .. China. As for QE, need I say anymore, or anything at all?

So Goldman today says oil will drop to $40, but Goldman was spectacularly wrong until now, so why believe them this time around? As oil prices plunged from $75 in mid november all the way to $45 today (about a 40% drop, more like 55% from June 2014’s $102), their analysts kept saying OPEC and the Saudis would cut output. Didn’t happen. As I said several times since last fall, OPEC saw the new reality before anyone else. But why did it still take 2 months+ for the ‘experts’ and ‘analysts’ to catch up? I would almost wonder how many of these smart guys bet against their clients in the meantime.

I’m going to try and adhere to a chronological order here, or both you and I will get lost. On November 22 2014, when WTI oil was at about $75, I wrote:

Who’s Ready For $30 Oil?

What is clear is that even at $75, angst is setting in, if not yet panic. If China demand falls substantially in 2015, and prices move south of $70, $60 etc., that panic will be there. In US shale, in Venezuela, in Russia, and all across producing nations. Even if OPEC on November 27 decides on an output cut, there’s no guarantee members will stick to it. Let alone non-members. And sure, yes, eventually production will sink so much that prices stop falling. But with all major economies in the doldrums, it may not hit a bottom until $40 or even lower.

Oil was last- and briefly – at $40 exactly 6 years ago, but today is a very different situation. All the stimulus, all $50 trillion or so globally, has been thrown into the fire, and look at where we are. There’s nothing left, and there won’t be another $50 trillion. Sure, stock markets set records. But who cares with oil at $40? Calling for more QE, from Japan and/or Europe or even grandma Yellen, is either entirely useless or will work only to prop up stock markets for a very short time. Diminishing returns. The one word that comes to mind here is bloodbath. Well, unless China miraculously recovers. But who believes in that?

5 days later, on November 27, with WTI still around $75, I followed up with:

The Price Of Oil Exposes The True State Of The Economy

Tracy Alloway at FT mentions major banks and their energy-related losses:

“Banks including Barclays and Wells Fargo are facing potentially heavy losses on an $850 million loan made to two oil and gas companies, in a sign of how the dramatic slide in the price of oil is beginning to reverberate through the wider economy. [..] if Barclays and Wells attempted to syndicate the $850m loan now, it could go for as little as 60 cents on the dollar.”

That’s just one loan. At 60 cents on the dollar, a $340 million loss. Who knows how many similar, and bigger, loans are out there? Put together, these stories slowly seeping out of the juncture of energy and finance gives the good and willing listener an inkling of an idea of the losses being incurred throughout the global economy, and by the large financiers. There’s a bloodbath brewing in the shadows. Countries can see their revenues cut by a third and move on, perhaps with new leaders, but many companies can’t lose that much income and keep on going, certainly not when they’re heavily leveraged.

The Saudi’s refuse to cut output and say: let America cut. But American oil producers can’t cut even if they would want to, it would blow their debt laden enterprises out of the water, and out of existence. Besides, that energy independence thing plays a big role of course. But with prices continuing to fall, much of that industry will go belly up because credit gets withdrawn.

That was then. Today, oil is at $46, not $75. Also today, Michael A. Gayed, CFA, hedge funder and chief investment strategist and co-portfolio manager at Pension Partners, LLC, draws the exact same conclusion, over 7 weeks and a 40%-odd drop in prices later:

Falling Oil Reveals The Truth About The Market

It seems like every day some pundit is on air arguing that falling oil is a net long-term positive for the U.S. economy. The cheaper energy gets, the more consumers have to spend elsewhere, serving as a tax cut for the average American. There is a lot of logic to that, assuming that oil’s price movement is not indicative of a major breakdown in economic and growth expectations. What’s not to love about cheap oil? The problem with this argument, of course, is that it assumes follow through to end users. If oil gets cheaper but is not fully reflected in the price of goods, the consumer does not benefit, or at least only partially does and less so than one might otherwise think. I believe this is a nuance not fully understood by those making the bull argument. Falling oil may actually be a precursor to higher volatility as investors begin to question speed’s message.

How much did Michael’s clients lose in those 7+ weeks?

Something I also said in that same November 27 article was:

US shale is no longer about what’s feasible to drill today, it’s about what can still be financed tomorrow.

And whaddaya know, Bloomberg runs this headline 51 days and -40% further along:

What Matters Is the Debt Shale Drillers Have, Not the Oil

U.S. shale drillers may tout how much oil they have in the ground or how cheaply they can get it out. For stock investors, what matters most is debt. The worst performers among U.S. oil producers in a Bloomberg index owe about 5.7 times more than they earn, before certain deductions, compared with 1.7 times for companies that have taken less of a hit. Operations, such as where the companies drill or how much oil versus gas they pump, matter less.

“With oil prices below $50 and approaching $40, we’re in survivor mode,” Steven Rees, who helps oversee about $1 trillion as global head of equity strategy at JPMorgan Private Bank, said via phone. “The companies with the higher degrees of leverage have underperformed, and you don’t want to own those because there’s a fair amount of uncertainty as to whether they can repay that debt.”

That’s the exact same thing I said way back when! Who trusts these guys with either their money or their news? When they could just read me and be 7 weeks+ ahead of the game? Not that I want to manage your money, don’t get me wrong, I’m just thinking these errors can add up to serious losses. And they wouldn’t have to. That’s why there’s TheAutomaticEarth.com.

A good one, which I posted December 12, with WTI at $67 (remember the gold old days, grandma?), was this one on what oil actually sells for out there, not what WTO and Brent standards say. An eye-opener.

Will Oil Kill The Zombies?

Tom Kloza, founder and analyst at Oil Price Information Service, said the market could bottom for the winter in about 30 days, but then it will be up to whatever OPEC does. “It’s (oil) actually much weaker than the futures markets indicate. This is true for crude oil, and it’s true for gasoline. There’s a little bit of a desperation in the crude market,” said Kloza.”The Canadian crude, if you go into the oil sands, is in the $30s, and you talk about Western Canadian Select heavy crude upgrade that comes out of Canada, it’s at $41/$42 a barrel.”

“Bakken is probably about $54.” Kloza said there’s some talk that Venezuelan heavy crude is seeing prices $20 to $22 less than Brent, the international benchmark. Brent futures were at $63.20 per barrel late Thursday. “In the actual physical market, it’s fallen by even more than the futures market. That’s a telling sign, and it’s telling me that this isn’t over yet. This isn’t the bottoming process. The physical market turns before the futures,” he said.

Oil prices have come down close to another 20% since then, in just one month $67 to $46 right now. And it’s going to keep plunging, if only because Goldman belatedly woke up and said so today:

Goldman Sees Need for $40 Oil as OPEC Cut Forecast Abandoned

Goldman Sachs said U.S. oil prices need to trade near $40 a barrel in the first half of this year to curb shale investments as it gave up on OPEC cutting output to balance the market. The bank cut its forecasts for global benchmark crude prices, predicting inventories will increase over the first half of this year.. Excess storage and tanker capacity suggests the market can run a surplus far longer than it has in the past, said Goldman analysts including Jeffrey Currie in New York. The U.S. is pumping oil at the fastest pace in more than three decades, helped by a shale boom ..

“To keep all capital sidelined and curtail investment in shale until the market has re-balanced, we believe prices need to stay lower for longer,” Goldman said in the report. “The search for a new equilibrium in oil markets continues.” West Texas Intermediate, the U.S. marker crude, will trade at $41 a barrel and global benchmark Brent at $42 in three months, the bank said. It had previously forecast WTI at $70 and Brent at $80 for the first quarter. Goldman reduced its six and 12-month WTI predictions to $39 a barrel and $65, from $75 and $80, respectively ..

Well, after that 2-month blooper I described above, who would trust Goldman anymore, right, silly you is thinking. Don’t be mistaken, people listen to GS, no matter how wrong they are.

Meanwhile, the thumbscrews keep on tightening:

UK Oil Firms Warn Osborne: Without Big Tax Cuts We Are Doomed

North Sea oil and gas companies are to be offered tax concessions by the Chancellor in an effort to avoid production and investment cutbacks and an exodus of explorers. George Osborne has drawn up a set of tax reform plans, following warnings that the industry’s future is at risk without substantial tax cuts. But the industry fears he will not go far enough. Oil & Gas UK, the industry body, is urging a tax cut of as much as 30% [..] “If we don’t get an immediate 10% cut, then that will be the death knell for the industry [..] Companies operating fields discovered before 1992 can end up with handing over80% of their profits to the Chancellor; post-1992 discoveries carry a 60% profits hit.

And hitting botttom lines:

As Oil Plummets, How Much Pain Still Looms For US Energy Firms?

A closer look at valuations and interviews with a dozen of smaller firms ahead of fourth quarter results from their bigger, listed rivals, shows there are reasons to be nervous. What small firms say is that the oil rout hit home faster and harder than most had expected. “Things have changed a lot quicker than I thought they would,” says Greg Doramus, sales manager at Orion Drilling in Texas, a small firm which leases 16 drilling rigs. He talks about falling rates, last-minute order cancellations and customers breaking leases. The conventional wisdom is that hedging and long-term contracts would ensure that most energy firms would only start feeling the full force of the downdraft this year.

The view from the oil fields from Texas to North Dakota is that the pain is already spreading. “We have been cut from the work,” says Adam Marriott, president of Fandango Logistics, a small oil trucking firm in Salt Lake City. He says shipments have fallen by half since June when oil was fetching more than $100 a barrel and his company had all the business it could handle. Bigger firms are also feeling the sting. Last week, a leading U.S. drilling contractor Helmerich & Payne reported that leasing rates for its high-tech rigs plunged 10% from the previous quarter, sending its shares 5% lower.

And, then, as yours truly predicted last fall, oil’s downward spiral spreads, and the entire – always nonsensical – narrative of a boost to the economy from falling oil prices vanishes into thin air. You could have known that, too, at least 2 months ago. Bloomberg:

Oil’s Plunge Wipes Out S&P 500 Earnings

While stock investors wait for the benefits of cheaper oil to seep into the economy, all they can see lately is downside. Forecasts for first-quarter profits in the Standard & Poor’s 500 Index have fallen by 6.4 percentage points from three months ago, the biggest decrease since 2009, according to more than 6,000 analyst estimates compiled by Bloomberg. Reductions spread across nine of 10 industry groups and energy companies saw the biggest cut. Earnings pessimism is growing just as the best three-year rally since the technology boom pushed equity valuations to the highest level since 2010.

At the same time, volatility has surged in the American stock market as oil’s 55% drop since June to below $49 a barrel raises speculation that companies will cancel investment and credit markets and banks will suffer from debt defaults. [..] American companies are facing the weakest back-to-back quarterly earnings expansions since 2009 as energy wipes out more than half the growth and the benefit to retailers and shippers fails to catch up.

Oil producers are rocked by a combination of faltering demand and booming supplies from North American shale fields, with crude sinking to $48.36 a barrel from an average $98.61 in the first three months of 2014. Except for utilities, every other industry has seen reductions in estimates. Profit from energy producers such as Exxon Mobil and Chevron will plunge 35% this quarter, analysts estimated.

In October, analysts expected the industry to earn about the same as it did a year ago. “My initial thought was oil would take a dollar or two off the overall S&P 500 earnings but that obviously might be worse now,” Dan Greenhaus at BTIG said in a phone interview. “The whole thing has moved much more rapidly and farther than anyone thought. People were only taking into account consumer spending and there was a sense that falling energy is ubiquitously positive for the U.S., but I’m not convinced.”

Well, not than anyone thought. Not me, for one. Just than the ‘experts’ thought. But that’s exactly what I said at the time. And I must thank Bloomberg for vindicating me. Don’t worry, guys, I wouldn’t want to be part of your expert panel if my life depended on it. And it’s not about me wanting to toot my own horn either, tickling as it may be for a few seconds, but about the likes of TheAutomaticEarth.com, or ZeroHedge.com and WolfStreet.com and many others, getting the recognition we deserve. If you ask me, reading the finance blogosphere can save you a lot of money. That’s merely a simple conclusion to draw from the above.

And only now are people starting to figure out that the real economy may not have had any boon from lower oil prices either:

How Falling Gasoline Prices Are Hurting Retail Sales

Aren’t declining gasoline prices supposed to be good news for the economy? They certainly are to households not employed in the energy industry, but it might not seem so from the one of the biggest economic indicators due for release this week. On Wednesday, the Commerce Department is set to report retail sales for December. It’s the most important month of the year for retailers, but economists polled by MarketWatch are expecting a flat reading, and quite a few say a monthly decline wouldn’t be a surprise. [..] After department stores saw a 1% monthly gain in November, the segment may reverse some of that advance in the final month of the year.

This whole idea of Americans running rampant in malls with the cash they saved from lower prices at the pump was always just something somebody smoked. And now we’ll get swamped soon with desperate attempts to make US holiday sales look good, but if I were you, I’d take an idled oiltanker’s worth of salt with all of those attempts.

Still, the Fed, in my view, is set to stick with its narrative of the US economy doing so well they just have to raise interest rates. It’s for the Wall Street banks, don’t you know. That narrative, in this case, is “Ignore transitory volatility in energy prices.” The Fed expects for sufficient mayhem to happen in emerging markets to lift the US, and for enough dollars to ‘come home’ to justify a rate hike that will shake the world economy on its foundations but will leave the US elites relatively unscathed and even provide them with more riches. And if anyone wants to get richer, it’s the rich. They simply think they have it figured out.

Why Falling Oil Prices Won’t Delay Fed Rate Increases /span>

Financial markets have been shaken over the past several weeks by a misguided fear that deflation has imbedded itself not only into the European economy but the U.S. economy as well. Deflation is a serious problem for Europe, because the eurozone is plagued with bad debts and stagnant growth. Prices and wages in the peripheral nations (such as Greece and Spain) must fall still further in relation to Germany’s in order to restore their economies to competitiveness. But that’s not possible if prices and wages are falling in Germany (or even if they are only rising slowly).

In Europe, deflation will extend the economic crisis, but that’s not an issue in the United States, where households, businesses and banks have mostly completed the necessary adjustments to their balance sheets after the great debt boom of the prior decade. The plunge in oil prices will likely push the annual U.S. inflation rate below 1%, further from the Fed target of 2%. [..] Falling oil prices are a temporary phenomenon that shouldn’t alter anyone’s view about the underlying rate of inflation.

On Wednesday, the newly released minutes of the Fed’s latest meeting in December revealed that most members of the FOMC are ready to raise rates this summer even if inflation continues to fall, as long as there’s a reasonable expectation that inflation will eventually drift back to 2%. Fed Chairman Ben Bernanke got a lot of flak in the spring of 2011 when oil prices were rising and annual inflation rates climbed to near 4%, double the Fed’s target.

Bernanke’s critics wanted him to raise interest rates immediately to fight the inflation, but he insisted that the spike was “transitory” and that the Fed wouldn’t respond. Bernanke was right then: Inflation rates drifted lower, just as he predicted. Now the situation is reversed: Oil prices are falling, and critics of the Fed say it should hold off on raising interest rates. The Fed’s policy in both cases is the same: Ignore transitory volatility in energy prices.

There are all these press-op announcements all the time by Fed officials that I think can only be read as setting up a fake discussion between pro and con rate hike, that are meant just for public consumption. The Fed serves it member banks, not the American people, don’t let’s forget that. No matter what happens, they can always issue a majority opinion that oil prices or real estate prices, or anything, are only ‘transitory’, and so their policies should ignore them. US economic numbers look great on the surface, it’s only when you start digging that they don’t.

I see far too much complacency out there when it comes to interest rates, in the same manner that I’ve seen it concerning oil prices. We live in a new world, not a continuation of the old one. That old world died with Fed QE. Just check the price of oil. There have been tectonic shifts since over, let’s say, the holidays, and I wouldn’t wait for the ‘experts’ to catch up with live events. Being 7 weeks or two months late is a lot of time. And they will be late, again. It’s inherent in what they do. And what they represent.

Nov 062014
 
 November 6, 2014  Posted by at 12:16 pm Finance Tagged with: , , , ,  10 Responses »


NPC Ford Motor Co. coal truck, Washington, DC 1925

I think I should come back to what I wrote yesterday in The Revenge Of A Government On Its People, because in my view the essence of that essay deserves far more attention than I see it get, either in reactions to my piece or in the financial press as a whole.

That essence is that, as reported by Reuters yesterday morning, Bank of Japan Governor Haruhiko Kuroda, in a speech at a seminar, stated that last Friday’s surprise QE9 measures were a reaction to one thing, and one only: falling oil prices. This was not announced on Friday, and nobody is addressing it now, though it is a crucial piece of information. First, here’s Reuters:

BOJ’s Kuroda Vows To Hit Price Goal, Stands Ready To Do More

“There’s no change to our policy of trying to achieve 2% inflation at the earliest date possible, with a roughly two-year time horizon in mind ..” [..] “There are no limits to our policy tools, including purchases of Japanese government bonds .. ”

Kuroda said while inflation expectations have been rising as a trend, the BOJ decided to ease to pre-empt risks that slumping oil prices will slow consumer inflation and delay progress in shaking off the public’s deflationary mind-set.

“In order to completely overcome the chronic disease of deflation, you need to take all your medicine. Half-baked medical treatment will only worsen the symptoms ..” While he stressed that Japan’s economy continued to recover moderately, Kuroda said falling commodity prices could be risks to the outlook if they reflected weakness in global growth.

That is to say, plunging oil prices scared Kuroda to such an extent that he couldn’t even wait for their effect to play out. He felt sure about what the effects would be: more deflation, aka less consumer spending. Kuroda was convinced beforehand that the Japanese people would not use their ‘oil savings’ to make alternative purchases, he very strongly suspected they would keep the savings in their pocket. Well, not if he can help it. As I wrote:

You would expect falling oil prices to provide the Japanese, like Americans, with some very welcome, even necessary, financial breathing room. But PM Abe and BoJ’s Kuroda will have none of it. And no matter how you look at it, there’s something at best curious about a central bank that decides to throw ‘free money’ at an economy BECAUSE it sees falling resource prices, which would supposedly make money available already.

Kuroda makes money available to the system because he is afraid, make that convinced, that other available money, from lower gas prices, will not be spent ‘properly’. He doesn’t have faith in consumers’ contribution to inflation/deflation, even if they have more money available. So he launches another step of QE, which he knows will never reach consumers, to keep deflation at bay. There is something very peculiar about all this. Where does QE end up? Here:

BoJ’s Surprise Easing Showers Wealth On Japan’s Top Billionaires

The Bank of Japan’s unexpected stimulus has already made the country’s richest even wealthier, adding more than $3 billion to the four top billionaires’ net worth. Fast Retailing Chairman Tadashi Yanai, Japan’s richest person, saw his fortune grow by about $2 billion in the three trading days since the central bank’s Oct. 31 announcement that sparked a plunge in the yen and a rally in stocks. While billionaires such as Yanai gained, the central bank’s unprecedented asset purchases to support economic growth have yet to show evidence of spreading beyond Japan’s wealthiest people and corporations.

What consumers see of this is that since Kuroda’s QE9 ‘policy’ is aimed at sinking the yen, oil becomes more expensive for the Japanese people. A shrewd way of denying people the benefits of lower oil prices, while at the same time enriching Tokyo’s elites. Kuroda – and PM Abe’s – own stated goals are more important than the people of Japan who are supposed to benefit from these goals. They’ve sworn to raise inflation rates to 2%, and you better not stand in their way. If Japan doesn’t get rid of the duo, and fast, even crazier ideas will be tried out. And the game doesn’t stop there. Europe, too, will be affected:

Kuroda Has Draghi in a Bind as Euro Soars Against Yen

Mario Draghi has something new to worry about as he prepares for tomorrow’s European Central Bank policy meeting: the euro-yen exchange rate. The yen approached a six-year low versus the shared European currency after Bank of Japan Governor Haruhiko Kuroda surprised investors late last week by extending his record stimulus program. Kuroda’s actions jeopardize the weaker euro that analysts say Draghi needs to reflate the economy, heaping pressure on him to come up with a policy response. “Kuroda has thrown down the gauntlet to Draghi,” Robert Rennie at Westpac Banking Corp. said: “Whether Draghi will, or can, accept the challenge remains to be seen.”

The question then becomes if Draghi et al are pondering the same line of thought that Kuroda does. Deflation is a major issue in Europe already. Lower oil prices can be as much of a threat there as in Japan. My first idea would be that Europeans are more likely to spend the cheap oil savings into the economy than the Japanese are, but on the other hand there’s so much poverty all over the old continent that many people won’t have much at all to spend.

In the run-up to today’s ECB meetings there’s been lots of criticism of Draghi ‘going it alone’ and communicating very poorly with eurozone members’ central bankers. And he seems to be on course for his perhaps most serious confrontations:

Mario Draghi’s Efforts To Save EMU Have Hit The Berlin Wall

Mario Draghi has finally overplayed his hand. He tried to bounce the European Central Bank into €1 trillion of stimulus without the acquiescence of Europe’s creditor bloc or the political assent of Germany. The counter-attack is in full swing. The Frankfurter Allgemeine talks of a “palace coup”, the German boulevard press of a “Putsch”. [..] .. a blizzard of leaks points to an ugly showdown between Mr Draghi and Bundesbank chief Jens Weidmann. They are at daggers drawn. Mr Draghi is accused of withholding key documents from the ECB’s two German members, lest they use them in their guerrilla campaign to head off quantitative easing.

[..] We now learn from a Reuters report that Mr Draghi defied an explicit order from the governing council when he seemingly promised to boost the ECB’s balance sheet by €1 trillion. He also jumped the gun with a speech in Jackson Hole, giving the very strong impression that the ECB was alarmed by the collapse of the so-called five-year/five-year swap rate and would therefore respond with overpowering force. He had no clearance for this. [..]

The North is competitive. The South is 20pc overvalued, caught in a debt-deflation vice. Data from the IMF show that Germany’s net foreign credit position (NIIP) has risen from 34pc to 48pc of GDP since 2009, Holland’s from 17pc to 46pc. The net debtors are sinking into deeper trouble, France from -9pc to -17pc, Italy from -27pc to -30pc and Spain from -94pc to -98pc.

As I said, there’s neither love nor trust lost between the Japanese government/central bank and the people of Japan. And though Abe and Kuroda understand the link between deflation and consumer spending much better than most western ‘leaders’, what they don’t – want to – understand is that there is no magic wand to boost spending, other than raising wages. But wages have been falling for 20 years in Japan, and companies have n incentive to raise them in the present environment.

What will happen if oil and gas prices fall further? What is other commodity prices also start falling? What will Kuroda come up with then? Will he tell Abe to raise taxes? The 2nd part of the sales tax rise, of which part 1 hammered the economy after April 1, is already bitterly discussed. Other tax hikes seem even less plausible.

Japan is slowballing its way into a dead end street. Europe may be doing the same, just at an earlier stage, but picking up speed. While the US and UK are in a detour to that same dead end, blissfully unaware that no matter what you spend, you still end up in the same place, just poorer. Whoever can get his citizens to borrow most will seem strongest the longest, and then still break down.

But that’s tomorrow’s tale. Kuroda’s statement that QE9 (or whatever one may label it) was the direct, even pre-emptive, reaction to plummeting global oil prices, should give us lots of things to ponder. What will happen to European in/deflation numbers? They already look ugly, and where additional spending should come from is entirely unclear. What about the US? How far is it still removed from a deflationary threat? And what will it do when that threat intensifies, for instance when commodities’ prices sink?

Kuroda has thrown the first stone, and he’s named it. Central bank policies are no longer about the general state of an economy, or about jobs numbers, they’re about the threat of specific price levels. Now, I think that unlike the western press, Yellen and Draghi and other central bankers are acutely aware of what Kuroda stated yesterday. But perhaps I give them too much credit.

Oct 062014
 
 October 6, 2014  Posted by at 10:45 am Finance Tagged with: , , , , ,  Comments Off on Debt Rattle October 6 2014


Marjory Collins New York Times linotype operatots Sep 1942

Surging Dollar May Be Triple Whammy For US Earnings (Reuters)
Can The US Dollar Save The World? (CNBC)
Betting On Massive Central Bank Puts (CNBC)
The $100 Trillion Global Bond Market Is Much More Fragile Than You Think (AP)
Tumbling Oil Prices Punish Hedge Funds Betting on Gains (Bloomberg)
The Surprising Impact Of Plunging Oil Prices (CNBC)
S&P 500 Companies Spend Almost All Profits on Buybacks, Payouts (Bloomberg)
German Orders Post Biggest Drop Since Start Of 2009 In August (Reuters)
Faltering Demand Weighs On Eurozone Business Growth In September (Reuters)
EU Prepares to Reject France’s 2015 Budget, Set Up Clash Over Deficit (WSJ)
Have The Aussie Dollar Bears Won The Argument? (CNBC)
Your Winter Heating Bills: It Won’t Be Pretty (CNBC)
RIP Abenomics: ‘This Week Japan Will State It Is In Recession’ (Zero Hedge)
Catalan Standoff to Hit Spanish Economy, Whoever Wins (Bloomberg)
WWF International Accused Of ‘Selling Its Soul’ To Corporations (Observer)
Economists Are Blind to the Limits of Growth (Bloomberg)
The New Washington Consensus – Time To Fight Rising Inequality (Guardian)
Carmen Segarra, The Whistleblower Of Wall Street (Guardian)
‘In 1976 I Discovered Ebola, Now I Fear An Unimaginable Tragedy’ (Observer)
Ebola Is In America – And, Finally, Within Range Of Big Pharma (Observer)

You better move to a domestic industry.

Surging Dollar May Be Triple Whammy For US Earnings (Reuters)

The suddenly unstoppable U.S. dollar is posing a triple threat to American companies’ profits: driving up the costs of doing business overseas, suppressing the value of non-U.S. sales and, perhaps most worryingly, signaling weak international demand. The dollar has been on a tear, with an index tracking it against six other major currencies notching roughly an 8% gain since the end of June. Few analysts see its breakout performance stalling out anytime soon since the U.S. economy stands on much firmer footing than most others around the world, Europe’s in particular. For companies in the benchmark S&P 500, that’s a big headwind because so many are multinationals, and as a group they derive almost half of their revenue from international markets. “You will get some companies that have failed to meet expectations based on the weakness we’re seeing overseas, so it is going to be a source of disappointment,” said Carmine Grigoli, chief investment strategist at Mizuho Securities in New York.

Moreover, that weakness, especially in Europe, “is going to be critical here,” he said. “It’s an important component of (U.S.) earnings going forward.” And while investors and analysts have begun to figure in the negative effects of a fast-strengthening dollar with regard to the approaching third-quarter reporting period, the risk to the fourth quarter and 2015 remains largely unaccounted for. For instance, third-quarter profit-growth expectations for S&P 500 companies have fallen back to 6.4% from about 11% two months ago, Thomson Reuters data showed. By contrast, the fourth-quarter growth forecast is down just slightly, to 11.1% from a July 1 forecast of 12.0%. And profit-growth estimates for 2015 have actually increased in that time from 11.5% to 12.4%. “If you try and extrapolate out to the fourth quarter and how much that currency effect is going to be, your guidance is probably going to come down for a good slug of the multinationals on the S&P,” said Art Hogan, chief market strategist at Wunderlich Securities in New York.

Read more …

No, but it will save the banks. Again.

Can The US Dollar Save The World? (CNBC)

The U.S. dollar rally has much further to run, and could help out countries dealing with excessively low inflation, a report from HSBC argues. The dollar index, which measures the strength of the greenback against the major currencies, has risen near 7% this year, amid positive economic data out of the U.S. and increased expectations that as the U.S. Federal Reserve ends its massive bond-buying program, it will hike interest rates. But the rally has only just begun, analysts at HSBC said in a note published this week, who argue the greenback should rein supreme as the world’s strongest currency both this year and next. “The current U.S. dollar rally is unlike any we have seen before…[the rally] so far has only been roughly 5% yet history shows a 20% rise would not be implausible,” the analysts said.

And the dollar’s relative strength could be the perfect antidote for other global economies, such as the euro zone, struggling to fend off the threat of deflation, said HSBC. The single currency union this week saw its annual inflation rate fall further below the European Central Bank’s target of 2% in September to 0.3%. The idea is that if U.S. goods start to look too expensive due to the stronger dollar, buyers of those goods will start to look at alternatives nearer home, therefore increasing demand and consequently leading to a rise in prices. “While the scale of a U.S. dollar rally required to bring inflation all the way back to target in the likes of the euro zone would likely be unpalatable to U.S. policymakers, U.S. dollar strength will still help stave off the deflation threat,” added the HSBC analysts. “The U.S. dollar on its own may not be able to save the world but it will certainly buy these economies time,” they added.

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How much longer will Draghi be able to keep his post after his plans are shot down?

Betting On Massive Central Bank Puts (CNBC)

Here is a bet based on the latest episode in a long-running policy dispute. Last Thursday (October 2), the meeting of the governing council of the European Central Bank (ECB) in the splendors of the Capodimonte (“top of the hill”) Palace in Naples, Italy, reaffirmed with overwhelming majority the zero (0.05%) interest rate policy and a program of security purchases that could expand the bank’s balance sheet by an estimated €1 trillion. Policy deliberations at this regal venue were greeted by some 2,000 protesters clashing with police and braving waves of teargas in a city (Naples) whose unemployment rate of 25% is exactly double Italy’s average, and whose per capita economic output is more than 30% below that of the country as a whole. True to form, Germany continued to strongly oppose this ECB policy. The German member of the ECB’s governing council maintains that the euro area banks don’t need virtually free loanable funds and security purchases that will, in his view, again lead to banks’ mischief requiring bailouts with taxpayers’ money.

His position was supported by his Austrian colleague (16:2, in case you want to keep the score). Who will win? Can Germany again bull its way through this one as it did with the widely condemned austerity policies? (Hint: if you look at the euro’s exchange rate, you will see that markets have already voted.) Staying within the policy mandate, the vast majority of the ECB’s governing council is inclined to look for additional measures that would restore the transmission mechanism (i.e., the financial intermediation system) between easy credit conditions and real economy. The ECB’s purchases of asset-backed securities are aiming to achieve that, because they are designed to provide incentives to the banking system to significantly expand lending to euro area businesses and households.

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Bond volatility is set to cause great damage. What does ‘fixed income’ mean anymore?

The $100 Trillion Global Bond Market Is Much More Fragile Than You Think (AP)

A bottleneck is building in the global market for bonds. Main Street investors have poured a trillion dollars into bonds since the financial crisis, and helped send prices soaring. As fund managers and regulators fret about an inevitable sell-off, the bigger fear is that when people go to unload, there won’t be anyone to buy. Too many funds own the same bonds, making them difficult to sell in a sudden downturn. On top of that, the banks that used to bring bond buyers and sellers together have pulled back from the role. Investors looking to sell would be slow to find buyers, spreading fear through the $100 trillion global bond market and sending prices tumbling. It’s a situation known as “liquidity risk” and some bond pros are scrambling to prepare for it. Portfolio managers are hoarding cash. BlackRock, the world’s largest fund manager, is suggesting regulators consider new fees for investors pulling out of funds. Apollo Management, famous for profiting from a bond collapse 25 years ago, is launching a fund to bet against bonds.

Mohamed El-Erian, former CEO of bond fund giant Pimco, thinks ordinary investors are too blase about the flaws in the trading system. Investors today are like homeowners who only discover there’s a clog under the sink when it’s too late and they’re staring at a mess. “It’s only when you try to put a lot of things through the pipes that you realize” you’ve got a problem, says El-Erian, now chief economic adviser to global insurer Allianz. “You get an enormous backup.” What’s at risk is more than money in retirement accounts. Big investors often borrow when buying bonds and so losses can be magnified. Trillions of dollars of bets using derivatives ride on bonds, too. A small fall in prices could lead to losses that reverberate throughout the financial system. “The market is so tightly wound,” says JPMorgan’s William Eigen, head of its Strategic Income Opportunities fund, who has put 63% of his portfolio in cash. “There’s no place to hide.” In such a fragile situation, even news with no bearing on bond fundamentals can trigger losses.

[..] Since the financial crisis, the Federal Reserve’s efforts to hold down borrowing costs for businesses and consumers have pushed interest payments on many bonds to record lows. That’s set off a rush by investors into riskier ones offering higher payments. The buying has pushed up prices, and added to the risk. Since the start of 2009, funds invested in junk bonds have returned an average 14% each year and municipal bond funds 6%, according to the Investment Company Institute, double their averages in the prior six years. Even seemingly “safe” government debt looks dangerous now, according to a September report by Deutsche Bank. Many bonds sold by wealthy countries like France, Australia and Britain recently are so high-priced you’d have to go back centuries to find more expensive ones, the report notes. And since corporate bonds are priced off government ones, much of that market is also at risk for a fall.

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The energy casino.

Tumbling Oil Prices Punish Hedge Funds Betting on Gains (Bloomberg)

Hedge funds increased bets on rising oil prices just before crude futures tumbled to a 17-month low on signs that global supply is outstripping demand. Prices capped the biggest weekly decline in two months after money managers boosted net-long positions in West Texas Intermediate by 4.1% in the seven days ended Sept. 30. Long positions climbed 2.7%, U.S. Commodity Futures Trading Commission data show. WTI sank below $90 on Oct. 2 after Saudi Arabia, the world’s largest oil exporter, cut its prices to Asia. U.S. production is the highest since 1986, while OPEC output expanded to the most in a year. The International Energy Agency last month reduced its projections for demand growth this year and in 2015, citing a weakening economic outlook.

“Oil isn’t looking like a good bet anymore,” Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts, said by phone Oct. 3. “Production continues to rise, flooding the market, while on a good day the demand picture looks anemic.” Crude declined 0.4% to $91.16 a barrel on the New York Mercantile Exchange in the period covered by the CFTC report. Futures were little changed in today’s electronic trading after sliding $1.27 to close at $89.74 on Oct. 3, the lowest settlement since April 2013. Saudi Arabia reduced the price for Arab Light to Asia by $1 a barrel to a discount of $1.05 to the average of Oman and Dubai crude, the lowest since December 2008. Official selling prices are regional adjustments Aramco makes to price formulas to compete against oil from other countries.

Production by the 12-member Organization of Petroleum Exporting Countries rose to 30.935 million barrels a day in September, the highest since August 2013, a Bloomberg survey of oil companies, producers and analysts showed. U.S. crude output reached 8.867 million barrels a day in the week ended Sept. 19, the most since March 1986. Production will climb to 9.53 million in 2015, a 45-year high, the Energy Information Administration said in its monthly Short-Term Energy Outlook on Sept. 9. “Earlier this week there was a debate over whether prices had reached a bottom,” John Kilduff, a partner at Again Capital, a New York-based hedge fund that focuses on energy, said by phone Oct. 3. “Investors took a chance and gathered length. Sometimes when you put your toe in the water it gets snapped off.”

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But who understands what’s happening?

The Surprising Impact Of Plunging Oil Prices (CNBC)

Sliding crude oil prices are giving consumers relief at the pump, which is bound to provide a fillip for consumer spending. But whether that is good news for the stock market is another story. Crude oil futures have been demolished over the last four months, falling some 17% from their June highs, and settling at a 17-month low on Friday. And as oil prices have fallen, consumer gasoline prices have dropped to a nationwide average of $3.32 a gallon, the lowest since February, according to AAA. The motor club group also notes that in 26 states, gas can be found for cheaper than $3.00 per gallon. And AAA predicts that gas prices will continue to fall in October. Given the massive role gasoline plays in American life (in a February 2013 report, the U.S. Energy Information Administration estimated that Americans spend about 4% of their pre-tax income on gasoline) the drop in gas prices is naturally expected to have an impact on consumer spending.

“The per capita usage is about 400 gallons of gas used per year for each person in this country. That’s a lot of money going back into the economy when you have cheaper gas,” said Jim Iuorio of TJM Institutional Services. “Gasoline is down noticeably, and I know it’s noticeable, because I noticed it when I filled up my car,” remarked Jonathan Golub, chief U.S. market strategist at RBC Capital Markets. “That is a big deal, and it immediately hits consumption.” But that doesn’t necessarily mean it’s time to buy stocks. Golub notes that between oil stocks, the materials sector, and industrial and utilities names in commodity-related businesses, “17 or 18% of the S&P is a loser with falling oil prices.” rom a market perspective, then, the benefit to the consumer is “100% offset” by losses in oil-exposed names, making it a mere “rotation issue.” In other words, the market as a whole shouldn’t be expected to rise or sink on a big drop in energy prices, but those oily names should sink, and consumer-exposed names should get a boost.

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The perversion of ultra-low rates and central banks buying and pushing up stocks. There will be a huge price to pay.

S&P 500 Companies Spend Almost All Profits on Buybacks, Payouts (Bloomberg)

Companies in the Standard & Poor’s 500 Index really love their shareholders. Maybe too much. They’re poised to spend $914 billion on share buybacks and dividends this year, or about 95% of earnings, data compiled by Bloomberg and S&P Dow Jones Indices show. Money returned to stock owners exceeded profits in the first quarter and may again in the third. The proportion of cash flow used for repurchases has almost doubled over the last decade while it’s slipped for capital investments, according to Jonathan Glionna, head of U.S. equity strategy research at Barclays. Buybacks have helped fuel one of the strongest rallies of the past 50 years as stocks with the most repurchases gained more than 300% since March 2009.

Now, with returns slowing, investors say executives risk snuffing out the bull market unless they start plowing money into their businesses. “You can only go so far with financial engineering before you actually have to have a business with real growth,” Chris Bouffard, chief investment officer who oversees $9 billion at Mutual Fund Store, said. “Companies have done about all that they can in terms of maximizing the ability to do those buybacks.” S&P 500 constituents will probably say earnings rose 4.9% in the third quarter when they begin reporting results this week, according to more than 10,000 analyst estimates compiled by Bloomberg. Alcoa, Yum! Brands. and Monsanto are among nine companies scheduled to announce financial details.

While the ratio to earnings shows how buybacks and dividends compare to past economic expansions, it doesn’t indicate companies are struggling to fund them. Five years of profit growth have left S&P 500 constituents with $3.59 trillion in cash and marketable securities and they’ve raised almost $1.28 trillion in 2014 through bond sales, headed for a record. “Buybacks are something corporations can take control of and at low borrowing costs, they’re a viable option,”Randy Bateman, chief investment officer of Huntington Asset Advisors, which manages about $2.8 billion, said by phone on Oct. 1. At the same time, he said, “If management can’t unearth future opportunities for growth, as a shareholder, I lose confidence.”

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It’s called ‘recession’.

German Orders Post Biggest Drop Since Start Of 2009 In August (Reuters)

German industrial orders posted their biggest drop in August since the height of the global financial crisis in 2009 due to the subdued euro zone economy and uncertainty caused by crises abroad, data from the Economy Ministry showed on Monday. Contracts plunged by 5.7% on the month, undershooting by far the Reuters consensus forecast for a 2.5% drop. Bookings from the euro zone slumped by 5.7% while domestic orders decreased by 2.0%. The data for July was revised up to a rise of 4.9% from a previously reported gain of 4.6%.

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Growth? We’re still talking growth in Europe?

Faltering Demand Weighs On Eurozone Business Growth In September (Reuters)

Euro zone business grew at its slowest rate this year in September on tumbling demand, surveys showed on Friday, as the bloc struggles to add momentum to its fragile economic recovery. Germany’s private sector expanded at a robust pace last month, pointing to an economic rebound between July-September after Europe’s biggest economy unexpectedly shrank the quarter before. However, business growth in the euro zone’s number two and three economies – France and Italy – contracted, suggesting stagnation or worse there could continue. Despite firms cutting prices more deeply, the common thread across most of the surveys in the euro zone was that of weak demand, with businesses and consumers lacking the confidence to spend in economies plagued by high unemployment and years of austerity.

This mirrors order book conditions for factories in much of Asia as well. The data are likely to disappoint policymakers yet again, a day after the European Central Bank outlined its plans to buy securitised debt in a bid to revive lending and boost demand. “The PMIs reflect a familiar dangerous trend of low demand and weak producer pricing power which reinforces concerns on the effectiveness of the ECB’s stimulus,” said Lena Komileva, chief economist at G+ Economics in London. “The ECB does not have much room for error with the starting point of close to zero rate of inflation and growth.”

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“What people underestimate is that what’s at stake is the entire credibility of the rules …”

EU Prepares to Reject France’s 2015 Budget, Set Up Clash Over Deficit (WSJ)

The European Union is preparing to reject France’s 2015 budget, according to European officials, setting up a clash that would be the biggest test yet of new powers for Brussels that were designed to prevent a repeat of the eurozone’s sovereign-debt crisis. French Finance Minister Michel Sapin said last month that his country would run a budget deficit of 4.3% of gross domestic product next year—far from the 3% deficit it had previously pledged. Stripping out the effects of the weak economy, the government’s planned cost cuts would amount to just 0.2% of GDP, falling short of cuts worth 0.8% that it had agreed upon with Brussels.

That could put France’s budget in “serious noncompliance” with tightened EU deficit rules, likely leading the commission to send it back to Paris for revisions, European officials said. So far, the French government has said it won’t take any extra belt-tightening measures beyond what it proposed in the spring, indicating it is ready to risk a public clash with Brussels. “People are ready to let the big boys in Brussels reject the budget,” a European official said. The conflict with France could be joined by a budget fight with Italy, which has also said that it will miss budget targets. Italy has more leeway because its past budgets have run lower deficits than France’s, but a senior EU official called a decision about whether to confront Italy “borderline.”

The credibility of Brussels’ new powers threatens to be seriously undermined if big countries such as France and Italy are able to flout the new rules—which give the European Commission the right to demand changes to proposed budgets before they are presented to national parliaments. It would signal the tough budget regime can only be imposed on the eurozone’s smaller economies, such as Greece and Portugal. Some European officials have drawn parallels with the way France and Germany ignored deficit limits a decade ago without consequences, a step that they believe fatally weakened budget discipline in the bloc. “What people underestimate is that what’s at stake is the entire credibility of the rules,” one of the officials said.

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Currencies around the world are going through a major reset, courtesy of the buck. Many will have a hard time with the transition, few are prepared.

Have The Aussie Dollar Bears Won The Argument? (CNBC)

Despite a long downtrend in commodity prices, the Australian dollar has managed to keep a loyal set of diehard fans among currency traders and analysts — but now some of them are throwing in the towel. “We’ve been constructive on Australian dollar throughout 2014, consistently forecasting it to be the relative G-10 outperformer after the U.S. dollar,” Geoffrey Kendrick and Vandit Shah, analysts at Morgan Stanley, said in a note last week. But since the payrolls data release last month, the bank’s bullish assumptions have been called into question. Morgan Stanley cut its forecast for the Australian dollar to $0.84 by the end of 2014 and $0.76 by the end of 2015, a sharp drop from its previous expectation of $0.95 by the end of this year and $0.88 by the end of next. A number of analysts have long been calling for the Aussie to fall as low as 80 cents – a level it hasn’t seen since 2009 – as economic fundamentals come back into play, and the central bank continues to talk the currency lower.

Over the past year, Reserve Bank of Australia Governor Glenn Stevens repeatedly voiced his opinion that he would like to see the Aussie at 85 cents against the U.S. dollar. The Australian dollar is fetching $0.8655 in early Monday trade, down a bit more than 7% since the beginning of September, touching its lowest levels since January. Morgan Stanley’s bullish call had been premised on the assumption that non-resident buyers of Australian government debt and Japanese buyers of Australian-dollar assets would remain keen, as well as an expectation that the country’s terms of trade would stabilize. But with U.S. yields starting to rise again and increased volatility in markets, Australian government bonds became less attractive, Morgan Stanley said adding that it expected the Aussie dollar to depreciate further “especially with G-10 foreign exchange becoming increasingly sensitive to moves in the belly of the U.S. curve.”

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There we go again.

Your Winter Heating Bills: It Won’t Be Pretty (CNBC)

The ongoing U.S. energy boom may be driving gasoline prices lower, but homeowners who heat with natural gas may be in for another winter of sticker shock. “It is now looking almost certain that stocks of natural gas in the U.S. will be significantly lower than the five-year average” when temperatures begin falling in November,” said Tom Pugh, commodities economist for Capital Economics. “Another cold winter, combined with lower stocks than last year, could lead to even higher price spikes than last year.” Thanks to big surges in seasonal demand, natural gas producers are busy this time of year building up supplies. But despite record production, natural gas storage levels are still below their five-year range heading into the winter heating season. The latest data from the Energy Department shows that producers are playing catch-up, with storage levels more than 10% lower than last year’s levels.

That means homeowners who heat with gas could see the same price spikes they saw last winter during cold snaps. Despite mild weather so far this fall, the gas storage shortfall already has helped nudge natural gas higher, well before households begin nudging up the thermostat despite mild temperatures. Last winter’s record demand for natural gas included a single day in January that sent demand to nearly double the average daily consumption, according to the American Gas Association. That pushed the average bill for gas customers up 10% over the year before—mostly due to gas furnaces working overtime, the AGA said. But the cold weather demand surge also produced a big jump in prices. The average weekly spot price peaked in February more than 80% higher than the end of November.

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In reality, Abenomics died before it was conceived.

RIP Abenomics: ‘This Week Japan Will State It Is In Recession’ (Zero Hedge)

We have been waiting for this particular bolded sentence ever since we predicted it would take place back in December 2012 when a bunch of Keynesians, a disgraced former/current prime minister with a diarrhea problem and, of course, the Goldman Sachs’ corner suite, first unleashed Abenomics. From Goldman’s Naohiko Baba, previewing this week’s key Japanese economic events

The Cabinet Office makes an assessment of the state of the economy based on the trend in the coincident CI, using a set of objective criteria. The August coincident CI is set to print negative mom. In this case, the Cabinet Office’s economic assessment will likely shift downward to “signaling a possible turning point” from the current level of “weakening”. According to the Cabinet Office, such a change in assessment provisionally indicates a likelihood that the economy has already fallen into recession. This is effectively akin to the government acknowledging that the economy is in recession.

And because every Keynesian lunacy has to end some time, RIP Abenomics: December 2012 – October 2014.

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For the sake of all of Europe, Rajoy must be careful not to incite violence.

Catalan Standoff to Hit Spanish Economy, Whoever Wins (Bloomberg)

Spanish Prime Minister Mariano Rajoy is battling to keep his country together, facing down Catalan separatists. Even if he wins, the standoff risks weakening the economy that the two sides are fighting over. Catalan President Artur Mas, backed by about two-thirds of the region’s lawmakers, is defying orders from Spain’s highest court and pressing ahead with a vote on independence on Nov. 9. The wrangling last week pushed the gap between Spanish and German bond yields to the widest since Scotland voted to remain in the U.K. “Investors are pricing the risk of political instability in Catalonia,” said Francesco Marani, a fixed-income trader at Auriga Global Investors SA in Madrid, who trades government and regional debt. “The independence issue has already been hurting the Spanish economy, and it’s not over.” Spain’s economy is losing momentum amid a slowdown in its European trading partners.

Uncertainty over the future of Catalonia, whose contribution to the Spanish economy is twice that of Scotland’s to the U.K., risks undermining investment as well as pushing up borrowing costs and distracting politicians from tackling the 24% jobless rate. “Boosting growth requires an ambitious policy mix as political tensions over Catalonia may last for months, maybe till the next general elections, weighing on confidence and investment,” said Frederik Ducrozet, an economist at Credit Agricole CIB in Paris. Rajoy’s four-year mandate finishes at the end of next year. “Now is where the uncertainty begins,” Justin Knight, a London-based European rates strategist at UBS said in a telephone interview after the Constitutional Court declared the vote illegal last week. Despite that ruling, a poll commissioned by the Catalan regional government and published on Oct. 3 showed 71% of Catalans want the independence vote to be held next month.

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A big problem with most of the big charities: “On the one hand it protects the forest; on the other it helps corporations lay claim to land not previously in their grasp.”

WWF International Accused Of ‘Selling Its Soul’ To Corporations (Observer)

WWF International, the world’s largest conservation group, has been accused of “selling its soul” by forging alliances with powerful businesses which destroy nature and use the WWF brand to “greenwash” their operations.The allegations are made in an explosive book previously barred from Britain. The Silence of the Pandas became a German bestseller in 2012 but, following a series of injunctions and court cases, it has not been published until now in English. Revised and renamed Pandaleaks, it will be out next week. Its author, Wilfried Huismann, says the Geneva-based WWF International has received millions of dollars from its links with governments and business.

Global corporations such as Coca-Cola, Shell, Monsanto, HSBC, Cargill, BP, Alcoa and Marine Harvest have all benefited from the group’s green image only to carry on their businesses as usual. Huismann argues that by setting up “round tables” of industrialists on strategic commodities such as palm oil, timber, sugar, soy, biofuels and cocoa, WWF International has become a political power that is too close to industry and in danger of becoming reliant on corporate money. “WWF is a willing service provider to the giants of the food and energy sectors, supplying industry with a green, progressive image … On the one hand it protects the forest; on the other it helps corporations lay claim to land not previously in their grasp.

WWF helps sell the idea of voluntary resettlement to indigenous peoples,” says Huismann. WWF’s conservation philosophy has changed considerably in 50 years, but until recently it was widely thought that people and wildlife could not live together, which led to the group being accused of complicity in evictions of indigenous peoples from Indian and African forests. The book also argues that WWF, which was set up by Prince Philip and Prince Bernhart of the Netherlands in 1961, runs an elite club of 1,001 of the richest people in the world, whose names are not revealed. Industrialists, philanthropists and ultra-conservative, upper-class naturalists, they are said to make up an “old boys’ network with influence in the corridors of global and corporate and policy-making power”.

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Rehash of 100 different Automatic Earth articles.

Economists Are Blind to the Limits of Growth (Bloomberg)

For all their calculating nature, economists are surprisingly optimistic about humanity’s ability to have as much prosperity as it wants. Express concern about the negative impact of excessive growth on our planet’s ecosystems, and many will simply chuckle and say you don’t understand what growth means. Nobel laureate Paul Krugman, for example, chides natural scientists for thinking of growth as a “crude, physical thing, a matter simply of producing more stuff.” They fail to appreciate, he suggests, that growth is about innovation and deciding which technologies and resources to use. Allow me to explain why I am one of those scientists who are preoccupied with the physical. Economists are correct in saying that growth doesn’t necessarily require more pollution, more carbon pumped into the atmosphere or more deforestation, even though we’re getting all of the above today. Humans can learn, and we might figure out how to grow differently in the future, separating the benefits from the environmental costs. There’s just one crucial exception: energy.

Growth inevitably entails doing more stuff of one kind or another, whether it’s manufacturing things or transporting people or feeding electricity to Facebook server farms or providing legal services. All this activity requires energy. We are getting more efficient in using it: The available data suggest that the U.S. uses about half as much per dollar of economic output as it did 30 years ago. Still, the total amount of energy we consume increases every year. Data from more than 200 nations from 1980 to 2003 fit a consistent pattern: On average, energy use increases about 70% every time economic output doubles. This is consistent with other things we know from biology. Bigger organisms as a rule use energy more efficiently than small ones do, yet they use more energy overall. The same goes for cities. Efficiencies of scale are never powerful enough to make bigger things use less energy. I have yet to see an economist present a coherent argument as to how humans will somehow break free from such physical constraints.

Standard economics doesn’t even discuss how energy is tied into growth, which it sees as the outcome of interactions between capital and labor. Why does using ever more energy matter? For one, it feeds directly into all the bad things we’re trying to stop doing – polluting, destroying forests, wiping out habitats, covering the planet with an ever-denser network of roads. Our energy use – either by design or by accident – always ends up changing the environment in one way or another. Then there’s the issue of climate change. Even if by some miracle we act to fix carbon-dioxide levels soon, that won’t actually be a lasting solution. If energy consumption follows the historical trend, by 2150 or so the waste heat alone will warm the Earth as much as carbon dioxide is doing now. We’ll have yet another global warming problem. I’m not sure how economics broke free from the laws of physics and biology. Maybe we’ll eventually leave the planet and live among the stars, escaping the limits of our Earth. Those dreams aside, the physical limits to growth apply as much to us as they would to a colony of bacteria expanding into a jar of sugar water.

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The wrong people for the right cause. Watch out.

The New Washington Consensus – Time To Fight Rising Inequality (Guardian)

The theme of this week’s annual meetings of the International Monetary Fund and the World Bank is shared prosperity. In years gone by, the Washington consensus was all about opening up markets and cutting public spending. The new Washington consensus is the need to tackle inequality. Everybody is getting in on the act. Justin Welby, the archbishop of Canterbury, will share a platform with Christine Lagarde, the head of the IMF, and Mark Carney, the governor of the Bank of England, next weekend to discuss how to make global capitalism more inclusive. The World Economic Forum – the body that organises the Davos shindig – thinks it can go one better. It is angling to get the pope along for its annual meeting in January. No question, 2014 has been the year when the need to tackle inequality has gone mainstream. Oxfam kicked it off with the report showing that 85 billionaires owned as much wealth as half the world’s population.

Thomas Piketty’s Capital in the 21st Century provided some intellectual underpinning, with its thesis that a rawer, 19th-century version of capitalism was reasserting itself. It’s not hard to see why both struck a chord: a tepid global economy, high unemployment, stagnant living standards and trickle up to those at the top have created an environment of sullen unease. No political speech these days is complete without a reference to the need to ensure that a rising tide lifts all boats. But talk is one thing, action another. How does Lagarde’s pledge to fight inequality square with the wage cuts and austerity the IMF has imposed on Greece and Portugal as part of its bailout packages? Is there not a disparity between the commitment of the World Bank president, Jim Kim, to raise the incomes of the bottom 40% of the world’s population with his organisation’s Doing Business report, an annual study that ranks countries by the progress they are making in cutting corporate taxes, keeping minimum wages at low levels and ensuring that paid holidays and sick pay are not excessive?

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“If wealthy, guilty people have to remain free to make money, and the living standards of working people have to decline, so be it. It’s just livelihoods on the line.”

Carmen Segarra, The Whistleblower Of Wall Street (Guardian)

The key implications from this exposé are twofold. First, it shows who’s really running the country. The Fed is supposed to be working for the people, not the banks. Goldman is a private institution rescued by public money that has paid billions in settlements after selling dubious products that contributed to a major financial crisis. Segarra is told to show some humility; in reality that is an attribute Goldman would do well to acquire. Instead its chief executive still believes it is doing “God’s work”. So the state genuflects before capital, with those sole task it is to enforce the law deferring to those whose sole task is to make money.

Second, it indicates that America has apparently learned nothing from the financial crisis. As recently as 2012, a Goldman employee wrote on the day he left the company: “I don’t know of any illegal behaviour, but will people push the envelope and pitch lucrative and complicated products to clients even if they are not the simplest investments or the ones most directly aligned with the client’s goals? Absolutely. Every day, in fact.” When terrorists strike, we are told nothing will ever be the same. The full power of the state is marshalled to prevent a recurrence. If innocent people have to go to jail and basic human rights are violated, so be it. Lives are on the line. But when banks defraud the country into crisis, precious little changes. The bonuses keep coming. Profits keep rising. Regulation remains weak. If wealthy, guilty people have to remain free to make money, and the living standards of working people have to decline, so be it. It’s just livelihoods on the line.

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Very interesting interview.

‘In 1976 I Discovered Ebola, Now I Fear An Unimaginable Tragedy’ (Observer)

Professor Piot, as a young scientist in Antwerp, you were part of the team that discovered the Ebola virus in 1976. How did it happen?

I still remember exactly. One day in September, a pilot from Sabena Airlines brought us a shiny blue Thermos and a letter from a doctor in Kinshasa in what was then Zaire. In the Thermos, he wrote, there was a blood sample from a Belgian nun who had recently fallen ill from a mysterious sickness in Yambuku, a remote village in the northern part of the country. He asked us to test the sample for yellow fever.

These days, Ebola may only be researched in high-security laboratories. How did you protect yourself back then?

We had no idea how dangerous the virus was. And there were no high-security labs in Belgium. We just wore our white lab coats and protective gloves. When we opened the Thermos, the ice inside had largely melted and one of the vials had broken. Blood and glass shards were floating in the ice water. We fished the other, intact, test tube out of the slop and began examining the blood for pathogens, using the methods that were standard at the time.

But the yellow fever virus apparently had nothing to do with the nun’s illness.

No. And the tests for Lassa fever and typhoid were also negative. What, then, could it be? Our hopes were dependent on being able to isolate the virus from the sample. To do so, we injected it into mice and other lab animals. At first nothing happened for several days. We thought that perhaps the pathogen had been damaged from insufficient refrigeration in the Thermos. But then one animal after the next began to die. We began to realise that the sample contained something quite deadly.

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And that’s supposed to be a good thing.

Ebola Is In America – And, Finally, Within Range Of Big Pharma (Observer)

As the Ebola epidemic continues to rage in west Africa, with more than 3,000 dead and infections doubling every few weeks, the first confirmed case in the US last week stepped up global fears over the rapid spread of the incurable virus. But behind the gruesome headlines, the scale of the outbreak has been raising hopes that it could focus minds at the world’s biggest pharmaceutical groups, boosting research on other devastating tropical diseases that have been neglected for years by the drugs makers. There are already an estimated 12 million Americans suffering from life-threatening or debilitating infections such as Chagas disease, dengue fever or West Nile virus.

“Ebola helps us realise we are a global planet: the health of one region affects the rest of us,” says Julie Jacobson, senior programme officer for infectious diseases at the Bill and Melinda Gates Foundation. Mike Turner, head of infection and immunobiology at the Wellcome Trust, says that “almost certainly, Ebola will increase the visibility” of tropical diseases. The worst Ebola outbreak in history has infected more than 6,500 people, mainly in Guinea, Liberia and Sierra Leone. The World Health Organisation (WHO) has declared the outbreak an international health emergency, warning that the deadly virus could infect up to 20,000 people by November. When last week a man was hospitalised with the disease in Dallas, Texas, it was the first case diagnosed outside Africa.

GlaxoSmithKline has started making 10,000 doses of its experimental Ebola vaccine – the most advanced product around – and could supply it to the WHO for an emergency vaccination programme early next year, assuming clinical trials go well. The vaccine has been rushed into tests on healthy human volunteers in the UK and US. Other Ebola vaccines in development, from Johnson & Johnson’s Crucell division and NewLink Genetics, are close to entering the laboratory. ZMapp, made by a San Diego-based company, is the most advanced of the experimental treatments and has cured some patients, including the British nurse Will Pooley, but stocks have now run out. ZMapp’s development was supported by the US military’s main biodefence research facility, amid fears that the virus could be turned into a biological weapon.

Read more …

Aug 132014
 
 August 13, 2014  Posted by at 7:06 pm Finance Tagged with: , , , ,  5 Responses »


Warner Bros Lauren Bacall publicity still from To Have and Have Not 1944

If you put all the pieces in a jigsaw puzzle in their proper places, a picture emerges. An easy enough principle. But how do you get the pieces, and where do they go? That’s often not so easy at all.

Oil prices are low, and falling, in the face of Iraq and Ukraine. But what does that mean, and how does it fit into the puzzle?

In a report issued on Tuesday, the IEA cut its forecast for worldwide oil consumption growth to 1 million bpd (barrels per day), 180,000 bpd less than previously predicted, while supplies have risen by 300,000 bpd above the forecast output.

Now, the IEA and its US sister, the EIA, are notoriously as unreliable in their numbers as the US government is in jobs and growth numbers, and as China is in all economic numbers. But the trend looks believable.

And to think that only in March the IEA predicted increasing demand and said: “Growth momentum is expected to benefit from a more robust global economic backdrop”.

One thing from the IEA report makes sense; it says the oil market seemed “eerily calm in the face of mounting geopolitical risks spanning an unusually large swathe of the oil-producing world”.

Russia Vulnerable As Oil Prices Hit Nine-Month Low On IEA ‘Glut’ Warnings

Oil prices have fallen to a nine-month low as surging supply from Opec and the US floods the market and fresh demand wilts [..] OECD inventories rose by 88m barrels in the second quarter, the most since 2006. Stocks are still below their five-year average but are no longer as dangerously thin as they were last winter.

[..] Saudi Arabia cranked up its production to more than 10m b/d, the highest since last September. Oil demand fell by 440,000 b/d in Europe and the US over the period [..] The big surprise has been a “sharp contraction” in German demand for oil products, down 3.9pc over the past year. It is much the same picture in Italy and Japan.

I find it curious that Saudi Arabia would raise its production in times when there is an oil ‘glut’. What would they be trying to achieve? Lower prices? For political reasons perhaps? It gets more curious when the EIA says OPEC will reduce production, as per the Wall Street Journal:

EIA Lowers Global Oil Demand Forecast for 2014, 2015

The EIA said it expects the Organization of the Petroleum Exporting Countries to reduce output in 2014 [..] The agency called for 35.84 million bpd of OPEC production in 2014[ ..] OPEC produced 36.12 million bpd last year, according to the EIA. In the U.S., production hit 8.5 million bpd in July, the highest monthly level since April 1987 [..] its forecast total U.S. crude production at 8.46 million bpd in 2015 However, the agency cut its forecast for production in the lower 48 states.

The EIA maintained its forecast for U.S. average daily oil consumption at 18.88 million bpd in 2014 but raised its 2015 forecast to 18.98 million bpd.

The glut can come from either one of two directions: more supply or less demand. Since demand fell by 440,000 b/d in Europe and the US since September, and the IEA says production will rise by 300,000 bpd, there is some wiggle room. But.

US oil consumption never recovered. It’s now at about the same level as in 1997, when there were about 45 million fewer people living in America. That is a huge drop. While there have been advances in efficiency etc., there’s no denying that the economy never recovered either, not by a very long shot. No matter that it supposedly grew at a 4% annualized rate in Q2…

And please don’t forget that this happened at a time when stock markets set records, the Fed balance sheet rose to $4+ trillion and overall debt went to the moon and never looked back. What is that, a quadruple whammy?

Worst Retail Sales Showing in Six Months in Slow Start to Third Quarter

Retail sales were little changed in July, the worst performance in six months, as car demand slowed and tepid wage growth restrained U.S. consumers. The slowdown in purchases followed a 0.2% advance in June [..]

Retailers such as Macy’s are relying on promotions and discounts to entice customers. “There’s no sign of momentum or enthusiasm out of the consumer right now,” said Stephen Stanley, chief economist at Pierpont Securities [..] I don’t think people have the wherewithal, not to mention the inclination, to ramp it up.”

Not even subprime car loans can do the trick anymore. Let alone housing:

Not that that’s a typical American problem:

Chinese Home Sales Fall 10.5%

Home sales in China fell 10.5% in the first seven months of the year to 2.98 trillion yuan ($484 billion) [..] To lure home buyers back to the market, around 30 local governments have loosened property restrictions such as limits on second home purchases. But there has yet to be any meaningful pickup in sales [..] Average home prices in 100 Chinese cities fell for the third straight month in July on a month over month basis, according to data tracker China Real Estate Index System. New construction starts in the January-July period measured by area fell 12.8%

Nor is the US the only country with a retails sales problem:

Japanese GDP Plunges 6.8%, Record Drop in Consumer Spending

Compared to the 3.6% drop in GDP when Japan last hiked its consumption tax in 1997, today’s Q2 GDP collapse of 6.8% annualized is an utter disaster. Consumer Spending collapsed 5.2% QoQ – the most on record.

And Europe fares no better:

Crisis Stalks Europe Again As Deflation Deepens, Germany Stalls

Portugal has crashed into deep deflation and Italy’s inflation rate has fallen to zero as the eurozone flirts with recession, automatically pushing these countries further towards a debt compound spiral. The slide comes amid signs of a deepening slowdown in the eurozone core, with even Germany flirting with possible recession. Germany’s ZEW index of investor confidence plunged from 27.1 to 8.6 in July, the sharpest fall since June 2012 [..]

Markets were stunned by the sudden fall in Portugal’s HICP inflation to -0.7% in July, from -0.2% the month before. Spain’s provisional estimate is for a fall of -0.3%. The risk is that this will cause inflation expectations to become unhinged and extremely difficult to reverse.

“The latest inflation figures call for the ultimate bazooka from the ECB. We’re seeing the Japanification of Europe,” said Lena Komileva from G+ Economics. “Deflation pushes up the debt ratios in the southern countries and makes their task even more insurmountable.”

Morgan Stanley warned that Germany’s economy contracted by 0.1% in the second quarter [..] Hans Redeker, the bank’s currency chief said: “It is very difficult to keep recovery going in the eurozone without credit. Companies are just eating up their cash flow.”

Germany’s factory orders from the rest of the eurozone dropped by 10.4% in June [..] The DAX index of stocks in Frankfurt has plummeted 10% over the past month, while yields on 10-year German Bunds have dropped to historic lows of 1.06%.

For Italy, it is already becoming a fresh crisis. The country is caught in a vice, squeezed by a triple-dip recession and zero inflation at the same time. Italy’s €2.1 trillion public debt is rising on a shrinking base of nominal GDP despite austerity policies. The debt ratio has surged five percentage points to 135.6% of GDP over the past year, despite austerity. Portugal is close behind. Its debt has jumped from 127.4% to 132.9% [..] Deflation is pushing both nations into a textbook debt trap.

And then we haven’t even talked about France. Or fresh sanctions that will bite a piece out of GDP both in Russia and in Europe.

Without the markets, or economies, collapsing outright yet, it’s starting to look like while oil cannot save us from economic mayhem, the downfall of our economies is indeed keeping the lack-of-energy monster at bay.

Not that that’s something we should be too happy about, for obvious reasons.

But that’s not the whole story, or the end of the story, and it’s not where the jigsaw pieces fall neatly into place.

What we tend to label geopolitical risks, which will come in very handy to mask economic problems we would have had anyway, are already leading to other events and consequences.

That is to say, the world has started fighting over oil for real. It’s no longer just about dominance, it’s about survival. Of societies, of values, political systems, religions.

Islamist State Funds Caliphate With Mosul Dam, Oil and Gas

Islamic State militants who last week captured the Mosul Dam, Iraq’s largest, had one demand for workers: Keep it going. [..] militants from the al-Qaeda breakaway group told workers hiding in management offices they would get their salaries as long as the dam continued to produce electricity for the region under their control.

[IS] fighters are capturing the strategic assets needed to fund the Islamic caliphate [..] “These extremists are not just mad,” said Salman Shaikh, director of the Brookings Institution’s Doha Center in Qatar. [..] “It’s been a big mistake for some people to think that these guys are some ragtag outfit .. ” [..] “There’s a method to their madness, because they’ve managed to amass cash and natural resources, both oil and water, the two most important things. And of course they are going to use those as a way of continuing to grow and strengthen.”

The dam is the most important asset the group captured since taking Nineveh province in June. The group controls several oil and gas fields in western Iraq and eastern Syria, generating millions of dollars in daily revenue. The group is using the dam as a hideout because it knows it wouldn’t be bombed, he said [..] The dam was completed in 1986 and its generators can produce as much as 1010 megawatts of electricity, according to the website of the Iraqi State Commission for Dams and Reservoirs.

Aziz Alwash, an environmental adviser to the Water Resources Ministry, said the dam needs cement injections as part of its maintenance. “Mosul city would drown within three hours” if the dam broke, he said Aug. 10 in a telephone interview. Other cities down the road to Baghdad would also be inundated while the capital would be under water within four hours.

While you were sleeping, the world changed. Our economies are no longer growing. But some things are. The Islamist State for one. International tension in general. And “We” are actively causing these things to grow as much as anyone else.

It should be crystal clear that oil prices can shoot up at any given moment. One wrong move, one faulty calculation, one missed shot or one stray bullet, that’s all it takes. We like to think of ourselves as being in control, that’s how we grew up. But we no longer are, if we ever were.

Someone at CNBC found a few pieces that fit together:

Are Weaker Oil Prices Signaling Doom For Stocks?

The price of Brent crude slipped to a 13-month low on Wednesday, pushed lower by reports of oversupply in the markets. However, some market watchers believe that this softness could be signaling something more sinister in the global economy, with a risk that the weakness could spread to other assets. [..] Michael Hewson, analyst at CMC Markets, agrees that current global growth forecasts may be too optimistic and depressed demand in Europe and China, along with the anticipated normalization of interest rates in the U.S. and the U.K., could be about to bring investors back down to earth.

[..[ he has felt the market has been too upbeat for most of 2014. “Far be it from me to get in front of a runaway train … but I think that train is a bit crowded.”

“Far be it from me to get in front of a runaway train … but I think that train is a bit crowded,”

Are Weaker Oil Prices Signaling Doom For Stocks? (CNBC)

The price of Brent crude slipped to a 13-month low on Wednesday, pushed lower by reports of oversupply in the markets. However, some market watchers believe that this softness could be signaling something more sinister in the global economy, with a risk that the weakness could spread to other assets. “At the end of the day it’s all about demand,” Michael Hewson, the chief market analyst at brokerage firm CMC Markets told CNBC via telephone. The oil price is simply a leading indicator for demand across the globe, according to Hewson, who predicts the price has more downside risk than upside, barring any unexpected geopolitical event. He agrees that current global growth forecasts may be too optimistic and depressed demand in Europe and China, along with the anticipated normalization of interest rates in the U.S. and the U.K., could be about to bring investors back down to earth.

“I think the (growth forecasts) have been over egging the pudding,” he said, adding that he has felt the market has been too upbeat for most of 2014. “Far be it from me to get in front of a runaway train … but I think that train is a bit crowded,” he said. The price of Brent and WTI has been relatively stable for the last two years as the expansive monetary policy by central banks has coincided with a bull run in the equities market. The commodity saw a brief spike in June with fears over an Islamist militant group taking over large parts of northern Iraq. But markets have slipped since that price move, with Brent crude sliding to $102.45 a barrel on Wednesday to trade near its lowest level since June 2013. U.S. crude fell to $97.16 on Wednesday morning, near levels not seen since February this year.

Oil prices have been in this trend in recent weeks despite tensions in Iraq, Libya and Ukraine, however, it was a new report by the International Energy Agency that weighed on markets Wednesday. On Tuesday, the IEA said that oil has seen weak demand in the last few months and an oil glut has helped to keep a lid on prices. It added that markets were “eerily calm” in the face of the mounting geopolitical risks. Commenting on the report Marshall Gittler, a currency market strategist at IronFX, said that U.S. intervention in Iraq – with targeted airstrikes and militarily advisers entering the country – would only mean a further price fall as the risk premium diminishes.

Read more …

Brent Trades Near 13-Month Low Amid Signs China Is Slowing (Bloomberg)

Brent crude traded near its lowest intraday level in 13 months on speculation that supplies are excessive as Libyan output recovers and economic activity in China slows. West Texas Intermediate was steady. Futures slipped as much as 0.6% in London in a fourth daily decline. Libya exported the first oil cargo from Ras Lanuf port since it was closed by rebels a year ago. China’s broadest measure of new credit plunged to the lowest since the global financial crisis, while the National Bureau of Statistics in Beijing said growth in factory production slowed. The IEA said yesterday a supply glut was shielding the market against threats to output in the Middle East. “On the supply side, there’s been positive news from Libya even as the fighting worsens, giving a better situation in the physical market,” said Frank Klumpp, an analyst at Landesbank Baden-Wuerttemberg in Stuttgart, Germany. “The demand side has potential for a bearish surprise as we have growing uncertainty” over China’s economy, he said.

Read more …

Japanese GDP Plunges 6.8%, Record Drop in Consumer Spending (Zero Hedge)

Compared to the 3.6% drop in GDP when Japan last hiked its consumption tax in 1997, today’s Q2 GDP collapse of 6.8% annualized is an utter disaster (even if it is slightly better than the expected -7.0% expectations thanks to a surge in the deflator). Inventory additions added 1.0% growth. Consumer Spending collapsed 5.2% QoQ – the most on record. Of course, in the tradition of Keynesian hockey-sticks, this XX% collapse in Q2 is expected to surge back to a 2.5% growth figure in Q3 and lead Japan to the holy grail once more.. only it didn’t quite work out that way last time for Japan. Simply put this is the worst posible outcome for bulls, small beat not enough to rejuice QQE.

Here come the hockeysticks …

Read more …

Chinese Home Sales Fall 10.5% (WSJ)

Home sales in China fell 10.5% in the first seven months of the year to 2.98 trillion yuan ($484 billion), data released by the National Bureau of Statistics on Wednesday showed, as potential buyers wait for prices to slide further. Sales were 2.56 trillion yuan in the first half of the year – down 9.2% from the same period of 2013. To lure home buyers back to the market, around 30 local governments have loosened property restrictions such as limits on second home purchases. But there has yet to be any meaningful pickup in sales, as home buyers stay away due to expectations of further price falls and rising inventories. Average home prices in 100 Chinese cities fell for the third straight month in July on a month over month basis, according to data tracker China Real Estate Index System. New construction starts in the January-July period measured by area fell 12.8% to 982.3 million square meters. This compared with a decline of 16.4% to 801.3 million square meters in the first six months.

Property investment in the first seven months of this year rose 13.7% to 5.04 trillion yuan, slowing from 14.1% growth in the first six months of the year. The investment figures are a lagging indicator, and reflect continuing activity in projects that started last year. New construction starts grew 13.5% in 2013. Analysts however, noted that they are awaiting sales data in August and September, rather than July, for cues on whether a turnaround is in the works. More property developers plan new home launches for sale during the two months. The statistics bureau doesn’t give data for individual months. Earlier Wednesday, China’s central bank issued data showing that new lending in July fell sharply from June, dashing hopes of a widespread pickup in mortgage loans and housing sales amid some property policy easing. Many economists have said that the downturn in the property sector poses the biggest risk to China’s economy.

Read more …

Crisis Stalks Europe Again As Deflation Deepens, Germany Stalls (AEP)

Portugal has crashed into deep deflation and Italy’s inflation rate has fallen to zero as the eurozone flirts with recession, automatically pushing these countries further towards a debt compound spiral. The slide comes amid signs of a deepening slowdown in the eurozone core, with even Germany flirting with possible recession. Germany’s ZEW index of investor confidence plunged from 27.1 to 8.6 in July, the sharpest fall since June 2012, during the European sovereign debt crisis. “The European Central Bank has to act now,” said Andrew Roberts, credit chief at RBS. Markets were stunned by the sudden fall in Portugal’s HICP inflation to -0.7% in July, from -0.2% the month before. Spain’s provisional estimate is for a fall of -0.3%. The risk is that this will cause inflation expectations to become unhinged and extremely difficult to reverse.

“The latest inflation figures call for the ultimate bazooka from the ECB. We’re seeing the Japanification of Europe,” said Lena Komileva from G+ Economics. “Deflation pushes up the debt ratios in the southern countries and makes their task even more insurmountable.” The ECB is waiting to see whether its new four-year loans for banks (TLTROs) will stop the relentless contraction of credit and stave off the threat of a Japanese-style deflation trap, but the auctions will not take place until September and December. “Europe could be in deflation before the TLTROs have even begun. They cannot wait until February or March to start thinking about quantitative easing,” said Mr Roberts. Morgan Stanley warned that Germany’s economy contracted by 0.1% in the second quarter, raising the risk of outright recession as the Russia crisis starts to bite. “Momentum really stalled in May and June,” said Hans Redeker, the bank’s currency chief. “It is very difficult to keep recovery going in the eurozone without credit. Companies are just eating up their cash flow.”

Germany’s factory orders from the rest of the eurozone dropped by 10.4% in June, a fall not seen since the white heat of the Lehman crisis in late 2008. The DAX index of stocks in Frankfurt has plummeted 10% over the past month, while yields on 10-year German Bunds have dropped to historic lows of 1.06%. A sudden drop in yields typically signals a recession risk. Ingo Kramer, head of the BDI, the German industry federation, said German companies are struggling but it has not yet reached crisis level. “We are not at risk of recession,” he said. Brussels expects sanctions against Russia to cut eurozone growth by 0.3% this year.

For Italy, it is already becoming a fresh crisis. The country is caught in a vice, squeezed by a triple-dip recession and zero inflation at the same time. Italy’s €2.1 trillion public debt is rising on a shrinking base of nominal GDP despite austerity policies. The debt ratio has surged five percentage points to 135.6% of GDP over the past year, despite austerity. Portugal is close behind. Its debt has jumped from 127.4% to 132.9%, and is certain to move higher after the recovery collapsed earlier this year. There are growing concerns that the Portuguese state will end up footing the bill for the rescue of Banco Espirito Santo after senior bondholders were protected. Deflation is pushing both nations into a textbook debt trap.

Read more …

Europe’s Crash-and-Burn Economy (Bloomberg)

As the euro-region economy struggled to emerge from recession in recent years, officials could at least comfort themselves with the performance of the German economy: “We’ll always have Frankfurt,” to miscoin a phrase. That’s no longer true. German investor confidence has worsened for eight consecutive months; today, it collapsed to its lowest level in two years. The euro-region economy is in flames. Here ends the argument that the world of finance and economics is shrugging off Ukraine and Iraq and Ebola and Gaza and all the other geopolitical risks currently assailing the headlines. A sentiment index measuring faith in the six-month economic outlook dropped to 8.6 this month, according to the ZEW Center for European Economic Research in Mannheim. The index has slumped from a seven-year high of 62 reached in December. ZEW explained the situation thus:

The decline in economic sentiment is likely connected to the ongoing geopolitical tensions that have affected the German economy. Since the economy in the euro zone is not gaining momentum either, the signs are that economic growth in Germany will be weaker in 2014 than expected.

Figures scheduled for release on Aug. 14 are likely to show that the German economy, Europe’s biggest, contracted by 0.1% in the second quarter, according to the median forecast of economists surveyed by Bloomberg News. The euro zone as a whole will be lucky to manage growth of 0.1%, based on data scheduled for release that same day. So just one slip and the region will be flatlining; two slips, as it were, and recession will be just one quarter away: The specter of deflation, meantime, looms ever larger. In Portugal, consumer prices fell at an annual pace of 0.9% last month, their sixth consecutive decline, figures today showed. In Italy, already mired in recession, prices were unchanged as companies presumably decided their prospects are too gloomy for customers to endure increases. The euro-zone economy is heading for a crash; what will it take for European Central Bank President Mario Draghi to see that?

Read more …

Sliding German Output Bodes Ill For Eurozone (NY Times)

An important reading on the health of the eurozone economy is expected to show this week that growth stagnated in the most recent quarter as German output faltered, confirming the assessment of many analysts that a lasting recovery remains out of reach for the region. Economists are expecting that in the 18-nation currency bloc, gross domestic product expanded 0.1%in the second quarter compared with the first quarter, equivalent to an annual rate of growth of 0.4%. The eurozone eked out quarterly growth of 0.2%in the first three months of the year. The eurozone GDP report, to be released Thursday by the European Union statistical agency, Eurostat, is based on data from before the latest tensions about Ukraine and before the sanctions against Russia for its involvement in the crisis began to be felt. That means there are plenty of questions hanging over the second half of the year.

Most worrying are the indications that Germany is beginning to struggle, including a steep drop in economic sentiment reported Tuesday. Germany, which accounts for more than one-fourth of the overall eurozone economy, had been propping up the rest of the area for much of the last few years. On Tuesday, a report from the ZEW economic research institute in Mannheim, Germany, showed German economic sentiment fell this month to the lowest level since December 2012. The drop, the report said, “is likely connected to the ongoing geopolitical tensions that have affected the German economy.” The setback followed a warning from the OECD on Monday that its analysis showed “growth losing momentum” in Germany and an official report last week that showed German factories produced far less than expected in June. The gloomy sentiment in Germany is a “signal that the growth performance in the second quarter could suddenly morph from a one-off into an undesired trend,” said Carsten Brzeski, an economist with ING Group in Brussels.

Read more …

Eurozone Industrial Production Fell Again in June (WSJ)

Industrial production in the 18 countries that share the euro fell for a second straight month in June, an indication that the currency area’s economic recovery may have faltered again in the second quarter. The European Union’s statistics agency Wednesday said output from factories, mines and utilities fell 0.3% from May, and was unchanged compared with June 2013. That was a surprise, with 21 economists surveyed by The Wall Street Journal last week estimating the production rose by 0.3% during the month. Eurostat will Thursday release its measure of economic growth during the second quarter. Economists expect the agency to record a second straight quarter of slowing growth, with gross domestic product having risen by just 0.1% from the three months to March. The weakness of industrial production will likely cement those expectations. The euro zone’s economy has struggled to grow in the years since the 2008 financial crisis, and in particular has lagged behind other parts of the world economy since its interlinked government debt and banking crises erupted in late 2009.

But with the worst appearing to have passed last year, policy makers had hoped for a gradual acceleration in the rate of growth as 2014 advanced. Instead, the first quarter marked a slowdown from the final three months of 2013, and hopes for a significant rebound in gross domestic product during the second quarter have faded with every data release. Without higher rates of growth, the currency area will struggle to reduce its high levels of debt and unemployment. Weak demand and high joblessness across much of Europe’s economy is reflected in inflation rates far below the European Central Bank’s target of just under 2%. Spain’s statistics agency Wednesday said consumer prices were 0.4% lower in July than a year earlier, having previously estimated prices were down 0.3%. Portugal’s statistics agency Tuesday said consumer prices were down 0.7% on the year in July, a sixth straight month of deflation.

Read more …

Eurozone GDP: Brace Yourself (CNBC)

Complacency about the state of the euro zone’s economy could get a serious shaking Thursday, with the latest growth figures not expected to paint a pretty picture. The gross domestic product figures for the second quarter of 2014, following on from a paltry 0.2% increase in the first three months of the year, are unlikely to banish the looming specter of deflation and economic stagnation. Between April and June, the single currency region’s economy is expected to grow by just 0.1% from the previous quarter – or 0.4% from the same time in 2013. By contrast, the U.S. announced last month that its economy grew 4% on an annual basis.

Most importantly, Germany, long the engine room of Europe, and the region’s largest economy, is expected to show faltering or even declining growth. This can partly be accounted for by an unusually strong first quarter, powered by unseasonably high construction figures. Still, German investors are increasingly sceptical about the country’s economic potential, according to the ZEW figures released on Tuesday. Neighboring France is also unlikely to provide much of a fillip to growth, as pressure grows on its government to enact economic reforms more quickly. “Growth in the euro area is perilously low, and vulnerable to even slight setbacks in sentiment,” according to Claus Vistesen, chief euro zone economist at Pantheon Macroeconomics. “At the current rate, growth is far too low and uncertain to make a meaningful difference to a still high unemployment rate and too high debt levels.”

Read more …

Oh mon Dieu.

France’s ‘Recovery’ In 1 Hard-To-Believe Chart (Zero Hedge)

With French government bonds trading at record low yields under 1.5%, it is hard to argue that the troubled socialist nation is ‘priced’ for either recovery or credit risk… but then again, thanks to Draghi’s promise and domestic banks’ largesse, none of that matters. With joblessness at record highs, the following chart of France’s “recovery” shows near-record high bankruptcies and record-low profitability. Oh the beauty of socialism…as Europe’s core diverges dramatically. “Recovery”?

Read more …

China money supply is waning.

China Credit Gauge Plunges as Expansion in Money Supply Slows (Bloomberg)

China’s broadest measure of new credit unexpectedly plunged to the lowest level since the global financial crisis, adding risks to economic growth already headed for the weakest annual pace in 24 years. Aggregate financing was 273.1 billion yuan ($44.3 billion) in July, the People’s Bank of China said today in Beijing, compared with the 1.5 trillion yuan median estimate of analysts surveyed by Bloomberg News. New local-currency loans of 385.2 billion yuan were half of projections, while M2 money supply grew a less-than-anticipated 13.5% from a year earlier.

Chinese stocks fell after the credit slowdown joined a property slump in testing Premier Li Keqiang’s economic-expansion target of about 7.5%this year, spurring speculation the government will ease policy. The PBOC said the drop in financing resulted from recent regulation and financial institutions’ enhanced control of risks. n“The numbers reflect both tightened regulation over certain financing activities and an underlying weak economy,” said Zhang Bin, an economist in Beijing with the state-run Chinese Academy of Social Sciences. “There’s still no real recovery in growth – at best, we can say that economic performance is stabilizing at a low level.”

Read more …

China is teetering.

China Trust Asset Growth Slows in Shadow Banking Campaign (Bloomberg)

China’s trust assets expanded at the slowest pace in two years as the government cracks down on shadow banking and investors reassess the risks of the high-yield investments. Trust companies’ assets under management climbed 6.4% to 12.5 trillion yuan ($2 trillion) as of June 30 from three months earlier, the China Trustee Association said in a statement yesterday. That’s the slowest growth since the first quarter of 2012 and compares with an average annual gain of 50% since 2008. Premier Li Keqiang is grappling with sustaining economic growth while containing financial risks after shadow banking exploded in China from 2010.

A “day of reckoning” is approaching for the trust industry with repayments to peak this quarter and next, and banks are set to bear the bulk of losses as defaults rise, Haitong International Securities Co. economist Hu Yifan wrote in a July 25 report. “Regulators, banks and local governments are all trying to contain the trust risks but things will only really improve if the economy picks up and borrowers get back on their feet,” Zeng Yu, a Beijing-based analyst at China Securities Co., said today by phone. “Chinese investors are becoming more risk averse and increasingly will go for lower-yield but less risky products.” Trust assets under management fell 240 billion yuan in June from May. That was the first monthly decline, the statement said, without specifying a time period.

Read more …

We’ll all be rich!

JPMorgan Joins Goldman in Designing New Generation Derivatives (Bloomberg)

Derivatives that helped inflate the 2007 credit bubble are being remade for a new generation. JPMorgan Chase is offering a swap contract tied to a speculative-grade loan index that makes it easier for investors to wager on the debt. Goldman Sachs Group Inc. is planning as much as €10 billion ($13.4 billion) of structured investments that bundle debt into top-rated securities, while ProShares last week started offering exchange-traded funds backed by credit-default swaps on company debt. Wall Street is starting to return to the financial innovation that helped extend the debt rally seven years ago before exacerbating the worst financial crisis since the Great Depression.

The instruments are springing back to life as investors seek new ways to boost returns that are being suppressed by central bank stimulus. At the same time, they’re allowing hedge funds and other investors to bet more cheaply on a plunge after a 145%rally in junk bonds since 2008. “The true sign of a top is when you have these new structures piling up,” said Lawrence McDonald, a chief strategist at Newedge USA LLC, and author of the book “A Colossal Failure of Common Sense” about the 2008 demise of Lehman Brothers Holdings Inc. “At the top of the market in 2007, there were these types of innovation and many investors didn’t realize about it at that time. These products are a clear risk indicator.”

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New York Prosecutors Charge Payday Loan Firms With Usury (NY Times)

A trail of money that began with triple-digit loans to troubled New Yorkers and wound through companies owned by a former used-car salesman in Tennessee led New York prosecutors on a yearlong hunt through the shadowy world of payday lending. On Monday, that investigation culminated with state prosecutors in Manhattan bringing criminal charges against a dozen companies and their owner, Carey Vaughn Brown, accusing them of enabling payday loans that flouted the state’s limits on interest rates in loans to New Yorkers. Such charges are rare. The case is a harbinger of others that may be brought to rein in payday lenders that offer quick cash, backed by borrowers’ paychecks, to people desperate for money, according to several people with knowledge of the investigations. “The exploitative practices — including exorbitant interest rates and automatic payments from borrowers’ bank accounts, as charged in the indictment — are sadly typical of this industry as a whole,” Cyrus R. Vance Jr., the Manhattan district attorney, said on Monday.

In the indictment, prosecutors outline how Mr. Brown assembled “a payday syndicate” that controlled every facet of the loan process — from extending the loans to processing payments to collecting from borrowers behind on their bills. The authorities argue that Mr. Brown, along with Ronald Beaver, who was the chief operating officer for several companies within the syndicate, and Joanna Temple, who provided legal advice, “carefully crafted their corporate entities to obscure ownership and secure increasing profits.” Beneath the dizzying corporate structure, prosecutors said, was a simple goal: make expensive loans even in states that outlawed them. To do that, Mr. Brown incorporated the online payday lending arm, MyCashNow.com, in the West Indies, a tactic that prosecutors say was intended to try to put the company beyond the reach of American authorities. Other subsidiaries, owned by Mr. Brown, were incorporated in states like Nevada, which were chosen for their light regulatory touch and modest corporate record-keeping requirements, prosecutors said.

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Islamist State Funds Caliphate With Mosul Dam, Oil and Gas (Bloomberg)

Islamic State militants who last week captured the Mosul Dam, Iraq’s largest, had one demand for workers: Keep it going. Arriving in their Toyota pickup trucks, armed with Kalashnikov assault rifles and wearing a patchwork of military uniforms, robes and turbans, jubilant militants from the al-Qaeda breakaway group told workers hiding in management offices they would get their salaries as long as the dam continued to produce electricity for the region under their control, according to a technician who was at the dam when nearly 500 militants drove off Kurdish troops. Islamic State’s rampage through northern Iraq has inspired terror as stories spread of beheadings and crucifixions. At the same time, its fighters are capturing the strategic assets needed to fund the Islamic caliphate it announced in June and strengthen its grip on the territory already captured. “These extremists are not just mad,” said Salman Shaikh, director of the Brookings Institution’s Doha Center in Qatar.

“There’s a method to their madness, because they’ve managed to amass cash and natural resources, both oil and water, the two most important things. And of course they are going to use those as a way of continuing to grow and strengthen.” The dam is the most important asset the group captured since taking Nineveh province in June. The group controls several oil and gas fields in western Iraq and eastern Syria, generating millions of dollars in daily revenue. U.S. President Barack Obama said the fight against militants in Iraq will be a “long-term project,” tying the prospects for success to whether the nation’s leaders quickly form an inclusive government. The U.S. conducted several strikes last week against Islamic State fighters attacking Yezidi civilians near Sinjar. The group still controls the dam. Fighter jets and drones were flying over it on Aug. 9 without hitting it, said the technician.

The group, which used to call itself Islamic State in Iraq and the Levant, is using the dam as a hideout because it knows it wouldn’t be bombed, he said [..] The dam was completed in 1986 and its generators can produce as much as 1010 megawatts of electricity, according to the website of the Iraqi State Commission for Dams and Reservoirs. Aziz Alwash, an environmental adviser to the Water Resources Ministry, said he’s concerned the militants will use the dam to blackmail the government. The dam needs cement injections as part of its maintenance, he said. “Mosul city would drown within three hours” if the dam broke, he said Aug. 10 in a telephone interview. Other cities down the road to Baghdad would also be inundated while the capital would be under water within four hours. [..] “It’s been a big mistake for some people to think that these guys are some ragtag outfit,” said Shaikh of the Brookings Institution.

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Just what we needed.

Obama Administration Loosens Ban on Lobbyists in Government (Reuters)

President Barack Obama is loosening restrictions on lobbyists who want to serve on federal advisory boards, a White House official said on Tuesday, a setback to the president’s efforts to tamp down special interest influence in Washington. Obama came to office pledging to curtail the sway of lobbyists and banned lobbyists from serving on such panels, which guide government policy on a range of topics ranging from cancer to towing safety. The president said he was doing so because the voices of paid representatives of interest groups were drowning out the views of ordinary citizens.

But many lobbyists felt they were being unfairly tarred by Obama’s campaign to keep them out of public service. A lawsuit challenging the ban was initially dismissed, but a District of Columbia Circuit Court in January reinstated it. A spokesperson for the White House Office of Management and Budget said the administration was revising its earlier guidance on lobbyists serving on federal advisory panels to clarify that lobbyists may now serve on such panels when they are representing the views of a particular group. There are more than 1,000 federal advisory committees. The head of a lobbying industry trade group called the change a positive step that will allow the government to draw on the expertise of people whose experience can be beneficial in making policy.

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Get out! There’s no future for your children there.

Southwest Braces As Lake Mead Water Levels Drop Further (AP)

Once-teeming Lake Mead marinas are idle as a 14-year drought steadily drops water levels to historic lows. Officials from nearby Las Vegas are pushing conservation but also are drilling a new pipeline to keep drawing water from the lake. Hundreds of miles away, farmers who receive water from the lake behind Hoover Dam are preparing for the worst. The receding shoreline at one of the main reservoirs in the vast Colorado River water system is raising concerns about the future of a network serving a perennially parched region home to 40 million people and 4 million acres of farmland. Marina operators, water managers and farmers who for decades have chased every drop of water across the booming Southwest and part of Mexico are closely tracking the reservoir water level already at its lowest point since it was first filled in the 1930s.

“We just hope for snow and rain up in Colorado, so it’ll come our way,” said marina operator Steve Biggs, referring to precipitation in the Rockies that flows down the Colorado River to help fill the reservoir separating Nevada and Arizona. By 2016, continued drought could trigger cuts in water deliveries to both states. [..] The effect of increased demand and diminished supply is visible on Lake Mead’s canyon walls. A white mineral band often compared with a bathtub ring marks the depleted water level. The lake has dropped to 1,080 feet above sea level this year – down almost the width of a football field from a high of 1,225 feet in 1983. A projected level of 1,075 feet in January 2016 would trigger cuts in water deliveries to Arizona and Nevada. At 1,000 feet, drinking water intakes would go dry to Las Vegas, a city of 2 million residents and a destination for 40 million tourists per year that is almost completely dependent on the reservoir. That has the Southern Nevada Water Authority spending more than $800 million to build a 20-foot-diameter pipe so it can keep getting water.

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Ouch.

Worst Drought In Half A Century Hits China’s Bread-Basket (MarketWatch)

China’s worst drought in half a century is sweeping across crucial agricultural regions, devastating harvests in its wake and threatening food security. Part of the area hit by unusually dry weather — the northeastern Manchurian Plain — is known as China’s bread-basket, supplying much of the country’s corn, wheat and soybean production. In a portion of the plain, in Jilin province, 10 major grain producing counties are facing the lowest rainfall since 1951, and many corn fields are facing “zero harvest,” according to report by the state-run Xinhua New Agency, citing Jilin’s provincial weather bureau. Next door in Liaoning province, there has been no rain at all since late July.

And with Jilin government meteorologist Yang Xueyan warning that the situation will likely get worse in the near future, concern over the drought has sent local corn futures rising more than 4% in less than two week, First Financial Daily reported Friday. But the crisis isn’t confined to the Manchurian Plain alone — according to state broadcaster CCTV, the drought is impacting more than one-third of China. This includes the central Chinese province of Henan, another agriculturally important area, which has seen the weakest flood season in 53 years, leaving some rural communities with no viable drinking water, let alone water needed for irrigation, for as long as three months, CCTV said. In what may be a sign of things to come, the state-owned SDIC Zhonggu Futures brokerage is predicting a 40-million-ton corn deficit this summer.

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Brilliant.

The Privilege Of Watching War (Mises Canada)

The prospect of renewed war has little effect on the public anymore. We have been desensitized to the violence because it seemingly never stops. Material capitalism has created a state of luxury never known to mankind before our current day; yet it renders our sympathy for the plight of others flaccid. We watch movies and play video games and pretend to know what war is like. But in reality, we can’t begin to understand how it feels to live under the threat of bombs and shrapnel every day. As Americans, and Westerners, we are gifted with the option to not partake directly in war, but play the casual observer. It’s a privilege; and not at all like the class privilege egalitarians are constantly harping about. To see explosions go off in foreign lands, destroying homes, mutilating children, killing family members, is a jarring sight. But as long as it’s a pixelated image on a computer screen, it fails to have the same heart-wrenching effect as if it were occurring just a few feet away. It fails to invoke the emotional intensity that is the most potent weapon in battle.

It fails to show the emotional impetus that is behind vindictive combat. How lucky we are to be far removed from the cries of a mother whose child was collateral damage in an air strike. How lucky we are to not have our brothers and sisters disintegrated before our eyes. How lucky we are to not have our parents taken from us by stray bullets. How lucky are we not to have a generation of orphans, angry over the death of their mothers and fathers and wishing to exact revenge. The new Vice News documentary on the growing Islamic State in Syria provides a candid but eerie look into the internal deliberations of West-hating Muslim fanatics. These aren’t ordinary folks happy with careers and raising families. They live for jihad. They feed children propaganda on why American and European infidels must die. What’s discomforting about this mindset is that it’s not completely unjustifiable.

At one point during the mini-series, a pious man dedicated to the cause of the Islamic State declares, “we are going to invade you as you invaded us. We will capture your women as you captured our women. We will orphan your children as you orphaned our children.” Can it really be denied that a century of meddling in the Middle East hasn’t created this sentiment of seething vengefulness? Who are we, as Americans and citizens of militarily-dominant countries, to sit back and ignore this type of anger, when under the same circumstances, we would feel the same way? Such unfettered rage demands reflection: how blessed we are to not live in such a maddening state. And how fortunate we are to have an ocean of distance between us and pit of despair known as the Middle East. It’s truly unfortunate how the suffering of others helps us to understand the blessings wrought by domestic tranquility.

The other day, I shared an elevator with Eli Lake of The Daily Beast. Well-respected as a foreign policy analyst with high-ranking connections, Lake is one of the biggest agitators for war in the media. Seeing him up close was quite a revelation. Clad in nicely-fitted dress clothes, I was struck by Lake’s protruding belly. It was reminiscent of when I ran into Bill Kristol months before in the same elevator. Same clothes, same overweight figure. These men have the benefit of filling their gullets at rubber chicken dinners while begging for death and destruction across the globe. They don’t don military garb, pick up AR-15s and take care of business themselves. They would rather stare into a television camera and make the case for other people’s children to go off and die in war.

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Highly recommended read.

Sovereign Debt For Territory: A New Global Elite Swap Strategy (Salbuchi)

In recent decades, dozens of sovereign nations have fallen into ever-deepening trouble by becoming indebted with the “private megabank over-world” for amounts far, far in excess of what they can ever pay back. Is this due to bankers’ professional malpractice coupled with government mismanagement on a truly grand scale? Or are we seeing global power elite long-term planners slowly achieving their goals? Recurrent sovereign debt crises reflect neither “over-lending mistakes” by bankers and investors, nor “innocence” on the part of successive governments in deeply indebted nations. Rather, it all ties in with a global model for domination driven by a system of perpetual national debt which I have called “The Shylock Model”. [..] Sovereign debts are a major problem in just about every country in the world, including the US, UK and EU nations. So much so, those debts have become a Damocles’ Sword threatening the livelihood of untold billions of workers around the world.

One often wonders why governments indebt themselves for so much more than they can ever hope to pay… Here, Western economists, bankers, traders, Ivy League academics and professors, Nobel laureates and the mainstream media have a quick and monolithic reply: because all nations need “investment and investors” if they wish to build highways, power plants, schools, airports, hospitals, raise armies, service infrastructures and a long list of et ceteras, economic and national activities are all about. But more and more people are starting to ask a fundamental common-sense question: why should governments indebt themselves in hard currencies, decades into the future with global mega-bankers, when they could just as well finance these projects and needs far more safely by issuing the proper amounts of their own local sovereign currency instead?

Here is where all the above “experts” go berserk & ballistic, shouting back: “Issue currency? Are you crazy?? That’s against the “rules & laws” of economics!!! Issuing national sovereign currency to finance the real economy’s monetary needs leads to inflation and lost jobs and chaos and… (puts us nice mega-bankers out of a job…)!!.” That’s when they all gang-up into noisy “The sky is falling! The sky is falling!!” mode. Then you ask them: What happens when countries default on their unpayable sovereign debts – as they invariably and repeatedly do – not just in Argentina, but in Brazil, Spain, Venezuela, France, Costa Rica, Peru, El Salvador, Portugal, Russia, Bolivia, Iceland, Turkey, Greece, Cyprus, Thailand, Nigeria, Mexico, and Indonesia? Again the voice of the “experts”: “Then countries must “restructure” their debts kicking them forwards 20, 40 or more years into the future, so that your great, great, great grandchildren can continue paying them”. Oh, I see!

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Russia Vulnerable As Oil Prices Hit Nine-Month Low On IEA ‘Glut’ Warnings

Oil prices have fallen to a nine-month low as surging supply from Opec and the US floods the market and fresh demand wilts, leading to an “oil glut” in the Atlantic region despite the twin crises in Iraq and Russia. The International Energy Agency (IEA) cut its forecast for the rise in global consumption to just 1m bpd (b/d) this year due to near recession conditions in Europe and as pervasive weakness in the world economy disappoints. This comes as supply rises by a further 300,000 b/d beyond what was already planned. The warning sent Brent crude prices tumbling to $104 a barrel, the lowest this year. The sudden shift in the balance of the market has allowed the OECD club of rich states to build up their oil stocks at the fastest rate in eight years, creating an extra layer of protection against any possible supply shock from Russia and Iraq. The agency said OECD inventories rose by 88m barrels in the second quarter, the most since 2006. Stocks are still below their five-year average but are no longer as dangerously thin as they were last winter.

The IEA said in its monthly report that the oil market seemed “eerily calm in the face of mounting geopolitical risks spanning an unusually large swathe of the oil-producing world”. Yet so far the rise in supply has overwhelmed any actual disruptions from crisis zones. Libya’s output doubled to 430,000 b/d in July from a month earlier despite the continuing war between rival militias for control of the country’s oil wealth. Saudi Arabia cranked up its production to more than 10m b/d, the highest since last September. Oil demand fell by 440,000 b/d in Europe and the US over the period, a sign of how weak global recovery still is, consistent with a rare fall in the CPB’s index of world trade in May. The big surprise has been a “sharp contraction” in German demand for oil products, down 3.9pc over the past year. It is much the same picture in Italy and Japan.

The supply glut leaves the world economy slightly less vulnerable to a shock if the crisis escalates in Russia. The West has already imposed a funding freeze on Russia’s top oil company, Rosneft. This could ratchet up to Iran-style sanctions on Rosneft deliveries as well if the Kremlin launches a full-blown invasion of eastern Ukraine. Falling prices will ratchet up the pressure on Russia, which needs a price near $110 to balance its budget. While it has a reserve fund to cover any shortfall, this would be depleted fast if oil falls anywhere near $80 and Russia goes into a deep recession. Most of Russia’s energy revenues come from oil, not gas. The crisis in Iraq has yet to pose a serious threat to oil exports, though this could change at any time. The vast majority of Iraqi supply comes from Shia-controlled fields in the south. The most powerful force now holding down global prices is the US fracking industry. Shale will boost US output by a further 1.2m b/d this year to a total of 11.5m, increasing America’s lead as the world’s biggest producer.

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Petrol prices expected to fall after Saudis open the oil taps

Petrol prices are poised to fall further after the cost of a barrel of crude oil reached its lowest level this year. The fall followed the publication of an influential report that showed a glut of crude from Saudi Arabia flowing on to the market and rising stockpiles. The Paris-based International Energy Agency, the leading oil think tank, said yesterday that the world will consume less crude than experts had thought this year. Saudi Arabia’s supplies are running at the highest level since last September and crude from Libya is back on the market. Recent figures from Experian Catalist, a petrol analyst, show the typical price of unleaded petrol is almost unchanged this year at 131.3p a litre and the cost of diesel is down from 138.3p to 135.6p. However, supermarkets are already cutting prices at the pumps in a battle for customers that could be intensified by the slump in crude. The supply glut leaves the world economy slightly less vulnerable to a shock if the crisis over Ukraine escalates.

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EIA Lowers Global Oil Demand Forecast for 2014, 2015 (WSJ)

Government forecasters lowered their forecast for global oil consumption this year and next, the latest sign of weak demand that is pressuring prices. The U.S. Energy Information Administration, in its monthly short-term energy outlook released Tuesday, cut its international consumption forecast to 91.56 million bpd this year and 92.96 million bpd next year. Last month, the EIA called for 91.62 million bpd in 2014 and 93.08 million in 2015. Earlier Tuesday, the International Energy Agency also lowered its global demand forecast for 2014 to 92.7 million bpd. Prices have fallen in recent weeks on concerns about weak demand. Ongoing violence in Iraq, Ukraine and other parts of the world hasn’t disrupted oil production, as investors worried earlier this summer. Brent, the global oil benchmark, traded at nine-month intraday lows Tuesday and appeared on track to close at a 13- month low.

The EIA said it expects the Organization of the Petroleum Exporting Countries to reduce output in 2014, offsetting the production growth from such non-OPEC countries as the U.S. The agency called for 35.84 million bpd of OPEC production in 2014, down from its earlier forecast of 35.93 million bpd. OPEC produced 36.12 million bpd last year, according to the EIA. In the U.S., production hit 8.5 million bpd in July, the highest monthly level since April 1987, the EIA said. The agency maintained its forecasts for total U.S. crude production at 8.46 million bpd in 2015 and 9.28 million bpd, noting it would represent the highest level of annual average oil production since 1972. However, the agency cut its forecast for production in the lower 48 states and raised its expectation for production in the offshore Gulf of Mexico.

The EIA maintained its forecast for U.S. average daily oil consumption at 18.88 million bpd in 2014 but raised its 2015 forecast from 18.95 million bpd to 18.98 million bpd. The EIA cut its forecast of average prices for the global Brent benchmark oil contract this year and raised its estimate for next year. The agency said it expects prices of $108.11 a barrel in 2014 and $105.00 a barrel in 2015, compared to its prior assessment of $109.55 a barrel this year and $104.92 a barrel next year. For the U.S. benchmark, the EIA lowered its estimate to an average price of $100.45 a barrel in 2014, from $100.98 a barrel last month. The gap between the Brent and the U.S. benchmark contracts is likely to average $8 in 2014 and $9 in 2015, the EIA said. As a result of soaring domestic energy production, petroleum imports have declined significantly, the EIA said, with the share of consumption met by net imports expected to fall from 33% in 2013 to 22% in 2015, the lowest level since 1970. The EIA lowered its forecast for average retail gasoline prices this year from $3.54 a gallon to $3.50 a gallon.

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The US economy supposedly grew at a 4% annualized rate in Q2.

Worst Retail Sales Showing in Six Months in Slow Start to Third Quarter (Bloomberg)

Retail sales were little changed in July, the worst performance in six months, as car demand slowed and tepid wage growth restrained U.S. consumers. The slowdown in purchases followed a 0.2% advance in June, the Commerce Department reported today in Washington. The median forecast of 82 economists surveyed by Bloomberg called for a 0.2% gain. Excluding cars, sales rose 0.1%. Job growth has yet to stoke the type of wage gains needed to boost household purchases, a sign the economic expansion will probably not sustain the second-quarter pickup into the end of the year.

Retailers such as Macy’s are relying on promotions and discounts to entice customers, whose spending accounts for about 70 percent of the economy. “There’s no sign of momentum or enthusiasm out of the consumer right now,” said Stephen Stanley, chief economist at Pierpont Securities in Stamford, Connecticut, who accurately forecast today’s sales figure. “Income growth continues to be so-so. Employment has picked up in recent months but you’re not seeing the growth in hours worked that would generate big increases in paychecks. I don’t think people have the wherewithal, not to mention the inclination, to ramp it up.”

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