John Collier Trucks on highway en route to Utica, New York Oct 1941
Do take note.
• With Regret And Sadness We Announce The Death Of Money On Nov 16 2014 (Rapier)
It is with regret and sadness we announce the death of money on November 16th 2014 in Brisbane, Australia.
In the musical Cabaret, Sally Bowles and the Emcee sing about money from the perspective of those witnessing its collapse in value in real terms in the great German hyperinflation of 1923. Less than a decade later, and a continent away, a young lawyer from Youngstown, Ohio noted on July 25th 1932 how money’s value could also fall in nominal terms:
“A considerable traffic has grown up in Youngstown in purchase and sale at a discount of Pass-Books on the Dollar Bank, City Trust and Home Savings Banks. Prices vary from 60% to 70% cash. All of these banks are now open but are not paying out funds.”
– The Great Depression – A Diary: Benjamin Roth (1932, first published 2009)
In Youngstown the bank deposit, an asset previously referred to as “money”, had fallen by up to 40% relative to the value of cash. The G20 announcement in Brisbane on November 16th will formalize a “bail in” for large-scale depositors raising the spectre that their deposits are, as many were in 1932, worth less than banknotes. It will be very clear that the value of bank deposits can fall in nominal terms. On Sunday in Brisbane the G20 will announce that bank deposits are just part of commercial banks’ capital structure, and also that they are far from the most senior portion of that structure. With deposits then subjected to a decline in nominal value following a bank failure, it is self-evident that a bank deposit is no longer money in the way a banknote is. If a banknote cannot be subjected to a decline in nominal value, we need to ask whether banknotes can act as a superior store of value than bank deposits? If that is the case, will some investors prefer banknotes to bank deposits as a form of savings? Such a change in preference is known as a “bank run.”
[UK] deposits larger than £85,000 will rank ahead of the bond holders of banks, but they will rank above little else. Importantly, both borrowings of the banks of less than 7 days maturity from other financial institutions and sums owed by banks in their role as counterparties to OTC derivatives will rank above large deposits. Large deposits at banks are no longer money, as this legislation will formally push them down through the capital structure to a position of material capital risk in any “failing” institution. In our last financial crisis, deposits were de facto guaranteed by the state, but from November 16th holders of large-scale deposits will be, both de facto and de jure, just another creditor squabbling over their share of the assets of a failed bank.
If we have another Lehman Brothers collapse, large-scale depositors could find themselves in the courts for years before final adjudication on the scale of their losses could be established. During this period would this illiquid asset, formerly called a deposit and now subject to an unknown capital loss, be considered money? Clearly it would not, as its illiquidity and likely decline in nominal value would make it unacceptable as a medium of exchange. From November 16th 2014 the large-scale deposit at a commercial bank is, at best, a lesser form of money, and to many it will cease to be money at all as its nominal value can fall and it could cease to be accepted as a medium of exchange.
“Some 82pc of the items in the producer price basket are deflating in China. The figure is 90pc in Thailand, and 97pc in Singapore. These include machinery, telecommunications, and electrical equipment, as well as commodities.”
• Spreading Deflation Across East Asia Threatens Fresh Debt Crisis (AEP)
Deflation is becoming lodged in all the economic strongholds of East Asia. It is happening faster and going deeper than almost anybody expected just months ago, and is likely to find its way to Europe through currency warfare in short order. Factory gate prices are falling in China, Korea, Thailand, the Philippines, Taiwan and Singapore. Some 82pc of the items in the producer price basket are deflating in China. The figure is 90pc in Thailand, and 97pc in Singapore. These include machinery, telecommunications, and electrical equipment, as well as commodities. Chetan Ahya from Morgan Stanley says deflationary forces are “getting entrenched” across much of Asia. This risks a “rapid worsening of the debt dynamic” for a string of countries that allowed their debt ratios to reach record highs during the era of Fed largesse. Debt levels for the region as a whole (ex-Japan) have jumped from 147pc to 207pc of GDP in six years.
These countries face a Sisyphean Task. They are trying to deleverage, but the slowdown in nominal GDP caused by falling inflation is always one step ahead of them. “Debt to GDP has risen despite these efforts,” he said. If this sounds familiar, it should be. It is exactly what is happening in Italy, France, the Netherlands, and much of the eurozone. Data from Nomura show that the composite PPI index for the whole of emerging Asia – including India – turned negative in September. This was before the Bank of Japan sent a further deflationary impulse through the region by driving down the yen, and before the latest downward lurch in Brent crude prices. The Japanese know what it is like to be on the receiving end. A recent study by Naohisa Hirakata and Yuto Iwasaki from the Bank of Japan suggests that China’s weak-yuan policy – a polite way of saying currency manipulation to gain export share – was the chief cause of Japan’s deflation crisis over its two Lost Decades.
The tables are now turned. China itself is now one shock away from a deflation trap. Chinese PPI has been negative for 32 months as the economy grapples with overcapacity in everything from steel, cement, glass, chemicals, and shipbuilding, to solar panels. It dropped to minus 2.2pc in October. The sheer scale of over-investment is epic. The country funnelled $5 trillion into new plant and fixed capital last year – as much as Europe and the US combined – even after the Communist Party vowed to clear away excess capacity in its Third Plenum reforms. Old habits die hard. Consumer prices are starting to track factory prices with a long delay. Headline inflation dropped to 1.6pc in October. This is so far below the 3.5pc target of the People’s Bank of China that it looks increasingly like a policy mistake. Core inflation is down to 1.4pc.
So how does deflation link with gold? Ugly numbers, and certainly not all manipulation.
• Gold Demand in China Slumps 37% Amid Drive to Root Out Graft (Bloomberg)
Gold demand in China shrank for a third quarter as slumping prices failed to boost the purchases of bars, coins and jewelry in the world’s biggest user and officials pressed on with a nationwide anti-graft campaign. Buying by Asia’s largest economy tumbled 37% to 182.7 metric tons in the three months to September from the same period in 2013 as last year’s price-driven surge in demand wasn’t repeated, the World Gold Council said in a report today. India was the only Asian economy tracked by the producer-funded group that bought more bullion than China as usage across the biggest consuming region contracted 15% to 473.4 tons. An anti-graft drive in China this year hurt demand for luxury goods including bullion, while volatility that sank to a four-year low damped interest in the metal as an alternative investment.
Banks including Goldman Sachs expect prices to extend losses, in part as the buying frenzy that accompanied gold’s drop into a bear market in April 2013 hasn’t been sustained. China surpassed India as the world’s largest gold user last year as prices retreated 28%. “The scale of 2013’s exceptional buying continued to overshadow the market,” the London-based council said in the quarterly report that surveys global demand patterns. “The quiet environment provided China’s notoriously price-savvy investors with a further reason to stay out of the market.” Jewelry consumption in China fell 39% to 147.1 tons in the quarter, while demand for bars and coins slid 30% to 35.6 tons, the council said. Usage in the nine months to September was 638.4 tons, according to Bloomberg calculations based on figures in quarterly WGC reports in May, August and today. Last year, mainland demand was a record 1,275.1 tons, according to the council at a briefing in Shanghai today.
“China’s jewelry market continued to normalize following last year’s rapid expansion,” the council said. “Chinese investment demand this year has paused to catch its breath. Fourth-quarter bar and coin demand is shaping up to be much the same – steady, but unremarkable.” Buying in Indonesia, Southeast Asia’s largest economy, plunged 45% in the period as the Presidential election in July created a degree of political instability, according to the council. Japan’s bullion purchases fell 45% as a new sales tax damped demand, while consumption in Thailand fell 42% amid the unstable political climate, it said.
A lot of these ‘experts’ are going to get duped, and their clients hammered.
• Carney-Yellen Neck-and-Neck on Being First to Raise Rates (Bloomberg)
Federal Reserve Chair Janet Yellen may just beat Bank of England Governor Mark Carney to the first interest-rate increase since the financial crisis. Investors extended bets yesterday on how long the BOE will keep its benchmark at a record-low 0.5% after officials cut their growth and inflation forecasts. Markets are now pricing in a quarter-point increase by November next year, Sonia forwards show. As recently as August, wagers were for around February. In the U.S., the Fed is seen acting by September. “This is almost going to be like a horse race to the finish line on who’s going to go first now, whereas only three or four months ago that wouldn’t have even been close,” said Andrew Goldberg, a global market strategist at JP Morgan Asset Management in London. “The key in both countries is going to be to see what happens in wages and because of that the U.S. is now in the lead.”
Presenting the BOE’s quarterly Inflation Report, Carney cited the “specter of economic stagnation” in the euro area, the biggest market for British exports, and said U.K. inflation could slow to below 1% within months. [..] “Whereas in the middle of the year the BOE was happy to go ahead of the Fed, now we’re in a world where the BOE will likely follow the Fed,” said Mike Amey, a fund manager at Pimco in London. Investors are betting the first rate increase from the Fed will come in 10 months, Morgan Stanley index data show. Policy makers have kept their benchmark target for overnight lending between banks in a range of zero to 0.25% since December 2008. “We are behind the Fed in terms of timing,” said Ian Winship, head of sterling bond portfolios at BlackRock the world’s biggest money manager with more than $4 trillion of assets. In the UK, “we’re looking at September or October for a full hike,” he said. “The impact of the disappointment we’ve had globally is having an impact on U.K. monetary policy.”
Better do it when nobody expects it.
• Fed’s Dudley: Expectations For Mid-2015 Rate Lift-Off Reasonable (Reuters)
Market expectations that U.S. interest rates will start to lift off sometime in mid-2015 are reasonable, New York Federal Reserve President William Dudley said on Thursday. Dudley, answering questions at a luncheon hosted by the United Arab Emirates central bank in Abu Dhabi, also said recent U.S. non-farm payrolls data had been very consistent with previous releases, and had not changed his policy outlook in any meaningful way. “What I can tell you is that we are making progress toward our objectives but there is considerable further progress still to go,” he said. “I think the market expectations that expect us to lift off sometime around the middle or somewhat later next year are reasonable expectations.”
Dudley said, however, that he could not give the likely timing for when the Fed would start raising interest rates, as it would depend on how the U.S. economy was evolving and how financial markets were reacting. “No, I cannot give you more specifics and the long answer is: because I do not know. It really depends on how the economy evolves and how we progress toward our objectives of maximum sustainable employment in the context of price stability.”
I wouldn’t discount the option that Abe WANTS to lose an election, and save at least some face while the Japanese economy plummets further. If he’s not PM when the whip really comes down, he can claim innocence. Only, the opposition in Japan is so weakened it seems unlikely he can lose even if he tried. Either way, Japan is not a good place to be for the foreseeable future. A deepening deflationary recession, nationalist rhetoric and gun-slingering, the restart of nuclear plants in a shaky quaky setting, it doesn’t add up to a nice living environment.
• Abe Poised to Gamble Political Future on Snap Election (Bloomberg)
Japanese Prime Minister Shinzo Abe is poised to gamble his political future on a plan to call a snap election next month, halfway into his current term. “It’s always risky to dissolve the house when you’re the prime minister,” said Robert Dujarric, director of the Institute of Contemporary Asian Studies at Temple University in Tokyo. “Unless you win a crushing victory, you have nowhere to go but down.” Abe is likely to go to the people on Dec. 14 after postponing an unpopular sales-tax increase slated for October 2015, according to people with knowledge of his plan, who asked not to be identified because they aren’t authorized to speak. Abe is less than two years into his four-year term and elections aren’t due until 2016.
For Abe, postponing the tax would buy him goodwill with voters, increasing his chances of winning a broader mandate to push through unpopular security legislation next year. The risk is that Abe’s strategy backfires and rather than increasing his majority in the lower house, his ruling Liberal Democratic Party loses seats. That would leave him vulnerable to a leadership challenge from within his own ranks. “It’s far from certain,” he will pick up support, said Koichi Nakano, professor of political science at Sophia University in Tokyo. “His government may end up with fewer seats, and he may even face calls to step down as prime minister as a result.” Chief Cabinet Secretary Yoshihide Suga yesterday denied reports that Abe told party leaders he planned to dissolve the Diet and delay the tax increase.
” .. during the 2004 tax holiday “most of that cash was used to fund dividend payouts and share buybacks rather than to boost investment.” A Democratic congressional report indicated that the biggest companies receiving the benefits of $360 billion in repatriated funds actually cut a net 20,000 jobs”.
• US Companies Now Stashing $2 Trillion Overseas (CNBC)
U.S. companies are for the first time holding more than $2 trillion overseas, according to an analysis that paints a bleak picture of whether that money will make its way home and the limited economic impact it would have even if it does. Corporate cash has hit $2.1 trillion, a sixfold increase over the past 12 years, Capital Economics said, citing its own database as well as that of Audit Analytics and other sources. There is no official total, but the firm also used regulatory filings that included “indefinitely reinvested foreign earnings” to glean the total sitting outside U.S. borders. “The latest signs suggest that, as business confidence improves in light of the continued economic recovery, U.S. firms are starting to hold less cash domestically,” Capital economists Paul Dales and Andrew Hunter said in a report for clients. “However, the foreign cash piles of the largest firms have almost certainly continued to grow.”
That total, while daunting in its own right, is now greater than the amount held on U.S. shores, which totals just under $1.9 trillion, according to the latest Federal Reserve flow of funds tally. Such numbers are bound to get attention in Washington, which for years has been debating so-called repatriation measures that would allow companies to bring their cash back home at drastically reduced tax rates. The new Republican-controlled Congress is expected to take up the issue quickly when it convenes in January. But the Capital analysis provides little optimism in that regard. Dales and Hunter pointed out that during the 2004 tax holiday “most of that cash was used to fund dividend payouts and share buybacks rather than to boost investment.” A Democratic congressional report indicated that the biggest companies receiving the benefits of $360 billion in repatriated funds actually cut a net 20,000 jobs, and that the holiday cost Treasury coffers $3.3 billion.
“I don’t know if corruption is a strong enough word for it”.
• Barclays May Face Massive New Penalty Over Currency Rigging (Guardian)
Barclays could face a huge new penalty for rigging currency markets after pulling out at the 11th hour from the settlement talks that led to £2.6bn of fines being slapped on six other big players in the currency markets. Barclays will not be eligible for the 30% discount on the fines handed to its rivals in exchange for settling early after its surprise move not to participate in the settlement with US and UK regulators. The bank, which was the first to be fined for rigging Libor in 2012, is reported not to have agreed to the settlement with the UK’s Financial Conduct Authority and the US commodity futures trading commission because of continuing talks with another US regulator. It was the only one of the banks involved in talks over the ground-breaking settlement that is also regulated by the New York State department of financial services (DFS), run by Benjamin Lawsky, the American attorney who has in the past taken a tough stance over wrongdoing at banks.
Barclays said it had considered a settlement with the FCA and the CFTC on terms similar to the other banks – Royal Bank of Scotland, HSBC, UBS, JP Morgan and Citigroup. “However, after discussions with other regulators and authorities, we have concluded that it is in the interests of the company to seek a more general coordinated settlement,” the bank said. [..] In Britain, UBS was handed the biggest fine, at £233m, followed by £225m for Citibank, JP Morgan at £222m, RBS at £217m and £216m for HSBC. In the US, the regulator fined Citibank and JP Morgan $310m (£196m) each, $290m (£184m) each for RBS and UBS, and $275m (£174m) for HSBC. The Swiss regulator – which also found issues with UBS’s metal trading – also punished the Swiss bank for having failed to investigate warnings of currency market manipulation. Another US regulator, the Office of the Comptroller of the Currency, also imposed fines on JP Morgan, Citi and Bank of America, taking the day’s tally to £2.6bn.
The banks face further fines from regulators whose investigations are continuing. The FCA and the CFTC published hundreds of pages of documents alongside their findings against five banks. Chatroom talk between traders showed them discussing information about their clients’ orders with names such as “3 musketeers” and the “A-team”. The City minister, Andrea Leadsom, said those who had done wrong “will not be back in a dealing room on a big salary”. She told BBC Radio 4’s Today programme: “It’s completely disgusting. I think taxpayers will be horrified … I don’t know if corruption is a strong enough word for it.”
Well, there’s a plan.
• Rig A Market, Go To Jail (Bloomberg ed.)
Regulators in the U.K., the U.S. and Switzerland have moved with impressive speed to extract about $4.3 billion from some of the world’s largest banks for their role in rigging global currency markets. Now comes the hard part: identifying and punishing the people who actually did the manipulating. The settlements with six banks – UBS, Citigroup, JPMorgan Chase, Bank of America, Royal Bank of Scotland and HSBC – paint a picture that has become depressingly familiar from previous market-manipulation scandals, ranging from commodities to interest rates. Foreign-exchange traders profited at their clients’ expense by abusing information about orders, and they conspired to influence London-based financial benchmarks that affected trillions of dollars in transactions and investments worldwide. The relevant transgressions went on from 2008 through late 2013, persisting even as some of the same banks were reaching settlements over the rigging of the London interbank offered rate, or Libor.
At least one more bank, Barclays, is still working on a deal with authorities. Details presented by regulators illustrate just how commonplace the manipulation of global benchmarks had become. Traders formed groups – with names such as “the players,” “the 3 musketeers” and “the A-team” – that focused on specific currencies. Using private chat rooms, they routinely shared information about their clients’ orders with the aim of pushing the WM/Reuters benchmark exchange rates, set at 4 p.m. London time, in the desired direction. “Hooray nice team work,” one trader wrote after an apparently successful attempt to “whack” the British pound. Misbehavior on such a scale could not have happened without the participation – or at least the willful blindness – of numerous actual people, most likely including senior managers. So it’s encouraging that the U.K. Serious Fraud Office and the U.S. Department of Justice are conducting criminal investigations, which the latter expects to result in charges sometime next year.
Unfortunately, the prosecutors won’t be able to build cases as strong as they could have been. They came late to the game, starting their investigations only after Bloomberg News published its first reports on the manipulation in 2013. Beyond that, London’s foreign-exchange markets have existed in a legal gray area, where no laws expressly prohibit manipulation.
Ban them from trading and break them up. What are we waiting for?
• Fines Don’t Deter Bad Banks. So Ban Them From Trading (Guardian)
The rigging of foreign exchange markets is a bigger scandal than Libor. It lacks the element of surprise since it is no longer news that some traders will lie and cheat when inadequately supervised. But that’s what makes it bigger. Forex-rigging continued to happen after the Libor scandal broke. Note the end-date of the investigations overseen by the UK’s Financial Conduct Authority (FCA) and the US’s commodities futures and trading commission: 15 October 2013. The deterrent impact of Libor seems to have been zero. What were these banks’ managements doing to honour their worthy words about cleansing the rotten culture in trading rooms? As FCA chief executive Martin Wheatley noted wearily, monitoring employees’ chat rooms “is not a complex thing to do”. Quite. The existence of potential conflicts of interest between a bank and its clients is obvious in currency markets. So too is the scope for collusion.
You do not have to be Sherlock Holmes to suspect that chat-room exchanges such as these might indicate dodgy practices: “how can I make free money with no fcking heads up”; “just about to slam some stops”; “lets double team em”. Yet this garbage was bandied about for years. Did managements really not know, or even suspect, something was wrong? Did they just turn a blind eye? Or did they take comfort in the false notion that the forex market is so big and so liquid that it would be impossible to rig? All possible explanations are alarming. In a rational world, the customers would move their business to firms with higher standards. That is not going to happen because investment banking is almost a closed shop. The five firms involved in today’s settlement plus Barclays, which is yet to settle, are six of the biggest banks in the world. But if fines (paid by shareholders anyway) don’t improve behaviour, and if bank managements can’t, or won’t, police their trading floors competently, what’s left?
Criminal convictions for fraudulent behaviour are one great hope – rightly so because the threat of time in jail is the surest way to concentrate minds on trading floors. We wait to see what the Serious Fraud Office delivers. But regulators must also look beyond endless fines. The FCA, we are told, considered imposing suspensions on the banks from trading forex on behalf of clients but decided against. Some of the offending acts were considered too ancient and there was a fear of disrupting a critical financial market. OK, but a three-month temporary ban on trading forex would improve behaviour faster than any fine. Managements would fear being sacked. Shareholders might wake up and demand proof of root-and-branch reform. Or big banks might break themselves up into easier-to-manage units. Heavy-handed? You bet, but six years after the financial crash, some of the world’s biggest banks are still out of control. In other fields, firms with shoddy practices fear the loss of their licence to operate. Big banks don’t, but should.
The prediction nonsense takes on grotesque forms.
• G-20 Stimulus Plans May Boost Growth by Extra 2.1%, OECD Says (Bloomberg)
Group of 20 economies will surpass their 2% additional growth target if stimulus plans are fully implemented, according to the OECD. Global GDP could expand by an additional 2.1% by 2018, OECD Secretary-General Angel Gurria said today in Brisbane, where the G-20 summit takes place this weekend. “The big ‘if’ is full implementation, and that’s not always something that one can assume,” he said in an interview. G-20 members have submitted plans to achieve the target of lifting the group’s collective GDP by an additional 2%, or more, over five years. Australian Treasurer Joe Hockey said at a meeting of finance ministers in September that measures proposed at that time by member economies had brought the G-20 about 90% of the way to achieving the target. “There is a heavy burden on the shoulders of leaders and finance ministers to deliver on the plan to grow economic growth right across the world, and therefore create jobs for millions and millions of people,” Hockey told reporters in Brisbane today.
Beijing feeds its people the misery one bite at a time.
• China Slowdown Deepens as Leaders Said to Mull Cutting Growth Target (Bloomberg)
China’s slowdown deepened in October as policy makers refrained from economy-wide stimulus, with industrial output and investment trailing estimates. Factory production rose 7.7% from a year earlier, the second weakest pace since 2009, a government report showed today. Investment in fixed assets such as machinery expanded the least since 2001 from January through October, and retail sales gains also missed economists’ forecasts last month. The government has kept to targeted steps to shore up the economy this year, rather than a broader response such as nationwide interest-rate cuts, to avert a repeat of a buildup in debt from the record 2008-2009 credit surge. With the focus instead on structural changes, leaders have discussed lowering their economic growth target for 2015.
“The data highlights downward pressure,” said Dariusz Kowalczyk, senior economist at Credit Agricole SA in Hong Kong. “It will encourage further monetary easing.” After the figures, reports spread of a fresh initiative by the central bank to target liquidity injections. The People’s Bank of China is gauging city commercial banks’ demand for funds to support lending to small enterprises, according to an official with knowledge of the matter. The PBOC didn’t immediately respond to requests for comment. Financial institutions in some provinces, including Jiangsu and Zhejiang, are submitting applications for collateralized central bank loans, according to the official. The PBOC will later decide the total size of the injections, which could run into tens of billions of yuan, the official said.
After all, what good would it do?
• China’s Central Bank Resists Calls For Stimulus (FT)
Even as Japan and the EU embark on fresh rounds of quantitative easing to ward off deflation, the People’s Bank of China (PBoC) is holding the line against major stimulus. China’s central bank is resisting a rising chorus appealing for more aggressive easing to arrest a slowdown in the economy. Instead it is taking a gritted-teeth approach that accepts short-term pain as the price of structural reform that will support sustainable long-term growth. At first glance calls for easing in China appear justified. Consumer price inflation remained mired near a five-year low in October, while the government’s purchasing managers’ index hit a five-month low. That followed growth in economic output in the third quarter that was the slowest since the financial crisis.
Yet a year after the Communist party revealed a landmark economic reform blueprint, the PBoC wants to avoid steps that would be viewed as undermining the effort to reduce the economy’s reliance on debt and investment to fuel growth. “The central bank has become wary of using its traditional monetary tools like cuts in the required reserve ratio and benchmark interest rates. They’ve basically shelved them,” says Wang Yingfeng, investment director at Shanghai Yaozhi Asset Management, which runs a bond fund. The shifting approach is in part a matter of style over substance. Even as it held off on a reserve ratio cut, in September and October the PBoC injected Rmb770 billion ($125 billion) into the banking system via a new monetary policy tool called the Medium-term Lending Facility.
That is more money than would have entered the system through a 0.5 percentage-point RRR cut, traditionally the central bank’s main tool for managing the money supply. But the low-key nature of these fund injections – which went unannounced at the time – allows the central bank to avoid sending a strong easing signal. “The PBoC can lower actual market rates by injecting liquidity without cutting bank benchmark rates,” Lu Ting, chief China economist at Bank of America-Merrill Lynch, wrote in a note last week. “Cutting rates is perceived as anti-reform and kind of politically incorrect.”
” .. what does Bill Dudley and the rest of the Fed have wrong? They have wrong the idea that 2% inflation is going to accomplish anything. There is no historical or scholastic basis.”
• Stockman: Central Banks Setting Up World for Bad Time (Bloomberg)
It has gotten worse. Much worse. The Bank Of Japan trumps all with massive accommodation. They try to reverse deflation and spur growth. That brings us to my chart of the year. This is from the team’s strategic. This is back to the Draghi speech of 2012. All you need to know is one of the banks, it is not like the others. The austerity of the ECB and everybody else has a punch bowl seal – filled to the brim. This is the method. None of this is in the textbook. This is monetary madness off the deep end. They started with 50%. They will be adding 80 trillion to the balance sheet. What is the purpose? To trash the yen. They have a process started that is going to up end – what does Bill Dudley and the rest of the Fed have wrong? They have wrong the idea that 2% inflation is going to accomplish anything. There is no historical or scholastic basis.
All the world is no longer a stage as it was in Shakespeare’s day, it’s a casino.
• Cash-Burning Bets on Oil Rebound Surge in U.S. ETF Market (Bloomberg)
While calling a bottom in oil is proving a tricky, and costly, exercise for contrarian investors, they are undeterred. After pouring the most money into funds that track oil prices in two years last month, investors are ramping up the bet even further this month, moving cash in at twice the October pace. The four biggest U.S. exchange-traded products tied to oil had 70.5 million shares outstanding yesterday, the most since May 2013, according to exchange data compiled by Bloomberg. More than 1 million shares in the ETFs are being created on average each day this month, the result of soaring demand.
The trade has gone terribly since investors first started adding to oil ETF positions at the start of October. West Texas Intermediate, the U.S. crude benchmark, has tumbled 15% over that time, swelling its selloff since a June peak to 28% as soaring U.S. output and a slowdown in global demand growth created a supply glut. “Price momentum is still negative, and yet someone is buying,” said Stoyan Bojinov, a Chicago-based analyst at ETF Database. “Either they are wrong and they are hoping for the reversal, or they are establishing a position while everybody else is still selling.” The inflows have almost been non-stop since Oct. 1, with more shares being added to the four biggest oil ETFs than redeemed on all but four days.
It’s just business.
• Saudi Oil Minister: There Is No ‘Price War’ (CNBC)
Saudi Arabia’s oil minister publicly knocked talk of an OPEC “price war” but did little in the way of clarifying what the cartel will do about falling prices.Ali al-Naimi, speaking in Mexico, said Saudi oil policy is not changing and has been stable for decades. He said the market, not Saudi Arabia, sets prices, and that the kingdom is doing what it can with other producers to ensure stability, according to Reuters.The oil market has become laser focused on the Nov. 27 OPEC meeting, and there is speculation its much-divided members will have to agree to cut production if they want to see the roughly 30% decline in prices start to reverse.Oil prices continued to grind lower Wednesday, with Brent crude futures falling further after Naimi spoke, breaking $80 per barrel for the first time since September, 2010. Brent ended the day at $80.38, down 1.6%, and U.S. West Texas Intermediate was also lower, falling more than 1% to $77.18 per barrel.
Given its slowing economy, one should wonder if China now does with oil what it did with copper. With that economy set to keep slowing, that would mean much less Chinese demand for oil going forward, further pressuring prices..
• Oil Tankers Stream Toward China as Price Drop Sparks Boom (Bloomberg)
Add oil shippers to the list of winners from this year’s collapse in crude. The price plunge has spurred China, the world’s second-biggest importer after the U.S., to accelerate bookings of oil cargoes. It will also shave almost $20 billion a year in fuel costs across the maritime industry if prices that dropped 18 percent since last November hold around current levels, according to data compiled by Bloomberg. While the oil slide is hurting nations from Saudi Arabia to Iran that depend on energy for revenues, companies including airlines and cement makers are benefiting as their fuel costs decline. Ship owners serving the industry’s benchmark Middle East-to-Asia trade routes are reaping the best returns from charters in years as the slump drives down the industry’s single biggest expense.
“We’ve seen the Chinese buying a lot from the Middle East and that’s really let rates cook,” Erik Stavseth, an analyst at Arctic Securities in Oslo whose recommendations on shippers returned 15 percent in the past year, said by phone Nov. 11. “With oil prices low going into winter, that’s likely to continue.” The number of supertankers sailing toward China’s ports matched a record on Oct. 17 and is still close to that level now. The increase reflects China taking advantage of falling prices to fill its Strategic Petroleum Reserve, according to Richard Mallinson, a London-based analyst at Energy Aspects Ltd.
LNG is not a great business to be in. Upfront investment has been huge, and look now.
• Russia-China Gas Accord to Pressure LNG in Canada, Australia (Bloomberg)
Russia’s move to broaden its energy ties to China is clouding the outlook for natural gas export projects on the drawing board in the U.S., Canada and Australia. Companies looking to approve liquefied natural gas plants in the next couple of years and start shipments at the end of the decade will probably experience delays, according to energy consultants Tri-Zen International Inc. Gas-supply agreements between Russia, the world’s largest energy exporter, and China, the biggest consumer, are adding to pressure on projects that are already facing increasing competition, rising costs and the prospect of lower prices.
“It’s just bad news generally” for LNG around the world, said Peter Howard, president of the Canadian Energy Research Institute. “It’s going to get really crowded.” China and Russia signed an initial gas accord two days ago, after a $400 billion deal earlier this year. The tie-up means that only one-in-20 proposed LNG projects targeting the 2020 market will be needed, while one-in-five seeking 2025 sales will be required, according to a Macquarie Group Ltd. report. “It’s not good news for projects hoping to get to a final investment decision in the next year or two,” Tony Regan, a consultant at Singapore-based Tri-Zen, said today. “Those developers will need to think about the post 2020 market.”
Historical fiction writer Hilary Mantel (“The Assassination of Margaret Thatcher”) doesn’t like what she sees.
• ‘What’s Happening in Britain at the Moment Is Really Ugly’ (Spiegel)
SPIEGEL: How is the Britain of today different from the country you grew up in?
Mantel: I was born into a working class family in a village near Manchester. My grandmother worked as a weaver in a mill when she was 12, my mother at 14. That was what you did: As soon as you left school, you had to work in the mill. By the time I was a child, the mills were closing and I was lucky to get a government grant for university. In the years after the war, both big parties, Labour and the Conservatives, were becoming ever-more centrist, drawing together on a social democratic path — a period known as the postwar consensus. Maybe it couldn’t have lasted, but we perceive Ms. Thatcher as the person who knocked it down. Going to university is a seriously expensive business now.
SPIEGEL: It seems as though Britain today wants to retreat from the world, as though it has become war-weary, disinterested in global affairs and obsessed with immigration. Where does this come from?
Mantel: It’s a retreat into insularity, into a mood of harshness. When people feel they’re being mistreated, they lash out against people who are weaker than themselves, immigrants for example. What’s happening here at the moment is really ugly. The government portrays poor and unfortunate people as being morally defective. This is a return to the thinking of the Victorians. Even in the 16th century, Thomas Cromwell was trying to tell people that a thriving economy has casualties and that something must be done by the state for people out of work. Even back then, you saw the tide turning against this idea that poverty was a moral weakness. Who could have predicted that it would come back into style? It’s myth making on a grand scale, and it’s poisonous.
Dmitry looks at the future.
• Twilight of the Oligarchs (Dmitry Orlov)
Last week I published a brave prediction: “I see the political elites and their oligarch puppet-masters becoming endangered species in the United States before too long as the populace, including their own bodyguards, turns against them.” As usual, I made no attempt to specify what I mean by “before too long” because making predictions as to timing is a fool’s game. And, as usual, I got a flurry of emails expressing a wide range of rationalizations but all adding up to the same sentiment: “not any time soon.” Some people thought that the populace, consisting as it does of zombified overfed clowns addicted to Facebook and internet porn is unlikely to stage the revolution.
Others thought that the oligarchy will manage to manipulate financial markets, destroy one country after another in order to drain all remaining wealth out of the world and consume it, and by so doing manage to placate the populace with bread and circuses, well into the future. The bodyguards are unlikely to rebel, some said, because they are so well paid. Getting back to basics, it is a fairly obvious and increasingly well-recognized fact that the American empire, the empire of military bases, the Federal Reserve, the IMF and the World Bank, is on its way out. And it is a well-known fact about empires that when they fail those who held positions of power and privilege within them are quickly recycled into punching bags and pincushions. Oddly, nobody mentioned any of the mechanisms by which this transformation tends to take place, so I thought I’d mention them briefly.
First, when empires start falling apart, this is manifested in a few ways. One is loss of control over the periphery, as a shrinking pool of resources is used to shore up the center. Another is loss of control over the use of violence, as a wide variety of violent entrepreneurs enter the scene and the center is forced to play them against each other and make deals with them. And as the unraveling progresses, the violent entrepreneurs develop agendas of their own, which, inevitably, involve having the cooperation flow the other way: instead of cooperating with those formerly in charge, they demand that those formerly in charge start cooperating with them. And it is here that the scene turns bloody.