Sep 212016
 
 September 21, 2016  Posted by at 9:16 am Finance Tagged with: , , , , , , , , ,  Comments Off on Debt Rattle September 21 2016


Harris&Ewing Preparations for the inauguration of Woodrow Wilson, Court of Honor before White House 1913

Unlike in 1986, This Time US Might Not Dodge a Recession: Deutsche Bank (BBG)
Get Ready For The Mother Of All Stock Market Corrections (Tel.)
Japan Exports Fall 11th Straight Month, 9.6% YoY, Imports Plunge 17.3% (R.)
Bank of Japan Overhauls Policy Framework, Sets Yield Curve Target (R.)
Bank of Japan Introduces Rate Target for 10-Year Government Bonds (WSJ)
Could Germany Allow Deutsche Bank To Go Under? (Golem XIV)
Keynesian Deflation Humbug (Mish)
Nobody Has Ever Shut Down The World’s Best Drilling Rigs – Until Now (BBG)
Crude Slips As Venezuela Says Market Is 10% Oversupplied (Dow Jones)
SEC Probes Exxon Over Asset Valuation, Climate Change Accounting (WSJ)
Court Says Hanjin Shipping Rehab Plan ‘Realistically Impossible’ (R.)
Elizabeth Warren to Wells Fargo CEO: Resign, Return Earnings, Face Inquiry (G.)
Mexico Police Raid Sawmills To Rescue Monarch Butterfly Refuge (AFP)
Italy PM Renzi: Merkel Is ‘Lying To The Public’, Europe Is a ‘GHOST’ (Exp.)
EU: Refugees Must Stay On Greek Islands Despite Lesbos Fire (AP)

 

 

There are few things more nonsensical than ‘experts’ saying things like “..there’s a 30% probability that the U.S. will succumb to a recession over the next 12 months..” Yet, people keep listening.

Unlike in 1986, This Time US Might Not Dodge a Recession: Deutsche Bank (BBG)

Falling corporate margins, weakness in the U.S. labor market and rising corporate default rates — all features of the U.S. economy in 1986, a year it avoided a recession. Even if this year markets are largely shrugging off the deterioration in those key indicators and betting grim readings are down to temporary forces, Deutsche Bank strategists say to take little hope from a 30-year old precedent. Investors jittery over bleak readings on a slew of macro and corporate data have seized on 1986, when the same signals for a U.S recession were in place but the economy ended up growing 3.5% after inflation.

But bets on the continued expansion in U.S. output over the next year might be misplaced, according to European equity strategists at Deutsche Bank, since the economy is on a significantly weaker footing compared to the year that saw the release of Ferris Bueller’s Day Off. They restate the bank’s call that there’s a 30% probability that the U.S. will succumb to a recession over the next 12 months. That compares pessimistically with the 20% that is the average expectations of analysts surveyed by Bloomberg — and even with other analysts at the bank.

Read more …

…when central banks stop printing…

Get Ready For The Mother Of All Stock Market Corrections (Tel.)

[..] According to Chris Watling at Longview Economics, a wide range of indicators confirm the message: recession risks are rising. And if a recession is indeed looming, it almost certainly means a bear market in equities. Looking at all the US recessions of the last 77 years, Mr Watling finds that there is only one (1945) which has not been accompanied by a stock market correction. Complicating matters further is an ever more worrisome phenomenon – that both bond and equity markets are being artificially propped up by central bank money printing. Further easing this week from the Bank of Japan would only deepen the problem. Yet eventually it must end, and when it does, share prices globally will return to earth with a bump. Only lack of alternatives for today’s ever rising wall of money seems to hold them aloft.

Over the last year, central bank manipulation of markets has reached ludicrous levels, far beyond the “quantitative easing” used to mitigate the early stages of the crisis. Through long use, “unconventional monetary policy” of the original sort has become ineffective, and, well, simply conventional in nature. To get pushback, central banks have been straying ever further onto the wild-west frontiers of monetary policy. Today it’s not just government bonds which are being bought up by the lorry load, but corporate debt, and in the case of the Bank of Japan and the Swiss National Bank (SNB), even high risk equities. [..] For global corporations at least, credit has never been so free and easy, encouraging aggressive share buy-back programmes.

This in turn further inflates valuations already in danger of losing all touch with underlying fundamentals. By the by, it also helps trigger lucrative executive bonus awards. Where’s the real earnings and productivity growth to justify the present state of stock markets? As long as the central bank is there to do the dirty work, it scarcely seems to matter. In any case, the situation seems ever more precarious and unsustainable. Conventional pricing signals have all but disappeared, swept away by a tsunami of newly created money. Globally, the misallocation of capital must already be on a par with what happened in the run-up to the financial crisis, and possibly worse given the continued build-up of debt since then.

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World trade summed up.

Japan Exports Fall 11th Straight Month, 9.6% YoY, Imports Plunge 17.3% (R.)

Japan’s exports fell 9.6% in August from a year earlier, posting an 11th straight month of decline, Ministry of Finance data showed on Wednesday, underscoring sluggish external demand. The fall compares with a 4.8% decrease expected by economists in a Reuters poll. It followed a 14.0% drop in July, the data showed. Imports fell 17.3% in August, versus the median estimate for a 17.8% decline. The trade balance swung to a deficit of 18.7 billion yen ($184 million), versus the median estimate for a 202.3 billion yen surplus. It was a first trade deficit in three months.

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Who says Kuroda has no sense of humor? After failing to lift inflation for years, he now says he will “..allow inflation to overshoot its target..

Bank of Japan Overhauls Policy Framework, Sets Yield Curve Target (R.)

The Bank of Japan added a long-term interest rate target to its massive asset-buying program on Wednesday, overhauling its policy framework and recommitting to reaching its 2% inflation target as quickly as possible. The central bank also said it will allow inflation to overshoot its target by maintaining an ultra-loose policy – beefing up its previous commitment to keep policy easy until the target was reached and kept in a stable manner. At the two-day rate review that ended on Wednesday, the BOJ maintained the 0.1% negative interest rate it applies to some of the excess reserves that financial institutions park with the central bank.

But it abandoned its base money target and instead adopted “yield curve control” under which it will buy long-term government bonds to keep 10-year bond yields at current levels around zero %. The BOJ said it would continue to buy long-term government bonds at a pace that ensures its holdings increase by 80 trillion yen ($781 billion) per year. Under the new framework that adds yield curve control to its current quantitative and qualitative easing (QQE), the BOJ will deepen negative rates, lower the long-term rate target, or expand base money if it were to ease again, the central bank said in a statement announcing the policy decision. “The BOJ will seek to lower real interest rates by controlling short-term and long-term interest rates, which would be placed as the core of the new policy framework,” it said.

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But seriously, historians will look back on today wondering how on earth we could have all swallowed this continuing gibberish.

Bank of Japan Introduces Rate Target for 10-Year Government Bonds (WSJ)

Japan’s central bank took an unexpected step Wednesday, introducing a zero interest-rate target for 10-year government bonds to step up its fight against deflation, after an internal review of previous measures that fell short of expectations. he adoption of a long-term target, the first such attempt in the BOJ’s history, came as global central banks struggle to find ways to get prices rising. Financial markets gyrated following the Bank of Japan’s announcement of what it called a “new framework” to overcome deflation. Some thought it illustrated the limits of the BOJ’s powers, since the decision didn’t include any direct new stimulus measures, while others were encouraged by the BOJ’s tone.

“Investors are showing a positive response as they got the feeling that the BOJ will do whatever it can do to tackle deflation,” said Kengo Suzuki at Mizuho Securities in reference to the yen’s fall following the BOJ action. The dollar was around 102.60 yen in afternoon Tokyo trading, compared with around 101.90 yen before the decision. The 10-year Japanese government bond yield had already been near zero in recent weeks. It was minus 0.06% just before the decision and was minus 0.03% in Tokyo afternoon trading hours after the decision. The new framework puts 10-year interest rates at the center of policy, a contrast to the BOJ’s approach for the last 3 1/2 years under Gov. Haruhiko Kuroda, when asset purchases and expanding the monetary base were the key policy tool.

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Smart from Golem.

Could Germany Allow Deutsche Bank To Go Under? (Golem XIV)

[..] public bail outs are supposed to be strictly temporary. No holding 80% of RBS for most of a decade. Really? But that’s not the point which is important for Deutsche Bank. The important point is that in any sale of the viable parts of Germany’s only G-SIB, the brutal fact of the matter is that there is no other German financial institution that could afford to buy any of it. Commerzbank? Allianz? Letting an insurer buy a bank? So imagine the situation for Germany. They lose their seat at the top table and then they watch as France, England, American or perhaps China buy the crown of German financial might. So I don’t think it will ever happen. Or at least it will only happen when Germany is truly out of any other options. So if Deutsche is not going to be declared “no longer viable” what are the alternatives?

One option is the UniCredit route. UniCredit was a trillion euro bank. It was Italy’s flag carrier. It had bought Bavaria’s banks and some of Austria’s as well. And yet it’s share price was always paltry. Just 7.6 Euros at the market top in May ’07. And since then it has been a hollow and enfeebled giant. Lumbering and ineffectual. It has been the laughing stock of European banks. But Italy doesn’t seem to mind. They seem content to let UniCredit be the quintessential Zombie bank. Would Germany be as sanguine to leave Deutsche to go the same way? This would, I suggest, be almost as injurious to German pride and industrial policy as letting Deutsche go down completely.

But if Germany decided it could not face the financial consequences of obeying the letter of the resolution law nor leave the bank to be a bloated and useless zombie then the alternatives bring in their train even greater political upheavals. Imagine the German government decides that not bailing out Deutsche just inflicts too much damage on Germany – potentially reducing Germany from the front rank of globally significant nations to something lesser. It becomes a matter of national pride if not of survival. So Germany ignores all the FSB rules and regulations and bails Deutsche bringing it into government ownership/protection – call it what you like. In so doing it demolishes the entirety of European policy regarding bail outs, government debts and austerity.

Where then all the German insistence on fiscal discipline it has forced upon Greece, Ireland, Portugal, Spain and Italy? The Bundesbank, Berlin and the ECB would have no authority at all. Every country would have a green light to do the same for their flag carriers. It would be the end the European experiment. Or the European system would have to try to continue without Germany. And that could only happen if all debts to Germany were repudiated. I realise all this is speculation. But Deutsche has lost 90% of its value. Only RBS has lost more. Deutsche has 7000 legal cases against it. Frau Merkel is losing her grip, Brexit rocked the complacent rulers of Euroland and Madame Marine Le Pen would like to push France to do the same.

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Mish restates the obvious: “Keynesian theory says consumers will delay purchases if prices are falling. In practice, all things being equal, it’s precisely the opposite.”

Keynesian Deflation Humbug (Mish)

Hip, hip, hooray! The CPI is up more than expected, led by a huge 1.1% month-over-month surge in medical care supplies. Medical care services jumped 0.9%, and shelter jumped 0.3%. This will not help the economy. And it will subtract from consumer spending other than Obamacare and rent, but economists are cheering.

Real World Happiness

  • Food at home -1.9%
  • Energy -9.2%
  • Gasoline -17.3%
  • Fuel Oil -12.8%
  • Electricity -.07%
  • Used cars -4.0%

Unreal World Happiness

  • Food Away From Home +2.8%
  • Medical Care Commodities +4.5%
  • Shelter +3.4%
  • Transportation Services +3.1%
  • Medical Care Services +5.1%

Keynesian Theory vs. Practice Keynesian theory says consumers will delay purchases if prices are falling. In practice, all things being equal, it’s precisely the opposite. If consumers think prices are too high, they will wait for bargains. It happens every year at Christmas and all year long on discretionary items not in immediate need.

Reality Check Questions

  • If price of food drops will people stop eating?
  • If the price of gasoline drops will people stop driving?
  • If price of airline tickets drop will people stop flying?
  • If the handle on your frying pan falls off or your blow-dryer breaks, will you delay making another purchase because you can get it cheaper next month?
  • If computers, printers, TVs, and other electronic devices will be cheaper next year, then cheaper again the following year, will people delay purchasing electronic devices as long as prices decline?
  • If your coat is worn out, are you inclined to wait another year if there are discounts now, but you expect even bigger discounts a year from now?
  • Will people delay medical procedures in expectation of falling prices?
  • If deflation theory is accurate, why are there huge lines at stores when prices drop the most?

Bonus Question

If falling prices stop people from buying things, how are any computers, flat screen TVs, monitors, etc., ever sold, in light of the fact that quality improves and prices decline every year?

Anyone who thinks soaring Obamacare and rent is a good thing and will help the economy is crazy.

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Forget the OPEC output cut talks, here’s what’s really happening in oil.

Nobody Has Ever Shut Down The World’s Best Drilling Rigs – Until Now (BBG)

In a far corner of the Caribbean Sea, one of those idyllic spots touched most days by little more than a fisherman chasing blue marlin, billions of dollars worth of the world’s finest oil equipment bobs quietly in the water. They are high-tech, deepwater drillships – big, hulking things with giant rigs that tower high above the deck. They’re packed tight in a cluster, nine of them in all. The engines are off. The 20-ton anchors are down. The crews are gone. For months now, they’ve been parked here, 12 miles off the coast of Trinidad & Tobago, waiting for the global oil market to recover. The ships are owned by a company called Transocean Ltd., the biggest offshore-rig operator in the world. And while the decision to idle a chunk of its fleet would seem logical enough given the collapse in oil drilling activity, Transocean is in truth taking an enormous, and unprecedented, risk.

No one, it turns out, had ever shut off these ships before. In the two decades since the newest models hit the market, there never had really been a need to. And no one can tell you, with any certainty or precision, what will happen when they flip the switch back on. It’s a gamble that Transocean, and a couple smaller rig operators, felt compelled to take after having shelled out millions of dollars to keep the motors running on ships not in use. That technique is called warm-stacking. Parked in a safe harbor and manned by a skeleton crew, it typically costs about $40,000 a day. Cold-stacking – when the engines are cut – costs as little as $15,000 a day. Huge savings, yes, but the angst runs high.

Read more …

OPES helps the US bring Maduro to his knees.

Crude Slips As Venezuela Says Market Is 10% Oversupplied (Dow Jones)

Oil prices dipped to a new one-month low Tuesday as hopes for any deal between OPEC countries and Russia to freeze production continued to fade. U.S. crude for October delivery recently fell 14 cents, or 0.3%, to $43.18 a barrel on the New York Mercantile Exchange. The October contract expires at settlement, and the more actively traded November contract recently fell 27 cents, or 0.6%, to $43.59 a barrel. Brent, the global benchmark, fell 42 cents, or 0.9%, to $45.53 a barrel on ICE Futures Europe. Recent trade has been marked by fears that more OPEC members are intent on increasing production, even as leaders discuss the possibility of an output cap. Libya, Iran and Nigeria combined want to increase their output by about 1.5 million barrels a day this year.

Even Venezuela is raising exports, despite financial and production troubles, and the moves from all these countries are a clear message that none would be interested in agreeing to a cap, said Bjarne Schieldrop from Sweden’s SEB bank. He added that any deal would probably allow exceptions for Nigeria, Libya, Venezuela and Iran to lift production, possibly nullifying any agreement. “It doesn’t seem like any oil producers outside of North America are doing anything to control their production levels,” said Gene McGillian, research manager at Tradition Energy. Oil has been in a steady downtrend for the better part of two weeks with concerns over lingering oversupply. Prices are down 9.4% since they hit a high point for nearly the past month on Sept. 8.

The biggest drop came in two days last week after the International Energy Agency said a slowdown in global oil demand growth accelerated this quarter, sinking to 800,000 barrels a day – 1.5 million barrels a day lower than the third quarter of 2015. Despite that and talks of an output cap, data show OPEC members broadly producing near-record amounts of crude. “Fundamentals suggest the oil market is likely to remain in surplus for longer than many expected,” strategists at ING Bank said in a note.

Read more …

Exxon has not: 1) written down valuations of reserves as prices plunged, and 2) accounted for the financial consequences of climate change regulations.

SEC Probes Exxon Over Asset Valuation, Climate Change Accounting (WSJ)

The U.S. Securities and Exchange Commission is investigating how Exxon Mobil values its assets in a world of increasing climate-change regulations, a probe that could have far-reaching consequences for the oil and gas industry. The SEC sought information and documents in August from Exxon and the company’s auditor, PricewaterhouseCoopers, according to people familiar with the matter. The federal agency has been receiving documents the company submitted as part of a continuing probe into similar issues begun last year by New York Attorney General Eric Schneiderman, the people said.

The SEC’s probe is homing in on how Exxon calculates the impact to its business from the world’s mounting response to climate change, including what figures the company uses to account for the future costs of complying with regulations to curb greenhouse gases as it evaluates the economic viability of its projects. The decision to step into an Exxon investigation and seek climate-related information represents a moment in the effort to take climate change more seriously in the financial community, said Andrew Logan, director of the oil and gas program at Ceres, a Boston-based advocacy organization that has pushed for more carbon-related disclosure from companies.

“It’s a potential tipping point not just for Exxon, but for the industry as a whole,” he said. As part of its probe, the SEC is also examining Exxon’s longstanding practice of not writing down the value of its oil and gas reserves when prices fall, people familiar with the matter said. Exxon is the only major U.S. producer that hasn’t taken a write down or impairment since oil prices plunged two years ago. Peers including Chevron have lowered valuations by a collective $50 billion.

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Shipping prices will plummet.

Court Says Hanjin Shipping Rehab Plan ‘Realistically Impossible’ (R.)

The South Korean court overseeing Hanjin Shipping’s receivership said a rehabilitation plan is “realistically impossible” if top priority debt such as backlogged charter fees exceed 1 trillion won ($896 million), South Korea’s Yonhap newswire reported on Wednesday. Hanjin Shipping, the world’s seventh-largest container carrier, filed for receivership late last month in a South Korean court and must submit a rehabilitation plan in December. With debt of about 6 trillion won ($5.4 billion) at the end of June and the South Korean government’s unwillingness to mount a rescue, expectations are low that Hanjin Shipping will be able to survive. Top priority debt means claims for public interests, which are paid first to creditors and include cargo owners’ damages and unpaid charter fees, Yonhap reported citing the Seoul Central District Court.

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Shouldn’t such an inquiry be as obvious as common sense??

Elizabeth Warren to Wells Fargo CEO: Resign, Return Earnings, Face Inquiry (G.)

Wells Fargo chief executive John Stumpf should resign, return his pay and be criminally investigated over the bank’s illegal sales practices, Senator Elizabeth Warren said on Tuesday. The Massachusetts senator’s comments came moments after Stumpf said he was “deeply sorry” for the more than 2m unauthorized accounts his staff opened for the bank’s customers. The accounts, ranging from credit cards to checking accounts, were opened by thousands of the bank’s employees in an effort to meet Wells Fargo’s sales quotas and have already led to a record $185m fine. While testifying in front of the Senate banking committee, Stumpf said he was “deeply sorry” that the bank let down its customers and apologized for violating their trust.

“I accept full responsibility for all unethical sales practices in our retail banking business, and I am fully committed to doing everything possible to fix this issue, strengthen our culture, and take the necessary actions to restore our customers’ trust,” Stumpf said in his prepared remarks. Warren accused Stumpf of “gutless leadership”, telling him that his definition of being accountable is to push the blame on lower-level employees who do not have a PR firm to defend them. Warren questioned Stumpf’s compensation, asking him: “Have you returned one nickel of the millions of dollars that you were paid while this scam was going on?” “The board will take care of that,” Stumpf said after attempting to duck the question. He also told Warren that this “was not a scam”.

Warren pointed out that during the time that the unauthorized accounts were being opened, the share price of Wells Fargo went up by about $30. Stumpf personally owns about 6.75m shares of Wells Fargo stock and made more than $200m just off his stock during that time, Warren said. [..] At the hearing Stumpf pointed out that the lowest paid employees at Wells Fargo earn $12 an hour and that the employees let go for opening unauthorized accounts were making “good money”, earning $30,000 to $60,000 a year. “How much money did you make last year?” New Jersey senator Robert Menendez asked Stumpf. “$19.3m,” said Stumpf. “Now that’s good money,” said Menendez.

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Kudo’s.

Mexico Police Raid Sawmills To Rescue Monarch Butterfly Refuge (AFP)

A special Mexican police unit has raided seven sawmills near the monarch butterfly’s mountain sanctuary in a bid to prevent illegal logging threatening the insect’s winter migration, officials said Tuesday. Backed up by a helicopter, some 220 members of the country’s police force and 40 forestry inspectors participated in the September 12 operation in the western state of Michoacan. North American governments have taken steps since last year to protect the monarch butterfly, which crosses Canada and the United States each year to hibernate on the fir and pine trees of Mexico’s western mountains. Last week’s raid was the first since the government decided in April to add the police to protection efforts for the brilliant orange and black monarchs.

The force has been conducting foot patrols day and night, using drones and helicopters for surveillance when weather permits, Abel Corona, director of the special units, said at a news conference. [..] Illegal logging dropped by 40% between the 2014-2015 and 2015-2016 butterfly season, environmental protection authorities said last month. But March storms killed seven% of the monarchs. The cold spell came after authorities had reported a rebound in the 2015-2016 season, with the butterfly covering 4.01 hectares (9.9 acres) of forest, more than tripling the previous year’s figure.

Read more …

Renzi in his referendum desperation finally tells the truth, somewhat.

Italy PM Renzi: Merkel Is ‘Lying To The Public’, Europe Is a ‘GHOST’ (Exp.)

Angela Merkel has been lying to the public about European unity, Italian Prime Minister Matteo Renzi has said. In a brutal attack on his fellow EU members, he said the first EU summit without the UK amounted to no more than “a nice cruise on the Danube”. Having been excluded from a joint news conference by the German Chancellor, Mrs Merkel and French President Francois Hollande, he said he was dissatisfied with the Bratislava summit’s closing statement. The outspoken Italian premier hit out at the lack of commitments on the economy and immigration in the summit’s conclusions, despite signing it himself. In a fiery interview in Italian daily Corriere della Sera, Mr Renzi intensified his criticisms, although he remained vague on what commitments he would have liked the summit to produce.

The Prime Minister has staked his career on a referendum this autumn over plans for constitutional reform, promising to resign if he loses. Talking about his fellow leaders, he said: “If we want to pass the afternoon writing documents without any soul or any horizon they can do it on their own. “I don’t know what Merkel is referring to when she talks about the ‘spirit of Bratislava’. “If things go on like this, instead of the spirit of Bratislava we’ll be talking about the ghost of Europe.” Mr Renzi said he is preparing a 2017 budget which he claims will cut taxes despite a slowing economy and record high public debt. He added: “At Bratislava we had a nice cruise on the Danube, but I hoped for answers to the crisis caused by Brexit, not just to go on a boat trip.”

He was similarly belligerent about the Italian budget to be presented next month, saying there would be “no negotiation” with Brussels, and money he planned to spend on tackling immigration and making Italy safer from earthquakes would be excluded from EU rules on deficit limits. Other countries were more guilty than Italy of breaking budget rules and Italy had met its commitments on tackling the inflows of migrants crossing the Mediterranean, Renzi said. He said: “I’m not going to stay silent for the sake of a quiet life. “If someone wants to keep Italy quiet they have picked the wrong place, the wrong method and the wrong subject.”

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In case anyone still had any doubts about this, here’s more proof that it’s the EU, not Greece, that is responsible for the expanding misery. Europe wants the islands to serve as holding pens, so richer Europe doesn’t have to face the consequences of the policies it itself dictates.

“To avoid secondary movement to the rest of Europe, that means keeping asylum seekers on the islands..”

EU: Refugees Must Stay On Greek Islands Despite Lesbos Fire (AP)

Authorities on the island of Lesvos called for the immediate evacuation Tuesday of thousands of refugees to the Greek mainland after a fire gutted a detention camp following protests. But EU officials appeared cool to the idea. More than 4,000 people were housed at the camp in Moria on Lesvos where the fire broke out late Monday, destroying or damaging tents and trailers. No injuries were reported at the camp, about 8 kilometers north of the island’s main town. Nine migrants were arrested on public disturbance charges after the chaotic scenes. Families with young children hastily packed up their belongings and fled into the nearby fields as the fire raged after nightfall. Many were later given shelter at volunteer-run camps. “We have been saying for a very long time that overcrowding on the islands must be eased,” regional governor Christiana Kalogirou said.

“On the islands of the northeast Aegean, official facilities have a capacity of 5,450 places, but more than 10,500 people are there. There is an immediate need to take people off the islands because things will get even more difficult,” she said. More than 60,000 migrants and refugees are stranded in transit in Greece, and those who arrived after March 20 have been restricted to five Aegean islands under an EU-brokered deal to deport them back to Turkey. But the agreement has been fraught with delays. In Brussels, a spokeswoman for the European Commission, Natasha Bertaud, said the Greek government had described the situation as being under control. Transfers to the mainland, she said, would remain limited. “To avoid secondary movement to the rest of Europe, that means keeping asylum seekers on the islands for the most part,” Bertaud said.

Read more …

Feb 082015
 
 February 8, 2015  Posted by at 11:55 am Finance Tagged with: , , , , , , ,  


DPC New Orleans milk cart 1903

Tsipras Scrambles to Find a Way Forward for Greece (Bloomberg)
Europe’s Revolt Isn’t Just In Greece Or Spain (MarketWatch)
Greece Could Run Out of Cash in Weeks (WSJ)
Syriza and the French indemnity of 1871-73 (Michael Pettis)
Democracy Could Have Saved Europe From The Disastrous Single Currency (Hannan)
Sarkozy: Crimea Cannot Be Blamed For Joining Russia (RT)
Merkel Objection to Arms for Ukraine May Spur Backlash for Obama (Bloomberg)
Lavrov: US Escalated Ukraine Crisis At Every Stage, Blamed Russia (RT)
Europeans Laugh as Lavrov Talks Ukraine (Bloomberg)
4 Reasons Stocks Aren’t Soaring After That Stellar Jobs Report (MarketWatch)
America’s Shrinking Middle Class Is Holding On For Dear Life (MarketWatch)
Fears For US Economy As Shale Industry Goes Into Hibernation (Observer)
Bitter Economic Winds Hasten Oil Industry Retreat From North Sea (Observer)
US Oil Rig Count Plunges 29% from Peak. Halfway to Bottom? (WolfStreet)
Bracing for Another Storm in Emerging Markets (Kevin Gallagher)
China’s Exports Slump, Imports Crash In January, Record Trade Surplus (Reuters)
China’s Record Trade Surplus Highlights Weak Domestic Demand (Bloomberg)
Stream of ‘Dark’ Foreign Wealth Flows to Elite New York Real Estate (NY Times)
Twitter Execs Enrich Themselves At Shareholders’ Expense (MarketWatch)
Peak Food Is The World’s No. 1 Ticking Time Bomb (Paul B. Farrell)

Should be a good speech. 1 PM EDT.

Tsipras Scrambles to Find a Way Forward for Greece (Bloomberg)

Prime Minister Alexis Tsipras will outline his plans to keep Greece financially afloat while breaking free from its bailout program when he addresses the nation’s parliament on Sunday. “It is very unlikely that the euro zone will give new money to Greece for months, as the Greek positions are uncertain and significant negotiation is necessary,” Nicholas Economides, professor of economics at New York University’s Stern School of Business, said by e-mail. “This puts cash-strapped Greece in a very dire position.” Jeroen Dijsselbloem, head of the group of 19 euro-area finance ministers, on Friday rejected a short-term financing agreement while Greece negotiates a successor program to its current bailout provided by the EU and IMF. The prime minister will need to address doubts about Greece’s ability to pay its bills, possibly as early as the end of the month.

Tsipras will set out measures for the government to take from now until the end of June, corresponding to the bridge program it has requested from country’s creditors, a government official said after a cabinet meeting Saturday. The prime minister will also set out policies for the next 3 1/2 years, said the official, who commented by e-mail and asked not to be identified in line with policy. The speech is scheduled to start at 7 p.m. local time. Tsipras, 40, will be addressing lawmakers exactly two weeks after his Syriza party swept into power with a promise to reject EU demands for more budget austerity. “Faced with financial reality, the new Greek government will have to reverse or severely pare down its pre-election program,” Economides said. “Already, in a major U-turn, the government has abandoned the position that Greece will not fully pay its debt.”

The next showdown with Greece’s EU partners is scheduled for Feb. 11 in Brussels, when Finance Minister Yanis Varoufakis faces his 18 euro-area counterparts in an emergency meeting. Standard & Poor’s lowered Greece’s long-term credit rating one level to B- and kept the ratings on CreditWatch negative. The rating downgrade to B- pushes Greece’s debt six levels into non-investment grade, or junk status. S&P said it plans to “update or resolve” the CreditWatch status by next month. “We could lower our ratings on Greece if we perceive that the likelihood of a distressed exchange of Greece’s commercial debt has increased further because official funding has been curtailed, government borrowing requirements have deteriorated beyond our expectations, or Greece’s external financing has come under greater stress,” S&P said in a statement on Friday.

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“In France and Germany, the mainstream center-left parties have dropped any pretense of fighting the neoliberal orthodoxy that dominates EU economic policy and have been punished by voters accordingly.”

Europe’s Revolt Isn’t Just In Greece Or Spain (MarketWatch)

Greek voters crowded into Athens’ Syntagma Square to celebrate the landslide election of the leftist Syriza party last month, just as they had the victory of the center-left Pasok party in 1981, which ushered in Greece’s first leftist government after it threw off military dictatorship in 1974. The tens of thousands of Spanish voters who filled Madrid’s Puerta del Sol last Saturday also wanted to celebrate the leftist victory in Greece and rally support for a similar result for Spain’s new left-wing party, Podemos, in parliamentary elections at the end of this year. But the electoral victory of Syriza and the rise of Podemos are not signs of a resurgence of the left in Europe. The huge square in Madrid was also filled with demonstrators in May 2011 when a wave of protests opposed the Socialist government’s willingness to go along with European Union austerity policies.

One of the major ironies of the eurozone crisis, in fact, is that the historic left-wing parties in Europe have been so compromised by the austerity policies dictated by Brussels and Berlin that they have lost significant voter support or collapsed altogether. The once-celebrated Pasok, for instance, which led the government when the euro crisis erupted in 2009, has seen its electoral support plunge from its zenith of 48% in 1981 to a paltry 4.7% in last month’s election. The Spanish Socialist Party, which governed Spain for 14 years under Felipe Gonzalez, has seen its support fall from 48% in 1982 to just 22% in the most recent polls, putting it in third place behind Podemos, which is just one-year-old.

In France and Germany, the mainstream center-left parties have dropped any pretense of fighting the neoliberal orthodoxy that dominates EU economic policy and have been punished by voters accordingly. French Socialist President François Hollande, who swept into office with a parliamentary majority in 2012 on pledges that he would fight German-imposed austerity, saw his approval ratings plummet below 20% when he failed to deliver on that promise. Germany’s Social Democrats, too timid to resist the popularity of conservative Chancellor Angela Merkel, have not only been co-opted into her stringent view of European economic policy but into most every aspect of domestic policy as part of a coalition government.

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“Greece “will be the first country to go bankrupt over €5 billion.”

Greece Could Run Out of Cash in Weeks (WSJ)

Greece warned it was on course to run out of money within weeks if it doesn’t gain access to additional funds, effectively daring Germany and its other European creditors to let it fail and stumble out of the euro. Greek Economy Minister George Stathakis said in an interview with The Wall Street Journal that a recent drop in tax revenue and other government income had pushed the country’s finances to the brink of collapse. “We will have liquidity problems in March if taxes don’t improve,” Mr. Stathakis said. “Then we’ll see how harsh Europe is.” Government revenue has declined sharply in recent weeks, as Greeks with unpaid tax bills hold back from settling arrears, hoping the new leftist government will cut them a better deal. Many also aren’t paying an unpopular property tax that their new leaders campaigned against. Tax revenue dropped 7%, or about €1.5 billion ($1.7 billion), in December from November and likely fell by a similar percentage in January, the minister said.

Other senior Greek officials said the country would have trouble paying pensions and other charges beyond February. Greece has made no secret of its precarious financial position, but the minister’s comments suggest the country has even less time than many policy makers thought to resolve its standoff with Europe. Eurozone officials have asked Greece to come up with a specific funding plan by Wednesday, when finance ministers have called a special meeting to discuss the country’s financial situation. The country needs €4 billion to €5 billion to tide it over until June, by which time it hopes to negotiate a broader deal with creditors, Mr. Stathakis said, adding that he believes “logic will prevail.” If it doesn’t, he warned, Greece “will be the first country to go bankrupt over €5 billion.” If the Greek government runs out of cash, the country would be forced to default on its debts and reintroduce its own currency, thus abandoning the euro.

Most of the €240 billion in aid that Europe and the International Monetary Fund have pumped into the country would be lost. Greece’s new, leftist government has been in a tug of war with its European creditors for days over relaxing strictures of its bailout program. Athens is pressing for less-onerous terms so it can reverse some of the austerity measures weighing on the country, but its partners in the euro currency area, led by Germany, have refused. Before the two sides can address Greece’s broader bailout framework, however, they need to quickly find a way to keep the country solvent. Mr. Stathakis said Athens has asked for €1.9 billion in profits from Greek bonds held by other eurozone governments. In addition, the government wants the eurozone to allow Greece to raise an additional €2 billion by issuing treasury bills, he said. Both proposals clash with the rules governing Greece’s bailout and eurozone officials have dismissed them.

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Very long in-depth analysis of the eurozone by Pettis.

Syriza and the French indemnity of 1871-73 (Michael Pettis)

1. The euro crisis is a crisis of Europe, not of European countries. It is not a conflict between Germany and Spain (and I use these two countries to represent every European country on one side or the other of the boom) about who should be deemed irresponsible, and so should absorb the enormous costs of nearly a decade of mismanagement. There was plenty of irresponsible behavior in every country, and it is absurd to think that if German and Spanish banks were pouring nearly unlimited amounts of money into countries at extremely low or even negative real interest rates, especially once these initial inflows had set off stock market and real estate booms, that there was any chance that these countries would not respond in the way every country in history, including Germany in the 1870s and in the 1920s, had responded under similar conditions.

2. The “losers” in this system have been German and Spanish workers, until now, and German and Spanish middle class savers and taxpayers in the future as European banks are directly or indirectly bailed out. The winners have been banks, owners of assets, and business owners, mainly in Germany, whose profits were much higher during the last decade than they could possibly have been otherwise

3. In fact, the current European crisis is boringly similar to nearly every currency and sovereign debt crisis in modern history, in that it pits the interests of workers and small producers against the interests of bankers. The former want higher wages and rapid economic growth. The latter want to protect the value of the currency and the sanctity of debt.

4. I am not smart enough to say with any confidence that one side or the other is right. There have been cases in history in which the bankers were probably right, and cases in which the workers were probably right. I can say, however, that the historical precedents suggest two very obvious things. First, as long as Spain suffers from its current debt burden, it does not matter how intelligently and forcefully it implements economic reforms. It will not be able to grow out of its debt burden and must choose between two paths. One path involves many, many more years of economic hell, as ordinary households are slowly forced to absorb the costs of debt — sometimes explicitly but usually implicitly in the form of financial repression, unemployment, and debt monetization. The other path is a swift resolution of the debt as it is restructured and partially forgiven in a disruptive but short process, after which growth will return and almost certainly with vigor

5. Second, it is the responsibility of the leading centrist parties to recognize the options explicitly. If they do not, extremist parties either of the right or the left will take control of the debate, and convert what is a conflict between different economic sectors into a nationalist conflict or a class conflict. If the former win, it will spell the end of the grand European experiment.

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“Distrust of the masses is in the EU’s genome.”

Democracy Could Have Saved Europe From The Disastrous Single Currency (Hannan)

“Elections change nothing,” said Wolfgang Schäuble, Germany’s tough-minded finance minister. He was talking about Greece, but he could have been talking about the entire EU racket. The Europhile elites have a guarded and contingent attitude towards democracy. It has its place, to be sure, but it must never be allowed to slow the process of political integration. As the President of the European Commission, Jean-Claude Juncker, put it in response to Syriza’s election victory, “There can be no democratic choice against the European treaties”. He means it. In 2011, in order to keep the euro intact, the EU connived at the toppling of two elected prime ministers: Silvio Berlusconi in Rome and George Papandreou in Athens. Both men were replaced by Eurocrats who presided over, in effect, Brussels-approved civilian juntas.

Although their regimes were called “national governments”, their purpose was to drive through policies that would be rejected at the ballot box. Distrust of the masses is in the EU’s genome. Its founders had lived through the horrors of the Second World War, and associated democracy – especially in its plebiscitary form – with the demagoguery and fascism of the 1930s. They made no bones about vesting supreme power with a group of Commissioners who were immune to public opinion. Sure enough, those Commissioners and their successors saw it as their role to step in when the voters got it wrong – as when, for example, they voted against closer integration in referendums. I could easily fill the rest of this column with either anger or mockery; but I’d rather do Eurocrats the courtesy of taking their argument seriously.

Their contention is, in effect, that voters often misjudge things – that they are likely simultaneously to demand higher spending and lower taxes, and then complain when the money runs out. As José Manuel Barroso, Mr Juncker’s predecessor, put it four years ago, at the height of the economic crisis: “Governments are not always right. If governments were always right we would not have the situation that we have today. Decisions taken by the most democratic institutions in the world are very often wrong.” At first glance, the recent Greek election seems to sustain that view. Here, after all, is a country brought to ruin by excessive spending and borrowing. Yet its voters have just opted for a party that offers more of the medicine that sickened them: a 50% hike in the minimum wage, higher pensions, free electricity for 300,000 households and other fantasies.

[..] When the EU assumed responsibility for the Greek economy, it licensed Greeks to behave irresponsibly. If voters are treated like recalcitrant teenagers, they will behave like recalcitrant teenagers, storming petulantly at the parents whom they none the less expect to pay their phone bills. Greece is an example, not of too much democracy, but of too little. Had the Hellenic Republic been a sovereign country, wholly accountable to its own electorate, things would have worked out very differently. But for the euro, the debt crisis would never have got so badly out of hand: the markets would have imposed their own discipline years ago.

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Dead on: “we must find the means to create a peacekeeping force to protect Russian speakers in Ukraine.” and “It is not destined to join the EU; Ukraine must preserve its role as a bridge between Europe and Russia.”

Sarkozy: Crimea Cannot Be Blamed For Joining Russia (RT)

Crimea cannot be blamed for seceding from Ukraine – a country in turmoil – and choosing to join Russia, said former president of France, Nicolas Sarkozy. He also added that Ukraine “is not destined to join the EU.” “We are part of a common civilization with Russia,” said Sarkozy, speaking on Saturday at the congress of the Union for a Popular Movement Party (UMP), which the former president heads. “The interests of the Americans with the Russians are not the interests of Europe and Russia,” he said adding that “we do not want the revival of a Cold War between Europe and Russia.” Regarding Crimea’s choice to secede from Ukraine when the country was in the midst of political turmoil, Sarkozy noted that the residents of the peninsula cannot be accused for doing so.

“Crimea has chosen Russia, and we cannot blame it [for doing so],” he said pointing out that “we must find the means to create a peacekeeping force to protect Russian speakers in Ukraine.” In March 2014 over 96% of Crimea’s residents – the majority of whom are ethnic Russians – voted to secede from Ukraine to reunify with Russia. The decision was prompted by a massive uprising in Ukraine, that led to the ouster of its democratically elected government, and the fact that the first bills approved by the new Kiev authorities were infringing the rights of ethnic Russians. Concerning Kiev’s hopes of joining the EU in the near future Sarkozy voiced the same position as had been previously expressed by some EU leaders.

“It is not destined to join the EU,” he said. “Ukraine must preserve its role as a bridge between Europe and Russia.” While the West has been criticizing Russia’s stance on Crimea, the Russian Foreign Minister said on Saturday that the peninsula’s residents had the right to “self-determination” citing the March referendum. He gave the example of Kosovo, which despite not holding a referendum, was allowed to leave Serbia and create its own state. “In Crimea what happened complies with the UN Charter on self-determination,” Lavrov said during his speech at the Munich security conference. “The UN Charter has several principles, and the right of a nation for self-determination has a key position.”

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I still don’t get this bit after reading it multiple times: “Obama won’t authorize weapons deployment if Merkel signals that she will not publicly condemn individual nations from arming Ukraine..” Does that mean he will if she will?

Merkel Objection to Arms for Ukraine May Spur Backlash for Obama (Bloomberg)

Germany’s rejection of supplying weapons to Ukrainian forces fighting pro-Russian rebels may heighten the domestic pressure on a reluctant U.S. President Barack Obama to deliver the arms. Increasing numbers of senior military and State Department officials are joining Republican lawmakers in a push to arm Ukraine – an option the commander-in-chief personally opposes, according to three people familiar with the dynamics in the Obama administration. They asked not to be named due to sensitivity of the matter.
German Chancellor Angela Merkel, who made an impassioned case against shipping lethal military support to Ukraine in a speech Saturday at the Munich Security Conference, will discuss the issue with Obama in Washington on Monday. U.S. Secretary of State John Kerry said he’s confident Obama will make his decision soon after the meeting.

Obama’s delay in making his move until after Merkel’s visit reflects not only the gravity of the situation and the dueling arguments, but his emphasis on international alliances, his own deliberative nature and the degree to which he’s concentrated power on foreign policy in the White House. Obama won’t authorize weapons deployment if Merkel signals that she will not publicly condemn individual nations from arming Ukraine, the three people said. If she opposes any unilateral supplying of weapons, Obama will explain his decision to follow her lead by citing the importance of keeping a united front against Russian President Vladimir Putin and the risk of triggering a proxy war with him, the people said. [..]

Merkel in her Saturday speech said, “The progress that Ukraine needs cannot be achieved by more weapons.” Instead, she evoked the perseverance of the U.S. and European diplomatic efforts in confronting the Soviet Union during four decades of Cold War that ended with collapse of communism. Like then, that approach needs staying power and unity, said Merkel, who grew up in communist East Germany. “The problem is that I cannot envisage any situation in which an improved equipment of the Ukrainian army leads to a situation where President Putin is so impressed that he will lose militarily,” she said, reiterating the importance of a negotiated peace without military intervention. “I have to put it in such a blunt manner.” Facing Ukraine President Petro Poroshenko in the audience, she said: “There’s no way to win this militarily — that’s the bitter truth. The international community has to think of a different approach.”

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“Our partners in the West have closed their eyes to everything that the Kiev government has said and done, which includes xenophobia.”

Lavrov: US Escalated Ukraine Crisis At Every Stage, Blamed Russia (RT)

Sergey Lavrov has lashed out at the US for their double standards over Ukraine and taking steps that “only promoted further aggravation” of the conflict. He added Russia is ready to guarantee agreements between Kiev and the self-proclaimed republics. One of the major sticking points of the crisis so far has been the failure of Kiev to engage in talks with militia leaders in the East of the country. Lavrov is staggered the US, who talked with the Taliban during their invasion of Afghanistan, through channels in Doha, Qatar, is unable to put pressure on Kiev to engage in discussions. “In the case of Libya, Afghanistan, Iraq, Yemen and Sudan our partners actively asked governments to enter into dialogue with the opposition, even if they were extremists. However, during the Ukrainian crisis, they act differently, making up excuses and try to justify the use of cluster bombs,” the Russian Foreign Minister said, who was speaking at a security conference in Munich on Saturday.

The issue of the far right’s rise in Ukrainian politics has been swept under the carpet by the US and EU. Some members of the Ukrainian parliament have promoted ideas such as exterminating Russians and Jews. However, these haven’t been reported or caused any alarm in the West, Russia’s foreign minister added. “Our partners in the West have closed their eyes to everything that the Kiev government has said and done, which includes xenophobia. Some have advocated an ethnically clean Ukraine.” Throughout the Ukrainian crisis, the West has viewed Russia as the aggressor. The Kremlin has been accused of arming eastern Ukrainian militia and even sending Russian troops to reinforce them – claims Moscow has repeatedly denied. It has stated on many occasions that despite the damning rhetoric no sufficient evidence has been ever presented.

On the contrary, Lavrov says the US has been the destabilizing factor in Ukraine. “Through every step, as the crisis has developed, our American colleagues and the EU under their influence have tried to escalate the situation,” Lavrov maintained. He pointed to the failure of the EU to engage Russia about Ukraine signing an economic association agreement with the bloc, Western involvement during the Maidan protests, the failure of the West to condemn Ukraine for calling its own citizens terrorists and for supporting a coup, which led to the toppling of a democratically elected president. “The US made it public it brokered the transit of power in Ukraine. But we know perfectly well what exactly happened, who discussed candidates for the future Ukrainian government on the phone, who was at Maidan, and what is going on (in Ukraine) right now,” Lavrov said.

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The west and its press are no longer even capable anymore of discussing Russia without accusing it of a whole range of alleged misdeeds.

Europeans Laugh as Lavrov Talks Ukraine (Bloomberg)

In the span of 45 minutes today, Russian Foreign Minister Sergei Lavrov rewrote the history of the Cold War, accused the West of fomenting a coup in Ukraine and declared himself a champion of the United Nations Charter. The crowd here in Germany laughed at and then booed him, but he didn’t seem to care. When Lavrov took the stage Saturday morning at the Munich Security Conference, he knew it was going to be a tough crowd. He was speaking just after German Chancellor Angela Merkel and ahead of U.S. Vice President Joseph Biden. For two days, almost all of the panelists at the conference had railed against Russia’s actions in Ukraine. The debates were not over whether Russia was a bad actor spoiling international security, but rather how to deal with that consensus view.

He looked nervous, perhaps because Sergei Ivanov, chief of staff to Russian President Vladimir Putin and Lavrov’s superior, was sitting in the front row, staring at him as if to warn him not to mess up. But none of that kept him from turning in an audacious performance. “In any situation, the United States is trying to blame Russia for everything,” he said. “Russia will be committed to peace. We are against combat. We would like to see a withdrawal of heavy weapons.” Lavrov then accused the U.S. of supporting military attacks against innocent Ukrainians. (He chose not to mention the Russian heavy weaponry in Eastern Ukraine or the hundreds of Russian military advisers on the ground.) Lavrov accused the Ukrainian military and government of being anti-Jewish and said that the Hungarian minority in Ukraine was being mistreated.

He called out the U.S. for negotiating with the Afghan Taliban but – in his view – not supporting negotiations between the Ukraine government and the Eastern separatists. Talking about the possibility of the U.S. giving lethal aid to the Ukrainian military, Lavrov leveled a thinly veiled threat that the Russians might invade Ukraine outright, as they did Georgia seven years ago after what they saw as provocation from President Mikheil Saakashvili. “I don’t think our Ukrainian colleagues should hope the support they are receiving will solve their problems,” he said. “That support … is going to their heads in the way it did for Saakashvili in 2008, and we know how that ended.” The crowd took that in stride, but then burst out laughing when Lavrov said that the annexation of Crimea, which was invaded by unmarked Russian troops, was an example of international legal norms working well.

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“Conditions are likely to come together that will allow the Federal Reserve to hike short-term interest rates anytime “from June on,” said Dennis Lockhart, the president of the Atlanta Fed.”

4 Reasons Stocks Aren’t Soaring After That Stellar Jobs Report (MarketWatch)

Why isn’t the stock market ripping higher Friday after that stellar jobs report? The S&P 500 and Dow industrials were up only moderately by around midday, then they turned negative to roughly flat in a hurry. Here are four factors:

1) A rally into the jobs report: Stocks already were showing big gains for the week before the jobs report came out. The S&P 500 is still up 3.4% for the week at last check. The Dow is coming off a four-day winning streak that had it up 720 points for the week as of Thursday’s close. So Friday’s lackluster action probably won’t change a positive weekly trend.

2) Fresh Greek worries: A downgrade of Greece by Standard & Poor’s on Friday afternoon may have sparked a move away from riskier assets like stocks. S&P cut the troubled nation’s long-term rating to B-minus from B, meaning further into junk territory. The folks at ZeroHedge, known for spotlighting the negative, say what’s “scariest” is that S&P itself is mentioning capital controls and bank runs. But other market watchers have been playing down the significance of the latest Greek drama, and they note Friday’s downgrade is similar to an earlier one by Moody’s Investors Service. That said, there are mounting concerns that Greece must get tidy its economic house or risk roiling the market.

3) Rate hikes ahead: The strong jobs report has boosted expectations around the Fed’s rate hikes, and higher rates ought to peel some investors away from stocks. Investors now think the Federal Reserve will raise rates one more time by December 2016 than they expected before Friday’s January job report, as MarketWatch’s Gregg Robb notes. Robb also reports on a notable Fed speech on Friday afternoon. Conditions are likely to come together that will allow the Federal Reserve to hike short-term interest rates anytime “from June on,” said Dennis Lockhart, the president of the Atlanta Fed.

4) A lagging indicator: The January jobs report reveals a lot, but it is important to realize the labor market is often a lagging indicator. Don’t let the stellar report make you forget about real challenges facing the U.S. economy, says MarketWatch’s Steve Goldstein. In a similar vein, Barry Ritholtz at Bloomberg View argues investors might want to ignore every monthly jobs report, since trading off it requires guessing not just the results, but also how much it is already reflected in stock prices.

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And then we go and call that a recovery.

America’s Shrinking Middle Class Is Holding On For Dear Life (MarketWatch)

Middle America is holding on for dear life. The share of Americans who are part of middle-income households has plunged to 51% in 2013 from 61% in 1970, according to new research by the Pew Research Center, a nonpartisan, nonprofit think tank in Washington, D.C. And from 1990 to 2013, the share of adult Caucasians and Asians living in middle-income households decreased the most of any ethnic group, from 58% to 53% (for Caucasians) and from 56% to 50% (for Asians). The decline was less pronounced among Hispanics (from 48% to 47%) and African-Americans (from 47% to 45%). Over the same period, the share of the country that qualifies as ‘lower-income’ has also grown: they make up 29% of all households in 2013, after comprising 25% of all households in 1970.

The share of upper income households, on the other hand, rose from 14% in 1970 to 20% in 2013. (To fall in those categories in 2013, household incomes had to be: $166,623 a year for upper income, $71,014 a year for middle income, and $23,659 a year for lower income.) About one-in-four white and Asian adults are upper income versus just one-in-10 Hispanic and black adults, and there was “no meaningful change in these gaps in the past two decades,” Pew found. What’s more, the median incomes of all households fell by 7% during the “lost decade” of 2000 to 2013. In the last three years (between 2010 and 2013), however, the share of middle-income families has remained steady.

“While the muddled recovery has yet to bolster the middle, this flat trend might actually be good news because, for now, it stems a decades-long slide,” it concluded. Not everyone sees this as a reason for celebration. “Marching in place after the recession is a bit like saying, ‘We survived.’ But who has thrived?” says Mark Hamrick, Washington, D.C. bureau chief at personal finance website Bankrate.com. “The problem is that the middle class hasn’t made much headway over the past decade or so.” High-earning Americans have fared better than Middle America, he says. “Ultimately this is an economic problem that presents itself thoroughly across our society. It helps explain why the interests of the middle class have not been well attended to.”

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“The low oil price is bringing to a halt the world’s great engine of supply growth over the last five years..”

Fears For US Economy As Shale Industry Goes Into Hibernation (Observer)

America’s fracking revolution is becoming a victim of its own success. The controversial boom in shale gas and oil has driven the US economic recovery and helped lower world crude prices. But a price plunge from $115 (£75) a barrel last June to just above $50 last week means many shale operations no longer pay. Rigs across the US are being deactivated at a rate of nearly 100 a week. In the final week of January, 94 were pulled offline – the most since 1987, according to oil services company Baker Hughes. The number of active rigs fell by from 1,609 in October to 1,223 in January and some experts predict fewer than 1,000 will remain by the end of the year. “The low oil price is bringing to a halt the world’s great engine of supply growth over the last five years,” said James Burkhard at IHS Energy. “The US upstream is very responsive to changes in price and drilling is likely to slow down further until prices recover.

“The great revival of US production has been from intensive onshore drilling. These aren’t massive $7bn projects that can’t be stopped: these are mostly onshore fracking that be started and stopped much more easily.” Burkhard said the US fracking boom accounted for more than half of global oil supply growth over the last five years, and it is the easiest tap to turn off while the world waits for the oil price to recover. The US has built up its largest stockpile of crude in 84 years. The profitability of onshore US wells varies considerably, with some only turning a profit when oil price is as high as $90 while others can make money at $30. IHS says nearly 30% of new wells started in 2014 can break even at $81 a barrel. By comparison, Morgan Stanley says some Middle Eastern onshore production is profitable at $10 per barrel.

Oil companies big and small have been knocked by falling prices. Chevron last month reported a 30% fall in quarterly profits (its worst since 2009), while oil exploration company ConocoPhillips swung to a loss as its average realised price fell 19% to $52.88 per barrel. Continental Resources, one of the largest drillers in North Dakota’s Bakken shale, said late last year it would cut its active rigs by 40% this year, with three-quarters of cuts coming by April. North Dakota’s Department of Mineral Resources says the state’s producers need a wellhead price of around $55-$65 to sustain current output of 1.2m barrels per day. If similar cuts were made across the industry, the rig count would fall below 1,100 by the end of March and 950 by the end of the year. A collapse in US oil production – now at 12m barrels a day after rising from 5m in 2008 – is likely to have a big impact on the nation’s economy. The fracking boom has made millionaires out of landowners, strengthened the country’s energy security and created hundreds of thousands of well-paid jobs.

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“Bob Dudley, CEO of BP, warned last week that the industry had to prepare for a “new phase” of lower prices that could last months, even years.”

Bitter Economic Winds Hasten Oil Industry Retreat From North Sea (Observer)

For one oil industry veteran, the dismantling of the Brent oil field in the North Sea prompts mixed feelings. There is gratitude for the livelihood earned from Britain’s post-war energy boom. And relief that it means farewell to “hell on Earth”. “Brent kept me and my family in gainful employment, so I have something to be grateful for, but these platforms are from an era long gone,” says Jake Molloy, who was a production assistant on the Brent Delta platform. Describing the structure, which Shell plans to remove from the North Sea, Molloy adds: “Putting people down platform legs [which store pumps and vessels] is really bad. You could climb down thousands of steps to the bottom with 40 pounds of breathing apparatus on your back only for the alarms to go off and you had to go all the way back again. It was the worst working environment – horrendous, hell on earth.”

Shell’s announcement that it plans to remove the platform was just one of many symbolic retreats staged by the oil industry last week. A day after the Brent proposals, Shell’s rival BP said it was taking a $4.5bn (£3bn) hit in its quarterly accounts to pay for the cost of bringing forward the closure of some unprofitable UK fields, partly due to lower oil prices. Situated 115 miles east of the Shetland Islands, Brent is estimated to have produced 10% of all North Sea oil and gas while generating £20bn of tax revenues since it opened in 1976. Brent is not the first North Sea field to face decommissioning and BP has been planning closures for some time. But the timing makes the closures all the more pointed. Shell’s field gave its name to a benchmark that has plummeted over the past year.

The price of a barrel of Brent crude has dived from $115 in June last year to less than $50 last month. The price has bounced back in the past two weeks to $58 but Bob Dudley, CEO of BP, warned last week that the industry had to prepare for a “new phase” of lower prices that could last months, even years. There will be more cost-cutting moves by the global oil industry over the next 12 months. BP is halving its exploration activity, slashing its capital expenditure by 20% and spending $1bn on making staff redundant after recording a $1bn loss in the last quarter. The $4.5bn writedown for its North Sea operations includes “increases in expected decommissioning costs” – an accounting footnote viewed by Iain Reid at BMO Capital Markets, as an inevitable outcome of low oil prices. “It’s bound to lead to North Sea field shutdowns being brought forward,” he says.

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“..the levels of crude oil in storage have soared to a record. Which will pressure prices further.”

US Oil Rig Count Plunges 29% from Peak. Halfway to Bottom? (WolfStreet)

In the US, oil companies have been laying off workers and cutting capital expenditures at a feverish pace. With revenues dropping as a function of the price of oil that has fallen by over half since June, preserving cash is suddenly a priority. Wall Street, after years of handing out money no questions asked, shut off the spigot for junk-rated drillers that need new money the most. So it’s crunch time. The number of rigs actively drilling for oil in the US, reported by Baker Hughes every Friday, is a preliminary gauge of these changes. And during the last reporting week, that rig count plunged by 83 to 1,140 rigs, after having plunged by an all-time record of 93 in the prior week. The rig count is now down 469 rigs, or 29%, from the high of 1,609 in October.

And it’s down 359 rigs over the six reporting weeks so far this year. Never before has the rig count plunged this fast this far. During the financial crisis, the oil rig count fell 60% from peak to trough. If this oil bust plays out the same way on a percentage basis, the count would drop to 642 rigs! The bloodletting in the exploration and production sector would be enormous. Having cut the rig count by 29% already since the October peak, the sector might already be about halfway there. But production of oil from existing and recently completed wells continues to set records, and wells to be completed in the near future will add to it. Demand in the US has been slack. And the levels of crude oil in storage have soared to a record. Which will pressure prices further.

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“Floating exchange rates and resulting depreciation can cause the debt burden of firms and fiscal budgets to bloat overnight.”

Bracing for Another Storm in Emerging Markets (Kevin Gallagher)

In 2012, Brazilian President Dilma Roussef scolded U.S. Federal Reserve Chairman Ben Bernanke’s monetary easing policies for creating a “monetary tsunami”: Financial flows to emerging markets that were appreciating currencies, causing asset bubbles, and generally exporting financial instability to the developing world. Now, as growth increases in the United States and interest rates follow, the tide is turning in emerging markets. Many countries may be facing capital flight and exchange-rate depreciation that could lead to financial instability and weak growth for years to come. The Brazilian president had a point. Until recently U.S. banks wouldn’t lend in the United States despite the unconventionally low interest rates. There was too little demand in the U.S. economy and emerging market prospects seemed more lucrative.

From 2009 to 2013, countries like Brazil, South Korea, Chile, Colombia, Indonesia, and Taiwan all had wide interest rate differentials with the United States and experienced massive surges of capital flows. The differential between Brazil and the U.S. was more than 10 percentage points for a while—a much better bet than the slow growth in the United States. According to the latest estimates from the Bank for International Settlements (BIS), emerging markets now hold a staggering $2.6 trillion in international debt securities and $3.1 trillion in cross border loans—the majority in dollars. Official figures put corporate issuance at close to $700 billion since the crisis, but the BIS reckons that the figure is closer to $1.2 trillion when counting offshore transactions designed to evade regulations. Now the tide is turning.

China’s economy is undergoing a structural transformation that necessitates slower growth and less reliance on primary commodities. Oil prices and the prices of other major commodities are stabilizing or on the decline. It should be no surprise then that many emerging-market growth forecasts are continually being revised downward. Meanwhile, growth and interest rates are picking up in the United States. The dollar gains strength; the value of emerging market currencies fall. [..] Floating exchange rates and resulting depreciation can cause the debt burden of firms and fiscal budgets to bloat overnight. Given that most of the capital inflows were in dollars, depreciating currencies mean that nations and firms will need to come up with ever-more local currency to pay debt—but in a lower growth environment.

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“..imports slumped by 19.9%..”

China’s Exports Slump, Imports Crash In January, Record Trade Surplus (Reuters)

China’s exports fell 3.3% in January from a year earlier, while imports slumped by 19.9%, both missing expectations by a wide margin, and resulting in a record monthly trade surplus of $60 billion. Thinking that easing measures in Europe would boost demand for Chinese goods, analysts polled by Reuters had expected to exports to rise by 6.3%, and imports to fall by only 3%, to give a trade deficit of $48.9 billion. Instead, exports slid 12% on a monthly basis, while imports dove 21.1%, according to the data released by the Customs Administration said on Sunday. The decline was led by a sharp slide in commodities imports, in particular imports of coal which dropped nearly 40% to 16.78 million tonnes, down from December’s 27.22 million tonnes, as well as a scale back in crude oil imports, which slid 7.9%.

While the trade data augured badly for an economy that suffered its slowest economic growth in 24 years in 2014, analysts say strong seasonal distortions due to the Lunar New Year holiday make it difficult to interpret the data. Last year the holiday fell in January, and this year it falls in February. China’s export numbers tend to be erratic, sharp moves in opposite directions are common and the combined January and February figures are often a more accurate gauge of the overall trend, analysts say. [..] During 2014, China’s total trade value increased by 3.4% from a year earlier, short of the official target of 7.5%, and some analysts have raised questions about whether export data was inflated by fake invoicing as firms speculated in the currency and commodities markets.

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“Value of crude oil imports fell 41.8% from a year earlier, iron ore imports dropped 50.3% and coal plummeted 61.8%.” [..] “We are going to see more of these alarming data in the next few months.”

China’s Record Trade Surplus Highlights Weak Domestic Demand (Bloomberg)

China registered a record trade surplus last month as imports plunged on falling commodity prices and weak domestic demand. Imports fell by the most in more than five years, declining 19.9% from a year earlier. That compared with estimates for a 3.2% drop in a Bloomberg survey of analysts. Exports slid 3.3%, leaving a trade surplus of $60 billion, the customs administration in Beijing said. A property downturn and a stall in manufacturing are signals the government may need to step up measures to stimulate the economy, as domestic demand for commodities including crude oil and iron ore declines. The record trade surplus, combined with declines in exports and imports, complicates the government’s management of exchange rates after January’s depreciation.

“It seems that sharp decline in commodity prices, weak domestic demand and weak external demand, reflected in processing imports, all played a role in the decline in imports,” said Wang Tao at UBS in Hong Kong. “Trade data again creates a dilemma for the exchange rate. A record trade surplus is supposed to add appreciation pressure, but declining exports would say otherwise.” It’s not in China’s interest to let the yuan depreciate sharply, Liu Ligang and Zhou Hao at ANZ wrote in a note. “China’s central bank will continue to use a slew of instruments, including fixing rates, open market operations, and direct interventions, to prevent the RMB from weakening sharply,” they wrote.

Value of crude oil imports fell 41.8% from a year earlier, iron ore imports dropped 50.3% and coal plummeted 61.8%. Quantities of the commodities declined as well. Imports declined from all major trade partners, including the EU and US. Falling prices have cut the dollar value of imports and contributed to a prolonged decline in factory gate prices, which may extend to a record 35 months, according to economist estimates. “The slump in imports means a slump in the overall situation of the economy,” said Hu Yifan at Haitong in Hong Kong. “We are going to see more of these alarming data in the next few months.”

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Extensive NYT reasearch project. This reflects very poorly on New York, the US, the UK and London.

Stream of ‘Dark’ Foreign Wealth Flows to Elite New York Real Estate (NY Times)

On the 74th floor of the Time Warner Center, Condominium 74B was purchased in 2010 for $15.65 million by a secretive entity called 25CC ST74B L.L.C. It traces to the family of Vitaly Malkin, a former Russian senator and banker who was barred from entering Canada because of suspected connections to organized crime. Last fall, another shell company bought a condo down the hall for $21.4 million from a Greek businessman named Dimitrios Contominas, who was arrested a year ago as part of a corruption sweep in Greece. A few floors down are three condos owned by another shell company, Columbus Skyline, which belongs to the family of a Chinese businessman and contractor named Wang Wenliang. His construction company was found housing workers in New Jersey in hazardous, unsanitary conditions.

Behind the dark glass towers of the Time Warner Center looming over Central Park, a majority of owners have taken steps to keep their identities hidden, registering condos in trusts, limited liability companies or other entities that shield their names. By piercing the secrecy of more than 200 shell companies, The New York Times documented a decade of ownership in this iconic Manhattan way station for global money transforming the city s real estate market. Many of the owners represent a cross-section of American wealth: chief executives and celebrities, doctors and lawyers, technology entrepreneurs and Wall Street traders. But The Times also found a growing proportion of wealthy foreigners, at least 16 of whom have been the subject of government inquiries around the world, either personally or as heads of companies. The cases range from housing and environmental violations to financial fraud.

Four owners have been arrested, and another four have been the subject of fines or penalties for illegal activities. The foreign owners have included government officials and close associates of officials from Russia, Colombia, Malaysia, China, Kazakhstan and Mexico. They have been able to make these multimillion-dollar purchases with few questions asked because of United States laws that foster the movement of largely untraceable money through shell companies. Vast sums are flowing unchecked around the world as never before whether motivated by corruption, tax avoidance or investment strategy, and enabled by an ever-more-borderless economy and a proliferation of ways to move and hide assets. Alighting in places like London, Singapore and other financial centers, this flood of capital has created colonies of the foreign super-rich, with the attendant resentments and controversies about class inequality made tangible in the glass and steel towers reordering urban landscapes.

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Lovely.

Twitter Execs Enrich Themselves At Shareholders’ Expense (MarketWatch)

In October, we pointed out that the $170 million in stock-based compensation dished out to Twitter employees during the third quarter represented 47% of the company’s third-quarter revenue. That was an outsized amount — much higher than the most recently reported payouts for any company included in the S&P 1500 Composite Index. Twitter suffered a third-quarter net loss of $175 million, owing almost entirely from the stock awards. (Twitter is not yet included in the S&P 1500, presumably because it has been publicly traded for only a little over a year.)

Following a memo to employees in which Twitter CEO Dick Costolo said the company was doing a poor job preventing abuse over its messaging platform, the company said on Thursday that for the fourth quarter, its stock-based compensation totaled $177 million, or 37% of revenue. The company reported a net loss of $125.4 million, or 20 cents a share, but would have shown a profit of $79.3 million, or 12 cents a share, if the non-cash stock awards were excluded. The good news for Twitter was that its fourth-quarter revenue totaled $479.1 million, rising from $361.3 million the previous quarter and $242.7 million a year earlier. The company beat consensus estimates for earnings and revenue, though it reported a slowdown in subscriber growth. Twitter said it expects growth to pick up, and investors believed it, sending the shares up 13% on Friday.

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“We’re slowly poisoning America’s food supply, poisoning the whole world’s food supply.”

Peak Food Is The World’s No. 1 Ticking Time Bomb (Paul B. Farrell)

Global food poisoning? Yes, We’re maxing out. Forget Peak Oil. We’re maxing-out on Peak Food. Billions go hungry. We’re poisoning our future, That’s why Cargill, America’s largest private food company, is warning us: about water, seeds, fertilizers, diseases, pesticides, droughts. You name it. Everything impacts the food supply. Wake up America, it’s worse than you think. We’re slowly poisoning America’s food supply, poisoning the whole world’s food supply. Fortunately Cargill’s thinking ahead. But politicians are dragging their feet. They’re trapped in denial, protecting Big Oil donors, afraid of losing their job security; their inaction is killing, starving, poisoning people, while hiding behind junk-science.

The truth is, America, Big Ag worldwide farm production can’t feed the 10 billion humans forecast on Planet Earth by 2050. Can we wait till 2050 for the fallout? No. The clock’s ticking on the Peak Food disaster dead ahead. We’re at the critical tipping point, the planet is boiling over. Conservative Greg Page, executive chairman of the Cargill food empire, has that great can-do spirit of capitalism: At $43 billion, Cargill is America’s largest privately held company, launched during the Civil War with one grain warehouse. An unabashed optimist, Page was sounding a loud battle cry in Burt Helm’s New York Times op ed, “The Climate Bottom Line:”

Page is a powerful leader, optimistic, realistic, experienced … admits he “doesn’t know … or particularly care … whether human activity causes climate change … doesn’t give much serious thought to apocalyptic predictions of unbearably hot summers and endless storms.” Page wants action, results. Yes, he’s no left-wing environmentalist. Far from it. This is business, jobs, profits, because it’s a fact, climate’s already damaging huge sectors of America’s agricultural business … dust bowls in the heartland, in California’s bone dry central valley, all over … Georgia, North Carolina, Texas, all farm economics are affected. Meanwhile, our politicians dilly-dally, drifting, dragging their feet, in denial, playing petty ideological games.

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Jan 212015
 
 January 21, 2015  Posted by at 11:28 am Finance Tagged with: , , , , , , , , ,  


DPC Cab stand at Madison Square, NY 1900

All Empires Die By Deflation – Not Inflation (Martin Armstrong)
Global Dollar Economy Hits ‘Deflationary Vortex’ (Zero Hedge)
Albert Edwards: ‘Markets Will Riot’ On Deflation (Huebscher)
QE Warfare Pushing World Financial System Out Of Control (AEP)
Fed Officials on Track to Raise Short-Term Rates Later in the Year (WSJ)
Central Bankers Lurch From ‘Whatever It Takes’ To ‘Whatever Next’ (Reuters)
Storm Clouds Gather Over US Economy: Can The Miracle Last? (CNBC)
Davos Is About More Control And Banksterism, Not Solutions: Lew Rockwell (RT)
Brokers Reveal Details Of Damage From Swiss Chaos (Independent)
Iran Oil Minister Sees ‘No Threat’ From $25 Oil (MarketWatch)
BHP Billiton Cuts US Shale Oil Rigs By 40% Amid Sliding Price (AFP)
Chinese Stocks’ Booms and Busts Getting Bigger on Margin Debt (Bloomberg)
The Era Of 7% Growth Is Over For China (CNBC)
Defiant Obama Pushes ‘Middle-Class Economics’ (Reuters)
Credit Rater S&P to Be Banned for Year From Commercial-Bond Market (Bloomberg)
If Money Speaks Louder Than Words, Is It Speech? (Reuters)
No Clear Majority Yet In EU For TTIP Trade Deal (Reuters)
Ukraine Crisis ‘Turning Point’ Close: Russian Deputy PM (CNBC)
If Christine Lagarde And Her EU Pals Are Our Friends, Who Needs Enemies? (IM)
Pope Francis: Failing to Care for Environment Is a Betrayal of God (Slate)

“This is the death-spiral of empires. They consume all wealth until none is left.”

All Empires Die By Deflation – Not Inflation (Martin Armstrong)

A lot of people have asked what to do because property taxes keep rising and they can see they are unable to retire under such circumstances. The politicians are wiping out the elderly diminishing their savings and exploiting them in every way. There are no exceptions for taxation when you sell your home as there are in Britain. You pay no tax on the profits from a primary residence there. In the USA, you are taxed until you die. and then they want what is left. Property taxes are the worst of all taxes for they prevent you from really owning your home. Can’t pay the tax – they take it and sell it for pennies on the dollar. You have to pay taxes as if you were still working so all you can do is sell and move south and then pay taxes on your gains. New Jersey even put in an exit tax on the people it has been forcing to leave.

California has been hunting former residents who moved demanding taxes on pensions claiming they earned it when living in that state. It is a wonder why we do not yet have a sea of grey hair people with guns and pitchforks storming Washington yet. This is how empires die. Taxes in Rome kept rising. Its population peaked about 180AD and as corruption began to rise, people began to leave. The higher the taxes, the more people left town. Eventually, people could not afford the taxes and were forced to just abandon their homes. This is the death-spiral of empires. They consume all wealth until none is left. Indeed, Ben Franklin got it right – our fate is always doomed by death and taxes. By the Middle Ages, the Roman Forum, was the grazing grounds for animals. Edward Gibbon wrote the best epitaph:

“Her primeval state, such as she -might–appear in a remote age, when Evander entertained the stranger of Troy, has been delineated by the fancy of Virgil. This Tarpeian rock was then a savage and solitary thicket; in the time of the poet, it was crowned with the golden roofs of a temple, the temple is overthrown, the gold has been pillaged, the wheel of Fortune has accomplished her revolution, and the sacred ground is again disfigured with thorns and brambles. The hill of the Capitol, on which we sit, was formerly the head of the Roman Empire, the citadel of the earth, the terror of kings; illustrated by the footsteps of so many triumphs, enriched with the spoils and tributes of so many nations. This spectacle of the world, how is it fallen! how changed! how defaced!

The path of victory is obliterated by vines, and the benches of the senators are concealed by a dunghill. Cast your eyes on the Palatine hill, and seek among the shapeless and enormous fragments the marble theatre, the obelisks, the colossal statues, the porticos of Nero’s palace: survey the other hills of the city, the vacant space is interrupted only by ruins and gardens. The forum of the Roman people where they assembled to enact their laws and elect their magistrates, is now enclosed for the cultivation of pot-herbs, or thrown open for the reception of swine and buffaloes. The public and private edifices that were founded for eternity lie prostrate, naked, and broken, like the limbs of a mighty giant, and the ruin is the more visible from the stupendous relics that have survived the injuries of time and fortune.”

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“..if the trade weighted dollar is appreciating, then this exerts downward pressure on the dollar economy on a near one-to-one basis.”

Global Dollar Economy Hits ‘Deflationary Vortex’ (Zero Hedge)

One of the macroeconomic observations that has gotten absolutely no mention in recent months is the curious fact that while global economic growth has not imploded in recent quarters, it is because GDP has been represented, as is customary, in local currency terms. Of course, this comes as a time when local currencies (at least those which are not the USD) have been plunging against the greenback on the back of the expectations that the Fed will hike rates some time in the summer or later in 2015. Which also means that in “dollar economy” terms, i.e., converted in USD, things are not nearly as good.

In fact, as the chart below shows, the global dollar economy is not only shrinking fast, but it is doing so at the fastest pace since the Lehman collapse, having shrunk by $4 trillion, or a whopping 5%, in just the last 6 months! By way of comparison the dollar economy lost $7 trillion, or a 10% contraction, during the Lehman crisis. Should the USD continue to appreciate, the global dollar economy collapse may surpass the plunge observed just as the great financial crisis struck. SocGen calls it “a deflationary vortex”; CNBC would call it a “global recovery.” Here is SocGen on this largely undiscussed topic with “The deflationary vortex of a shrinking dollar economy”:

As the ECB prepares to race faster in a bid to export deflation, the risk is that the dollar economy (world GDP measured in US dollars) will shrink further. The dollar economy is down by just over 5% since July, marking a loss of just over $4tn in nominal terms. The last sharp contraction of the dollar economy took place in 2008. Back then the economy shrank by just over $7tn, marking a loss in excess of 10%. The foreign trade mix of the US fairly closely mirrors the composition of world GDP. As such, if the trade weighted dollar is appreciating, then this exerts downward pressure on the dollar economy on a near one-to-one basis.

Any offset then comes from nominal GDP growth in local currency terms. Since July, the trade weighted dollar has gained just over 10%. Viewing the global economy from the vantage point of the dollar economy, it is hardly surprising that when the trade weighted dollar appreciates, commodity demand is eroded as economies with depreciating currencies lose purchasing power. To the extent that central banks actively seek currency depreciation, this could see further shrinkage of the dollar economy and add further downward pressure to commodity prices.

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“This is the year the markets really panic about deflation. You haven’t had that panic yet.”

Albert Edwards: ‘Markets Will Riot’ On Deflation (Huebscher)

Albert Edwards admits that his “uber bear” reputation is well deserved, at least with respect to equities, an asset class he has dismissed for the last 10 years. His bearishness has not abated, and for the coming year, he fears that “deflation will overwhelm the west.” Markets, he said, will riot. Edwards is the chief global strategist for Societe Generale and he spoke at that firm’s annual global strategy conference in London on January 13. Global markets face three risks, according to Edwards: bearishness in the U.S. government bond market, a flawed confidence that the U.S. is in a self-sustaining recovery and undue faith in the relationship between quantitative easing (QE) and the equity markets. Deflation is the main threat, though, according to Edwards. “This is the year the markets really panic about deflation. You haven’t had that panic yet.”

Edwards said that U.S. equities are “stuck in a secular-valuation bear market” and have been inflated by QE. Though he did not predict a recession, he said stocks would react very negatively if one were to happen. “The market embraces a recession by going to a new lower low on valuations,” he said. He offset that pessimism with a bullish view on the U.S. bond market. He said the 10-year yield could go below 1% and “converge on what is happening in Japan.” “Markets move on extreme surprises,” Edwards said, “and when expectations are so firmly held and they are shown not to be the case, you get these extreme moves.”

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“QE is not going to help at all. Europe has far greater reliance than the US on small and medium-sized companies and they get their money from banks, not from the bond market..”

QE Warfare Pushing World Financial System Out Of Control (AEP)

The economic prophet who foresaw the Lehman crisis with uncanny accuracy is even more worried about the world’s financial system going into 2015. Beggar-thy-neighbour devaluations are spreading to every region. All the major central banks are stoking asset bubbles deliberately to put off the day of reckoning. This time emerging markets have been drawn into the quagmire as well, corrupted by the leakage from quantitative easing (QE) in the West. “We are in a world that is dangerously unanchored,” said William White, the Swiss-based chairman of the OECD’s Review Committee. “We’re seeing true currency wars and everybody is doing it, and I have no idea where this is going to end.” Mr White is a former chief economist to the Bank for International Settlements – the bank of central banks – and currently an advisor to German Chancellor Angela Merkel. He said the global elastic has been stretched even further than it was in 2008 on the eve of the Great Recession.

The excesses have reached almost every corner of the globe, and combined public/private debt is 20% of GDP higher today. “We are holding a tiger by the tail,” he said. He warned that QE in Europe is doomed to failure at this late stage and may instead draw the region into deeper difficulties. “Sovereign bond yields haven’t been so low since the ‘Black Plague’: how much more bang can you get for your buck?” he told The Telegraph before the World Economic Forum in Davos. “QE is not going to help at all. Europe has far greater reliance than the US on small and medium-sized companies (SMEs) and they get their money from banks, not from the bond market,” he said. “Even after the stress tests the banks are still in ‘hunkering down mode’. They are not lending to small firms for a variety of reasons. The interest rate differential is still going up,” he said.

The warnings come just as the ECBprepares a blitz of bond purchases at a crucial meeting on Thursday. Most ECB-watchers expect QE of around €500bn now that the eurozone is already in deflation. Even the Bundesbank is struggling to come with fresh reasons to oppose it. The psychological potency of this largesse will depend on whether the ECB opts for shock-and-awe concentration or trickles out the stimulus slowly. It also depends on the exact mechanism used to conduct QE, a loose term at best. ECB president Mario Draghi hopes that bond purchases will push money out into the broader economy through a “wealth effect”, but critics fear this will be worse than useless if it leads to an asset bubble without gaining traction on the real economy. Classic moneratists say the ECB may end up spinning its wheels should it merely try to expand the money base. Mr White said QE is a disguised form of competitive devaluation. “The Japanese are now doing it as well but nobody can complain because the US started it,” he said.

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Jon Hilsenrath is the unofficial Fed bullhorn. So pay attention.

Fed Officials on Track to Raise Short-Term Rates Later in the Year (WSJ)

Federal Reserve officials are staying on track to start raising short-term interest rates later this year, even though long-term rates are going in the other direction amid new investor worries about weak global growth, falling oil prices and slowing consumer price inflation. The Fed’s stance, as it prepares for a policy meeting later this month, is striking because European Central Bank officials are poised to take the opposite approach later this week. The ECB is nearing a decision on whether to launch a controversial stimulus program known as quantitative easing on Thursday. It is widely expected to announce it will buy hundreds of billions or more of euro-denominated government bonds in an effort to beat back Japan-style deflation.

The world hasn’t seen an economic divergence like this since the mid-1990s, when growth in the U.S., Japan and Europe went in different directions. Back then, Japan was mired in a post-real-estate bubble downturn, Europe was grappling with the consequences of the collapse of the Soviet Union and the U.S. was enjoying a burgeoning technology boom. The looming moves have important implications for markets and growth. Investors have already been driving up the value of the U.S. dollar in anticipation of the moves and driving down long-term interest rates across the globe. “I think it is important to get started and to start normalizing policy,” St. Louis Fed President James Bullard said in an interview with The Wall Street Journal on Monday. “Even once we start to normalize, interest rates would be extraordinarily low.” [..]

“The level of inflation is not so low that it can alone justify a policy rate of zero,” Mr. Bullard said in a speech Friday. He wants the Fed to start raising rates by March, earlier than most other officials. San Francisco Fed President John Williams said in a speech Friday the middle of the year may still be the best time for the U.S. central bank to increase rates. Given the health of the broader economy, “what I’m really watching for is underlying inflation—wage growth, prices [..] My forecast is once we get through this slow path in inflation it will start moving back,” he said, adding, “I’m not expecting inflation to be 2% when we raise interest rates.I don’t need to be at the goal when we raise the rates.”

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“Monetary methadone..”

Central Bankers Lurch From ‘Whatever It Takes’ To ‘Whatever Next’ (Reuters)

The Swiss currency shock has raised an awkward question many investors have been fearful of asking – what if central banks become as unpredictable and fallible as they are powerful? The Swiss National Bank’s sudden decision to abandon its three-year-old cap on the franc – the “cornerstone” of its monetary policy just three days before – led to the biggest one-day move in major exchange rates in the post-1973 floating rates era. To some it was a warning sign of other U-turns, mishaps and possible failures by central banks still ahead, outcomes not fully appreciated by long-becalmed markets. For decades the power of currency printing presses has held markets in thrall. “Don’t fight the Fed” and all its international variations has been a devout belief among financial traders.

Even after the failure of Alan Greenspan’s Federal Reserve to spot and headoff one of the biggest credit booms and busts in history, the ability of the Fed, Bank of England, Bank of Japan, European Central Bank and others to flood their money supply to ease the fallout helped anaesthetise fractious markets. The subsequent waves of cheap credit, currency fixes and “quantitative easing” drove down borrowing rates and erased volatility. The demonstrations of central bank might culminated in ECB chief Mario Draghi’s declaration in 2012 that he would do “whatever it takes” to save the euro. In the face of the power of the money printing press, speculation became pointless. So much so that one of the biggest conundrums of recent years became the persistently low implied volatility in markets even in the face of outsized economic, political and policy risks.

Not everyone was pleased by the complacency. “Monetary methadone was the best of no choice but we have become addicted to cheap money everywhere and, somehow, that central bankers are prophetic,” Nigel Wilson, chief executive of UK insurer Legal & General told Reuters. The first cracks appeared last summer, when it became clear the Fed was turning off the printing presses even as counterparts in Europe and Japan were still cranking up theirs. The idea the world’s largest economy was about to suck dollars back out of the world just as others were pumping in euros and yen sent once-steady exchange rates lurching. The power of the central banks was as daunting as ever, but no longer such a reassuring and calming influence.

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No.

Storm Clouds Gather Over US Economy: Can The Miracle Last? (CNBC)

The world just got a bit scarier for risk assets. On Thursday morning, the Swiss National Bank shocked the world by removing its cap on the Swiss franc against the euro, causing its currency to soar and the euro to plunge—and creating fears about more sudden central bank moves. Meanwhile, global growth concerns continue to drive industrial commodities like copper and crude oil to multi-year lows. With the U.S. serving as one of the world’s few bastions of security and growth, the dollar continues to soar and Treasury yields are plummeting in a bid for safe havens. The question now: How long can America continue to shine in an increasingly uncertain and slow-growing world? A key clue could come in the week ahead, as a slate of major companies report their fourth-quarter results and release forward guidance.

Most closely watched will be energy companies like Halliburton and Baker Hughes, consumer discretionary names like Starbucks and McDonald’s, and industrial giants like GE. The overarching questions will be whether the soaring dollar and plunging energy prices are helping or hurting—and just how much the weakening global environment is a concern for corporate managers. “What I’m going to be watching for is some clarity from the companies in terms of the decline in the price of oil, and the decline of interest rates and the rise of the dollar,” said John Conlon, chief investment officer at People’s United Bank. “I’m going to see if there’s some consensus developing in terms of the price of oil and interest rates.”

Thus far, the “blended” estimate for fourth quarter earnings growth (which combines reported earnings with analyst estimates for yet-to-be-reported earnings) stands at a meager 0.6%, according to FactSet. That’s down from 1.7% on December 31st, mostly due to misses from Citigroup, Bank of America and JPMorgan. It’s worth noting that since more companies beat than miss, actual earnings growth tends to be prettier than the estimates. But if the growth rate does stand at 0.6% after the dust has settled, that would mark the slowest earnings growth since the third quarter of 2012, when S&P 500 companies reported an earnings decline of 1%.

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“..what they actually are doing is plotting even more wars, interventions, more economic controls, more ‘banksterism’, more benefits to the power elite versus the people”

Davos Is About More Control And Banksterism, Not Solutions: Lew Rockwell (RT)

The Davos meeting is not looking for world crisis solutions but plotting more controls, ‘banksterism’ and power elite benefits, says economic journalist Lew Rockwell. They are going to tax and rip off their own people to even greater extent, he added.

RT: The main theme of the Davos forum in the past has largely been finding solutions for world economic problems. How about today? Is it still about that?

Lew Rockwell: No, it is actually about control. I think it has always been about control for the US Empire, for the oligarchs associated with it. They may talk about wanting to solve problems, or make people’s lives better, [but] what they actually are doing is plotting even more wars, interventions, more economic controls, more ‘banksterism’, more benefits to the power elite versus the people. We don’t know what is going on there. I’d like to put chest cams on all of them so we can see what they are doing, what they are talking about. It is not good for the cause of freedom, for the cause of prosperity, not good for the cause of human rights what goes on in Davos.

RT: Let’s talk about numbers. For example, this year companies have to pay $20,000 per executive for a ticket. A simple dinner in an average restaurant was $40 last year. A night in a mid-range hotel has gone from roughly $600 to $700. Do the Forum’s participants need all these special arrangements to make an effective decision?

LR: It is a meeting of the very rich and it’s a meeting of the politicians that they own. They all live very well; they are not staying in the middle range hotels and are not eating at the regular restaurants. They are having the times of their lives; they lived the life of riley at the expense of everybody else. I don’t think we need to worry about cost to them. They are happy to spend the money. It is not theirs after all; they are taking it from the rest of us.

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“The aftermath is like a black hole that can suck massive amounts of credit from currency trading as we have known it.”

Brokers Reveal Details Of Damage From Swiss Chaos (Independent)

The UK’s biggest spread-betting firm, IG Group, said yesterday that it would “learn lessons” from last week’s stunning reversal by the Swiss National Bank (SNB), which cost it £30m. IG is nursing £18m in client losses from the SNB’s shock scrapping of the franc’s cap against the euro, as well as £12m in market exposure. IG honoured the loss limits of clients but was unable to close its hedging positions on bets because of the extreme volatility, which saw the euro tumble 30% against the “Swissie” at one stage. The company intends to maintain the dividend at last year’s level. “Although this was because of an unprecedented and unforeseeable degree of movement in a major global currency, and only a few hundred clients were affected, we will seek to learn lessons from this incident which we can incorporate into our risk-management approach,” the company said.

The Swiss blow took the gloss off strong results from the company, which has seen 1,700 clients sign up to a new stockbroking account. IG generated its highest monthly revenue in October, when global markets sank on growth fears, helping half-year profits up 2.8% to £101.4m. Another victim of the SNB’s currency earthquake, the US broker FXCM, also revealed the punishing terms of a $300m (£198m) rescue loan from investment firm Leucadia National, owner of a wide range of companies that includes broker Jefferies. FXCM will pay an eye-watering 10% annual interest on the loan, with the rate increasing by 1.5% a quarter up to a maximum of 17%, to encourage a sale of the business within three years. Leucadia will get half the proceeds on a sale of FXCM after the loan is repaid, although it will claim an even bigger share on a sale above $500m.

Danish investment bank and broker Saxo said it would incur losses from the SNB move but that its capital position was not in peril. The firm gave its clients less leverage to bet on the currency last year, reducing its exposure. Analysts said that the full impact of the scrapping of the Swiss franc-euro ceiling by the Swiss central bank won’t be known for months. “[It is] closer to a nuclear explosion than a 1,000-kilogram conventional bomb” said Javier Paz, senior analyst in wealth management at Aite Group. “The aftermath is like a black hole that can suck massive amounts of credit from currency trading as we have known it.”

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“If the oil prices drop to $25 a barrel, there will yet again be no threat posed to Iran’s oil industry..”

Iran Oil Minister Sees ‘No Threat’ From $25 Oil (MarketWatch)

Do I hear $25-a-barrel oil? Iran’s oil Minister Bijan Namdar Zanganeh hinted at even lower prices for crude as he declared his well positioned for plunging crude oil prices. “If the oil prices drop to $25 a barrel, there will yet again be no threat posed to Iran’s oil industry,” said Zanganeh at a conference in Tehran on Monday. That means the country should be sitting pretty as the OPEC sticks to its guns on production cuts. But Zanganeh also predicted that OPEC and non-OPEC countries will eventually “cooperate to restore balance to the oil market.” Wishful thinking perhaps in a situation where the market only reads: too much supply, not enough demand. On Sunday, his Iraq counterpart, Adel Abdul-Mehdi, said his country pumped out a record four million barrels per day of oil in December

Recently, billionaire Saudi businessman Prince Alwaleed bin Talal, said the market can kiss $100-a-barrel oil goodbye forever. “I said a year ago [that] the price of oil above $100 is artificial,” Alwaleed said. “It’s not correct.” Over at Project Syndicate last week, Anatole Kaletsky, a former Times of London columnist said $50 oil should really be the ceiling for a much lower price range, which could drop all the way down to $20 a barrel. “As it happens, estimates of shale-oil production costs are mostly around $50, while marginal conventional oilfields generally break even at around $20. Thus, the trading range in the brave new world of competitive oil should be roughly $20 to $50,” said Kaletsky, chief economist and co-chairman of Gavekal Dragonomics.

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“The announcement that BHP will reduce the number of US onshore oil rigs it operates by the end of this financial year is a pointer to the industry-wide supply response yet to come..”

BHP Billiton Cuts US Shale Oil Rigs By 40% Amid Sliding Price (AFP)

The world’s biggest miner BHP Billiton is cutting back its operating US shale oil rigs by 40% amid slumping prices. BHP said on Wednesday it would reduce the number of rigs from 26 to 16 by the end of the June in response to weaker oil prices. However, shale volumes were still forecast to grow by approximately 50% during the period. “In petroleum, we have moved quickly in response to lower prices and will reduce the number of rigs we operate in our onshore US business by approximately 40% by the end of this financial year,” chief executive Andrew Mackenzie said. “The revised drilling programme will benefit from significant improvements in drilling and completions efficiency.” Mackenzie said while the firm’s drilling operations would focus on its Black Hawk field in Texas, “we will keep this activity under review and make further changes if we believe deferring development will create more value than near-term production”.

Oil prices slid again Tuesday after the International Monetary Fund slashed its forecast for world economic growth and revived concerns about the strength of crude demand. US benchmark West Texas Intermediate for February sank US$2.30, or 4.7%, to US$46.39 a barrel, not far from its lowest level since March 2009. “The announcement that BHP will reduce the number of US onshore oil rigs it operates by the end of this financial year is a pointer to the industry-wide supply response on lower oil prices that is yet to come,” CMC Markets’ chief market analyst Ric Spooner said in a note. BHP added that its iron ore output had risen by 16% for the three months to December compared to a year earlier, hitting 56.4m tonnes. Prices in iron ore, one of BHP’s core commodities, slumped 47% in 2014 amid a global supply glut and softening demand from China.

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“When the tide turns, it’s going to be very ugly, because you will have a forced exit from the market.”

Chinese Stocks’ Booms and Busts Getting Bigger on Margin Debt (Bloomberg)

The one thing China’s bulls and bears can agree on is that swings in the world’s most-volatile major stock market are only going to get bigger after equity traders took on record amounts of debt. Both Bank of America strategist David Cui, who predicts Chinese shares will fall, and JPMorgans Adrian Mowat, who has an overweight rating, say the surge in margin lending to all-time highs is amplifying price fluctuations in the $4.9 trillion market. Volatility in the benchmark Shanghai Composite Index reached the highest level since 2009 this week after rising more than fourfold since July. While the flood of borrowed money into Chinese stocks added fuel to a 59% rally in the Shanghai Composite during the past 12 months through yesterday, the gauge’s 7.7% tumble on Monday illustrates how leverage can also accelerate declines.

Margin traders unloaded shares at the fastest pace in 19 months during the rout, which was sparked by regulatory efforts to cool the growth of margin debt in a market where individuals drive 80% of equity volumes. “Margin trading will add more up-and-down to the market and increase volatility,” Xie Weiyu at Shenyin & Wanguo in Shanghai, said. “If a correction starts, the magnitude will be bigger than the past few years.” In a margin trade, investors use their own money for just a portion of their stock purchase, borrowing the rest from a brokerage. The loans are backed by the investors’ equity holdings, meaning they may be forced to sell when prices fall to repay their debt.

The Shanghai Composite sank the most in six years on Monday after the China Securities Regulatory Commission suspended the nation’s two biggest brokerages from lending money to new equity-trading clients and said securities firms shouldn’t lend to investors with assets below 500,000 yuan ($80,467). Outstanding margin loans on both the Shanghai and Shenzhen exchanges surged more than tenfold in the past two years to a record 1.1 trillion yuan as of Jan. 16, or about 3.5% of the nation’s market value. On the New York Stock Exchange, margin debt amounts to about 2.1% of market cap on the NYSE Composite Index. Margin lending is a “new phenomenon in China,” said Cui, who anticipates the Shanghai Composite will fall about 5% by year-end. “When the tide turns, it’s going to be very ugly, because you will have a forced exit from the market.”

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Again: China is doing far worse than it pretends.

The Era Of 7% Growth Is Over For China (CNBC)

Brace for growth numbers starting with “6” from China this year, economists say, after data showed the world’s second largest economy expanded at its slowest pace in over two decades in 2014. China’s GDP release on Tuesday showed the economy grew 7.3% in the fourth quarter from the year-ago period, bringing growth in the full year to 7.4% – the weakest performance since 1990. “The challenges facing China’s economy remain as large or even larger compared to a year prior,” Brian Jackson, chief economist at IHS Global Insight wrote in a note, citing the cooling property sector, industrial overcapacity and high debt levels as persistent headwinds for the economy.

IHS predicts growth will moderate to 6.5% in 2015, far short of a 7% official target the government is expected to announce in March, as the government prioritizes economic reform over stimulus While December monthly indicators, including industrial production and retail sales also released Tuesday, pointed to some upward momentum in the economy, economists say this will proved short-lived. “Brief spells of accelerating Chinese growth are taking place within a larger narrative of China’s secular slowdown, a trend which bouts of mini-stimulus and lower commodity prices cannot fully reverse,” Jackson said.

For example, the pickup in industrial output growth to 7.9% on year in December, from 7.2% in November, is a result of the re-opening of factories following a temporary shutdown during the time of the Asia-Pacific Economic Cooperation (APEC) conference, according to Nomura. Of all the headwinds facing the economy, analysts expect the property sector will be the top drag for the economy in the first half of 2015. Real estate is an important pillar of the economy, accounting for approximately 15% of GDP and directly affecting dozens of other sectors from steel to construction. “Chinese growth will continue to face downward pressure because of the slowdown in property investment,” said Tommy Xie, economist at OCBC Bank, who sees growth dipping below 7% in the first-half.

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Empty.

Defiant Obama Pushes ‘Middle-Class Economics’ (Reuters)

President Barack Obama struck a defiant tone for his dealings with the new Republican-led Congress on Tuesday, calling on his opponents to raise taxes on the rich and threatening to veto legislation that would challenge his key decisions. Dogged by an ailing economy since the start of his presidency six years ago, Obama appeared before a joint session of Congress for his State of the Union speech in a confident mood, buoyed by an economic revival that has trimmed the jobless rate to 5.6% and eager to use this as a mandate. It is now time, he told lawmakers and millions watching on television, to “turn the page” from recession and war and work together to boost those middle-class Americans who have been left behind.

But by calling for higher taxes that Republicans are unlikely to approve and chiding those who suggest climate change is not real, Obama set a confrontational tone for his final two years in office. He vowed to veto any Republican effort to roll back his signature healthcare law and his unilateral loosening of immigration policy. Any attempt to increase sanctions on Iran while negotiations with Tehran over its nuclear program are still under way would also be rejected, he said. In sum, Obama appeared liberated: no longer having to face American voters again after his election victories in 2008 and 2012, a point that he reminded Republicans about. “I have no more campaigns to run,” Obama said. When a smattering of applause rose from Republicans at that prospect, he added with a tight smile: “I know because I won both of them.”

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Costly.

Credit Rater S&P to Be Banned for Year From Commercial-Bond Market (Bloomberg)

Standard & Poor’s will be suspended for a year from rating bonds in one of its most lucrative businesses in a $60 million settlement with the U.S. Securities and Exchange Commission, according to a person with knowledge of the matter. The deal, which the person said may be announced as soon as tomorrow, is the agency’s toughest action yet in an industry blamed for fueling the 2008 financial crisis by assigning inflated grades to risky mortgage debt. Instead of securities created during that period, though, the SEC’s investigation has looked at whether S&P bent its criteria to win business on commercial-mortgage bonds issued in 2011.

The suspension will ban S&P from rating debt in the biggest portion of that market, those that bundle multiple loans tied to anything from shopping malls to skyscrapers, into securities that are sold to bond investors, according to the person, who asked not to be identified because the discussions are private. In addition to the SEC fine, the unit of McGraw Hill is also facing a penalty to settle probes of the same ratings by Attorneys General in New York and Massachusetts, said the person and a second with knowledge of the talks. The CMBS probe is separate from a lawsuit by the Justice Department tied to subprime home loans that S&P rated before the credit crisis. S&P is expected to settle that matter as soon as this quarter for about $1 billion in penalties, people familiar with the matter said this month.

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” One has a right, for example, to procreative liberty — yet no right to buy a baby. Money would help some people exercise these rights, too. But we don’t treat laws restricting baby selling as if they were restricting procreative liberty.”

If Money Speaks Louder Than Words, Is It Speech? (Reuters)

Citizens United may have been just what the United States needed — a decision by the U.S. Supreme Court so dramatically wrongheaded that people across the country paid attention to it and said, “Hold on, something is wrong here.” Though the actual ruling simply extended the flawed approach to campaign-finance laws that the court had been following for decades, Citizens United shined a light on the justices’ reasoning and demonstrated its shortcomings by taking that rationale to its logical — if absurd — conclusion. The Supreme Court treats restrictions on both giving and spending money on elections as restrictions on “speech” under the First Amendment. While the case law has been dotted with victories for both advocates and opponents of campaign-finance restrictions over the past 40 years, it is vital to step back and look at the bigger picture.

In the seminal 1976 campaign-finance case, Buckley v. Valeo, the court laid out the line of reasoning relied on ever since. Buckley said that restrictions on giving and spending money in politics should be treated as if they are restrictions on speech. This approach was not obvious or uncontroversial. Campaign-finance laws do not “prohibit” speech — using the word in its ordinary way. Rather, they restrict giving and spending money used on political speech. The decision to treat campaign-finance laws as restrictions on speech was based on the argument that money facilitates speech. “[V]irtually every means of communicating ideas in today’s society requires the expenditure of money,” the court argued. Though that may be somewhat less true today — given the Internet — it is still largely correct.

What this rationale misses is that money facilitates speech not because there is any special connection between the two, but because money is useful stuff. It facilitates the exercise of many other constitutionally protected rights, as well as the fulfillment of many goals and interests. Yet, and here’s the important part, no one — and especially not this Supreme Court — is likely to conclude that restrictions on spending money in connection with the exercise of all other rights would violate these rights. One has a right, for example, to procreative liberty — yet no right to buy a baby. Money would help some people exercise these rights, too. But we don’t treat laws restricting baby selling as if they were restricting procreative liberty.

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Here’s how you spell democracy in Europe today: “The EU has said the final wording would, however, remain confidential until an agreement was reached..”

No Clear Majority Yet In EU For TTIP Trade Deal (Reuters)

No clear majority has so far emerged among EU states for a free-trade agreement between the European Union and the United States and both sides need to explain the benefits of such a deal, the EU’s health chief said. Chancellor Angela Merkel has urged the 28-nation EU to speed up negotiations with the United States on what would be the world’s biggest trade deal. But there is public opposition in Europe based on fears of weaker food and environmental standards. “We have to take people’s concerns seriously,” Vytenis Andriukaitis, European commissioner for health and food safety, told German daily Tagesspiegel, adding that the trade agreement ultimately needed to be ratified by all national parliaments.

“At the moment, I don’t see a safe majority for this yet,” he said in an interview published on Monday, adding the EU Commission had published some negotiating papers to improve transparency. The EU has said the final wording would, however, remain confidential until an agreement was reached on the Transatlantic Trade and Investment Partnership (TTIP). Negotiations for the TTIP were launched in July 2013 and officials are seeking a deal that goes well beyond trade to remove barriers to businesses. There is concern in Europe that U.S. multinationals would use a proposed investment protection clause to bypass national laws in EU countries. In Berlin, more than 25,000 people joined a rally against the TTIP and genetically modified food over the weekend.

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Went to Diplomat School: “Russia is interested in stabilizing the situation globally and in Ukraine in particular..”

Ukraine Crisis ‘Turning Point’ Close: Russian Deputy PM (CNBC)

The conflict over Ukraine’s borders with Russia, which has soured Moscow’s relationship with the West and stirred up new concerns about global unrest, may be close to a “turning point”, according to Arkady Dvorkovich, Russia’s deputy Prime Minister. “Russia is interested in stabilizing the situation globally and in Ukraine in particular,” Dvorkovich told CNBC at the World Economic Forum in Davos, where he is one of Russia’s most senior representatives after both President Vladimir Putin and Prime Minister Dmitry Medvedev declined to make the trip. He extended the possibility of reducing the price of gas to Ukraine, after Russia hiked it earlier in the conflict. This week, military activity in Donetsk and Luhansk, the disputed parts of eastern Ukraine where Russian-backed militants are battling the Ukrainian army, had escalated after falling back over Christmas and New Year.

Petro Poroshenko, the Ukrainian President, who came to power last year, has acknowledged this week that a military solution to the fighting, which has claimed nearly 5,000 lives so far, does not exist. Economic sanctions enacted by Western countries against Russia, following the outbreak of conflict, combined with the falling price of oil and gas, its biggest export, and a tumbling ruble, have helped send the country into economic turmoil. Nonetheless, Dvorkovich argued that thanks to the country’s currency reserves “we have the resources to keep the economy in a relatively normal stance.” “We have resources, we have an anti-crisis plan.” There has also been a lack of external investment in Russia, as Western companies are concerned that they may fall foul of current or future sanctions. But Dvorkovich dismissed this, arguing “CEOs of foreign companies are all saying that they will continue investments in Russia, with the ruble at this low level.”

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“Christine Lagarde must be smiling to herself and thinking we are thick Paddies alright.”

If Christine Lagarde And Her EU Pals Are Our Friends, Who Needs Enemies? (IM)

There is nothing worse than a posh bird arriving into town and insulting the intelligence of the natives. That’s exactly what IMF chief Christine Lagarde did yesterday. She and her friends in Europe robbed around €10,000 a year out of the pocket of every Irish citizen to save the rich on the continent and to ensure no French or German bank would collapse for lending to the bankrupt Irish banks. And then she has the cheek to tell us we are the real heroes of the recovery. What’s even worse, our Taoiseach Enda Kenny stood there applauding her as she praised the victims of brutal austerity. If Lagarde and her cohorts from Europe can be classed as friends, who needs enemies? This country is sick to death of being the best boys and girls in the class in the EU. Let’s tell the truth Brussels couldn’t give a damn about us and never will. They will protect the euro at any cost and we as a nation paid a horrendous price. We have been landed with debt that will take generations to clear, if ever.

The whole crisis set this country back 20 years. Not one treacherous banker has gone to jail. Not one politician or civil servant has been held to account for horrendous decisions taken on the night of the bank guarantee. Europe has been a failure for the Republic of Ireland, they hung this country out to dry. So lets start having the debate about it. There is also no recovery here yet – very few people have any spare cash. The country is taxed to the hilt and the working man and woman is surviving by the skin of the teeth. That’s why the water charge was a tax too far and the people took to the streets. Our politicians are still living in a Leinster House bubble. They may mean well but the majority of them haven’t a clue what’s going on in the real world. They have no vision where Ireland is going it is all a game of retaining power. Christine Lagarde must be smiling to herself and thinking we are thick Paddies alright.

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“Respect for the environment means more than simply using cleaner products or recycling what we use.”

Pope Francis: Failing to Care for Environment Is a Betrayal of God (Slate)

Pope Francis has been wading into environmental issues during his week-long Asian tour, but he issued the strongest words on Sunday, when he said that man was betraying God’s calling by destroying nature. Or at least that’s what he was supposed to say at a rally with young people at a university in Manila. But the pope ended up being moved by the story of an abandoned girl so he improvised a speech. Still, the Vatican has said that when the pope decides to improvise, the prepared text is official, notes Reuters. “As stewards of God’s creation, we are called to make the earth a beautiful garden for the human family,” the pope said in the prepared text. “When we destroy our forests, ravage our soil and pollute our seas, we betray that noble calling.” The pope also pointed out that youth in the Philippines should feel a special obligation to care for the environment.

“This is not only because this country, more than many others, is likely to be seriously affected by climate change,” he said in the prepared text. “You are called to care for creation not only as responsible citizens, but also as followers of Christ!” He also appeared to chastise those who think that simply by buying environmentally friendly products and recycling they are doing enough for the cause. “Respect for the environment means more than simply using cleaner products or recycling what we use. These are important aspects, but not enough,” he said. God “created the world as a beautiful garden and asked us to care for it,” Francis said. “Through sin, man has disfigured that natural beauty. Through sin, man has also destroyed the unity and beauty of our human family, creating social structures that perpetuate poverty, ignorance and corruption.”

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Jan 172015
 
 January 17, 2015  Posted by at 11:52 am Finance Tagged with: , , , , , , ,  


Russell Lee Bike rack in Idaho Falls, Idaho Aug 1942

The narrative continues: “The U.S economic underlying momentum is really very good,” Williams said.

Low Inflation No Bar To Rate Rise, Fed Officials Say (Reuters)

The Federal Reserve is still on track for a potential mid-year interest-rate increase, a top Fed official said on Friday, citing strong U.S. economic momentum and a falling unemployment rate. “There is no need to rush to raise rates; at the same time we want to make sure that we appropriately act in a way that we don’t get behind the curve,” San Francisco Federal Reserve Bank President John Williams told reporters at the bank’s headquarters. “If the forecast evolves the way I expect, six months from now or whatever – middle of this year – I think we’ll have a better position to understand either well we need to wait longer, or maybe it’s we could act now.”

Fed officials are grappling with when to gradually wean the U.S. economy from more than six years of near-zero interest rates, now that unemployment has fallen and economic growth looks solidly above its long-term trend. But inflation has been undershooting the Fed’s 2% target, and some gauges suggest the inflation outlook is falling. That has prompted a few Fed officials to argue the Fed should defer any rate hikes until next year. “At some point you just have to give in to the data,” and respond to too-low inflation with stimulus, not tightening, Minneapolis Fed President Narayana Kocherlakota said on Friday. St. Louis Fed President James Bullard took the opposite view in a separate appearance in Chicago, saying while inflation is low, it is not low enough to justify keeping borrowing costs at zero.

Williams, who unlike Bullard and Kocherlakota votes this year on Fed policy and whose views are seen as centrist, acknowledged that dropping inflation expectations are a “negative signal,” but only about global growth prospects. Low yields on U.S. Treasuries, often tied to expectations for slowing future domestic growth, are “not about the U.S. economy and the Federal Reserve” but mostly reflect weakness in Europe and elsewhere, he said. “I don’t agree that it is sending a negative signal about the U.S. economy,” he said, forecasting GDP growth of 2.5% to 3% this year. While he does not expect inflation to be back up to 2% by the time the Fed raises rates, the inflation-subduing effects of falling oil prices should subside in six to 12 months, and it should begin to turn up as labor market slack declines further. “The U.S economic underlying momentum is really very good,” Williams said.

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Regulators should stay out and let markets discover prices.

Swiss Turmoil Hints at Future Lehman Moments (Bloomberg)

For three years, the Swiss National Bank successfully sat on its currency, selling the franc whenever it threatened to appreciate too much for the comfort of Swiss exporters. Yesterday, it tore up that policy, inciting the equivalent of a riot in the currency market and trashing retail brokerages from New York to New Zealand. While victims of the turmoil ponder whether Swiss policy makers are irresponsible or just incompetent, the scale of the damage is a timely reminder that contagion is always unpredictable, that markets always overshoot, and that traders, when they smell profit, can outgun central banks. Currency analysts all seem to assume that the Swiss central bank, after abandoning its €1.20 euro, expected its currency to settle at about €1.10 or even €1.15. Instead, the franc is trading at parity with the euro – a stunning blow for exporters. If the central bank thought that simultaneously cutting its deposit rate to -0.75% would deter franc purchasers – SNB President Thomas Jordan called negative rates “a very strong instrument” – it was badly mistaken.

Jordan also said markets “tend to strongly overreact” to surprises, and that the situation would “correct itself over time.” Maybe. But as of today, abandoning the cap rather than, say, adjusting the level seems to have been a wild miscalculation. And it contains a lesson for both U.S. and European policy makers. By the third quarter of this year, the Federal Reserve’s 0.25% interest rate is expected to at least double, according to economists surveyed by Bloomberg News. The Fed already has an idea of what the market impact will be: The so-called taper tantrum in May 2013, when then Fed Chairman Ben Bernanke first suggested the U.S. bond-purchase program would be scaled back, saw the yield on the 10-year Treasury jump half a percentage point in four weeks to end the month at 2.13%.

There’s a risk, though, that this time, having flagged the prospect of a change so far in advance, policy makers will be complacent about the probable market reaction. That’s what happened in 2008 when Lehman Brothers went bust. Treasury officials convinced themselves that the financial crisis had been rumbling on long enough for participants to have shielded themselves against the collapse of a big firm; instead, their earlier decision to contribute $29 billion to JPMorgan’s rescue of Bear Stearns had created a false sense of security about how far the government would go to support the financial system.

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“You have to believe a lot of what went on yesterday and somewhat today has been short covering. There is still a whole bunch of reckoning to still go on.”

Here’s Why Losses Triggered by Franc-Cap Removal Were So Painful (Bloomberg)

It’s easy to see why the Swiss National Bank’s surprise decision to abandon the cap on the franc versus the euro wreaked havoc on currency markets. You just have to look at data from the U.S.’s largest derivatives exchange. Speculators using futures to wager the franc would weaken versus the dollar had more than $3 billion worth of such bets as of Jan. 13, according to Bloomberg calculations based on Commodity Futures Trading Commission data. The SNB’s decision two days later to drop the cap sparked a rush for the exit as the franc surged 21% versus the greenback. “This move was so large that it would have gone through anybody’s reasonable stop level,” Robert Sinche, a strategist at Amherst Pierpont Securities LLC in Stamford, Connecticut, said by phone. “You have to believe a lot of what went on yesterday and somewhat today has been short covering. There is still a whole bunch of reckoning to still go on.”

Short covering is when traders try to buy back a security whose price is climbing after they sold it short, wagering the price would fall. Non-commercial accounts held a net short position on the franc versus the dollar of 26,444 contracts just before the SNB decision, the most since May 2013, according to CFTC data based on transactions on the CME exchange. With a contract valued at 125,000 Swiss francs ($122,537) on Jan. 13, the value of the position was $3.24 billion. The Swiss currency climbed more than 15% on Jan. 15 against all of the more-than 150 currencies tracked by Bloomberg. Dealers in London at banks including Deutsche Bank, UBS and Goldman Sachs battled to process orders after the SNB made its announcement in Zurich scrapping the three-year-old cap designed to stem the Swiss franc’s appreciation against the euro.

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And Draghi’s.

The Swiss Just Made Japan’s Job Harder (Bloomberg)

Haruhiko Kuroda’s monetary “bazooka” just got outgunned by the Swiss. Since April 2013, Japan’s central banker has been pumping trillions of dollars into the economy in an attempt to generate 2% inflation. But in a mature, aging economy like Japan’s, the effort is 95% about confidence. In order to “drastically convert the deflationary mindset,” as Kuroda puts it, the Bank of Japan must transform sentiment among households and businesses. Kuroda’s massive bond purchases mean little if the Japanese don’t trust that better days lay ahead. The Swiss National Bank’s move to abandon the franc’s cap against the euro may have blown a hole in Kuroda’s strategy.

By reneging on a promise made time and time again that he wouldn’t ditch the policy, SNB President Thomas Jordan “has undermined the credibility of central banks,” says Simon Grose-Hodge of LGT. Now, at central banks around the globe, he adds, “the unthinkable is entirely possible. You can’t rule anything out.” Even if the BOJ issues another blast of quantitative-easing after its two-day policy meeting next week, the question is how effective the move would be. Kuroda’s Oct. 31 shock-and-awe stimulus announcement worked for a time by bolstering perceptions that steady inflation was within reach. But this time, with even Economy Minister Akira Amari admitting “it will probably be difficult” for the BOJ to succeed, markets are likely to be more skeptical of the bank’s staying power.

Even aside from the Swiss decision, Kuroda has had trouble with signaling – what bankers call “open-mouth operations.” Understanding how minutely markets scrutinize their every word and deed, officials in Washington and Frankfurt have learned to use that obsessive attention to their advantage. In an April 2013 study, Federal Reserve Bank of San Francisco economists Michael Bauer and Glenn Rudebusch found “signaling effects are larger in magnitude and statistical significance” than investors appreciate. Former Fed Chairman Ben Bernanke’s skillful use of verbal winks, nods and innuendo to lead expectations helps explain why QE worked better in the U.S. than Japan.

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This is just bizarre. Investors should always be left guessing, by default.

SNB Officials Eating Words Risk Lasting Investor Aches (Bloomberg)

Switzerland’s central bank officials have just eaten their words, risking lingering indigestion in financial markets. Just three days after Swiss National Bank (SNBN) Vice President Jean-Pierre Danthine called the franc cap a “pillar” of monetary policy, the SNB yesterday dropped the minimum exchange rate of 1.20 per euro. The shock abandonment of the SNB’s primary policy of the past three years may now leave investors warier of taking officials’ words at face value, according to economists including Karsten Junius, chief economist at Bank J. Safra Sarasin. By scrapping one tool, the franc cap, SNB President Thomas Jordan risks blunting the effects of another. “The SNB’s credibility has suffered a bit,” said Junius, a former economist at the International Monetary Fund.

“Statements will get read in the future with a bit more caution. Verbal interventions will hardly work any more.” The central bank’s regular pledge to defend the franc cap with “utmost determination” had become part of the institution’s brand, not least because of the success of that policy in protecting the country’s domestic economy. “They’ve lost part of their credibility, I think, ”Han De Jong, chief economist at ABN Amro told Angie Lau on Bloomberg TV. “Whatever they will say, markets will not trust them very much.” George Buckley at Deutsche also argues the SNB’s words are hard to reconcile with the SNB’s new policy stance. “Their commentary now means nothing,” he said. “This is not utmost determination, is it?”

Bank of England Governor Mark Carney has suffered similar criticism. He was labeled an “unreliable boyfriend” by one U.K. lawmaker last year for giving conflicting messages on the possible timing of interest-rate increases in the U.K. SNB President Jordan yesterday defended his surprise move, saying that a tool like the cap would always need to be abandoned unexpectedly. Anatoli Annenkov at SocGen agrees. “It’s something we aren’t used to anymore because most central banks are talking about warning markets, improving communication, not surprising anymore,” Annenkov said by phone from London. “But in such circumstances, there’s basically no other way to do this. Markets would have speculated, positioned themselves beforehand.”

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“The transaction allows FXCM, the largest U.S. retail foreign-exchange broker, to “continue normal operations ..” But why would anyone want that?

FXCM, Brokerage Hit by Swiss Shock, Gets $300 Million From Leucadia (Bloomberg)

Leucadia gave FXCM a $300 million cash infusion, extending a lifeline to the currency brokerage hobbled by the Swiss central bank’s decision to let the franc trade freely against the euro. Leucadia, which owns New York-based investment bank Jefferies Group, extended FXCM a two-year, $300 million senior secured term loan with an initial coupon of 10%, according to a statement Friday. The transaction allows FXCM, the largest U.S. retail foreign-exchange broker, to “continue normal operations,” according to the statement. Shares of New York-based FXCM had tumbled as much as 92% to 98 cents Friday morning before they were halted. After the Leucadia deal was released, FXCM’s stock rebounded to $4.44 as of 5:40 p.m. New York time. That’s still down from the prior day’s closing price of $12.63.

Leucadia Chief Executive Officer Richard Handler has prior experience saving imperiled financial firms. Before Leucadia purchased the business, he ran Jefferies when the company was part of a group that bailed out Knight Capital Group Inc., which teetered on the brink of collapse after bombarding markets with errant trades in August 2012. FXCM had warned Thursday that client losses due to the Swiss National Bank’s action threatened the broker’s compliance with capital rules. The company, which handled $1.4 trillion of trades for individuals last quarter, said it was owed $225 million by clients.

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Cloud cuckoo.

FXCM Lobbied Against Leverage Limit Before Trades Went Bad (Bloomberg)

FXCM, the brokerage facing a shortfall of nearly a quarter-billion dollars after highly-leveraged investors made losing bets on the Swiss franc, pushed back against U.S. regulatory efforts that likely would have left it less vulnerable. In 2010, the Commodity Futures Trading Commission sought to force individual investors trading currencies to give their broker 10 cents in capital to back every $1 in positions. The regulator failed to accomplish that amid pressure from New York -based FXCM and other brokers, meaning only 2 cents must be pledged. The agency’s proposal would “have a devastating impact on the retail forex industry,” Drew Niv, FXCM’s chief executive officer, wrote in a March 2010 letter to the CFTC that was signed by eight other executives at currency dealers.

The industry relies on “electronic systems” to liquidate customer trades and protect against “currency fluctuations in the market,” they said in the letter, which is posted on the CFTC’s website. FXCM’s retail clients suffered big losses Thursday after the Swiss National Bank let the franc float freely against the euro. The franc surged as much as 41%. FXCM warned that client losses threatened the broker’s compliance with capital rules. The largest U.S. retail foreign-exchange broker, which handled $1.4 trillion of trades for individuals last quarter, said it was owed $225 million by clients. The CFTC, the main U.S derivatives regulator, is reviewing the situation at FXCM, Steve Adamske, a CFTC spokesman, said earlier.

The National Futures Association is in touch with the firm and CFTC, according to Karen Wuertz, an NFA spokeswoman. Leucadia, owner of Jefferies, said in a statement Friday that it will provide $300 million in cash to FXCM to enable the brokerage to meet regulatory capital requirements and continue normal operations. Shares of New York-based FXCM had tumbled as much as 92% Friday morning before they were halted, pending an announcement. Leucadia shares climbed 0.9% to $21.84 as of 12:24 p.m. in New York, when trading was halted. The client losses are shining a spotlight on U.S. regulators’ oversight of retail currency trading and whether they stopped short of necessary curbs to protect customers. In contrast to other markets, investors buying stock with borrowed money must put up at least 50% of the purchase price under Federal Reserve rules.

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“Suddenly, many of these companies are essentially locked out of the capital markets. They have to live within their means or go under.”

Money Dries Up for Oil & Gas, Layoffs Spread, Write-Offs Start (WolfStreet)

Larger drillers outspent their cash flows from production by 112% and smaller to midsize drillers by a breathtaking 157%, Barclays estimated. But no problem. Wall Street was eager to supply the remaining juice, and the piles of debt on these companies’ balance sheets ballooned. Oil-field services companies, suppliers, steel companies, accommodation providers… they all benefited. Now the music has stopped. Suddenly, many of these companies are essentially locked out of the capital markets. They have to live within their means or go under. California Resources, for example. This oil-and-gas production company operating exclusively in oil-state California, was spun off from Occidental Petroleum November 2014 to inflate Oxy’s share price. As part of the financial engineering that went into the spinoff, California Resources was loaded up with debt to pay Oxy $6 billion. Shares started trading on December 1.

Bank of America explained at the time that the company was undervalued and rated it a buy with a $14-a-share outlook. Those hapless souls who believed the Wall Street hype and bought these misbegotten shares have watched them drop to $4.33 by today, losing 57% of their investment in seven weeks. Its junk bonds – 6% notes due 2024 – were trading at 79 cents on the dollar today, down another 3 points from last week, according to S&P Capital IQ LCD. Others weren’t so lucky. Samson Resources is barely hanging on. It was acquired for $7.2 billion in 2011 by a group of private-equity firms led by KKR. They loaded it up with $3.6 billion in new debt and saddled it with “management fees.” Since its acquisition, it lost over $3 billion, the Wall Street Journal reported. This is the inevitable result of fracking for natural gas whose price has been below the cost of production for years – though the industry has vigorously denied this at every twist and turn to attract the new money it needed to fill the holes.

Having burned through most of its available credit, Samson is getting rid of workers and selling off a chunk of its oil-and-gas fields. According to S&P Capital IQ LCD, its junk bonds – 9.75% notes due 2020 – traded at 26.5 cents on the dollar today, down about 10 points this week alone. Halcón Resources, which cut its 2015 budget by 55% to 60% just to survive somehow, saw its shares plunge 10% today to $1.20, down 85% since June, and down 25% since January 12 when I wrote about it last. Its junk bonds slid six points this week to 72 cents on the dollar. Hercules Offshore, when I last wrote about it on October 15, was trading for $1.47 a share, down 81% since July. This rock-bottom price might have induced some folks to jump in and follow the Wall-Street hype-advice to “buy the most hated stocks.” Today, it’s trading for $0.82 a share, down another 44%. In mid-October, its 8.75% notes due 2022 traded at 66 cent on the dollar. Yesterday they traded at 45.

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“The oil rig count has fallen by 209 since Dec. 5, the steepest six-week decline since Baker Hughes began tracking the data in July 1987.”

Steepest Oil-Rig Drop Shows Shale Losing Fight to OPEC (Bloomberg)

U.S. drillers have taken a record number of oil rigs out of service in the past six weeks as OPEC sustains its production, sending prices below $50 a barrel. The oil rig count has fallen by 209 since Dec. 5, the steepest six-week decline since Baker Hughes began tracking the data in July 1987. The count was down 55 this week to 1,366. Horizontal rigs used in U.S. shale formations that account for virtually all of the nation’s oil production growth fell by 48, the biggest single-week drop. Analysts including HSBC say the decline shows that OPEC is winning its fight for market share and slowing the growth that’s propelled U.S. production to the highest in at least three decades. OPEC’s decision not to curb its output amid increasing supplies from the U.S. and other countries has driven global oil prices down 58% since June.

“OPEC’s strategy is working, and it will be obvious in U.S. production by midyear when growth from shale plays will come to a halt,” James Williams, president of energy consulting company WTRG in London, Arkansas, said by telephone Friday. “You can imagine the impact on any industry from a 50% impact on sales.” “Prices are being forced toward levels that would force outright shut-ins in high-cost areas, mainly in Canada and the U.S.,” Societe Generale SA (GLE) analysts including Mark Keenan, its head of commodities research for Asia in Singapore, said in a research note Jan. 14. The slump in oil rigs has yet to stop the unprecedented growth in U.S. oil production, which added 60,000 barrels a day in the week ended Jan. 9 to 9.19 million, Energy Information Administration data show. That’s the most in weekly data since at least 1983.

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“We’ve been saying for a year now to clients,” he added, “the risks are certainly rising and have been rising.”

Jim Chanos: Days Of Drilling For Cheap Oil Are Over (CNBC)

Jim Chanos, head of the world’s largest short-selling hedge fund, told CNBC on Friday he’s been short major oil companies for a couple years because the North American shale explosion has been “uneconomic for drillers.” “The fracking and shale revolution was propelling us to be the largest oil producer in a way that I thought was uneconomic and still is uneconomic for the drillers. But it was going to be enough supply to really disrupt the markets,” he said. Big oil companies like Exxon Mobil and Royal Dutch Shell are finding their business models challenged, he added, “because the days of finding cheap oil is over.” The founder of Kynikos Associates, with $3 billion in assets under management, has been betting against the economic situation in China for some time now. “We came across China because of our work in the mining sector in 2009.”

Chanos has also been short Caterpillar—saying the company is finding two out of its three business streams severely challenged: mining and now energy. Last year, he said mining was the sole troublemaker, but now with oil prices falling the heavy equipment marker is coming under even more pressure. He first disclosed his short position in Caterpillar at the CNBC and Institutional Investor Delivering Alpha conference in July 2013. Last month, Chanos told CNBC that 2014 was a better year for short sellers than 2013. But he said Friday that calling Kynikos the biggest short seller is damning with faint praise. “It’s sort of like being called the toughest guy in France. It’s been tough for five years.” “We’ve been saying for a year now to clients,” he added, “the risks are certainly rising and have been rising.”

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“We tend to have a short memory and we tend to forget that the price of oil breached the $50 a barrel level only a decade ago.”

Welcome to ‘Normal’ Crude Oil Price, Trading at 100-Year Average (Bloomberg)

The theory goes that commodity prices move in “supercycles” or bursts of phenomenal surges, followed by longer, less-exciting periods. As such, a barrel of oil at $50 is, well, normal. Many people think the oil price has crashed, but it has just gone back to its long-term historical trend, according to Ruchir Sharma at Morgan Stanley. That makes a barrel of oil at around $50 just about right based on a 100-year inflation-adjusted average, said Sharma. “The price of oil is returning to normal in its long-term 100-year history,” Sharma said in an interview from New York. “We tend to have a short memory and we tend to forget that the price of oil breached the $50 a barrel level only a decade ago.” Brent crude oil futures, which trade in London and are used as a benchmark to set prices for more than half of the world’s oil, reached a record of $139.83 a barrel on June 30, 2008, according to data compiled by Bloomberg. By Jan. 13, the price had plunged 67% to $46.59.

“At times like these, it’s good to step back and look at the bigger picture, look at what it has done through a long history,” he said. The supercycle surge in oil prices was kicked off by China’s emergence as an industrialized economy and net oil importer in the middle of the 1990s. In 1995 it imported 343,000 barrels a day, according to BP data. In 2013, it bought 5.7 million barrels a day. The nation is now the world’s biggest energy consumer and the second-biggest oil user. “China’s oil imports took off around 2003 and it emerged as a big factor in the market,” Thina Saltvedt at Nordea Bank said in a Jan. 13 phone interview. There’s a long time lag in oil between investments and new supply and it can take 10 years, sometimes 15 years, to balance the market and match it with demand, said Saltvedt. China is structurally changing its economy from big, energy-intensive industry to less so. India or perhaps Africa will start to take over the role China has played, said Saltvedt.

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“.. no “concrete proposal” has yet been made. The Governing Council will meet on Jan. 22 in Frankfurt to set monetary policy.”

ECB Weighing QE Through National Central Banks (Bloomberg)

ECB President Mario Draghi briefed German Chancellor Angela Merkel and Finance Minister Wolfgang Schaeuble on quantitative-easing plans under which national central banks would buy bonds issued by their own country, Spiegel magazine reported. The plan, which tries to avoid a transfer of risk between member states, envisages purchases in line with the ECB’s capital key with a limit of 20% to 25% of each country’s debt, Spiegel said in an article published yesterday, without saying where it got the information. Greece would be excluded from the program because its bonds don’t fulfill the necessary quality criteria, the magazine said. Klaas Knot, governor of the Dutch central bank, told Spiegel that no “concrete proposal” has yet been made. The Governing Council will meet on Jan. 22 in Frankfurt to set monetary policy.

Officials presented various forms of quantitative easing to the council at a Jan. 7 meeting, and Draghi signaled in an interview with Die Zeit that the ECB is ready to take a decision as early as next week. Officials have courted the German public in a flurry of interviews, arguing that more stimulus is needed to fend off deflation in the 19-nation currency region. Knot said in the Spiegel interview that he sees no sign households are postponing spending, which Draghi has pointed to as one indicator of deflation. Knot also signaled a preference for measures that limit risk-sharing. “If each central bank was only buying debt of its own country, the danger of an unwanted redistribution of financial risk would be lower,” he said. “We have to avoid that decisions are taken through the back door of the ECB balance sheet that have to continue to be reserved for elected politicians in euro-area countries.”

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Elections January 25.

Eurozone Ponders Yet Another Greek Bailout (Reuters)

Eurozone officials discussed on Thursday extending Greece’s bailout program by up to six months more to allow time for talks with any new government in Athens on closing the current bailout and on what should replace it. The current bailout, which has already been extended by two months, runs out at the end of February. Athens had hoped to replace it with an Enhanced Conditions Credit Line from the eurozone bailout fund that it would never have to use. “There will have to be an extension beyond February. It will be inevitable,” one eurozone official with knowledge of thetalks said. “It could be six months more.” The extension would have to be requested by the new Greek government that emerges after elections on Jan. 25. But with Greek borrowing costs skyrocketing on uncertainty about policy after the elections, Athens looks set to need further euro zone support and a credit line for insurance purposes only may not be enough, euro zone officials said.

Also, without another program, under which Greece gets cheap euro zone loans or access to a credit line in exchange for reforms, the European Central Bank said it could not provide liquidity to the Greek banking sector. No decisions were taken and the issue is likely to be further discussed at the next meeting of euro zone finance ministers on Jan. 26, a day after the Greek vote. “The ECCL is for a country which has in principle market access, and the ECCL is an insurance policy to calm any remaining doubts in the market,” a second eurozone official said. “With some goodwill you could say that towards the end of last year, this could apply to Greece. Now with the uncertainty, stress on the financial system, Greek long-term yield going beyond 10% – all that makes it much less obvious Greece qualifies for an ECCL,” the official said.

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In case this was not clear.

Forex Leverage: How It Works, Why It’s Dangerous (CNBC)

[..] many retail traders found their trading accounts completely wiped out, being on the wrong side of a trade that couldn’t be liquidated fast enough to preserve their capital. Trading in currency markets at the retail level, with these types of brokerages, centers on the use of one of the biggest double-edged swords in financial markets: leverage. In other words, borrowed funds that are used to amplify potential returns but can also exacerbate the potential losses of trading positions. In the world of retail foreign exchange trading, use of leverage is key. Here’s how it works: Let’s say you want to take a $10,000 position in terms of Swiss francs. Under current regulatory guidelines in the U.S., you are mandated to keep at least $200 in your account in order to support that position. That’s because there’s a mandated minimum margin requirement of 2% for retail forex markets.

In other words, you can only have a position that’s 50 times greater than the equity in your margin account. If the value of your position grows because of market movements, there is no issue. But if your position loses value to a point where you no longer meet minimum margin requirements, your broker will liquidate assets to help assure that you don’t lose more money than you put into the account. The reason why some retail foreign exchange brokerages have gone bankrupt, and others are in severe distress, has to do with how those margin accounts were maintained during the SNB’s shock move. Certain accounts with losing positions weren’t able to be liquidated quickly enough before they went into deficit. That left some brokers responsible for the debit balances in client margin accounts. If those debit balances were high enough, that could cripple the capital position of these retail brokerages. At that point, a handful of things can happen.

For one, the broker can request the client to add enough funds to bring their account back into good standing. Or, the broker is left holding the bag on client losses, perhaps with only legal recourse to try to recover those losses. According to Forex.com, which is a retail foreign exchange broker and is owned by publicly traded Gain Capital, the company does “reserve the right to hold clients responsible for large debit balances and in special circumstances.” Its website also encourages clients to manage use of leverage carefully, since use of more leverage increases risk. Bottom line, the pain of the SNB’s removal of its currency peg hit numerous parts of the market, and will lead to outsized financial losses for the big guys and the little guys. On a relative basis, retail traders may feel more pain than their bigger counterparts. The recent market action serves as a potent reminder of just how dangerous leverage can be when price action moves swiftly, and without warning.

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Sounds like an interesting book.

The End Of Banking, And How To Fix It (Reuters)

“The End of Banking” is an important book about finance. Jonathan McMillan, the nom de plume taken by an investment banker and a macroeconomist, provides a holistic and compelling explanation of the crisis of 2008. The authors predict a repeat, barring a revolution in finance. McMillan, as the co-authors can be called, defines banking as the private sector creation of money from extending credit. Loans create deposits – private money. The monetary liabilities are distinct from the physical or electronic money which comes out of central banks. The book’s central argument is that private money creation is impossible to control in the digital age. Until computers became widespread in the 1970s, banks could keep track of borrowers. But with electronic systems, transactions became more complex as lenders repackaged loans. Financial assets were spread across myriad interlocking chains of balance sheets, both of traditional banks and so-called shadow banks, which have grown into a $35 trillion monster in the United States and European Union.

The illustration of how balance sheets multiply and money grows in “The End of Banking” is illuminating. The focus is on how computing permitted massive regulatory arbitrage. “Over the last 40 years, IT has turned the stick [of capital requirements] into a toothpick.” Financial watchdogs are alert to shadow banking’s risks, but their efforts to bring non-regulated firms into a defined perimeter are akin to using a net to gather water. Thanks to electronic bookkeeping, firms can shift balance sheets out of the authorities’ purview at the tap of a button. Whether to prevent runs on banks or to firm up the financial stability of quasi-banks, weak governments have steadily extended guarantees to bigger portions of the private sector. McMillan has a solution. It starts with an accounting distinction.

Bank assets would be classified either as real, in other words claims on physical or distinct immaterial objects; or as financial, assets which appear as liabilities on the balance sheet of some other institution. Next, regulators would ensure that financial assets were 100%-backed by common equity. And lastly, in a combined regulatory and accounting change, the value of a company’s real assets would have to be greater or equal to the value of the total of its liabilities. This final fix is where the book goes beyond previous proposals to mend finance through concepts such as narrow- or limited-purpose banking. The implication of McMillan’s recommendation is that many derivatives, for which a counterparty’s losses could be infinite, would be banned. What’s more, the intended application to financial and non-financial companies alike would include shadow banking, addressing the so-called “boundary problem” of regulation that other approaches to improve the system fail to solve.

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“.. the private sector in Asia-Pacific now owes 1.5 times the region’s combined annual output ..”

Asia’s Big Demons: Debt, Deflation, Demographics (Reuters)

Asia is battling not one but three demons. The unholy trinity of debt, deflation and demographics threatens to sap the region’s growth potential. Fending off the challenge requires central banks to cut borrowing costs. But they are reluctant to do so when U.S. interest rates are poised to rise. That could turn out to be a huge error. Consider the debt overhang. Taken together, the private sector in Asia-Pacific now owes 1.5 times the region’s combined annual output, according to the Bank for International Settlements. As a big chunk of the borrowing is in the opaque shadow banking system, particularly in China, the debt could be even larger. Either way, servicing the loans requires incomes to increase quickly. Yet, real GDP growth is slowing almost everywhere in the region. The threat of slowly rising consumer prices slipping into outright deflation is making things worse. Producer prices are sliding across Asia-Pacific.

Falling energy costs provide a convenient excuse for margin-starved employers to skimp on pay hikes, just as they did in the late 1980s. That makes the situation harder for borrowers in Malaysia, Korea, Thailand and Singapore, all of which have high household leverage. Persistent lowflation will leave borrowers with higher debt burdens than they expected. Demographics aren’t helping. Japan, China, South Korea, Singapore and Thailand are ageing rapidly. Relatively young countries like Indonesia, Vietnam and the Philippines drag down the average age. Even so, the region will have more middle-aged people than youngsters by 2020. This will present Asian nations with the same problem that has plagued advanced nations: a savings glut. As those looking to invest for retirement outnumber those borrowing to buy new homes and start new businesses, market interest rates could fall.

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“It is the first attack by Islamic State itself against Saudi Arabia and is a clear message after Saudi Arabia entered the international coalition against it ..”

The Great Wall of Saudi Arabia? (Christian Science Monitor)

Saudi Arabia has been constructing a 600-mile East-West barrier on its Northern Border with Iraq since September. The main function of the barrier will be keeping out ISIS militants, who have stated that among their goals is an eventual takeover of the Muslim holy cities of Mecca and Medina, both of which lie deep inside Saudi territory, according to United Press International. This past week, a commander and two guards on the Saudi-Iraq border were killed during an attack by Islamic State militants, the first direct ground assault by the group on the border. “It is the first attack by Islamic State itself against Saudi Arabia and is a clear message after Saudi Arabia entered the international coalition against it,” Mustafa Alani, an Iraqi security analyst with close ties to Saudi Arabia’s interior ministry, told Reuters.

The Saudi “Great Wall” as it’s being dubbed by some media outlets, will be a fence and ditch barrier that features soft sand embankments that is designed to slow down infiltrators on foot and are too step to drive a tired-vehicle up, according to the Telegraph of London. It will have 40 watchtowers and seven command and control centers complete with radar that can detect aircraft and vehicles as far away as 22 miles as well as day and night camera installations. The barrier system will have five layers of fencing, complete with razor wire and underground motion sensors that trigger a silent alarm. The 600-mile structure will be patrolled by border guards and 240 rapid response vehicles. The Saudis sent 30,000 soldiers to patrol the border in July 2014 after ISIS forces swept into western Iraq and Iraqi guards on the Saudi border fled.

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“While Poroshenko was pretending his heart bled for French cartoonists, the civilians targeted for extermination by his government were bleeding literally: dozens, including children, have been killed in renewed shelling of Donetsk by Kiev’s military that weekend. ”

Why Should Charlie Hebdo Deaths Mean More Than Those In East Ukraine? RT)

Though US pundits have been the loudest in calling for another war on terror, American officials were nowhere to be seen on the Sunday march. Only the US Ambassador attended the event, while President Obama, Vice President Biden, or even top diplomat John Kerry was conspicuously absent. The highest-ranking US official in Paris was Attorney General Eric Holder, who had announced his resignation in September 2014. The leaders that did attend weren’t above using the march for their own political purposes. Israeli Prime Minister Benjamin Netanyahu came to the march, even though the French government asked him not to. Turkey’s Prime Minister Ahmet Davutoglu also attended, but as soon as he returned, President Recep Erdogan publicly declared the massacre a French false-flag operation, for which the mayor of the Turkish capital Ankara, Melih Gokcek, blamed the Israeli Mossad.

Perhaps the most hypocritical of all was the Kiev junta, whose leader, Petro Poroshenko, hastened to Paris to claim he too was a victim of terrorism , even as his forces restarted the terror shelling of civilians in dissenting Donetsk. Poroshenko paraded before the cameras, dutifully made accusations of yet another Russian invasion, again accused Russia of being behind the downing of flight MH17, and begged for money from the West to bail out his bankrupt government, and fund another military expedition against the civilians of Donetsk and Lugansk. While Poroshenko was pretending his heart bled for French cartoonists, the civilians targeted for extermination by his government were bleeding literally: dozens, including children, have been killed in renewed shelling of Donetsk by Kiev’s military that weekend.

Among them was a boy of eight named Vanya, who lost his legs, a hand and an eye to Kiev’s humanitarian bombs. When critics of the junta’s campaign of artillery terrorism posted news of this on Twitter with the hashtag #IamVanya, Russophobic trolls quickly responded with displays of hatred. Hypocrisy is the order of the day in the West. Frenchmen and other NATO-sphere subjects are supposed to simultaneously champion free speech and crack down on offensive speech; profess love of Islam and endless tolerance, while their governments sponsor Islamic terrorists in places like Libya, Syria, Iraq or the Balkans; and protest the murder of innocents while backing Kiev’s regime doing precisely that, in the name of – you guessed it – fighting terrorism.

Of course, NATO’s puppets in Kiev have the perfectly rational explanation why it’s different when they kill: their victims are “subhumans”, as US-backed PM Arseny Yatsenyuk once put it. The same man, during his visit to Germany just a day after the Charlie Hebdo massacre, claimed that Russia had invaded Ukraine and Germany in WW2. His German hosts, normally sensitive to pro-Nazi rhetoric, chose to remain silent.

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“NATO’s eastward expansion has destroyed the European security architecture as it was defined in the Helsinki Final Act in 1975. ”

Gorbachev: ‘I Am Truly and Deeply Concerned’ (Spiegel)

SPIEGEL: Michael Sergeyevich, few contributed more to ending the Cold War than you. Now it is returning as a result of the Ukraine crisis. How painful is that?
Gorbachev: It gives one a feeling of déjà-vu. Perhaps that would even make a good headline for this interview: Everything appears to be repeating itself. There was a time for building a Wall and a time for tearing it down. I’m not the only person to thank for the fact that this wall no longer exists. (Former Chancellor) Willy Brandt’s Ostpolitik was important, as were the protests in Eastern Europe. Now, new walls are being built and the situation is threatening to escalate. I do, in fact, see all the signs of a new Cold War. Things could blow up at any time if we don’t act. The loss of trust is disastrous. Moscow no longer believes the West and the West doesn’t believe Moscow. That’s terrible.

SPIEGEL: Do you think it is possible there could be another major war in Europe?
Gorbachev: Such a scenario shouldn’t even be considered. Such a war today would inevitably lead to a nuclear war. But the statements from both sides and the propaganda lead me to fear the worst. If one side loses its nerves in this inflamed atmosphere, then we won’t survive the coming years.

SPIEGEL: Aren’t you overstating things a bit?
Gorbachev: I don’t say such things lightly. I am a man with a conscience. But that’s the way things are. I am truly and deeply concerned.

SPIEGEL: The new Russian military doctrine labels NATO’s eastern expansion and the “reinforcement of NATO’s offensive capabilities” as one of the primary threats facing Russia. Do you agree?
Gorbachev: NATO’s eastward expansion has destroyed the European security architecture as it was defined in the Helsinki Final Act in 1975. The eastern expansion was a 180-degree reversal, a departure from the decision of the Paris Charter in 1990 taken together by all the European states to put the Cold War behind us for good. Russian proposals, like the one by former President Dmitri Medvedev that we should sit down together to work on a new security architecture, were arrogantly ignored by the West. We are now seeing the results.

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“The 10 warmest years on record have all occurred since 1997 ..”

2014 Was Hottest Year on Record (NY Times)

Last year was the hottest in earth’s recorded history, scientists reported on Friday, underscoring scientific warnings about the risks of runaway emissions and undermining claims by climate-change contrarians that global warming had somehow stopped. Extreme heat blanketed Alaska and much of the western United States last year. Several European countries set temperature records. And the ocean surface was unusually warm virtually everywhere except around Antarctica, the scientists said, providing the energy that fueled damaging Pacific storms. In the annals of climatology, 2014 now surpasses 2010 as the warmest year in a global temperature record that stretches back to 1880.

The 10 warmest years on record have all occurred since 1997, a reflection of the relentless planetary warming that scientists say is a consequence of human emissions and poses profound long-term risks to civilization and to the natural world. Of the large inhabited land areas, only the eastern half of the United States recorded below-average temperatures in 2014, a sort of mirror image of the unusual heat in the West. Some experts think the stuck-in-place weather pattern that produced those extremes in the United States is itself an indirect consequence of the release of greenhouse gases, though that is not proven. Several scientists said the most remarkable thing about the 2014 record was that it occurred in a year that did not feature El Niño, a large-scale weather pattern in which the ocean dumps an enormous amount of heat into the atmosphere.

Longstanding claims by climate-change skeptics that global warming has stopped, seized on by politicians in Washington to justify inaction on emissions, depend on a particular starting year: 1998, when an unusually powerful El Niño produced the hottest year of the 20th century. With the continued heating of the atmosphere and the surface of the ocean, 1998 is now being surpassed every four or five years, with 2014 being the first time that has happened in a year featuring no real El Niño pattern. Gavin A. Schmidt, head of NASA’s Goddard Institute for Space Studies, said the next time a strong El Niño occurs, it is likely to blow away all temperature records.

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


DPC Oyster luggers along Mississippi, New Orleans 1906

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Data

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

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

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

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

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

References

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

Dec 272014
 
 December 27, 2014  Posted by at 12:42 pm Finance Tagged with: , , , , , , ,  


John Vachon Billie Holiday at the Newport Jazz Festival Jul 1954

Natural Gas Drops Below $3 for First Time Since 2012 (Bloomberg)
Oil Caps Fifth Weekly Loss on Global Supply Glut Concern (Bloomberg)
Saudi Arabia Maintains Spending Plans in 2015 Despite Oil Slide (WSJ)
Saudis To Hit ‘Panic Button’ At $40 Oil: Energy CEO (CNBC)
Drilling Cutbacks Mean Service Companies Forced to Scrap Rigs (Oilprice.com)
Gartman: Get Ready For Oil Bankruptcies (CNBC)
China November Industrial Profits Suffer Sharpest Fall In 27 Months (Reuters)
China’s Shadow-Banking Boom Is Over (WSJ)
Game Over Japan: Real Wages Crash, Savings Rate Turns Negative (Zero Hedge)
Brazilian Oil Company Petrobras Sued By US City In Corruption Scandal (BBC)
Nicaragua Canal A Potential Threat To The US And Western Powers (RT)
The Cradle of Democracy Rocks the Autocrats (StealthFlation)
A Capitalist Christmas (Mises Inst.)
60 Prominent Germans Appeal Against Another War In Europe (Zero Hedge)
Gorbachev: Putin Saved Russia From Disintegration (RT)
Putin: It Is Time to Play Your Ace in the Hole (Daily Bell)
Google Further Crapifies Search, Exploiting Both Users and Advertisers (NC)
Apple Spent $56 Billion On Buybacks In 2014 (MarketWatch)
Strange Predictions For The Future From 1930 (BBC)

“We don’t see anything scary in the forecast ..”

Natural Gas Drops Below $3 for First Time Since 2012 (Bloomberg)

Natural gas slumped below $3 per million British thermal units in New York for the first time since 2012 on speculation that record production will overwhelm demand for the heating fuel. Futures settled at the lowest in 27 months and have plunged 26% in December, heading for the biggest one-month drop since July 2008, as mild weather and record production erased a surplus to year-ago levels for the first time in two years. Temperatures will be mostly above average in the eastern half of the U.S. through Dec. 30, according to Commodity Weather Group LLC. “We don’t see anything scary in the forecast,” said Stephen Schork, president of Schork Group Inc., a consulting group in Villanova, Pennsylvania.

“You had this psyche where people were worried about a polar vortex; we had a cold October and a cold early November, and boom, if you were long you are wrong.” Natural gas for January delivery fell 2.3 cents, or 0.8%, to settle at $3.007 per million Btu on the New York Mercantile Exchange. Futures touched $2.973, the lowest intraday price since Sept. 26, 2012. Volume was 54% below the 100-day average for the time of day at 2:32 p.m. Gas dropped 13% this week, a fifth straight weekly decline. Prices broke below several technical support levels, including $3.046 and then $3, and may be headed toward $2.80 or lower, said Schork. “I am playing this market short,” he said. “Anyone who is selling now is trying to trigger a panic selloff.”

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Why insist on talking about “OPEC’s refusal to cut production”, and not America’s?

Oil Caps Fifth Weekly Loss on Global Supply Glut Concern (Bloomberg)

Oil fell, capping a fifth weekly loss on concern that OPEC’s refusal to cut production will worsen a global supply glut. Brent and West Texas Intermediate extended their annual declines of more than 40%, the biggest since 2008, as the Organization of Petroleum Exporting Countries resisted supply cuts to defend market share while the highest U.S. production in three decades exacerbated a global glut. Trading volume headed for the lowest this year. “The market is still reeling from oversupply,” said Phil Flynn, senior market analyst at the Price Futures Group in Chicago. “It’s really hard to muster a substantial rally until we figure out how we are going to use all this oil.”

Brent for February settlement slipped 79 cents, or 1.3%, to $59.45 a barrel on the London-based ICE Futures Europe exchange, down 3.1% this week. The volume of all futures was 84% below the 100-day average as of 3:10 p.m., with much of Europe on holiday after Christmas. West Texas Intermediate crude for February delivery fell $1.11, or 2%, to $54.73 on the New York Mercantile Exchange with volume 68% below average. Prices were down 3.2% this week. Trading reached 174,562 contracts at 2:49 p.m. The previous lowest volume this year was 244,240 on Aug. 25. Brent traded at a premium of $4.72 to WTI on the ICE.

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They have zero choice.

Saudi Arabia Maintains Spending Plans in 2015 Despite Oil Slide (WSJ)

The Saudi government unveiled a 2015 budget on Thursday that signaled a continuation of a high level of spending despite pressures from a steep fall in oil prices in recent months. The kingdom, the world’s top oil exporter, depends on oil revenue to fund social spending, helping head off the kind of unrest that has roiled Middle Eastern countries since 2011. A prolonged oil-price slump could threaten such policies here and in other Gulf monarchies. Saudi King Abdullah struck a note of caution in the budget announcement, instructing officials to consider the developments that led to oil’s decline by “rationalizing the expenditure.” Riyadh has chosen not to cut output in an effort to push up prices, despite its dependence on oil exports.

The Saudi oil minister, Ali al-Naimi—secretary-general of OPEC – on Sunday blamed a lack of coordination among non-OPEC producers, along with speculators and misleading information, for the fall in the oil price. In an indication of the government’s confidence that it can weather the market volatility, Mr. al-Naimi described the slump as “a temporary situation.” The kingdom didn’t say on what price of oil it based its 2015 budget. The International Monetary Fund and others estimate a Saudi Arabia’s fiscal break-even price for oil at well above $90 a barrel—it has been trading recently under $60 – underlining the country’s vulnerability to changes in the energy market.

“It is worrying when the expanding government expenditure begins to erode the financial surpluses built over the last few years,” Saudi economist Fadhil Albuainain said. Saudi Arabia said on Thursday that it projects total expenditure in 2015 to reach 860 billion Saudi riyals ($229.3 billion), an increase of nearly 1% from the last budget, a record. It will likely use cash from its reserves to spend ondevelopment projects in sectors such as health care and education. The kingdom expects to run a wider deficit of 145 billion riyals to continue with its spending plans, as projected revenue falls by nearly a third to 715 billion riyals, according to a finance ministry statement.

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Really?

Saudis To Hit ‘Panic Button’ At $40 Oil: Energy CEO (CNBC)

Saudi Arabia has insisted that OPEC will keep oil production at 30 million barrels per day no matter the cost of crude, but even the world’s biggest oil exporter has a limit, the CEO of Breitling Energy told CNBC on Friday. “I think the panic button is at $40,” Chris Faulkner said in a “Squawk Box” interview. “They can say whatever they want, but at the end of the day, they can’t just bleed out money forever.” With the Saudis’ deficit for 2015 projected to reach $50 billion—the official figure is $39 billion—the country’s leaders will face challenges in maintaining its subsidies, he said. Young people will not stand for planned wage cuts, either, he added.

That said, Faulkner expects oil prices to rebound to the low $70s by the end of 2015, after initially sliding further into the low $50s and possibly recovering in the second quarter. With oil prices at current levels, Venezuela will likely default on its debt payments due in March and October, Faulkner said. Brent crude for February delivery traded below $61 in morning trade on Friday. Faulkner sees natural gas remaining below $5 until 2020, as the supply and demand fundamentals are unlikely to change significantly. Natural gas dipped below $3 on Friday for the first time since Sept. 24, 2012.

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A bit of hurt for Halliburton is always welcome.

Drilling Cutbacks Mean Service Companies Forced to Scrap Rigs (Oilprice.com)

Offshore oil contractors such as Halliburton or Transocean have seen their share prices tank worse than exploration companies because their revenue comes from being paid to drill, not necessarily from oil production after wells are completed. That means that when drilling slumps, their profits take an immediate hit. Even worse, exploration companies may see rising profits from existing production as oil prices rebound, but drilling service companies don’t benefit if their drilling contracts had been put on hold or cancelled. The problem is compounded by the fact that a slew of new offshore oil rigs are set to come into operation – an estimated 200 over the next six years. As Bloomberg reports, these new rigs will mean there could be a surplus of about 140 rigs, meaning offshore oil contractors will have to scrap that many to bring new ones online.

If oil prices stay where they are now – in the neighborhood of $60 per barrel – a deep contraction in shipping rig supply will be inevitable. In 2015, spending on offshore exploration may be slashed by 15%, which will mean taking a deep knife to companies providing rigs and contracting. Transocean has already announced that it is idling seven deepwater rigs, along with several other drillships. However the shakeout may take some time because offshore contractors can resort to using older rigs in order to bring down the rates they are charging, essential to maintaining market share. In order to entice exploration companies to keep up the drilling frenzy, older ships can keep costs lower. But that may not be a tenable prospect since offshore contractors will feel compelled to put the new and more state-of-the-art rigs into operation. That will force companies with older fleets to start discarding the most dated drilling rigs.

Transocean already took a $2.6 billion impairment charge in the third quarter of this year, due to a “decline in the market valuation of the company’s contract drilling services business.” By scrapping more ships, it expects to write down at least $240 million in the fourth quarter. More may be in the offing – Transocean released an update on the status of its fleet in mid-December, confirming its plans to scrap 11 ships. The statement also added that “additional rigs may be identified as candidates for scrapping.” Perhaps it is Seadrill, another offshore drilling services company, that has taking the worst of the oil price downturn. The company decided to cancel its dividend in November amid falling oil prices, a move that sent its share price tumbling downwards. Seadrill has seen its shares lose almost 75% of their value since July.

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Lots of ’em if the price doesn’t start rising soon.

Gartman: Get Ready For Oil Bankruptcies (CNBC)

Shale oil firms in the U.S. will suffer in the next two years due to the dramatic fall in the price of the commodity, according to Dennis Gartman, the founder and editor of the Gartman Letter, who expects a further fall in prices in the near term. The commodities investor has turned slightly more bearish on oil since last week, telling CNBC Tuesday that “crude oil prices haven’t seen their lows yet.” “I’m afraid we’re going to see demonstrably lower prices still,” he said. “Demand is weak and that price is going to continue to go down more.” The U.S. has seen a revolution in gas and oil production in the U.S. with new technology unlocking new shale resources.

This oil and gas boom has spurred economic activity and giving industry a competitive edge with less expensive fuel prices. However, the recent drop in prices – with Brent crude and WTI crude both down around 47% since mid-June – is set to impact the blossoming sector over the next two years, Gartman fears. “There will clearly be bankruptcies,” Gartman said, name checking oil production sites like the Permian Basin and the Marcellus Shale. U.S. oil production is a private-sector venture and differs wildly from the state-run companies in the Gulf states and South America.

These countries are able to extract oil from the ground at a cheaper cost than U.S. shale firms and there has been speculation that the two different industries could be playing a “game of chicken” over the price of oil before cutting back to ease the oversupply. A brief rally for oil on Monday was cut short with Saudi Arabian Oil Minister Ali al-Naimi stating that Organization of the Petroleum Exporting Countries would not cut production at any price, according to Reuters. Oil majors in Europe also received a stark warning this week with credit ratings agency Standard & Poor’s (S&P) placing BP, Total and Shell all on a negative watch. The change now means that the three firms are more likely to have their debt rating downgraded in the next three months.

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The “major unexpected headwinds” keep on coming.

China November Industrial Profits Suffer Sharpest Fall In 27 Months (Reuters)

Chinese industrial profits dropped 4.2% in November to 676.12 billion yuan ($108.85 billion), official data showed on Saturday, the biggest annual decline since August 2012 as the economy hit major unexpected headwinds in the second half. Despite last month’s drop, profits for January-November were 5.3% higher than in the first 11 months of 2013, according to the National Bureau of Statistics (NBS) data. The NBS attributed November’s profit drop to declining sales and a long-running slide in producer pricing power. “Increasing price falls shrank the space for profit,” the agency said. It said the impact of prices for coal, oil and basic materials falling to their lowest levels in years “was extremely clear”. As the NBS analysis suggested, the net slide in industrial profits was driven primarily by weakness in coal mining, and oil and gas industries, where November profits tumbled from a year earlier by 44.4% and 13.2% respectively.

Oil, coking coal and nuclear fuel processing industries saw their profits slide by 34.2%, according to the data. On the upside, Chinese technology industries saw profits grow sharply last month. Telecommunications firms saw a 20.7% increase, electronics and machinery grew 15.1% and automobile manufacturers enjoyed a 16.7% gain. “This suggests that on the one hand, in the context of weak investment demand, stable consumption demand provided a certain degree of support; on the other hand, promoting industry restructuring is having a positive effect on efficiency,” the NBS analysis said. However, the unbalanced nature of the performance highlights a quandary regulators face. They want to restructure the Chinese economy away from credit- and energy-intensive heavy industries toward lightweight technology products and services, yet they must also avoid causing a crisis in the financial system.

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Dangerous political games.

China’s Shadow-Banking Boom Is Over (WSJ)

Following years of explosive growth, China’s shadow-banking industry is experiencing a sharp slowdown after Beijing tightened its grip on the sector, which has been a key source of funding for the economy but also has added to rising debt levels and other risks in the financial system. The industry, a mélange of informal lenders such as trust companies and leasing firms, takes in money from investors and lends it to often risky projects for which traditional bank lending is unavailable. Investors have flocked to the so-called wealth-management and trust products sold by shadow lenders in recent years because they typically promise returns ranging from 4% to more than 10%, much higher than a bank account. But the sector has been hit especially hard in the second half of this year. Investors have shifted their cash into the rallying stock market.

The slowdown may become even more pronounced next year, with authorities set to increase efforts to rein in financial risks as the economy slows. “The government has realized that shadow banking has fallen off its radar screen and it carries enormous risks. The days of laissez-faire are over,” said Shen Meng, executive director of Chanson Capital, a boutique investment bank. A decline in interest rates in China and diminishing returns on property and infrastructure projects may also reduce the promised investment gains on the products issued by shadow banks. The outstanding value of shadow-banking products stood at 21.87 trillion yuan ($3.52 trillion) at the end of November, up 14.2% from the level a year earlier, according to estimates by Nomura Securities based on central-bank data. That growth is significantly slower than the 35.5% rise it registered for the whole of last year and the 33.1% gain in 2012.

The growth rate was as high as 75% in 2010, when Beijing encouraged shadow lenders to complement overstretched traditional banks and help extend a lending binge to keep the economy humming following the global financial crisis. The slowdown in the industry this year has primarily been caused by a series of tighter regulations that made it less profitable for shadow lenders to issue new products, or forced them to enhance risk controls. Shadow-lending products are usually sold through traditional banks. In July, China’s banking regulator asked banks to separate their wealth-management-product business from their retail-lending business, a move that incurred extra costs. Banks also were ordered to set up independent departments to oversee wealth-management products, and to better explain in sales documents that these products aren’t deposits and carry risks.

The result was immediate: New issuance of shadow-banking products fell by 309.6 billion yuan in July from a month earlier. That followed a month-on-month increase of 526.2 billion yuan in June and a rise of 993.2 billion yuan in January, according to estimates by Nomura Securities. There was a mild rebound in August, but issuance shrank in September and October before seeing a modest rise of 28.4 billion yuan in November. The slowdown since July coincided with a surge in China’s long-depressed stock market. Compared with the 43% gain of the Shanghai market this year, the yields on trust and wealth-management products, which have declined, no longer look as attractive.

Read more …

How much longer for Abe?

Game Over Japan: Real Wages Crash, Savings Rate Turns Negative (Zero Hedge)

When about a month ago it was revealed that Japan’s shadow economic advisor is none other than Paul Krugman, we said it was only a matter of time before the Japanese economy implodes. Terminally. We didn’t have long to wait and last night the barrage of Japanese economic data pretty much assured Japan’s transition into failed Keynesian state status. In fact, after last night’s abysmal Japanese eco data, we doubt even the most lobotomized Keynesian voodoo priests have anything favorable left to say about Abenomics: not only did core inflation miss expectations and is now clearly in slowdown mode despite Japan openly monetizing all gross Treasury issuance.

Not only did industrial production decline 0.6% missing expectations of an increase and record its first decline in 3 months with durable goods shipments crashing, not only did consumer spending plunge for the 8th straight month dropping 2.5% in November (with real spending on housing in 20% freefall), but – the punchline – both nominal and real wages imploded, when total cash wages and overtime pay declined for the first time in 9 months and 20 months, respectively. And the reason why any poll that shows a recently “re-elected” Abe has even a 1% approval rating has clearly been Diebolded beyond recognition, is that real wages cratered 4.3% compared to a year ago. This was the largest decline since the 4.8% recorded in December 1998. In other words, Abenomics has now resulted in the worst economy, if only for consumers, in the 21st century.

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The Petrobras scandal is yet to reach its climax. Brazil as a whole will be severely shaken.

Brazilian Oil Company Petrobras Sued By US City In Corruption Scandal (BBC)

The US city of Providence, Rhode Island is suing the Brazilian state-run oil company Petrobras over investor losses due to a corruption scandal. Unlike other class actions, some of the company’s senior executives have also been named as defendants. Providence alleges that Petrobras made false statements to investors that inflated the company’s value. Its lawyers say that when the corruption scandal broke, the city’s investments plummeted. So far, 39 people in Brazil have been indicted on charges that include corruption, money laundering and racketeering. They have been accused of forming a cartel to drive up the prices of major Petrobras infrastructure projects and of channelling money into a kickback scheme at Petrobras to pay politicians. The executives could face sentences of more than 20 years in jail.

The case has shaken the government of President Dilma Rousseff, who served as chair of the Petrobras board for seven years until 2010. She has denied any knowledge of the scheme. According to the Brazilian Federal Police the group under investigation moved more than $3.9bn (£2.5bn) in what police describe as “atypical” financial transactions. Brazilian courts have blocked around $270m in assets belonging to various suspects. Federal agents revealed contracts worth $22bn are regarded as suspicious. Former Petrobras director Paulo Roberto Costa, who worked at the company from 2004 to 2012, has told investigators that politicians received a 3% commission on contracts signed during this period.

Read more …

Crazy plan.

Nicaragua Canal A Potential Threat To The US And Western Powers (RT)

The Nicaragua Canal can become an alternative route through Central America for China and Russia, as well as an alternative route for potential military use right in America’s backyard, international consultant and author Adrian Salbuchi told RT. Nicaragua has begun the most ambitious construction project in Latin America – a waterway connecting the Atlantic and the Pacific oceans that is supposed to become an alternative to the Panama Canal. It is 278 km long, will cost around $50 billion and provide jobs for 50,000 people. The construction is being run by a Hong Kong company and should be completed by 2020. The project is supposed to boost Nicaragua’s GDP. Meanwhile, ecologists fear the giant ship canal will endanger Lake Nicaragua – Central America’s largest lake and Nicaragua’s largest main water source – which the waterway will run through. Locals are concerned their homes and farm lands are under threat. According to some estimates, around 30,000 people may be displaced by the waterway. RT discussed the project and protests it sparked in Nicaragua with international consultant and author Adrian Salbuchi.

RT: The residents are promised compensation. Why are they protesting? Were they misinformed about the project?
Adrian Salbuchi: It’s understandable because we are talking about a mega project that will displace many people; some estimates say as many as 30,000 farmers will be displaced. There will be an ecological impact, no doubt about it. However, I think we have to be very careful to distinguish between what is this spontaneous reaction of many of these farmers which is probably genuine, and what may also be some engineering of social convulsion from foreign powers, not only the US that had been doing that in the so-called Arab Spring and that had been doing that throughout Latin America for many decades. So I wouldn’t be surprised if some of the exaggeration or some of the future problems do come from some American agitators or Western agitators. Don’t forget this is the country which is governed by President Daniel Ortega of the Sandinista Liberation Front, who are enemies of the US for many decades.

RT: Just to push you a bit on this, do you think there may be a foreign state involved?
AS: Absolutely. And we should even take it together with what just happened with Cuba because if America is trying to bring Cuba into the fold, it might try to play a similar card with Nicaragua to try to range them away as in the case of Cuba from Russia, in the case of Nicaragua from China. We have to see not just the trade implications that are huge, and the economic implications that are also huge, as well as social and ecological, but much more so the geopolitical implications. This is a Chinese private company, but we all know that very likely behind the Chinese investment there are geopolitical factors being handled and being driven by the Chinese government quite rightly, who have an increasing interest throughout Latin America.

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People vs power.

The Cradle of Democracy Should Defy the Autocrats & Kleptocrats (Landevoisin)

On the old continent, this December 29th, a succinct political showdown is scheduled to take place which may well become a defining moment for our entirely unsettled new millenium. What is at stake is none other than the prosperity of the common man pitted against the privilege of concentrated power. Lamentably, this deliberate dogmatic divide has relentlessly defined human civilization for the ages. What is at hand isn’t so much about lofty ideals. It’s not about Socialism. It’s not about Capitalism. It’s not about Communism. It’s not about being a progressive, or a conservative or a liberal. It’s not about left vs right. Forget all those dumbed down dichotomies. It’s much more fundamental than all of that. Quite simply, it’s about People vs. Power, that’s it, nothing more. Those that have and wield institutional power, and those that do not. It’s as elementary and base as that I’m afraid.

Take a good look around, I defy you to point to a single socioeconomic construct in our supposedly enlightened and advanced society of today which is not essentially determined by that crude polarizing characterization. Whether it be our bought and paid for Political Class, our rapacious Banking Sector, our entitled Multinational Corporations, our entrenched Governmental Agencies, our marauding Military Industrial Complex, our fleecing Healthcare Providers, our muzzled Free Press, our hijacked Justice System, or our grossly overpaid CEOs, Athletes, and Entertainers, they all have one thing in common, and I assure you that it’s not the common good that they share. What they seek above all else is to expand the existing institutional dominion and their own privileges within it.

Sad to say, but at the end of the day, perhaps dog eat dog is what we humans are really best at, and the only state of being we’re actually capable of. Maybe all those exalted ideals of enlightened forms of governance are just a load of crap to make us feel better about ourselves. Judging by the overt self seeking avarice that dictates the pace of just about everything these days, it sure seems that way.

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“Menacing figures arrive at your door uninvited, demand your property, and threaten to perform an unspecified “trick” if you don’t fork over.”

A Capitalist Christmas (Mises Inst.)

Halloween has a socialist tenor. Menacing figures arrive at your door uninvited, demand your property, and threaten to perform an unspecified “trick” if you don’t fork over. That’s the way the government works in a nutshell. Thanksgiving has been reinterpreted as the white man, after burning, raping, and pillaging the noble Indian, trying to make amends with a cheap turkey dinner. New Year’s can be ruined as the beginning of a new tax year, and the knowledge that the next five or six months will be spent working for the government. That’s why I love Christmas. To this day it remains a celebration of liberty and private life, as well as a much-needed break from the incessant politicization of modern life. It’s the most pro-capitalist of all holidays because its temporal joys are based on private property, voluntary exchange, and mutual benefit.

In Christmas shopping, we find persistent reminders of charity programs that work and little sign of those (welfare bureaucracies) that don’t. The Salvation Army, Goodwill dispensers in parking lots, and boxes filled with canned goods and toys are all elements of true charity. This giving is based on volition rather than coercion, which is the key to its success. People complain about “commercialism,” but all the buying and selling is directed toward meeting the needs of others. Even if the recipient doesn’t give gifts in return, the giver still receives satisfaction. Absent entirely is the zero or negative-sum political process that tilts property in favor of one group or another. Santa, unlike Halloween figures, comes to your home to bring gifts and goodwill, and never takes anything except milk and cookies.

You wouldn’t think of hiding your silver from him. Unlike government bureaucrats, Santa and his workers are entirely trustworthy, and even work overtime by creating goods that are desired by millions of people. If the Labor Department or OSHA ever get around to investigating the North Pole, they’ll probably find all sorts of labor violations: safety and health (too cold), unemployment insurance (does he pay it?), minimum wage (is there exploitation here?), overtime (Heaven knows they work long hours), civil rights (any non-elves employed?), and disability (is Santa accommodating these tiny men?). But the point is that everyone is there voluntarily, and no doubt considers it an honor and privilege.

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What I said yesterday, in different words: “We appeal to the media, to more scrupulously adhere to their obligation to provide unbiased reporting.”

60 Prominent Germans Appeal Against Another War In Europe (Zero Hedge)

Two weeks ago, as the S&P was preparing to surge on the latest round of all time high market-goosing algo trickery by the FOMC, 60 prominent German personalities from the realms of politics, economics, culture and the media were less concerned with blinking red and green stock quotes and were focused on something far more serious to the future of the world: the threat of war with Russia. In a letter published by Germany’s Die Zeit, numerous famous and respected Germans including a former president and former prime minister write “Wieder Krieg in Europa? Nicht in unserem Namen!”, or, roughly translated, “War in Europe Again? Not in Our Names!”

The open letter to the German government, parliament, and media, excerpted here, was signed by more than 60 prominent German personalities and published in the weekly Die Zeit on Dec. 5. The initiators were Horst Teltschik (CDU), advisor to then-Chancellor Helmut Kohl at the time German of reunification; Walther Stützle (SPD), former Secretary of State for the Ministry of Defense; and Antje Vollmer (Greens), former Bundestag Vice President. Teltschik said, in motivating the appeal, “We are giving a political signal that the justified criticism of Russia’s Ukraine policy should not wipe out all the progress that we have made in the past 25 years in relations with Russia.” Below is an excerpted translation (source) of the original letter:

“Nobody wants war. But North America, the European Union, and Russia are inevitably driving towards war if they do not finally halt the disastrous spiral of threats and counter-threats. All Europeans, including Russia, are jointly responsible for peace and security. Only those who do not lose sight of this goal can avoid fatal actions. The Ukraine conflict shows that the quest for power and domination has not been overcome. In 1990, at the end of the Cold War, we all hoped that it would be. But the success of the détente policy and the peaceful revolutions allowed people to become lethargic and careless. In both East and West. The Americans, Europeans, and Russians all lost, as their guiding principle, the idea of permanently banishing war from their relationship.

Otherwise it is impossible to explain either the West’s eastward expansion without simultaneously deepening cooperation with Moscow—a policy which Russia sees as a threat—or Putin’s annexation of Crimea in violation of international law. At this moment of great danger for the continent, Germany has a special responsibility for the maintenance of peace. Without the will for reconciliation of the people of Russia, without the foresight of Mikhail Gorbachov, without the support of our Western allies, and without the prudent action by the then-Federal government, the division of Europe would not have been overcome. To allow German unification to evolve peacefully was a great gesture, shaped by the wisdom of the victorious powers. It was a decision of historic proportions. [..]

We call upon the members of the German Bundestag, delegated by the people as their political representatives, to deal appropriately with the seriousness of the situation. . . . Whoever is constructing a bogeyman, putting the blame on only one side, is exacerbating tensions, when the signals should be for de-escalation. We appeal to the media, to more scrupulously adhere to their obligation to provide unbiased reporting.than they have hitherto done. Editorialists and leading commentators are demonizing entire nations, without fully taking their histories into account. Any journalist experienced in foreign affairs would understand the Russians’ fear, since members of NATO in 2008 invited Georgia and Ukraine to join the Alliance. It is not about Putin. Heads of state come and go. What is at stake is Europe.

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And so he did. But not everybody likes that.

Gorbachev: Putin Saved Russia From Disintegration (RT)

Russian President Vladimir Putin saved the country from falling apart, former Soviet leader Mikhail Gorbachev said during the presentation of his new book ‘After the Kremlin.’ Gorbachev also commented on the situation in Ukraine and NATO expansion. “I think all of us – Russian citizens – must remember that [Putin] saved Russia from the beginning of a collapse. A lot of the regions did not recognize our constitution. There were over a hundred local constitutional variations from that of the Russian constitution,” RIA Novosti quoted Gorbachev as saying on Friday. He added that saving Russia during that crucial period was a “historical deed.” Gorbachev remarked that he knew the Russian president before Putin took office, describing him as having good judgment and discipline.

Commenting on the situation in Ukraine, the ex-Soviet president said the armed stand-off must be immediately stopped and both sides need to come to the negotiating table. “All of us are concerned by what is happening in Ukraine – politicians and the public. And the fact that our government is supporting the people who are in trouble there, no matter how hard things are at home, it is what always distinguished us,” Gorbachev said, stressing that the conflict cannot be solved through violence. Gorbachev also noted that influential American and European politicians need to speak out against the worsening of international ties, adding that many of his old colleagues are seeing the first signs of a new Cold War and understand how crucial it is to calm things down.

He said he has received comments which include concerns on how not to miss the escalating situation, and stopping it before it “acquires an explosive nature.” In terms of Russia’s worries over NATO’s expansion, Gorbachev agrees that the US is playing a key role in the process. “[NATO] began to establish bases around the world…I think the president is mostly right when drawing the attention to the special responsibility the US has,” Gorbachev said. Meanwhile, when speaking about the domestic situation in the country, the former president of the USSR expressed confidence that Russia will get out of the crisis, adding that the only questions are “when and at what price.” “Now we need to be very careful in politics – what policy is implemented, by who, and who stands to benefit?”

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Not smart enough for my tastes.

Putin: It Is Time to Play Your Ace in the Hole (Daily Bell)

The entire world is watching Putin play poker with the Western politicians lead by Obama and followed by Washington quislings in London, Brussels and Berlin. America’s goal since the end of the Cold War has been to weaken by financial, economic and, if necessary, military means any real competition to its global financial and resource domination through the petrodollar and dollar world reserve currency status. The current trade and economic sanctions against Russia and Iran follow this time-tested action that is never successful on its own, as we know from the 50-plus-year blockade of Cuba. But this strategy can lead to opposition nations retaliating by military means, often their only alternative to end blockades etc., which are an act of war and allow the US and other democracies to bring their ultimate superior military power to bare against the offending sovereign state.

This worked for Lincoln against the Confederate States of America, by Woodrow Wilson against the Central Powers before World War One, against the Japanese Empire before World War Two, Iraq, Libya – the list is endless. Recently the US has created the oil price collapse, working closely with its client state Saudi Arabia, in order to weaken the economic power of both Iran and Russia, the two main nations opposing US hegemony, foreign policy and petrodollar policy. Yes, this will play havoc with the US shale oil industry as well as London’s North Sea oil industry but oil profits pale in comparison to the importance of maintaining Western power over Russia and China. I hope Putin realizes the US is not playing games here, as this is a financial and strategic game to the death for Washington and it’s Western allies that have foolishly followed the Goldman Sachs/central banking cartel’s deadly sovereign debt recipe and for growth and prosperity.

The time is up; the debts can never be repaid and sooner or later must be repudiated one way or the other. China is waiting in the wings as the new world economic power and while it is too big to challenge, US strategy is to take out its top two allies, Iran and Russia, to buy time for Wall Street and Washington. The strategy might be a competitive economic course of action but the risk of military consequences and even a third world war loom on the horizon and no country has ever defeated Russia in a land attack. This is risky brinkmanship just to protect our banking and Wall Street elites and their profits at the expense of the American people, I might add, but the US has done this before.

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Nice takedown.

Google Further Crapifies Search, Exploiting Both Users and Advertisers (NC)

Google is a case study of why we need antitrust enforcement. With Google at 97% market share in search, Yahoo and Bing don’t have enough of a foothold for it to be worth the gamble of trying to beat Google at search, even with Google having degraded its service so badly that there are now obvious ways that a challenger could best them. I had assumed that the ongoing crapification of Google was for a commercial purpose, namely to optimize the browser for shopping and the hell with everything else. But as we will discuss in more detail below, my experience in poking around to see about buying a new laptop demonstrates that Google has gotten worse at that too. Lambert, who I enlisted to confirm my experience, was appalled and said, “What have they been doing with all that money?”

But as we’ll see, there is an evil purpose here, just not the evil purpose we’d first assumed. It isn’t as if the degradation of Google is a new phenomenon. I used Google heavily while researching ECONNED, which was written on an insanely tight time schedule. It worked really well then. But even a mere year later, by late 2010, the search algo had been restructured in some mysterious way to make the results much less targeted, and it’s been downhill since then. The most recent appalling change came in the last few months: eliminating the ability to do date range searches. But all of this ruination was so Google could make more money by optimizing for shopping right? Apparently not. I’ve idly and actively looked for stuff on the Internet over the years.

A reliable way to do that was to type in a rough or better yet precise description of the product/product name plus the word “price”. That would usually get you a nice list of vendors selling what you wanted so you could comparison shop, and often you’d get links to sites like Nextag which would provide a list of vendors with all-in prices as well as vendro ratings. Over the last two months, I’ve been looking for an easy-to-install monochrome laser printer (I have NO time to deal with anything more demanding than plug and play, and sadly, dealing with printers on a Mac is not plug and play). I didn’t get any good answers from all my searching and would up buying a used version of my current out-of-production printer. In retrospect, it appears some of my search hassles may have been due to Google, not to having atypical requirements.

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Biggest company on the planet because they buy their own stock?

Apple Spent $56 Billion On Buybacks In 2014 (MarketWatch)

If Apple’s year had a theme, it was the year the company finally started to chip away at that colossal hoard of cash. After a little nudging by activist investor Carl Icahn, Apple boosted its share-buyback program in April to $90 billion and increased the pace of capital returns. New data from FactSet show that Apple has been the biggest buyback spender of 2014 among the S&P 500, pouring more than $56 billion into the program on a trailing 12-month basis as of the end of the third quarter. That’s nearly three times the outlay of runner-up IBM, which spent $19.2 billion. Apple bought back $17 billion in shares last quarter, a 240% year-over-year increase that marks the second-highest dollar amount spent on buybacks during a quarter by any individual company in the S&P 500 since 2005, when FactSet began tracking the data. It’s second only to Apple’s own record of $18.6 billion set in the first quarter as part of the same buyback program.

Morningstar analyst Brian Colello said that while it’s not all surprising the world’s most valuable company would top a list such as this given its enormous cash cushion, he said the buybacks have undoubtedly been a “big contributor” to the stock’s strong performance in 2014. Adjusted for a 7-for-1 stock split earlier this year, shares of Apple have climbed more than 43% over the last 12 months. Since hitting a 52-week low back on Jan. 30, they have been on the march higher — flirting with all-time highs since September. “It showed that management was confident in its upcoming product launches and helped to put a floor into the company’s valuation during times of skepticism,” said Colello. Apple is the world’s most valuable company, with a $641.7 billion market cap, almost double the market valuations of the next companies on that list, Microsoft and Exxon Mobil, both valued around $377 billion.

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Curious.

Strange Predictions For The Future From 1930 (BBC)

Shortly before he died in 1930, former cabinet minister and leading lawyer FE Smith, a friend of Winston Churchill and one of the more outspoken British politicians of his age, wrote a book predicting how the world would look in 100 years’ time. They covered science, lifestyles, politics and war. So what did he say?

Health/lifespan Smith, a former Lord Chancellor who became the Earl of Birkenhead a few years before his death, was writing in a period when tuberculosis was a major killer in the UK and around the world. He was optimistic enough to suggest the eradication of this and other epidemic diseases was “fairly certain” by 2030, as was “the discovery of cures for such scourges as cancer”. Death from old age could also be delayed, Smith thought. Scientists would create injections containing an unspecified substance bringing “rejuvenations”, which would be used to prolong the average lifespan to as much as 150 years. Smith acknowledged this would present “grave problems” from an “immense increase in population”. He also foresaw extreme inter-generational inequality, wondering “how will youths of 20 be able to compete in the professions or business against vigorous men still in their prime at 120, with a century of experience on which to draw”?

Work and leisure
Mechanisation would mean a “gradual contraction” of hours worked, Smith believed. By 2030 it was likely the “average week of the factory hand will consist of 16 or perhaps 24 hours”, which no worker could possibly “grudge”. But, with factories largely automated, work would provide little scope for self-fulfilment, becoming “supremely easy and supremely dull”, consisting largely of supervising machines. It didn’t occur to Smith, in an age before widespread use of computers, that the machines might become self-monitoring. The cut in hours hasn’t happened yet. According to figures from the OECD group of industrialised nations, the lowest average weekly hours worked in a main job in 2013 were 30, in the Netherlands. The highest figure was 47.9, in Turkey. In the UK it was 36.5, with the US among the countries for which information was not provided.

Smith believed that, despite the shortening of hours, everyone would earn enough by 2030 to afford to play football, cricket or tennis in their spare time. But one of the big winners in this more leisure-rich world would be fox-hunting, one of his own hobbies. “As wealth increases, we shall all be able to ride to hounds,” he said. Men would free up even more time with changes to sartorial rules. By 2030 they would be expected to own only two outfits, one for leisure and the other for more formal occasions. John Logie-Baird had demonstrated television in the late 1920s and Smith was excited by the idea. He said that by 2030 full “stereoscopic television in full natural colours” would be available in people’s homes, with proper loudspeaker-quality sound. This meant exiled US citizens would be able to watch any baseball match and, in cricket, “the MCC selection committee, in conclave at Lord’s, will be able to follow the fortunes of an English eleven through the days (or weeks) of an Australian Test match”.

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Dec 242014
 
 December 24, 2014  Posted by at 1:09 pm Finance Tagged with: , , , , , , ,  


Frances Benjamin Johnston Courtyard, 620-621 Gov. Nicholls Street, New Orleans 1937

Merry Christmas!

Here Is The Reason For The “Surge” In Q3 GDP (Zero Hedge)
The US Economy ‘Grew’ By $140 Billion As Americans Became Poorer (Zero Hedge)
China’s Bubble Looks Bigger Than America’s, Says Steve Keen (Straits Times)
UBS Raises Flag on China’s $1 Trillion Overseas Debt Pile (Bloomberg)
Oil Drillers Under Pressure to Scrap Rigs to Cope With Downturn (Bloomberg)
Can Canadian Oil Sands Survive Falling Prices? (BW)
T. Boone Pickens Says Oil Down Due To “Weak Demand” (Zero Hedge)
Existing Home Sales Collapse Most Since July 2010 (Zero Hedge)
U.S. Minimum Wage Hikes To Impact 1,400-Plus Walmart Stores (Reuters)
20 Stunning Facts About Energy Jobs In The US (Zero Hedge)
Asian Currencies Set For A Wild Ride In 2015 (CNBC)
Greeks Used to Years of Chaos Dismiss Samaras’s Warnings (Bloomberg)
US Families Prepare For ‘Modern Day Apocalypse’ (Sky News)
El Nino Seen Looming by Australia as Pacific Ocean Heats Up (Bloomberg)

How to cut through the crap.

Here Is The Reason For The “Surge” In Q3 GDP (Zero Hedge)

Back in June, when we were looking at the final Q1 GDP print, we discovered something very surprising: after the BEA had first reported that absent for Obamacare, Q1 GDP would have been negative in its first Q1 GDP report, subsequent GDP prints imploded as a result of what is now believed to be the polar vortex. But the real surprise was that the Obamacare boost was, in the final print, revised massively lower to actually reduce GDP! This is how the unprecedented trimming of Obamacare’s contribution to GDP looked like back then.

Of course, even back then we knew what this means: payback is coming, and all the BEA is looking for is the right quarter in which to insert the “GDP boost”. This is what we said verbatim:

Don’t worry though: this is actually great news! Because the brilliant propaganda minds at the Dept of Commerce figured out something banks also realized with the stub “kitchen sink” quarter in November 2008. Namely, since Q1 is a total loss in GDP terms, let’s just remove Obamacare spending as a contributor to Q1 GDP and just shove it in Q2. Stated otherwise, some $40 billion in PCE that was supposed to boost Q1 GDP will now be added to Q2-Q4. And now, we all await as the US department of truth says, with a straight face, that in Q2 the US GDP “grew” by over 5% (no really: you’ll see).

Well, we were wrong: it wasn’t Q2. It was Q3, albeit precisely in the Q2-Q4 interval we expected. Fast forward to today when as every pundit is happy to report, the final estimate of Q3 GDP indeed rose by 5% (no really, just as we predicted), with a surge in personal consumption being the main driver of US growth in the June-September quarter. As noted before, between the second revision of the Q3 GDP number and its final print, Personal Consumption increased from 2.2% to 3.2% Q/Q, and ended up contributing 2.21% of the final 4.96% GDP amount, up from 1.51%. So what did Americans supposedly spend so much more on compared to the previous revision released one month ago? Was it cars? Furnishings? Housing and Utilities? Recreational Goods and RVs? Or maybe nondurable goods and financial services? Actually no. The answer, just as we predicted precisely 6 months ago is… well, just see for yourselves.

In short, two-thirds of the “boost” to final Q3 personal consumption came from, drumroll, the same Obamacare which initially was supposed to boost Q1 GDP until the “polar vortex” crashed the number so badly, the BEA decided to pull it completely and leave this “growth dry powder” for another quarter. That quarter was Q3.

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“Of note: real spending on gasoline and other energy goods rose 4.1%. Wait, what? Wasn’t spending on energy supposed to drop?”

The US Economy ‘Grew’ By $140 Billion As Americans Became Poorer (Zero Hedge)

This is simply stunning. Regular readers will recall that last month, at the same time as the US Bureau of Economic Analysis reported was a far better than expected 3.9% GDP (since revised to 5.0% on the back of the previously noted Obamacare spending surge), it also released its Personal Spending and Income numbers for the month of October, or rather revised numbers, because as we explained exactly one month ago “Americans Are Suddenly $80 Billion “Poorer”” thanks to (upward) revised spending data and (downward) revised income. What this meant a month ago is that as a result of a plunge in the imputed US savings rate, some $80 billion in personal savings was revised away from the average American household and right into the US economy. After all, something had to grow the US GDP by a massive amount in order to give the Fed the green light it needs to hike rates eventually, just so it can then ease when the global dry powders from all the other central banks is used up.

And sure enough, this is how just one month ago, personal income was revised lower…

… Even as personal spending was revised higher:

Leading to an $80 billion revision lower in personal saving, and by mathematical identity, a comparable growth in US GDP. Fast forward to today when we find that… absolutely nothing has changed, and in order to boost US GDP some more, the BEA engaged in precisely the same data revision trick! On the surface, today’s Personal Income and Spending data were inline to a little bit better than expected: Personal Income supposedly rose 0.4% in November, up from a 0.3% revised growth in October, and in line with expectations. Personal Spending supposedly also rose, this time by 0.6%, up from an upward revised 0.3%, and just above the 0.5% expected. Of note: real spending on gasoline and other energy goods rose 4.1%. Wait, what? Wasn’t spending on energy supposed to drop?

So far so good: nothing abnormal (except for the clearly made up spending data), and in isolation this data would be good, suggesting the US consumer is getting more confident and is spending ever more as the year closes, on expectations of higher paying jobs, stronger economy, etc. And then we looked at the Personal Savings number: it was reported at 4.4% in November, down from 4.6% in October. Which is odd because last month, the October savings rate was disclosed as 5.0%, in turn down from a downward revised 5.6% in September. Wait, could the BEA be engaging in precisely the same deception in November as it did in October. Why yes, Virgina: not only did the US Department of Economic Truth completely fabricate its GDP numbers earlier, but the way it got to said fabrication is by fudging – for the second month in a row – both the entire Personal Income and Personal Spending data series.

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“The Chinese private sector debt… is higher now than America’s at its peak. And the acceleration of debt was faster… “The bubble in China is bigger and faster than the sub-prime bubble was in America.”

China’s Bubble Looks Bigger Than America’s, Says Steve Keen (Straits Times)

“Did you wake up before or after the sunrise today?” asks Professor Steve Keen “After,” I mutter sheepishly. “That’s a trick question. The sun doesn’t rise,” he says before letting out a guffaw. “The earth rotates… (But) it’s more natural for us to use that language than to say what actually happens.” The analogy is rather fitting for an Australian academic who wrote a book called Debunking Economics, and is now the chief economist of a global network of thinkers that declares it is “dedicated to the reform of economics”. In Bangkok recently for the launch of the Institute for Dynamic Economic Analysis, the 61-year-old professor in Britain’s Kingston University London equates mainstream economic theory with spurious astronomy assumptions.

Strangely enough, he says, it overlooks the role of money. Instead, it likens governments to households which ought to prize prudence, which in government terms means generating consistent surpluses. But the private sector, in order to pay the government enough to generate its surplus, has two options: It either “runs down the money it’s got, which means the economy is shrinking”, or borrows money to make such payments. Countries that run a trade surplus with others can maintain a permanent surplus without forcing its private sector into a debt crisis, but the good times don’t last. China – the world’s largest economy – is an example where the rise of private sector debt is bringing the country dangerously close to a crisis, he says.

Its central bank made a surprise cut in interest rate in November amid weakening economic data. Growth in the third quarter slackened to 7.3%, which is already its lowest since 2009. Prof Keen, who accurately predicted the last financial crisis before the 2008 crash, warns that another even bigger bubble is brewing in China. Chinese private sector debt, he points out, has risen from roughly 100% of its gross domestic product in 2008 to about 180% now, as the government encouraged lending to stimulate demand and make up for the shortfall in exports. “That’s an enormous increase,” he says. “The Chinese private sector debt… is higher now than America’s at its peak. And the acceleration of debt was faster… “The bubble in China is bigger and faster than the sub-prime bubble was in America.”

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“.. mainland companies deposit 20% to get a letter of credit from an onshore lender. They take that document to get a low-interest dollar loan from a Hong Kong bank, which treats it like a no-risk check fully backed by the guarantor. The companies flip those dollars back to the mainland, where they use them as collateral to get even more letters of credit..”

UBS Raises Flag on China’s $1 Trillion Overseas Debt Pile (Bloomberg)

UBS is flagging risks from China’s $1 trillion worth of unhedged foreign debt as forecasters see bets against the greenback unwinding in 2015. The world’s second-largest economy is exposed to shifts in currency and interest rates as never before because of expanding international trade and easing foreign-exchange regulations, said Stephen Andrews, head of Asia banks research in Hong Kong at UBS. Daiwa Capital Markets has a $1 trillion estimate for carry-trade inflows since 2008, bets on the difference between yields in China and overseas. It sees a 5.7% drop in the yuan next year. The renminbi is heading for a 2.8% drop in 2014 as the dollar gains on Federal Reserve plans to raise interest rates and the People’s Bank of China cuts borrowing costs to support a flagging economy. Capital controls and record foreign-exchange reserves will help the PBOC cope with any similar situation to 1997’s Asian financial crisis, when firms struggled to repay debt as regional currencies slumped, Andrews said.

“This could get very uncomfortable very quickly,” he said in a Dec. 12 interview. “I boil it down to its basics. You’ve borrowed unhedged and leveraged: you’re at risk.” Andrews says the mechanics of what’s happening are this: mainland companies deposit 20% to get a letter of credit from an onshore lender. They take that document to get a low-interest dollar loan from a Hong Kong bank, which treats it like a no-risk check fully backed by the guarantor. The companies flip those dollars back to the mainland, where they use them as collateral to get even more letters of credit, leveraging even further, said Andrews. That money is then used to invest in China’s high-yield and often risky trust products or in the booming stock market. The profits are then used to pay off dollar borrowings.

Hong Kong banks mainland-related lending stood at HK$3.06 trillion ($394 billion) at the end of September, 14.7% of total assets, according to the city’s monetary authority. Andrews said his estimate is higher as he includes trade bills and other forms of lending not captured by the data, such as between sister companies in intergroup corporate transfers or letters of credit between onshore and offshore bank branches. “There were too many cheap dollars in the market for everyone to borrow,” Kevin Lai, an economist at Daiwa in Hong Kong, said Dec. 16. “If you just put the money in China, the carry plus appreciation is about 5%, so why not, right?” Lai estimates $1 trillion of carry-trade inflows since the first round of quantitative easing in 2008, of which $380 billion entered China disguised as commerce flows.

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Hundreds of rigs will be dropped.

Oil Drillers Under Pressure to Scrap Rigs to Cope With Downturn (Bloomberg)

Offshore oil-drilling contractors, who last year were able to charge record rates for their vessels, are now under pressure to scrap old rigs at an unprecedented pace. The recent five-year low in oil prices is threatening an industry already grappling with a flood of new vessels and weakening demand. More than 200 new rigs are scheduled to be delivered in the next six years. That’s a 25% jump from the number currently under contract. To cope, many rig owners will try to keep revenue up by culling older vessels to balance supply and demand. “The older assets, particularly those built before the 2000 time period, are really less desired by the industry,” James West, an analyst at Evercore ISI in New York, said in a phone interview.

Those vessels “are only causing the customer base to use those rigs against higher quality rigs to get pricing lower.” About 140 older rigs would need to be scrapped to make way for the new vessels scheduled for delivery by 2020, according to Andrew Cosgrove, an analyst at Bloomberg Intelligence. That pace would double the number scrapped in the previous six years and even eclipse the 123 vessels retired since 2000, according to data compiled by Bloomberg. Booming offshore exploration earlier in the decade encouraged a flurry of rig orders. That’s now leading to a potential market crash in a global industry pegged to generate revenue of $61.5 billion this year. Low oil prices are compounding the problem, alarming investors.

Three of the six worst performers in the Standard & Poor’s 500 Index this year are offshore rig contractors: Transocean, Noble and Ensco. Hercules Offshore, the largest provider of shallow-water rigs in the Gulf of Mexico, has fallen 84% as producers consolidated and drilling was postponed. “There is an old saying: If our customers get a cold, we get pneumonia,” John Rynd, chief executive officer of Houston-based Hercules, told investors this month. “We’re getting pneumonia right now.” Next year may be worse. Explorers and producers are expected to cut offshore spending by 15%, with “grievous” cuts coming for exploration, Bill Herbert, an analyst at Simmons & Co., said in an e-mail.

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“CNBC: “Peak Oil didn’t happen” .. Pickens: “That’s all bullshit .. I am the expert, not you.”

T. Boone Pickens Says Oil Down Due To “Weak Demand” (Zero Hedge)

Narrative, we have a problem! No lesser oil-man than T. Boone Pickens made quite an appearance on CNBC this morning – stunning the cheerleaders into first defense then silence as he broke the facts on oil’s collapse to them. Oil is down “mainly due to weak demand,” he explains… the anchors deny, “I am the expert, not you” Pickens rages as he warns drilling rigs will be laid down on a very wide scale (just as we have noted previously). Arguing over ‘peak oil’, he calls CNBC chatter “bullshit” and laid out a rather dismal short- to medium-term outlook for the oil & gas sector – not what the cheerleading tax-cut slurping media narrative wants to hear at all…

“demand is down” – “lower demand is the main driver” – “rig count is gonna fall – drop 500 rigs in next 6-9 months” Capex cuts coming… oil prices may be back at $90-100 Brent in 12-18 months but not without rig counts plunging. At 4:15 Pickens starts to discuss Peak Oil… enjoy – CNBC: “Peak Oil didn’t happen” .. Pickens: “That’s all bullshit… I am the expert not you” CNBC: “well you’re not much of an expert if you thought Peak Oil happened”

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Not a terribly intelligent piece.

Can Canadian Oil Sands Survive Falling Prices? (BW)

As oil prices have crashed over the past six months, a lot of attention has focused on what this means for frackers in the U.S., as well as the national budgets of a lot of large oil producing countries, such as Russia and Venezuela. In short, it’s not good. But what about Canada? The country is the world’s fifth-largest oil producer, and only Saudi Arabia and Venezuela have more proven reserves of crude. Almost all of Canada’s reserves (and production) are in the form of oil sands, which are among the most expensive types of crude to produce. There are pretty much two ways to do it. One is to inject steam into wells deep underground to heat up a thick, gooey type of oil called bitumen. The other is basically to strip mine large tracts of land and extract a synthetic blend of oil out of the earth and sand. Taken together, both methods require about 17% more energy and water than conventional oil wells and also result in similarly higher levels of carbon emissions.

That’s made oil sands a particular target of environmentalists. Now the Canadian oil sands producers have to contend with an even greater opposing force: economics. If Canadian oil sands are more expensive to produce than most other oil, how can they survive in the face of prices that are nearly 50% cheaper since June? A few things play to their favor. The first is that their costs are more akin to a mining operation than conventional oil drilling. Oil sands projects require massive upfront investments, but once those are made, they can go on producing for years with relatively low costs. That’s made oil sands, and the companies that produce them, quite profitable over the past few years. Suncor and Cenovus are two of the biggest oil sands producers in Canada. Both have profit margins that would be the envy of a lot of major oil companies.

At Suncor, earnings before interest, taxes, depreciation, and amortization (Ebitda), a basic measure of a company’s financial performance, have risen from 11.7% in 2009 to 31% through the first nine months of 2014. Exxon Mobil’s Ebitda so far this year is about half that at 14.3%. That cost structure may give oil sands producers an advantage over frackers in the U.S., who operate on a much shorter time horizon. Fracked wells in the U.S. tend to produce most of their oil within about 18 months or so. That means that to maintain production and rates of return, frackers need to keep reinvesting in projects with fairly short lifespans, whereas an oil sands project, once up and running, can continue to chug along, even in the face of lower prices, since its costs are spread out over a decade or more rather than over a couple years. That should keep overall oil sands production from falling and help insulate oil sands producers from lower prices, at least for now.

Read more …

But we’re doing great!

Existing Home Sales Collapse Most Since July 2010 (Zero Hedge)

Having exuberantly reached its highest level since September 2013 last month (despite the total collapse in mortgage applications), it appears the ugly reality of the housing market has peeked its head out once again. As prices rose, existing home sales plunged 6.1% – the most since July 2010 (against an expected 1.1% drop) to 4.93mm SAAR (the lowest in 6 months). So what was it this time: the polar vortex, the crude collapse, the crude vortex? Neither: According to the NAR’s endlessly amusing Larry Yun, this time it was the stock market: “The stock market swings in October may have impacted some consumers’ psyche and therefore led to fewer November closings. Furthermore, rising home values are causing more investors to retreat from the market.”

Supposedly he is referring to the tumble, not the resulting Bullard “QE4” mega-explosion in stocks that pushed everyhting to new all time highs. In other words, according to the NAR, even the tiniest downtick in stocks, and the housing market gets it. Sure enough, it is time to boost confidence in a rigged, manipulated ponzi scheme: DROP IN NOVEMBER COULD BE ONE-MONTH ‘ABERRATION,” YUN SAYS .. Unless, of course, stocks drop again, in which case all bets are off. Meanwhile, it appears investors have left the building…

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That’s what you get in a fake recovery.

U.S. Minimum Wage Hikes To Impact 1,400-Plus Walmart Stores (Reuters)

Minimum wage increases across the United States will prompt Wal-Mart Stores Inc to adjust base salaries at 1,434 stores, impacting about a third of its U.S. locations, according to an internal memo reviewed by Reuters. The memo, which was sent to store managers earlier this month, offers insight into the impact of minimum wage hikes in 21 states due to come into effect on or around Jan. 1, 2015. These are adjustments that Wal-Mart and other employers have to make each year, but growing attention to the issue has expanded the scope of the change. Thirteen U.S. states lifted the minimum wage in 2014, up from 10 in 2013 and 8 in 2012. Wal-Mart spokeswoman Brooke Buchanan said the company was making the changes to “ensure our stores in the 21 states comply with the law.”

For Wal-Mart, the biggest private employer in the United States with 1.3 million workers, minimum wage legislation is not a small thing. Its operating model is built on keeping costs under close control as it attracts consumers with low prices and operates on tight margins. In recent years, it has been struggling to grow sales after many lower-income Americans lost jobs or income in the financial crisis. The Wal-Mart memo shows that there will be changes to its pay structure, including a narrowing of the gap in the minimum premium paid to those in higher skilled positions, such as deli associates and department supervisors, over lower grade jobs. Wal-Mart will also combine its lowest three pay grades, which include cashiers, cart pushers and maintenance, into one base rate.

The changes appear in part to be an effort to offset the anticipated upswing in labor costs, according to a manager who was implementing the changes at his store. “Essentially that wage compression at the upper level of the hourly associate is going to help absorb that cost of the wage increase at the lower level,” said the manager, who spoke on condition of anonymity. Wal-Mart’s critics – including a group of its workers backed by labor unions – say the retailer pays its hourly workers too little, forcing some to seek government assistance that effectively provides the company with an indirect taxpayer subsidy. Labor groups have been calling for Wal-Mart, other retailers and fast-food chains to pay at least $15 an hour.

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Do read the entire piece, it has lots of goodies.

20 Stunning Facts About Energy Jobs In The US (Zero Hedge)

For all those who think the upcoming carnage to the shale industry will be “contained” we refer to the following research report from the Manhattan Institute for Policy Research:

  • The United States is now the world’s largest and fastest-growing producer of hydrocarbons. It has surpassed Saudi Arabia in combined oil and natural gas liquids output and has now surpassed Russia, formerly the top producer, in natural gas. [ZH: that’s about to change]
  • The increased production of domestic hydrocarbons not only employs people directly but also radically reduces the drag on growth and job formation associated with America’s trade deficit.
  • As the White House Council of Economic Advisors noted this past summer: “Every barrel of oil or cubic foot of gas that we produce at home instead of importing abroad means more jobs, faster growth, and a lower trade deficit.” [the focus now is not on the oil produced at home, which is set to plunge, but the consumer “tax cut” from plunging oil prices]
  • Since 2003, more than 400,000 jobs have been created in the direct production of oil & gas and some 2 million more in indirect employment in industries such as transportation, construction, and information services associated with finding, transporting, and storing fuels from the new shale bounty.
  • All told, about 10 million Americans are employed directly and indirectly in a broad range of businesses associated with hydrocarbons.
  • There are 16 states with more than 150,000 people employed in hydrocarbon-related activities. Even New York, which continues to ban the production of shale oil & gas, is seeing job benefits in a range of support and service industries associated with shale development in adjacent Pennsylvania.

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We all are, would be my guess.

Asian Currencies Set For A Wild Ride In 2015 (CNBC)

Asian currencies could be in for a wild ride in 2015, with central bank policy on track for further divergence as the Federal Reserve prepares to raise interest rates, analysts say. “The U.S. Federal Reserve will be hiking interest rates next year, while some Asian central banks will be acting in the opposite direction. Growth momentum is firmly in favor of the U.S., while structural and cyclical slowdowns in certain parts of Asia will see growth differentials narrow,” ANZ said in a note last week. The Federal Reserve is widely expected to hike interest rates in July after unwinding its quantitative easing program this year, according to CNBC’s latest Fed survey of economists, strategists and fund managers, released last week. By contrast, most of Asia’s central banks are easing.

The People’s Bank of China cut interest rates for the first time in two years in October, while the Bank of Korea cut rates to a record low that month. Meanwhile, the Bank of Japan remains committed to its massive stimulus effort, while calls for rate cuts in Thailand and Australia are growing. ANZ forecasts 3% depreciation in Asian currencies over 2015, “a similar decline to that seen in 2014,” noting that “risks are tilted towards a larger depreciation should tighter U.S. monetary policy lead to larger portfolio outflows from the region.” Saxo Capital Markets agrees. “The world’s major central banks and economies are entirely out of sync and the oil price collapse has added a dramatic new geopolitical and economic twist to global markets,” Saxo’s head of foreign-exchange strategy John Hardy said in a note last week.

He anticipates “U.S. dollar strength on U.S. outperformance” next year. There are four potential ‘what if’ catalysts for currency volatility next year, according to Hardy: U.S. junk bond outflows, the resignation of European Central Bank (ECB) president Mario Draghi, Chinese yuan devaluation and a substantial weakening in the Japanese yen. “There are already signs that the junk bond market in the U.S. is under severe strain here late in 2014. Liquidity is terrible in these bonds,” Hardy said. “Junk bonds related to the U.S. shale oil are the most clearly in the danger zone and investor flow out of bonds could see mayhem and see the Fed ceasing all thoughts of hiking rates,” which would see the dollar weaken sharply.

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“Evoking the fear of euro exit may not work this time with lawmakers and voters.”

Greeks Used to Years of Chaos Dismiss Samaras’s Warnings (Bloomberg)

As Prime Minister Antonis Samaras’s political maneuvers to avoid early elections edge toward a dead end, his warning of turmoil risks falling on deaf ears among Greeks numbed by years of upheaval. After losing a second vote in parliament yesterday on his candidate for a new president, Samaras needs to win over a dozen lawmakers before a final ballot on Dec. 29. Should he fail, the constitution dictates that elections must be called, with opposition party Syriza leading opinion polls. “We’ve already been living through chaos for years now,” said Kostas Grekas, a 23-year-old computer-technology student in Athens who graduates next year. “I’d prefer there to be elections now so that Syriza gets in, just to break up the old party system and to see something different.”

Greece marked 2014 by exiting a six-year recession that cost the country about a quarter of its economic output and tripled the unemployment rate. While Samaras’s pitch is that a change of government would endanger the incipient recovery, Syriza promises to abandon austerity measures tied to the country’s international bailout. Samaras, 63, garnered 168 votes out of 300 members of parliament to get approval for Stavros Dimas as the country’s largely ceremonial head of state. He needed 200 votes for victory and the threshold next week falls to 180 lawmakers. In the third vote, “each MP will come face to face with the anguish of the Greek people and the interests of the nation,” the prime minister said after the result.

The prospect of early parliamentary elections has roiled financial markets in Greece, evoking memories of the height of the financial crisis in 2012 when the country’s euro membership was in jeopardy and Samaras took power after two knife-edge ballots in the space of six weeks. Samaras says Syriza has revived the prospect of a euro exit, yet polls show the party would prevail in a vote. A survey by polling company Rass published on Dec. 21 showed Syriza ahead of Samaras’s New Democracy by 3.4 percentage points, albeit down from 5.3 points in November. “Samaras has cried wolf too many times,” said Dimitrios Triantaphyllou, assistant professor in the international relations department at Kadir Has University in Istanbul. “Evoking the fear of euro exit may not work this time with lawmakers and voters.”

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“Dangerous weather, terrorist attacks and economic collapses are all best dealt with by higher authorities, he said.”

US Families Prepare For ‘Modern Day Apocalypse’ (Sky News)

“We’re not talking about folks walking around wearing tin foil on their heads,” Jay tells Sky News. “We’re not talking about conspiracy theorists. “I’m talking about professionals: doctors and lawyers and law enforcement and military. Normal, everyday people. They can’t necessarily put their finger on it. But there’s something about the uncertainty of our times. They know something isn’t quite right.” Jay is a celebrity in the strange but increasingly mainstream world of preppers, writing prepper books and touring America, speaking at prepper expos where a bewildering range of survival supplies and techniques are on offer. Why is it happening? Partly, no doubt, because it allows Americans to indulge in some of their favourite pastimes: consuming, camping and buying lots and lots of guns.

And partly because fear sells, drives up numbers for cable news, and increases sales for everything from dried food to assault rifles. But it’s also arguably a sign of a country coping with economic decline. The end of the American Dream has left people more uncertain about their future, and their country’s. Katy Bryson is in Jay’s prepper network. Prepping, she says, puts Americans back in charge of their destiny. They’re not in control of whether they lose their job or not but they are in control of whether they are prepared. So I feel like that’s why the industry is just booming right now for preparedness,” Katy added. It is also a fundamentally American phenomenon. In a country built on the radical individualism of its founding fathers, people have an inbuilt mistrust in their government’s ability to protect them.

Sociologist Barry Glastner wrote The Culture of Fear. He told Sky News: “Americans are fairly unique as world citizens in that we tend to believe that we control our own destiny as individuals to a much greater extent than we really do.” Ironically, he points out preppers may actually be reacting to their fears in the least effective way. Dangerous weather, terrorist attacks and economic collapses are all best dealt with by higher authorities, he said. “Where there are real dangers, to take an individualistic approach is usually exactly the wrong thing to do. So the kinds of things that the preppers are preparing to protect themselves from are much better handled on a community-wide basis than they are in your own home.”

Read more …

It’s been predicted for a while now.

El Nino Seen Looming by Australia as Pacific Ocean Heats Up (Bloomberg)

El Nino-like weather may persist in coming months as the Pacific Ocean continues to warm and indicators approach thresholds for the event that brings drought to Asia and heavier-than-usual rains to South America. Sea-surface temperatures have exceeded the thresholds for a number of weeks and the Southern Oscillation Index has generally been negative for the past few months, Australia’s Bureau of Meteorology said today. While trade winds have been near-average along the equator, they have been weaker in the broader tropical belt, it said. A sustained weakening of trade winds is needed for the phenomenon to develop, the bureau says. El Ninos, caused by periodic warmings of the Pacific, can roil world agricultural markets as farmers contend with drought in Asia or too much rain in South America.

Palm oil, cocoa, coffee and sugar are among crops most at risk, Goldman Sachs says. Forecasters, including Australian scientists, raised the possibility of an El Nino earlier this year before tempering their outlook as conditions didn’t develop. “The tropical Pacific Ocean continues to border on El Nino thresholds, with rainfall patterns around the Pacific Ocean basin and at times further afield displaying El Nino-like patterns over recent months,” the bureau said. “If current conditions do persist, or strengthen into next year, 2014–2015 is likely to be considered a weak El Nino.” El Nino conditions appear to have formed and will probably continue, the Japan Meteorological Agency said on Dec. 10. The surface temperature of the Pacific was higher than normal in almost all areas in November, it said.

Read more …

Dec 132014
 
 December 13, 2014  Posted by at 11:42 am Finance Tagged with: , , , , , , ,  


Marjory Collins “Italian girls watching US Army parade on Mott Street, New York” Aug 1942

The Federal Reserve’s Language Lessons (Reuters)
After Years Of Doubts, Americans Turn More Bullish On Economy (Reuters)
Oil Seen Dropping to $55 ($45?) Next Week as Price Rout Deepens (Bloomberg)
US Stocks Tumble to Cap Dow’s Worst Week Since 2011 (Bloomberg)
Oil Rot Spreading in Credit (Bloomberg)
We Have Just Escaped The Earth’s Gravity And Are Now In Space Orbit (Zero Hedge)
U.S. Oil Rigs Drop Most in Two Years, Baker Hughes Says (Bloomberg)
Don’t Vote ‘Wrong’ Way, EU’s Juncker Urges Greeks (Reuters)
Albert Edwards: China Deflation Risks Sparking A Eurozone Break-Up (CNBC)
Would Global Deflation Really Be That Bad? (CNBC)
Falling Oil Threatens Canada’s Bulletproof Banking System (MarketWatch)
How Elizabeth Warren Led The Great Swaps Rebellion of 2014 (Bloomberg)
$303 Trillion In Derivatives US Taxpayers Are Now On The Hook For (Zero Hedge)
Venezuela’s Got $21 Billion. And Owes $21 Billion (Bloomberg)
Japan’s Lemmings March Toward The Cliff Chanting “Abenomics” (David Stockman)
Putin 2000 – 2014, Midterm Interim Economic Results (Awara)
Only ‘Minimal’ Risk Of Default: Ukrainian Official (CNBC)
Ukraine’s Chocolate King President Not Sweet On Keeping Promise (Reuters)
Australia’s Once-Vibrant Auto Industry Crashes in Slow Motion (NY Times)
Did A European Spacecraft Detect Dark Matter? (Christian Science Monitor)
The Chinese Mystery Of Vanishing Foreign Brides (FT)

The financial world caught behind the oil curve: they listen only to Yellen.

The Federal Reserve’s Language Lessons (Reuters)

“Will they or won’t they?” is the question on investors’ minds as the Federal Reserve policy-setting committee meets next week for the last time this year. Markets have followed Fed speakers closely in recent weeks for clues on whether the U.S. central bank will change key language in its post-meeting statement regarding how long it will keep benchmark interest rates near zero. Some expect the Fed to remove the reference to “considerable time” when setting a time frame for near-zero rates and maybe replace it, as it did ahead of the 2004-2005 monetary policy tightening cycle, with a nod to being “patient”. But that belief has been complicated somewhat by the slump in oil prices that has pulled inflation expectations lower and caused the S&P stock index to post its first negative week in eight on Friday.

The expectation of lower inflation could prevent the Fed from changing its current stance. Client notes from Goldman Sachs, Citi and Bank of America/Merrill Lynch this week deal with expectations for the removal of the wording, roughly agreeing that however close the call is, it is more likely than not that the phrase will go away. “They are going to remove it; I don’t think (Fed Chair Janet Yellen) is going to keep it in there just because of what we are seeing with the energy sector,” said Sean McCarthy, regional chief investment officer for Wells Fargo Private Bank in Scottsdale, Arizona. “All the other data has been strong, whether you are looking at construction, at the ISM numbers, and especially the jobs data that she cares about most.”

Indeed, recent statements from Fed officials suggest the language could be changed. Goldman Sachs, in a note, pointed to “widespread use of the word ‘patient'” as a signal that “some participants would prefer to revise the current language.” The lack of consensus on the Fed’s move all but guarantees that whatever the Federal Open Market Committee’s statement says on Wednesday the stock market will be volatile, as it usually is on Fed decision days. “The goal,” said the BofA/Merrill note, “will be to smooth the market’s reaction. The Fed does not intend to signal a fundamental shift in policy, and we expect chair Yellen’s press conference remarks to reinforce this point.”

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While Americans are not just behind the curve, they positively confirm a top has been reached. If ever you needed a sign, this is it: “Their expectations run quite counter to recent price data.”

After Years Of Doubts, Americans Turn More Bullish On Economy (Reuters)

Pessimism and doubt have dominated how Americans see the economy for many years. Now, in a hopeful sign for the economic outlook, confidence is suddenly perking up. Expectations for a better job market helped power the Thomson Reuters/University of Michigan index of consumer sentiment to a near eight-year high in December, according to data released on Friday. U.S. consumers also saw sharp drops in gasoline prices as a shot in the arm, and the survey added heft to strong November retail sales data that has showed Americans getting into the holiday shopping season with gusto. “Surging expectations signal very strong consumption over the next few months,” said Ian Shepherdson, an economist at Pantheon Macroeconomics.

While improvements in sentiment haven’t always translated into similar spending growth, consumers at the very least are feeling the warmth of several months of robust hiring, including 321,000 new jobs created in November. When asked in the survey about recent economic developments, more consumers volunteered good news than bad news than in any month since 1984, said the poll’s director, Richard Curtin. Moreover, half of all consumers expected the economy to avoid a recession over the next five years, the most favorable reading in a decade, Curtin said. The data bolsters the view that the U.S. economy is turning a corner and that worker wages could begin to rise more quickly, laying the groundwork for the Federal Reserve to begin hiking its benchmark interest rate to keep inflation from eventually rising above the Fed’s 2% target.

Overall, the sentiment index rose to a higher-than-expected 93.8, mirroring levels seen in boom years like 1996 and 2004. Many investors see the Fed raising rates in mid-2015, and policymakers will likely debate at a meeting next week whether to keep a pledge that borrowing costs will stay at rock bottom for a “considerable time.” Consumers see faster inflation ahead. Over the next year, they expect a 2.9% increase in prices, up from 2.8% in November, according to the sentiment survey. Their expectations run quite counter to recent price data. The Labor Department said separately its producer price index dropped 0.2% last month, brought lower by falling gasoline prices. Prices were soft even excluding the drag from gasoline.

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“The market hasn’t seen the response they’re looking for on the supply side yet ..”

Oil Seen Dropping to $55 ($45?) Next Week as Price Rout Deepens (Bloomberg)

Benchmark U.S. oil prices are poised to test $55 a barrel after a six-month rout pushed crude to the lowest in five years. West Texas Intermediate crude ended below $58 today for the first time since May 2009 after the International Energy Agency cut its global demand forecast for the fourth time in five months. Prices are down 46% from this year’s highest close of $107.26 on June 20. “By taking out $58, oil is moving towards the next target $55,” said Phil Flynn, senior market analyst at Price Futures. “It’s such an emotional selloff, and the even numbers are going to be the magic numbers.” WTI for January delivery dropped $2.14, or 3.6%, to $57.81 a barrel today on the New York Mercantile Exchange. Brent slid $1.83 to $61.85 on the London-based ICE Futures Europe exchange, the lowest since July 2009.

Both benchmarks have collapsed about 20% since Nov. 26, the day before OPEC agreed to leave its production limit unchanged at 30 million barrels a day. U.S. output, already at a three-decade high, will continue to rise in 2015, according to the IEA, which reduced its estimate for oil demand growth in 2015 by 230,000 barrels a day. “We could definitely see $55 next week,” said Tariq Zahir, commodity fund manager at Tyche Capital. “We are probably going to see some violent trading.” Skip York, vice president of energy research at Wood Mackenzie, said the next price target is $45. “The market hasn’t seen the response they’re looking for on the supply side yet,” York said. “We’re now in this environment where I think prices are going to keep drifting down until the market is convinced, until the signal that production growth needs to slow has been received and acted on by operators.”

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“At first it was just oversupply of oil. But now it’s that, plus fear of a world economy that’s growing too slow.”

US Stocks Tumble to Cap Dow’s Worst Week Since 2011 (Bloomberg)

U.S. stocks sank, with the Dow Jones Industrial Average capping its biggest weekly drop in three years, as oil continued to slide and Chinese industrial data raised concern over a global economic slowdown. Materials stocks declined the most in the Standard & Poor’s 500 Index, losing 2.9% as a group, while energy shares dropped 2.2%. IBM, DuPont and Exxon Mobil sank at least 2.9% to lead declines in all 30 Dow stocks. The S&P 500 lost 1.6% to 2,002.33 at 4 p.m. in New York, extending losses in the final hour to cap a weekly drop of 3.5%. The Dow sank 315.51 points, or 1.8%, to 17,280.83. The Dow slid 3.8% for the week, its biggest decline since November 2011. “Clearly the oil situation is driving things,” Randy Warren at Warren Financial said. “At first it was just oversupply of oil. But now it’s that, plus fear of a world economy that’s growing too slow. Those fears are definitely outweighing the positive signs we’re seeing domestically.”

The selloff picked up speed in the final hour as the Dow average plunged more than 100 points and the S&P 500 ended about 2 points above its average price for the last 50 days, a level monitored by technical analysts. At about 2:50 p.m., March futures on the benchmark gauge for U.S. equities slipped below 2,000 for the first time since Nov. 4. More than $1 trillion was erased from the value of global equities this week as oil prices tumbled, raising concern over the strength of the global economy. Oil extended losses today amid speculation that OPEC’s biggest members will defend market share against U.S. shale producers. The IEA cut its forecast for global oil demand for the fourth time in five months.

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“Everyone is trying to squeeze through a very small door.”

Oil Rot Spreading in Credit (Bloomberg)

Credit investors are preparing for the worst. They’re cleaning up their portfolios, selling riskier debt that’s harder to trade in bad times and hoarding longer-term government bonds that do best in souring markets. While investors have pruned energy-related holdings in particular as oil prices plunge, they’re also getting rid of other types of corporate bonds, causing yields to surge to the highest in more than a year. “We believe the pervasive nature of the sell-off is more reflective of overall liquidity concerns in the cash market than of fundamental deterioration,” Barclays analysts Jeffrey Meli and Bradley Rogoff wrote in a report today. “The weakness, while certainly most pronounced in the energy sector, has been broad based.”

Rather than waiting around for a trigger to escalate this month’s selloff, investors are pulling out of dollar-denominated corporate debt now, causing a 0.8% decline in the notes this month, according to a Bank of America Merrill Lynch index that includes investment-grade and junk-rated securities. This would be the first month of losses since September. Yields on the debt have surged to 2.21 percentage points more than benchmark rates, the highest premium in 14 months. While the biggest driver of the selling is plummeting oil prices, the selling extends beyond just energy. Bonds of wireless provider Verizon have fallen 1% this month and debt of HCA, a hospital operator, has dropped 1.2%, Bank of America Merrill Lynch index data show.

Even though the global speculative-grade default rate is less than half its historical average at 2.2%, investors are getting ready for sentiment to turn. When that happens, it may be all the more difficult to get out as hoards of other investors try to sell in a market where trading hasn’t kept pace with the growth of outstanding debt. There’s “very little liquidity” in corporate bonds, especially in lower-rated debt, Bill Gross, who joined Janus Capital in September, said today in a Bloomberg Surveillance interview with Tom Keene. “Everyone is trying to squeeze through a very small door.”

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Just take one look at that energy junk bond chart.

We Have Just Escaped The Earth’s Gravity And Are Now In Space Orbit (Zero Hedge)

Houston, we have a serious problem… With only 20% of US Shale regions remaining economic at these oil price levels, it should not be surprising that the credit risk of the US Energy sector is exploding to near 1000bps… and contagiously infecting the broad HY market… Credit risk in the energy sector is starting to infect the broad HY market – HYG at 2-year yield highs and HYCDX near 15-month wides…

Which signals considerable pain to come for US Energy stocks..

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“It’s starting ..”

U.S. Oil Rigs Drop Most in Two Years, Baker Hughes Says (Bloomberg)

U.S. oil drillers idled the most rigs in almost two years as they face oil trading below $60 a barrel and escalating competition from suppliers abroad. Rigs targeting oil dropped by 29 this week to 1,546, the lowest level since June and the biggest decline since December 2012, services company Baker Hughes said on its website yesterday. As OPEC resists calls to cut output, U.S. producers including ConocoPhillips and Oasis Petroleum have curbed spending. Chevron put its annual capital spending plan on hold until next year. Rigs targeting U.S. oil are sliding from a record 1,609 after a $50-a-barrel drop in global prices, threatening to slow the shale-drilling boom that has propelled domestic production to the highest level in three decades.

“It’s starting,” Robert Mackenzie, oilfield services analyst at Iberia Capital, said. “We knew this day was going to come. It was only a matter of time before the rig count was going to respond. The holiday is upon us and oil prices are falling through the floor.” ConocoPhillips said Dec. 8 that would cut spending next year by about 20%. The Houston-based company is deferring investment in North American plays including the Permian Basin of Texas and New Mexico and the Niobrara formation in Colorado. Oasis, an exploration and production company based in Houston, said Dec. 10 that it’s cutting 2015 spending 44%.

“Our capex will be lower,” Roger Jenkins, chief executive officer of Murphy Oil, an Arkansas-based exploration company, said during a presentation Dec. 10. “I think this idea of lowering capex around 20% is going to be pretty common in the industry.” Even as producers cut budgets and lay down rigs, domestic production is surging, with the yield from new wells in shale formations including North Dakota’s Bakken and Texas’s Eagle Ford projected to reach records next month, Energy Information Administration data show. Oil output climbed to 9.12 million barrels a day in the week ended Dec. 5, the highest in EIA data going back to 1983, and is projected to increase to 9.3 million barrels a day next year.

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“I won’t express my own opinion…”

Don’t Vote ‘Wrong’ Way, EU’s Juncker Urges Greeks (Reuters)

The European Union’s chief executive has given Greeks a stark and unusual warning of major problems if they vote the “wrong” way and radicals win an early parliamentary election. Jean-Claude Juncker, the president of the European Commission, stressed in remarks carried late on Thursday by Austrian broadcaster ORF that he was not trying to insert himself into the Greek political process. In general, EU officials take pains to avoid accusations of interference and Juncker’s remarks went beyond the normal reticence. As the government in Athens faces a possible election and defeat by an untried left-wing party that opposes the terms the EU has set on Greece’s financial bailout, Juncker said he was not averse to seeing “familiar faces” remaining in charge. Prime Minister Antonis Samaras said on Thursday that Greece risked a “catastrophic” return to financial crisis if his government fell as a result of a parliamentary vote he has called for this month to elect a head of state.

Juncker, who was closely involved in managing the euro zone debt crisis when he was prime minister of Luxembourg, said he was sure Greek voters understood the risks of an election that polls show could bring to power the left-wing Syriza party. “I assume that the Greeks – who don’t have an easy life, above all the many poor people – know very well what a wrong election result would mean for Greece and the euro zone,” he said. “I won’t express my own opinion. I just wouldn’t like extremist forces to take the wheel. “I would like Greece to be governed by people with an eye on and a heart for the many little people in Greece – and there are many – and also understand the necessity of European processes.” He said he did not view market ructions in Greece of late as a sign that a new Greek crisis was breaking out.

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“.. the euro zone cannot withstand another full scale recession and will ultimately fracture despite the best efforts of the ECB.”

Albert Edwards: China Deflation Risks Sparking A Eurozone Break-Up (CNBC)

Societe Generale’s uber-bearish strategist Albert Edwards believes that investors are slowly waking up to the idea that the Chinese have a “major deflation problem” and its transition into a more consumer-led economy won’t be a smooth one. Traditionally the country is known for its cheap exports that compete strongly with domestically produced goods around the world. That model is unlikely to change soon, according to Edwards. “The realization that China will be exporting more deflation helps to explain why U.S. inflation expectations continue to plunge despite recent stronger than expected real economy data,” he said in a note on Thursday.

He continues to warn that weakness in emerging markets could seriously impact Germany, the traditional powerhouse for the euro bloc. Germany sees China as one of the biggest buyers of its goods. Edwards said that Germany will eventually have to “walk the walk” and aggressively cut spending as it falls into recession next year. “My own view is that the euro zone cannot withstand another full scale recession and will ultimately fracture despite the best efforts of the ECB,” he said.

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“I am just not perceiving the global economy on the verge of a boom…the risks look to the downside – especially as the effects of lower oil are factored in.”

Would Global Deflation Really Be That Bad? (CNBC)

The collapse in oil process may only be a few months old, but economists are already debating its long-term effects: will the world be gripped in growth-sapping Japanese-style deflation or will the world economy benefit from a period of lower prices? Deflation is classed as when consumer prices turn negative with the theory being that buyers would hold off from making purchases in the hope of further falls. This raises the fear of a prolonged deflationary spiral with the slump becoming so entrenched that it impacts growth and does little for the potential of wage increases. The price of oil has seen a dramatic 40% fall since June and has weighed on headline inflation figures and is likely to continue to do so next year. Consultancy Capital Economics estimate that the energy component of inflation in advanced economies will fall temporarily to around minus 10% next year. Some consumers see little price reductions at the pump as their governments subsidize the commodity, but in the U.S. many have been cheering the drop in oil which has put more money in their pocket.

Bill Blain, a fixed income strategist at Mint Partners argues that lower oil prices does not necessarily translate into growth, however. “Oil price declines are initially hailed as positive growth drivers – but in an already recessionary environment, perhaps they have become a soporific too far?,” he said in a morning note on Friday. “I am just not perceiving the global economy on the verge of a boom…the risks look to the downside – especially as the effects of lower oil are factored in.” Consumer prices in November rose 0.3% for the euro zone, compared to the year before, and the European Central Bank has regularly downgraded its prospects for the next year as 2015 approaches. In the U.S., annual inflation still remains below the 2% goal given by the Federal Reserve. The Bank of England is expecting the U.K.’s inflation rate to fall below 1% next year and China’s number currently sits at a five-year low.

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“In this context, the risk to Canadian banks doesn’t stem necessarily from a narrow view of loans to oil companies, but more from a broad macro risk perspective.”

Falling Oil Threatens Canada’s Bulletproof Banking System (MarketWatch)

While the U.S. financial system – as well as many international banks – has gotten hopped up on a wide assortment of financial opiates and stumbled through more than a dozen bank-fueled crises through the decades, Canada boasts a stellar track record of banking sobriety. However, a spectacular death spiral in crude-oil futures – West Texas Intermediate settled Thursday at $59.95, a more than five-year low – threatens to deliver a serious shock to the banking system of the U.S.’s northern neighbor, according a research note published Thursday by Pavilion Global Markets. Canada ranks as one the world’s five largest energy producers and a net exporter of oil, according to the U.S. Energy Information Administration. So, a big drop in oil would pose several risks to Canada’s oil-dependent economy.

“The drop in oil prices, as mentioned above, will have wide-ranging implications on the Canadian economy,” Pavilion strategists Pierre Lapointe and Alex Bellefleur said in the note. It’s not just that Canada’s banks will find themselves saddled with souring loans from underwater energy producers. The problem, Pavilion argues, is that Canada’s employment rate could suffer as oil-related businesses are forced to close. Here’s how they put it: “In this context, the risk to Canadian banks doesn’t stem necessarily from a narrow view of loans to oil companies, but more from a broad macro risk perspective. As employment in the oil industry declines, a negative income and wealth shock to many households will take place, impacting a variety of loans (credit card, mortgage) on Canadian bank balance sheets.”

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It’s insane what goes on here. Banks get to write laws, and now out in the open.

How Elizabeth Warren Led The Great Swaps Rebellion of 2014 (Bloomberg)

John Carney couldn’t understand why the vote was so close. The Delaware congressman, a Democratic member of the House Financial Services Committee, had been there when a reform to the Dodd-Frank “swaps push-out” passed—in a 55-6 landslide. He’d joined a veto-proof majority, 292-122, to back the reform in a House bill that was throttled by the Democratic Senate. The bank-friendly Democrat had not expected the reform’s quiet return, as a rider in the must-pass “Cromnibus” spending package, to kick off a revolt. “This passed with nearly 300 votes,” said Carney on Thursday night, after the House had voted on the Cromnibus, and as legislators of both parties congratulated him or wished him Merry Christmas. “It would have been more than 300, like some of the other bills we’ve done, if there wasn’t this toxic description of what it might do. Unfortunately, the world we live in, the political world, is one of perception. I try to deal with the facts.”

“Sometimes that’s at odds with the way we do work here, where you get these political narratives that take on a larger than life part of the discussion.” Put it this way: Carney was not Ready for Warren. For the better part of two days, most of his fellow Democrats approached the Cromnibus—which did not de-fund the president’s immigration order, or the bulk of the Affordable Care Act—as a sell-out of cosmic proportion. This started when Massachusetts Senator Elizabeth Warren gave a Wednesday floor speech challenging her colleagues to restore swaps push-out, which prohibited banks from booking derivatives in their own subsidiaries. “The financial industry spent more than $1 million a day lobbying Congress on financial reform, and a lot of that money went to former elected officials and government employees,” said Warren. “And now we see the fruits of those investments. This provision is all about goosing the profits of the big banks.”

The backlash should have been predictable. As Carney recalled, the original bill to change the swaps rule lost some votes after critical media coverage. More specifically, the New York Times reporters Eric Lipton and Ben Protess noticed that Citigroup had practically written the swaps language; its “recommendations were reflected in more than 70 lines of the House committee’s 85-line bill.” Yet it didn’t become “toxic” until the fight over the “Cromnibus.” Warren made the swaps language infamous. In the House, she found an impromptu whip team led by Illinois Representative Jan Schakowsky and the party’s ranking member on the Financial Services Committee, California Representative Maxine Waters. She found an ally in the Minority Leader, California Representative Nancy Pelosi, who took the floor on Thursday to warn that the swaps rule was exactly the sort of time-bomb that could create another financial crisis in the pattern of 2008.

This rattled the Democrats’ appropriators, some of whom were heading for the exits. Virginia Representative Jim Moran spent a good part of Thursday telling reporters that Warren was “running for president” and drowning Democrats in her ambition. “She obviously has a lot of influence,” said Moran after the votes. “The media listens to everything she says.”

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Here’s what Warren doesn’t like.

$303 Trillion In Derivatives US Taxpayers Are Now On The Hook For (Zero Hedge)

Courtesy of the Cronybus(sic) last minute passage, government was provided a quid-pro-quo $1.1 trillion spending allowance with Wall Street’s blessing in exchange for assuring banks that taxpayers would be on the hook for yet another bailout, as a result of the swaps push-out provision, after incorporating explicit Citigroup language that allows financial institutions to trade certain financial derivatives from subsidiaries that are insured by the Federal Deposit Insurance Corp, explicitly putting taxpayers on the hook for losses caused by these contracts. Recall:

Five years after the Wall Street coup of 2008, it appears the U.S. House of Representatives is as bought and paid for as ever. We heard about the Citigroup crafted legislation currently being pushed through Congress back in May when Mother Jones reported on it. Fortunately, they included the following image in their article:

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And the CIA once again thinks it’s in control of toppling a government.

Venezuela’s Got $21 Billion. And Owes $21 Billion (Bloomberg)

Of all the financial barometers highlighting the crisis in Venezuela, this may be the one that unnerves investors the most as oil sinks: The country’s foreign reserves only cover two years of bond payments. The government and state-run oil company owe $21 billion on overseas bonds by the end of 2016, an amount equal to about 100% of reserves. Those figures explain why derivatives traders aren’t only betting that a default is almost certain but that it will most likely happen within a year. The 48% collapse in crude in the past six months stripped President Nicolas Maduro of the one thing – windfall profits for the country’s No. 1 export – that was preventing a full-blown crisis.

Even before oil started sinking, the OPEC member had depleted 30% of its international reserves in the past six years, the result of billions of dollars of capital flight triggered by the socialist push implemented by Maduro’s mentor and predecessor, the late Hugo Chavez. “These are panic capitulation levels,” Kathryn Rooney Vera, an economist at Bulltick Capital Markets, said in an e-mailed response to questions. “Oil’s continued price decline is ratcheting up risk aversion to exporters, and even more so for an economy already as distorted as that of Venezuela.” The cost to insure Venezuelan debt against non-payment over the next 12 months surged to about 6,928 basis points yesterday in New York, according to CMA data, widening the price gap over five-year protection to a record.

The upfront cost of one-year contracts implies a 65% probability of default by December 2015. Swaps prices show a 94% chance of non-payment by 2019. Venezuela’s benchmark bonds due 2027 have fallen for seven straight days, reaching 41.22 cents on the dollar as of 12:02 p.m. in New York today, the lowest in 16 years. Maduro said Dec. 10 that the government is doing everything it can to boost the price of oil, which he says should be about $100 a barrel. The country advocated unsuccessfully for production cuts at November’s meeting of members OPEC. Yesterday, Maduro said the country could export cement to bring more dollars into the country.

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” .. there is no evidence or honest economic logic to support the proposition that – over any reasonable period of time – a nation can become richer by making its people poorer ..”

Japan’s Lemmings March Toward The Cliff Chanting “Abenomics” (David Stockman)

According to Takahiro Mitani, trashing your currency, destroying your bond market and gutting the real wages of domestic citizens is a sure fire ticket to economic success. Yes, that’s what the man says, “I have no doubt that the economy is in a recovery trend if you look at the long run….” After two years of hoopla and running the BOJ’s printing presses red hot, however, there is not a shred of evidence that Abenomics will lead to any such thing. In fact, after the recent markdown of Q3 GDP even deeper into negative territory, Japan’s real GDP is no higher now than it was the day Abenomics was launched in early 2013; and, in fact, is no higher than it was on the eve of the global financial crisis way back in 2007.

In the meanwhile, the Yen has lost 40% of its value and teeters on the brink of an uncontrolled free fall. Currency depreciation, of course, is supposedly the heart of the primitive Keynesian cure on which Abenomics is predicated, but there is no evidence or honest economic logic to support the proposition that – over any reasonable period of time – a nation can become richer by making its people poorer. That’s especially true in the case at hand, which is to say, a Pacific archipelago of barren rocks. Japan imports virtually 100% of every BTU and every ton of metals and other raw materials consumed by its advanced $5 trillion industrial economy.

Yet thanks to the mad money printer who Prime Minister Abe seconded to the BOJ, Hiroki Kuroda, import prices are up by a staggering 30% since 2012. Even with oil prices now collapsing, the yen price of crude oil imports is still higher than it was two years back. Not surprisingly, input costs for Japan’s legions of small businesses have soared, and the cost of living faced by its legendary salary men has risen far faster than wages. Accordingly, domestic businesses that supply the home market—and that is the overwhelming share of Japan’s output—are being driven to the wall, bankruptcies are at record highs and the real incomes of Japan’s households have now shrunk for 16 consecutive months and are down by 6% compared to 2 years ago.

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A view of Russia we don’t often see here in the west.

Putin 2000 – 2014, Midterm Interim Economic Results (Awara)

A study released today by Awara Group, a Russia-based consulting firm, shows that Russia’s economy is not as dependent on oil and gas as is commonly claimed. Having researched the development of key indicators of the economy from 2000 to 2013, the authors of the study want to debunk the media story that Russia’s governments under Putin have been supposedly exclusively relying on an economic model based on oil and gas rents while neglecting the need to modernize and diversify the economy. It turns out that quite the opposite is true.

The crisis-torn economy battered by years of robber capitalism and anarchy of the 1990’s, which Putin inherited in 2000, has now reached sufficient maturity to justify a belief that Russia can make the industrial breakthrough that the President has announced. “The Russian economy is much more diversified and modernized than critics claim. The contention that it is only about oil and gas is total nonsense”, says Jon Hellevig, chief researcher for the study. “This is why Russia will not only stay afloat under the conditions of sanctions, but actually will make the industrial breakthrough that President Putin has announced”, Hellevig continues. The study reveals a range of impressive indicators on the development of the economy between 2000 and 2013 and the health of the Russian economy:

  1. The share of natural resources rents in GDP (oil, gas, coal, mineral, and forest rents) more than halved between 2000 to 2012 from 44.5% to 18.7%. The actual share of oil and gas was 16%.
  2. Russian industrial production has grown more than 50% while having undergone a total modernization at the same time.
  3. Production of food has grown by 100% in 2000 – 2013.
  4. Production of cars has more than doubled at the same time that all the production has been totally remodeled.
  5. Russian exports have grown by almost 400%, outdoing all major Western countries.
  6. Growth of exports of non-oil & gas goods has been 250%.
  7. Russia’s export growth has more than doubled compared with the competing Western powers.
  8. Oil & gas does not count for over 50% of state revenues as has been claimed, but only 27.4%. Top revenue source is instead payroll taxes.
  9. Russia’s total tax rate at 29.5% is among lowest of developed countries, non-oil & gas total tax rate is half that of the Western countries.
  10. Russia’s GDP has grown more than tenfold from 1999 to 2012.
  11. Public sector share of employment in Russia is not high in comparison with developed economies. State officials make up 17.7% of Russia’s total work force, which situates it in the middle of the pack with global economies.
  12. Russia’s labor productivity is not 40% of the Western standards as is frequently claimed, but rather about 80%.

Far from “relying” on oil & gas, the Russian government is engaged in massive investments in all sectors of the economy, biggest investments going to aviation, shipbuilding, and manufacturing of high-value machinery and technological equipment. Totally contrary to these facts, the Western media, financial analysts, and even leaders such as U.S. President Obama keep parroting the refrain that “Russia only relies on oil and gas” and “Russia does not produce anything”. Clearly, Barack Obama has not been analyzing the Russian economy, so this must mean that those whose job it is to do so are misleading the President.

We strongly believe that everyone benefits from knowing the true state of Russia’s economy, its real track record over the past decade, and its true potential. Having knowledge of the actual state of affairs is equally useful for the friends and foes of Russia, for investors, for the Russian population – and indeed for its government, which has not been very vocal in telling about the real progress. I think there is a great need for accurate data on Russia, especially among the leaders of its geopolitical foes. Correct data will help investors to make a profit. And correct data will help political leaders to maintain peace. Knowing that Russia is not the economic basket case that it is portrayed to be would help to steer the foes from the collision course with Russia they have embarked on.

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Translation: we’re about to go broke.

Only ‘Minimal’ Risk Of Default: Ukrainian Official (CNBC)

Ukraine is at “minimal” risk of defaulting on its debt repayments, according to an official in the country’s recently-appointed government, despite a currency in freefall and an apparent $15-billion black hole in its bailout from the IMF. “We do have economic difficulties, but that is something that is going into the debate with the IMF,” Dmytro Shymkiv, deputy head of presidential administration, told CNBC. “The risk of default is minimal,” he added, arguing that 95% of the country was not suffering as a result of the military conflict in the east of Ukraine. A further $15 billion may be needed to bailout the struggling country, on top of the $17-billion loan package the IMF worked out for the troubled country, and Prime Minister Arseny Yatseniuk appealed for Western help to stop a default on Thursday.

Ukraine’s currency, the hryvnia, has lost over 90% of its value against the U.S. dollar to date this year, as conflict raged on its borders. Inflation is spiralling, and the country is facing a future without cheap gas supplies from neighbor Russia, after their fallout over the deposition of former Ukrainian President Viktor Yanukovych and subsequent emergence of a more pro-European government in Ukraine. The economies of Donetsk and Luhansk, the areas where fighting between the Ukrainian army and pro-Russian separatists is worst, have ground to a halt – but these account for close-to a fifth of the country’s economy, according to Yatseniuk.

There is some hope that negotiations to resolve the conflict may re-open soon, with President Petro Poroshenko saying Friday morning that the country had experienced its first 24 hours of proper ceasefire in seven months. Shymkiv, the former head of Microsoft Ukraine who is now tasked with implementing much-needed administrative, social and economic reforms in the country, said: “We’re trying to bring our knowledge and experience to the development of the country. That’s the only way we can bring it out of the mis-development of the economy.” Asked about potential conflict between Yatseniuk and Poroshenko, he said: “There aren’t conflicts between President and Prime Minister. We have no time to have disputes.”

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He didn’t say he was willing to take any losses …

Ukraine’s Chocolate King President Not Sweet On Keeping Promise (Reuters)

The Chocolate King is finding it difficult to relinquish his throne. Petro Poroshenko, one of Ukraine’s richest men and owner of a sweets empire, made an unusual promise last spring while campaigning to be president – if elected, he would sell most of his business assets. “As president of Ukraine, I only want to concern myself with the good of the country and that is what I will do,” he told an interviewer. Poroshenko won the election, but he hasn’t succeeded yet at keeping his campaign promise. With his country at war with Russian-backed separatists in the east, the economy faltering and its currency weakening, Ukraine’s 49-year-old president hasn’t sold any of his assets, including his most valuable one: a majority stake in Roshen Confectionery Corp, Ukraine’s biggest sweets maker. His promise appears to be a victim of the very problems that face him as president.

Executives at the two financial firms that Poroshenko has hired to help sell his assets caution that deals, particularly in former Soviet republics and eastern Europe, can often take a year or more. But they also concede that their client’s timing is terrible. “It’s clearly not a good time to sell,” said Giovanni Salvetti, managing director of Rothschild CIS, which is trying to sell Roshen. “I hope the situation will improve in the first or second quarter” of 2015. Makar Paseniuk, a managing director at ICU in Kiev, which acts as Poroshenko’s financial adviser, said there is an agreement to sell one of his other assets. He declined to identify it but said the deal has not closed and it’s not clear when or if it will. Besides Roshen, Poroshenko’s portfolio includes numerous other assets, including real estate and investments in a bank, an insurance company and a shipyard in Crimea. He also owns a Ukrainian television station that he has said he will keep.

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Nice little history lesson. Must read, certainly if you don’t know what a ute is.

Australia’s Once-Vibrant Auto Industry Crashes in Slow Motion (NY Times)

There has been a car industry in Australia for about as long as there have been cars. But within two or three years, the last of the continent’s auto plants will go dark. At the turn of the 20th century, while visionaries in the United States and Europe labored on horseless carriages, Australians were also creating them. In 1896 in Melbourne, Herbert Thomson built a steam car for sale using Dunlop pneumatic tires made in Australia. In 1901, Harley Tarrant began selling cars made mostly from Australian parts. Over the next century, American automakers including General Motors, Ford and Chrysler came to dominate the market, turning out cars from factories set up in nearly every Australian state. Toyota, Nissan and Mitsubishi later joined them.

But the end is nigh. Auto plants have been closing, one by one, over five decades. The three remaining carmakers here — Toyota, Ford and the Holden subsidiary of G.M. — are shutting their manufacturing operations over the next few years. Government policy has played a large role in the contraction; the Australian market has gone from one of the world’s most protected to possibly the least-protected among auto-manufacturing nations. The Australian car industry had always benefited from barriers to imported vehicles. Those who bought early Thomson steam cars and gasoline-powered Tarrants were industrialists, wealthy ranchers, bankers and politicians who saw merit in protecting the home industry.

So early adopters in the 1900s who wanted foreign-made cars, and there were plenty of them, could only import the chassis complete with engine, transmission, axles and wheels — and the hood and the grille. The rest of the car had to be manufactured, mostly by hand, by body builders who generally evolved from outfits that had made coaches and buggies for the horse trade. Holden started in the leatherwork and saddlery business in 1856, but by the early 20th century was making motorcycle sidecars and car bodies for chassis from G.M. In 1931, G.M. bought Holden Motor Builders and plans were laid for a distinctly Australian car, which finally arrived after World War II, in 1948.

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If confirmed, this is the biggest discovery in eons.

Did A European Spacecraft Detect Dark Matter? (Christian Science Monitor)

Astronomers may finally have detected a signal of dark matter, the mysterious and elusive stuff thought to make up most of the material universe. While poring over data collected by the European Space Agency’s XMM-Newton spacecraft, a team of researchers spotted an odd spike in X-ray emissions coming from two different celestial objects – the Andromeda galaxy and the Perseus galaxy cluster. The signal corresponds to no known particle or atom and thus may have been produced by dark matter, researchers said. “The signal’s distribution within the galaxy corresponds exactly to what we were expecting with dark matter – that is, concentrated and intense in the center of objects and weaker and diffuse on the edges,” study co-author Oleg Ruchayskiy, of the École Polytechnique Fédérale de Lausanne (EPFL) in Switzerland, said in a statement.

“With the goal of verifying our findings, we then looked at data from our own galaxy, the Milky Way, and made the same observations,” added lead author Alexey Boyarsky, of EPFL and Leiden University in the Netherlands. Dark matter is so named because it neither absorbs nor emits light and therefore cannot be directly observed. But astronomers know dark matter exists because it interacts gravitationally with the “normal” matter we can see and touch. And there is apparently a lot of dark matter out there: Observations of star motion and galaxy dynamics suggest that about 80% of all matter in the universe is “dark,” exerting a gravitational force but not interacting with light.

Researchers have proposed a number of different exotic particles as the constituents of dark matter, including weakly interacting massive particles (WIMPs), axions and sterile neutrinos, hypothetical cousins of “ordinary” neutrinos (confirmed particles that resemble electrons but lack an electrical charge). The decay of sterile neutrinos is thought to produce X-rays, so the research team suspects these may be the dark matter particles responsible for the mysterious signal coming from Andromeda and the Perseus cluster. If the results — which will be published next week in the journal Physical Review Letters — hold up, they could usher in a new era in astronomy, study team members said. “Confirmation of this discovery may lead to construction of new telescopes specially designed for studying the signals from dark matter particles,” Boyarsky said. “We will know where to look in order to trace dark structures in space and will be able to reconstruct how the universe has formed.”

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Weird. Just plain weird.

The Chinese Mystery Of Vanishing Foreign Brides (FT)

Police in central China have launched an investigation into the disappearance of more than 100 Vietnamese women who married local bachelors and had been living in villages around the city of Handan. The women all disappeared at the same time in late November, along with a Vietnamese woman who married a local villager 20 years ago and had introduced most of the brides to local men in recent months in exchange for a fee. Faced with severe gender imbalances as a result of China’s decades-old one-child policy and a traditional preference for male children, many Chinese men are unable to find suitable brides and resort to paying for wives from poorer Asian countries such as Vietnam.

Particularly in more traditional rural parts of China, marriage is highly transactional and men are increasingly expected to provide a house, car, electrical appliances and a steady income before a woman or their family will consider him eligible for marriage. For those who cannot afford the expensive requirements of Chinese brides, paying for a bride from Vietnam or elsewhere in the region can be a much cheaper option. As a consequence of the demand for cheap foreign brides, China has an enormous problem with human trafficking. “My brother worked outside the village and was too poor to afford a local wife so my family paid Rmb100,000 to get a wife from Vietnam through that old Vietnamese woman who came here 20 years ago,” said the brother of Bai Baoxing, a local man whose Vietnamese wife disappeared with the others barely a month after they were married.

Mr Bai’s brother said the new bride spoke decent Mandarin Chinese and he and his family were now wondering whether she was even Vietnamese. Chinese media reports identified the absconded Vietnamese marriage broker as Wu Meiyu. After living in a village on the outskirts of Handan for 20 years, she started offering introductions to Vietnamese brides for a fee at the start of this year. An officer in the local Handan city police office told the Financial Times that provincial police were now handling the case and they could not comment on the ongoing investigation. Chinese media are filled with cases of women from poor rural areas who are abducted and sold into marriage, as well as cases involving foreign brides.

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Dec 032014
 
 December 3, 2014  Posted by at 12:25 pm Finance Tagged with: , , , , , , , , , ,  


Harris&Ewing National Emergency War Garden Commission display, Wash. DC 1918

New US Oil And Gas Well November Permits Tumble Nearly 40% (Reuters)
Think Collapsing Oil Is Bullish? Think Again (MarketWatch)
Deficit Spending And Money Printing: A German Point Of View (Salzer)
OPEC Is Wrong To Think It Can Outlast US On Oil Prices (MarketWatch)
Oil War Slams Venezuela, Probability of Default Soars to 84% (Wolfstreet)
Why Oil Is Finally Declining, Which May Lead to Disaster (Lee Adler)
The Financialization of Oil (CH Smith)
Oil, the Ruble and Putin Are All Headed for 63. A Russian Joke (Bloomberg)
What Low Oil Prices Mean For The Environment (Reuters)
French Bank Tells Investors To Dump UK Assets (CNBC)
Australia Headed Into Perfect Storm In 2015 (CNBC)
If Deflation Is So Terrible, Why Are Spain, Greece Growing? (MarketWatch)
Eurozone Business Activity Slumps To 16-Month Low (CNBC)
Non-Eurozone Czech Central Banker: We Need ECB Easing Too (CNBC)
The Gold Fairy Tale Fails Again (Barry Ritholtz)
Stop Talking about NATO Membership for Ukraine (Spiegel)
We Are Starting To Learn Who Owns Britain (Monbiot)
Mediterranean Diet Keeps People ‘Genetically Young’ (BBC)
Olive Oil Prices Soar After Bad Harvest (Guardian)
Stephen Hawking Warns Artificial Intelligence Could End Mankind (BBC)

Putting a brave face on the desperate hope for higher prices, soon. Or else.

New US Oil And Gas Well November Permits Tumble Nearly 40% (Reuters)

Plunging oil prices sparked a drop of almost 40% in new well permits issued across the United States in November, in a sudden pause in the growth of the U.S. shale oil and gas boom that started around 2007. Data provided exclusively to Reuters on Tuesday by industry data firm Drilling Info Inc showed 4,520 new well permits were approved last month, down from 7,227 in October. The pullback was a “very quick response” to U.S. crude prices, which settled on Tuesday at $66.88, said Allen Gilmer, chief executive officer of Drilling Info. New permits, which indicate what drilling rigs will be doing 60-90 days in the future, showed steep declines for the first time this year across the top three U.S. onshore fields: the Permian Basin and Eagle Ford in Texas and North Dakota’s Bakken shale. The Permian Basin in West Texas and New Mexico showed a 38% decline in new oil and gas well permits last month, while the Eagle Ford and Bakken permit counts fell 28% and 29%, respectively, the data showed.

That slide came in the same month U.S. crude oil futures fell 17% to $66.17 on Nov. 28 from $80.54 on Oct. 31. Prices are down about 40% since June. U.S. prices fell below $70 a barrel last week after the Organization of Petroleum Exporting Countries agreed to maintain output of 30 million barrels per day. Analysts said the cartel is trying to squeeze U.S. shale oil producers out of the market. Total U.S. production reached an average of 8.9 million barrels per day in October, and is expected to surpass 9 million bpd in December, the highest in decades, according to the U.S. Energy Information Administration. Gilmer said last month’s pullback in permits was more about holding off on drilling good locations in a low-price environment than breaking even on well economics. “I think in this case this was just a quick response, saying ‘there are enough drill sites in the inventory, let’s sit back, take a look and see what happens with prices,'” he said.

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Hey, that’s my headline!

Think Collapsing Oil Is Bullish? Think Again (MarketWatch)

The biggest story of 2014 isn’t the end of quantitative easing. It’s the unrelenting collapse in oil prices, and what that means for stock markets worldwide. The meme out there? Falling oil is bullish. After all, the more oil falls, the more consumers and companies save. I’m sorry, but there are a number of flaws with this argument. First of all, falling oil can be bullish, but collapsing oil tends to historically be very bearish. Many major corrections and bear markets have been preceded by oil in a precipitous fall. Second, people forget that several state budgets actually rely on tax revenue that is derived from oil drilling and exploration activities. If that tax revenue collapses because those companies collapse on that oil decline, what’s the response by those states? Raises taxes on, you guessed it, consumers.

Third, you might want to be careful what you wish for when it comes to falling oil prices. A good amount of many junk-debt indices is made up of energy-sector bonds. Junk-debt spreads have been widening, and should defaults occur in the energy space, that could serve as a butterfly effect for all bonds. The biggest thing that counters the “collapsing oil is bullish” meme is the behavior of defensive sectors of the stock market, which our equity sector ATAC Beta Rotation Fund BROTX, +0.68% has the ability to position all in to based on our proprietary risk trigger. If indeed falling oil were bullish, shouldn’t more cyclical areas of the market rally on that? If falling oil were bullish, shouldn’t U.S. small-cap stocks — which are heavily dependent upon domestic U.S. revenue growth — be substantially outperforming?

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And that’s my line! “Why do we insist upon economic growth, if we don’t actually need the products which are additionally produced every year?” Good to see I’m not the only one writing about that.

Deficit Spending And Money Printing: A German Point Of View (Salzer)

What we experience today is completely contrary to the German (maybe not the U.S.) understanding of the role of the Central Bank. The ECB has now assumed a role not only to protect the value of our common currency against inflation but also to take action as if it is responsible to create economic growth and full employment with instruments like money printing, zero interest rates and unlimited investments in bonds which the free market is rejecting.

We pay a high price for the chimera that we need constant economic growth and that it is a stigma if our GDP-growth is only 1.5% p.a. Can’t we accept that after 50 years of undisturbed peace and continuous prosperity we have reached a certain degree of personal satisfaction where we don’t need a new car every year, another cell-phone, additional furniture, more TV-sets, more laptops etc, etc.

Why do we insist upon economic growth, if we don’t actually need the products which are additionally produced every year? Is it really worth it to increase the already heavy burden of public debt, which our children must service someday, by accepting even more debt in a vain effort to increase public demand? Let’s instead be happy with zero GDP growth, zero inflation and zero growth of public debt! That could be a more rational solution. Why don’t we consider it?

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To what extent is North Dakota spinning its numbers? ” .. the state of North Dakota says the average cost per barrel in America’s top oil-producing state is only $42 [..] In McKenzie County, which boasts 72 of the state’s 188 oil rigs, the average production cost is just $30, the state says.”

OPEC Is Wrong To Think It Can Outlast US On Oil Prices (MarketWatch)

Give Saudi Arabia credit: Whoever sets oil-production policy for the desert kingdom has guts. Unfortunately, the sheiks have made what’s likely to become a sucker’s bet. You know this part already, but the 12-nation Organization of the Petroleum Exporting Countries last week declined to cut production, sending Brent crude oil futures tumbling to their cheapest point since 2009. The Saudis appear to be spoiling for a fight, trying to find out exactly how cheap oil must be to force surging U.S. shale-oil production to seize up like an unlubricated engine. “Naimi declares price war on U.S. shale oil,” a Reuters headline shouted, referring to Saudi Arabia Oil Minister Ali al-Naimi. But there are at least three big problems with this strategy.

One, North American crude isn’t as expensive to produce as it used to be. Two, there’s more than you think in the pipeline to make it even cheaper. And third, OPEC nations, including Saudi Arabia, have squandered their edge in cheap oil supplies on welfare states rulers can’t easily cut back. In 2012, when U.S. shale burst into public consciousness, common wisdom was that it would cost at least $70 to $75 a barrel to produce. As recently as last week, saying U.S. producers could tolerate $60 oil seemed aggressive. But data from the state of North Dakota says the average cost per barrel in America’s top oil-producing state is only $42 — to make a 10% return for rig owners. In McKenzie County, which boasts 72 of the state’s 188 oil rigs, the average production cost is just $30, the state says.

Another 27 rigs are around $29. That’s part of why oil companies aren’t cutting capital spending much — and they say they can keep production rising without spending more, by getting more out of wells they have already drilled. A key example is mega-independent Devon, which produces about 200,000 of the 9 million-plus barrels the U.S. drills each day. Devon wouldn’t give an interview, but said last month that it expects production to rise 20%-25% next year with little growth in capital spending. It has room to work because its pretax cash profit margins have widened by 37% in the first nine months of this year, to almost $30 per barrel of oil equivalent. More than half its 2015 production is protected by hedges if prices stay below $91 a barrel, the company says.

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Can the CIA finally take over?

Oil War Slams Venezuela, Probability of Default Soars to 84% (Wolfstreet)

OPEC member Venezuela has one of the largest oil and natural gas proven reserves in the world. It’s the 12th largest producer in the world. It’s still one of the top suppliers of crude oil to the US. Oil produces 95% of Venezuela’s export earnings. Oil and gas account for 25% of GDP. Oil is Venezuela’s single most important product. Oil is its critical source of foreign currency with which to pay for all manner of imported consumer and industrial products. But the price of oil has plunged 35% since June. Venezuela was already in trouble before the price of oil plunged. The fracking boom in the US and the tar-sands boom in Canada have been replacing Venezuelan imports of crude to the US for years.

The Keystone pipeline, if Congress approves it, will replace costly oil trains to move Canadian tar-sands crude to US refineries, making it even more competitive with Venezuelan crude. Shipments of crude from Venezuela to the US will continue to dwindle. Venezuela’s budget deficit is 16% of GDP, the worst in the world. Inflation is running at a white-hot 63%, also the worst in the world. The economy is heavily subsidized, but now the money for the subsidies is running out. Currency controls have been instituted to shore up the Bolivar. But instead, they’re strangling what is left of the economy. Anti-government protests and riots burst on the scene earlier this year as the exasperated people couldn’t take it any longer. The scarcity of even basic consumer products such as toothpaste and toilet paper has now spread across the spectrum, including medical supplies. Next year, scarcity is going to be even worse.

Venezuelan economist Angel Garcia Banchs worries that “what’s coming to Venezuela is chaos that will probably lead to barbarity and people looting.” It doesn’t help the budget that the government sells its most valuable export commodity at heavily subsidized prices at home, based on a special though iffy deal: the people get cheap energy, and in return, hopefully, they don’t riot, or outright revolt. The hope is that the government gets to stay in power a little longer even as it is going bankrupt. Yet social spending isn’t going to get cut, promised President Nicolas Maduro on state TV on Friday. “If we had to cut anything in our budget, we would cut extravagances, we would cut our own salaries as high officials, but we will never cut one Bolivar of the money that goes to education, food, housing, the missions of our nation,” he said.

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“For the biggest speculators and financiers in the world, oil was a money substitute, a hedge against the massive money printing campaigns of the Fed, the BoJ, and the ECB.”

Why Oil Is Finally Declining, Which May Lead to Disaster (Lee Adler)

The price of oil has finally started to obey the law. What law is that? The Law of Supply and Demand. Thanks to the US fracking boom that has done this (see chart) to US production, the supply of oil worldwide has outstripped demand since 2012. So why haven’t prices fallen before this summer? And are falling oil prices now a good thing? Or not? While US production was exploding, other countries had level or declining production. Meanwhile consumption was falling in developed nations, but the developing world more than made up for that. Worldwide consumption has been steadily increasing since 2009. However, because of the US fracking boom, with the exception of 2011 supply has exceeded demand. Prices should have been declining since 2012, right? After the oil price bubble peaked in 2008, the price of oil did crash when demand dropped. That drop in demand created a huge oversupply just as the US fracking boom was in its infancy.

Then the Fed and its cohort central banks started printing money helter skelter in 2009. The results showed up not only in world stock markets but in commodities as well, particularly oil. The price of oil rose in spite of the fact that world oil production continued to outstrip demand. For the biggest speculators and financiers in the world, oil was a money substitute, a hedge against the massive money printing campaigns of the Fed, the BoJ, and the ECB. It worked for a while, and the oil market even helped in 2011 when supply fell below consumption for a year. But then the US production increase again overran world wide consumption.

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Prices don’t have to sink further to cause mayhem, they only need to stay where they are now.

The Financialization of Oil (CH Smith)

Like home mortgages, oil has been viewed as a “safe” asset. The financialization of the oil sector has followed a slightly different script but the results are the same: A weak foundation of collateral is supporting a mountain of leveraged, high-risk debt and derivatives. Oil in the ground has been treated as collateral for trillions of dollars in junk bonds, loans and derivatives of all this new debt. The 35% decline in the price of oil has reduced the underlying collateral supporting all this debt by 35%. Loans that were deemed low-risk when oil was $100/barrel are no longer low-risk with oil below $70/barrel (dead-cat bounces notwithstanding). Financialization is always based on the presumption that risk can be cancelled out by hedging bets made with counterparties.

This sounds appealing, but as I have noted many times, risk cannot be disappeared, it can only be masked or transferred to others. Relying on counterparties to pay out cannot make risk vanish; it only masks the risk of default by transferring the risk to counterparties, who then transfer it to still other counterparties, and so on. This illusory vanishing act hasn’t made risk disappear: rather, it has set up a line of dominoes waiting for one domino to topple. This one domino will proceed to take down the entire line of financial dominoes. The 35% drop in the price of oil is the first domino. All the supposedly safe, low-risk loans and bets placed on oil, made with the supreme confidence that oil would continue to trade in a band around $100/barrel, are now revealed as high-risk. [..]

The failure of one counterparty will topple the entire line of counterparty dominoes. The first domino in the oil sector has fallen, and the long line of financialized dominoes is starting to topple. Everyone who bought a supposedly low-risk bond, loan or derivative based on oil in the ground is about to discover the low risk was illusory. All those who hedged the risk with a counterparty bet are about to discover that a counterparty failure ten dominoes down the line has destroyed their hedge, and the loss is theirs to absorb. All the analysts chortling over the “equivalent of a tax break” for consumers are about to be buried by an avalanche of defaults and crushing losses

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Putin is still very popular in Russia. Western media will tell you that’s because of domestic propaganda, but they themselves engage in anti-Putin propaganda over here.

Oil, the Ruble and Putin Are All Headed for 63. A Russian Joke (Bloomberg)

Heard the one about Vladimir Putin, the oil price and the ruble’s value against the dollar? They will all hit 63 next year. That’s the joke doing the rounds of the Kremlin as the Russian government digs in to weather international sanctions over the conflict in Ukraine. According to at least five people close to Putin, pressure from the U.S. and Europe is galvanizing Russians to withstand a siege on their economy. The black humor is part of an image of defiance not seen since the Cold War. As the economy enters its first recession in more than five years, the ruble depreciates to records and money exits the country, Putin’s supporters are closing ranks and say he’s sure to run for another six-year term in 2018. “We are becoming poorer, our savings vanish, prices grow, however we see an opposite effect to the one that is wanted by people who wish to see Putin knocked down,” said Olga Kryshtanovskaya, a sociologist studying the elite at the Russian Academy of Sciences. The jokes just underline their determination to stand till the end, she said.

Putin celebrates his 63rd birthday on Oct. 7. The price of Brent crude sank to a five-year low of $67.53 a barrel this week. The ruble has dropped to near 55 to the dollar from as strong as 34 less than six months ago, meaning it needs to lose another 13% to complete the joke. A friend of Putin who spoke on condition of anonymity said sanctions won’t work because the U.S. and European Union don’t understand the Russian mentality. The country endured the Leningrad siege for more than two years during World War II and will survive this too, he said. “The West is wrong in its understanding of the motivation Putin and his inner circle have,” said Evgeniy Minchenko, head of the International Institute of Political Expertise in Moscow. “They think Putin is a businessman, that money is the most important thing for him and that by pressing him and his allies financially they will break them.”

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Not much so far.

What Low Oil Prices Mean For The Environment (Reuters)

Are low oil prices good or bad for the environment? From one perspective, they’re bad: lower oil prices mean lower gas prices, which in turn encourage people to drive rather than use more environmentally friendly means of transportation. But in the case of U.S. shale oil, lower prices are good for Mother Earth, if only temporarily. Oil prices have been falling steadily since June, and given OPEC’s recent decision not to curb production, it seems they’ll remain low for a while. As Myles Udland pointed out in Business Insider last week, a lot of shale projects have break-even prices beneath the $80-per-barrel price level, but producers become less and less incentivized to start new projects as prices fall. [..] shale drilling permits fell 15% across 12 major shale formations in October, a sign that shale producers are willing to slow their rapid expansion until they can get more bang for their buck. It comes down to opportunity cost.

As Harold Hamm, an early shale pioneer who has lost $10 billion since August (let that sink in), told Bloomberg, “Nobody’s going to go out there and drill areas, exploration areas and other areas, at a loss. They’ll pull back and won’t drill it until the price recovers. That’s the way it ought to be.” Many see OPEC’s refusal to curb output as a multi-billion-dollar game of chicken with U.S. shale producers, whose booming production can be credited with the recent fall in world oil prices. Early evidence shows that it may be working—for now; fuelfix.com reported yesterday that Texas shale permits were down 50% in November. Ultimately, the case can be made that low oil prices are bad for the environment, as they encourage more oil use now, which makes investments in alternative energy less urgent. And the shale isn’t going anywhere–it’s just waiting there patiently for prices to become sufficient for new extraction projects.

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“Stay away from U.K. assets into the 7 May elections ..”

French Bank Tells Investors To Dump UK Assets (CNBC)

French bank Société Générale has told investors to steer clear of U.K. assets and sell sterling, because “zero” reform and political deadlock pose key risks to the country’s economy. “Stay away from U.K. assets into the 7 May elections,” the SocGen global asset strategy team, led by Alain Bokobza, said in the bank’s 2015 outlook. “In the U.K., 2015 will be marked by the General Election, triggering some volatility and pushing the risk premium on the FTSE 100 higher as the debate on the European Union exit gains momentum.” As such, Bokobza recommended: “Minimal exposure to U.K. assets as political deadlock and delayed tightening by the Bank of England should lead to a weakening of sterling.”

This warning comes despite the U.K.’s robust economic growth compared with the euro zone. U.K. GDP grew by 0.7% in the third quarter on the previous quarter, while the euro zone and France grew by just 0.2% and 0.3% respectively over the same period. But the French banking group insisted that U.K. assets remained risky, and had continually underperformed. “We have been underweight on U.K. assets in the last quarters, with little reason for regret. In particular, U.K. equities are underperforming all developed markets, and a lower GBP/USD is one of our strategic calls (with a 1.50 target),” the bank’s asset strategy team said. “So far there has been zero structural reform and no improvement in twin deficits or exports despite a significant devaluation of the currency. Also, the spillover effects of weak euro zone fundamentals have been underestimated. We are concerned, and therefore seek to protect our asset allocation.”

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The perils of having just one main client.

Australia Headed Into Perfect Storm In 2015 (CNBC)

Australia’s economy will undergo a crucial stress test in 2015, faced with a triple whammy from the lagged impact of plunging commodity prices, sharp declines in mining investment and renewed fiscal tightening, says Goldman Sachs. “The challenges are now widely known…but these challenges still lie mainly ahead for Australia rather than behind,” Tim Toohey, chief economist, Australia at Goldman Sachs wrote in a note on Wednesday. On top of the these headwinds, the economy also needs to contend with tighter financial conditions and lower levels of housing investment, said Toohey, factors that had previously helped to offset the slump in the mining sector. The bank expects GDP growth to average just 2.0% next year, down from an estimated 2.9% in 2014, as the economy continues to search for new growth drivers.

The decline in mining investment will continue to be a major drag on the economy, leaving commodity exports and consumption to pick up the slack, the bank said. Australia’s third quarter GDP data published on Wednesday pointed to a sluggish domestic economy, suggesting rebalancing away from mining-driven growth is taking longer than hoped. The economy expanded 2.7% on year in the three months to September, undershooting expectations for growth of 3.1%, as construction spending fell while sliding export prices hit incomes. “This GDP result concurs broadly with the perceived wisdom on the Australian economy, albeit with perhaps a little more domestic weakness than expected, said David de Garis, director and senior economist at National Australia Bank.

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A perfect example of why seeing deflation only as falling prices is so completely useless and dumbing. If you refuse to look a WHY prices fall, you never learn a thing, and you will always be behind. Apart from the fact that the idea of Greece and Spain doing well can easily be refuted by 1000 other data sources, looking at one day or week or month tells you nothing. You need to look at consumer spending over at least the past few years. That would also show more respect for the 25% of the working population, and 50% of youth, who are unemployed in both countries.

If Deflation Is So Terrible, Why Are Spain, Greece Growing? (MarketWatch)

Prices are starting to fall across the European continent. Mass unemployment, and a grinding recession are forcing companies with too much capacity to charge less for their products. Company profits will soon be collapsing, while government debt ratios threaten to spiral out of control. The threat of deflation is so worrying, the European Central Bank is expected to throw everything in its armory to prevent it, and to get prices rising again. It may even move towards full-blown quantitative easing as early as Thursday. But here’s a puzzle. The two countries with the worst deflation in Europe are Greece and Spain. And two of the countries with the best growth? Funnily enough, that also happens to be Greece and Spain. So if deflation is so terrible, how come those two are recovering fastest?

The answer is that deflation is not nearly as bad as it sometimes made out to be by mainstream economists. The real problem is debt. But if that is true, perhaps the eurozone would be better off trying to fix its debt crisis than campaigning to raise prices — especially as it probably won’t have much success with that anyway. There is no question that the eurozone is sliding inexorably towards deflation. Only last week, we learned that the inflation rate across the zone ratcheted down to 0.3% last month, from 0.4% a month earlier, and a significantly lower figure than the market expected. It has been going steadily down for some time. Consumer inflation has not hit the ECB’s target level of 2% since the start of 2013. It has been falling steadily since it peaked at 3% in late 2011

It would be rash to expect that to change any time soon. The oil price has collapsed, and other commodity prices are coming down as well. That will all feed into the inflation rate. Retail sales are still weak, and unemployment is still rising. People who have lost their job don’t spend money — and companies don’t hike prices when the shops are empty.

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Super Mario to the rescue.

Eurozone Business Activity Slumps To 16-Month Low (CNBC)

Business activity in the euro zone fell to a 16-month low in November, according to data released on Wednesday, confirming fears that the region’s economy is faltering. Final euro zone composite Purchasing Manager’s Index (PMI) data from Markit came in at 51.1 in November, below flash estimates of 51.4 released last month. It marks a fall from October’s final reading of 52.1. The composite reading measures both manufacturing and services activity, with the 50-point mark separating contraction from expansion. The figures could put more pressure on the ECB to increase stimulus measures ahead of its next monetary policy announcement on Thursday. There is growing pressure on the bank to start buying government bonds, although Germany has opposed the move to date.

The euro zone data was preceded by disappointing services PMI figures for Germany and France, the euro zone’s largest and second-largest economies respectively. The slowdown across the 18-country region reflected weakness in new order inflows, as new business fell for the first time since July last year. Job creation also remained near-stagnant, Markit said. Chris Williamson, chief economist at Markit, said there were “worrying signs” of economic performance deteriorating in the euro zone’s core countries, which, if sustained, “could drive the region back into recession.” “France remains the biggest concern, suffering an ongoing decline in business activity, but growth has also slowed to the weakest for one-and-a-half years in Germany,” he added.

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“ECB easing is necessary for us, we are closely related with the euro zone and ECB easing should, in the long run, generate more demand in the euro zone, which is helpful for us ..”

Non-Eurozone Czech Central Banker: We Need ECB Easing Too (CNBC)

As the European Central Bank’s (ECB) next policy meeting looms, the governor of the Czech central bank has insisted that further euro zone easing will have “necessary” knock-on benefits for the Czech Republic. The ECB is expected to leave monetary policy unchanged on Thursday, although there are growing calls for the bank to launch a full-blown quantitative easing package. ECB President Mario Draghi is likely to wait until the new year before deciding on sovereign bond-buying measures – a move that Czech National Bank (CNB) Governor Miroslav Singer said he supported. “It (further easing) is helpful for us. ECB easing is necessary for us, we are closely related with the euro zone and ECB easing should, in the long run, generate more demand in the euro zone, which is helpful for us,” Singer told CNBC.

Speaking from the CNB in Prague, Singer said that easing could take some time to filter through to some weaker parts of the euro zone, but added that a weaker euro would help “shield” the Czech Republic’s economy by giving some of the region’s biggest countries a boost. The Czech Republic is a member of the European Union, but doesn’t yet use the euro. Its currency is called the Czech koruna. The euro has weakened against the dollar and other currencies since the summer, falling to a two-year low against the greenback last month after Draghi hinted that the bank was prepared to undertake more stimulus. Singer added that a weaker euro had helped boost countries like Germany, which price their exports in euros. A weaker euro makes euro zone exports cheaper in the global market.

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Barry shares my worries.

The Gold Fairy Tale Fails Again (Barry Ritholtz)

Yesterday, oil rallied 4.3% and gold gained 3.6% as commodities had an up day after a long and painful fall. The fascinating aspect of the trading wasn’t the $45 pop in gold, nor the even greater%age rally in oil, but the accompanying narrative. (As of this writing, each has giving up about half of those gains). When it comes to speculating, especially in precious metals, it is all about storytelling. Over the years, I have tried to remind investors of the dangers of the narrative form (See this, this and this). Following a storyline is a recipe for losing money. Why? The spoken word emerged eons ago and narration was a convenient way to pass along information from person to person, generation to generation. Your DNA is coded to love a good yarn of heroes and villains and conflicts to resolve, preferably in a way that is both exciting and memorable. However, your genetic makeup wasn’t created with the risks and rewards of capital markets in mind. When it comes to being suckers for storytelling, I have been especially critical of the gold bugs.

Since 2011, the gold narrative has been a money loser, the secular bull market for the metal clearly over. However, gold often provides a plethora of teachable moments. I want to point out several recent gold narratives that have been dangerous to investors. One of my favorite narratives involves the SPDR Gold Shares, an exchange-traded fund. The history of this ETF is a fascinating tale, well told by Liam Pleven and Carolyn Cui of the Wall Street Journal. Since its peak in September 2011, GLD has declined 37%. As we discussed almost a year ago, the most popular gold narrative was that the Federal Reserve’s program of quantitative easing would lead to the collapse of the dollar and hyperinflation. “The problem with all of this was that even as the narrative was failing, the storytellers never changed their tale. The dollar hit three-year highs, despite QE. Inflation was nowhere to be found,” I wrote at the time.

More recently, the narrative has shifted. Switzerland was going to save gold based on a ballot proposal stipulating that the Swiss National Bank hold at least 20% of its 520-billion-franc ($538 billion) balance sheet in gold, repatriate overseas gold holdings and never sell bullion in the future. This was going to be the driver of the next leg up in gold. Except for the small fact that the “Save Our Swiss Gold” proposal was voted down, 77% to 23%, by the electorate. Why anyone believed this fairy tale in the first place is beyond me. Surveys of voters suggested that the ballot proposal was likely to fail. And yet there’s muddled thinking about gold among the bears too. Short sellers loaded up on bets that gold would plummet, a mistake in its own right since the outcome was all but foretold. When the collapse failed to materialize as the ballot initiative lost, the shorts had to cover their errant bets, sending spot prices higher (temporarily it seems).

Why do these narratives all tend to fail? For the most part, they reflect information that is already in prices. Markets are far from perfectly efficient (they are kinda- sorta-eventually-almost efficient). But they are more efficient than many seem to assume. What’s that you say? Consumers in China and India are big buyers of gold? You mean, the way they always have been? Indeed, most of the recent narratives contain information that is already reflected in prices. Yesterday, I read a breaking news article that said India’s decision to lift gold import restrictions would have a big, positive impact on prices. The problem with that narrative is that India eased import limits in May – and it moved gold prices higher by all of 0.5%.

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The Germans don’t like what NATO is up to.

Stop Talking about NATO Membership for Ukraine (Spiegel)

Just to be sure there is no misunderstanding: Vladimir Putin bears primarily responsibility for the new Cold War between the West and Russia. These days, you have to make that clear before criticizing Western policies so as not to be shoved into the pro-Putin camp. When NATO foreign ministers meet in Brussels today, the question of Ukraine’s possible future membership in the alliance is not on the agenda. It will, however, overshadow the meeting — and that is the fault of two politicians. During an interview with German public broadcaster ZDF on Sunday night, Ukrainian President Petro Poroshenko said he would like to hold a referendum on NATO membership at some point in the future. And new NATO General Secretary Jens Stoltenberg apparently had nothing better to do than to offer Poroshenko his verbal support and to reiterate the right of every sovereign nation in Europe to apply for NATO membership.

As if that weren’t enough, Stoltenberg added in comments directed at Moscow that “no third country outside NATO can veto” its enlargement. In the current tense environment, open speculation about possible Ukrainian membership in NATO is akin to playing with fire. German Chancellor Angela Merkel proposed the former Norwegian prime minister as NATO chief because he is considered to be a far more level-headed politician than predecessor Anders Fogh Rasmussen. But since he took the helm, differences between the two have been difficult to identify. Hawkish statements made by NATO’s top military commander, Philip Breedlove, haven’t done much to ease the situation either. Why is it even necessary for NATO officers to comment so frequently about Ukraine? Since the outbreak of the crisis, the alliance has expressed the opinion that the conflict cannot be resolved through military means. If that’s true, then wouldn’t it be better if Stoltenberg, Breedlove and company kept quiet?

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“David Cameron has been just as generous with our money: as he cuts essential services for the poor, he has almost doubled the public subsidy for English grouse moors, and frozen the price of shotgun licences, at a public cost of £17m a year.”

We Are Starting To Learn Who Owns Britain (Monbiot)

Bring out the violins. The land reform programme announced last week by the Scottish government is the end of civilised life on Earth, if you believe the corporate press. In a country where 432 people own half the private rural land, all change is Stalinism. The Telegraph has published a string of dire warnings – insisting, for example, that deer stalking and grouse shooting could come to an end if business rates are introduced for sporting estates. Moved to tears yet? Yes, sporting estates – where the richest people in Britain, or oil sheikhs and oligarchs from elsewhere, shoot grouse and stags – are exempt from business rates, a present from John Major’s government in 1994. David Cameron has been just as generous with our money: as he cuts essential services for the poor, he has almost doubled the public subsidy for English grouse moors, and frozen the price of shotgun licences, at a public cost of £17m a year.

But this is small change. Let’s talk about the real money. The Westminster government claims to champion an entrepreneurial society of wealth creators and hardworking families, but the real rewards and incentives are for rent. The power and majesty of the state protects the patrimonial class. A looped and windowed democratic cloak barely covers the corrupt old body of the nation. Here peaceful protesters can still be arrested under the 1361 Justices of the Peace Act. Here the Royal Mines Act 1424 gives the crown the right to all the gold and silver in Scotland. Here the Remembrancer of the City of London sits behind the Speaker’s chair in the House of Commons to protect the entitlements of a corporation that pre-dates the Norman conquest. This is an essentially feudal nation.

It’s no coincidence that the two most regressive forms of taxation in the UK – council tax banding and the payment of farm subsidies – both favour major owners of property. The capping of council tax bands ensures that the owners of £100m flats in London pay less than the owners of £200,000 houses in Blackburn. Farm subsidies, which remain limitless as a result of the Westminster government’s lobbying, ensure that every household in Britain hands £245 a year to the richest people in the land. The single farm payment system, under which landowners are paid by the hectare, is a reinstatement of a medieval levy called feudal aid, a tax the vassals had to pay to their lords.

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Sounds good, tastes good too.

Mediterranean Diet Keeps People ‘Genetically Young’ (BBC)

Following a Mediterranean diet might be a recipe for a long life because it appears to keep people genetically younger, say US researchers. Its mix of vegetables, olive oil, fresh fish and fruits may stop our DNA code from scrambling as we age, according to a study in the British Medical Journal. Nurses who adhered to the diet had fewer signs of ageing in their cells. The researchers from Boston followed the health of nearly 5,000 nurses over more than a decade. The Mediterranean diet has been repeatedly linked to health gains, such as cutting the risk of heart disease. Although it’s not clear exactly what makes it so good, its key components – an abundance of fresh fruit and vegetables as well as poultry and fish, rather than lots of red meat, butter and animal fats – all have well documented beneficial effects on the body. Foods rich in vitamins appear to provide a buffer against stress and damage of tissues and cells. And it appears from this latest study that a Mediterranean diet helps protect our DNA.

The researchers looked at tiny structures called telomeres that safeguard the ends of our chromosomes, which store our DNA code. These protective caps prevent the loss of genetic information during cell division. As we age and our cells divide, our telomeres get shorter – their structural integrity weakens, which can tell cells to stop dividing and die. Experts believe telomere length offers a window on cellular ageing. Shorter telomeres have been linked with a broad range of age-related diseases, including heart disease, and a variety of cancers. In the study, nurses who largely stuck to eating a Mediterranean diet had longer, healthier telomeres. No individual dietary component shone out as best, which the researchers say highlights the importance of having a well-rounded diet.

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But then this does not help. Especially for the poor in southern Europe.

Olive Oil Prices Soar After Bad Harvest (Guardian)

Take it easy with the salad dressing: the price of Italian olive oil has more than doubled in the past year to its highest level in a decade as the impact of drought and a fruit fly infestation has hit production. The price of extra virgin oil from Spain, the world’s biggest producer, is also up 15% year-on-year after olive trees across the Mediterranean suffered from drought and extreme heat in May and June, their peak blooming period when moisture is vital to develop a good crop. Analysts began warning that prices would rise this summer, but the cost of Italian extra virgin olive oil soared by nearly a quarter in November compared with October as the poor state of the harvest became clear, according to market analysts Mintec. Loraine Hudson at Mintec said demand could outstrip supply over the next year as Italian production would be down 35% and global production down 19% to 2.5m tonnes at a time when global consumption is rising.

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“It would take off on its own, and re-design itself at an ever increasing rate ..”

Stephen Hawking Warns Artificial Intelligence Could End Mankind (BBC)

Prof Stephen Hawking, one of Britain’s pre-eminent scientists, has said that efforts to create thinking machines pose a threat to our very existence. He told the BBC:”The development of full artificial intelligence could spell the end of the human race.” His warning came in response to a question about a revamp of the technology he uses to communicate, which involves a basic form of AI. But others are less gloomy about AI’s prospects. The theoretical physicist, who has the motor neurone disease amyotrophic lateral sclerosis (ALS), is using a new system developed by Intel to speak.

Machine learning experts from the British company Swiftkey were also involved in its creation. Their technology, already employed as a smartphone keyboard app, learns how the professor thinks and suggests the words he might want to use next. Prof Hawking says the primitive forms of artificial intelligence developed so far have already proved very useful, but he fears the consequences of creating something that can match or surpass humans. “It would take off on its own, and re-design itself at an ever increasing rate,” he said. “Humans, who are limited by slow biological evolution, couldn’t compete, and would be superseded.”

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Dec 022014
 
 December 2, 2014  Posted by at 12:13 pm Finance Tagged with: , , , , , , ,  


‘Daly’ Store, Manning, South Carolina July 1941

Canadian Natural Resources Chairman Sees Oil Touching $30 A Barrel (NatPost)
Banks’ $650 Billion Bet On Oil Backfires As Brent Prices Slump (Telegraph)
Billionaire Shale Pioneer Sees Drilling Slowdown on Oil Price Drop (Bloomberg)
US Shale Crude Exports To Asia Grind To Halt On Flood Of Mideast Oil (Reuters)
October Oil Shale Permits Drop 15%: Is The Slowdown Here? (Reuters)
As Crude Tumbles, Oil Drillers Seek To Temporarily Idle More Rigs (Reuters)
For Oil Companies, It’s Survival Of The Fittest (MarketWatch)
Beware the Vulnerable Oil Debt That Lurks in Your Junk-Bond ETFs (Bloomberg)
Oil Investors May Be Running Off a Cliff They Can’t See (BW)
Bank Of England Investigating Risk To Banks Of ‘Carbon Bubble’ (Guardian)
Fed’s Dudley Says Oil Price Decline Will Strengthen US Recovery (Bloomberg)
Why The Commodities Selloff May Continue In 2015 (CNBC)
Europe Debates Third Bailout Package for Greece (Spiegel)
European Banks Seen Afflicted by $82 Billion Capital Gap (Bloomberg)
Leak at Federal Reserve Revealed Confidential Bond-Buying Details (ProPublica)
The Return Of Currency Wars Will Strengthen The US Dollar Even More (Roubini)
Japanese Workers See Wages Drop for 16th Month (Bloomberg)
Putin: EU Stance Forces Russia To Withdraw From South Stream Project (RT)
Russia Intervenes As Crumbling Ruble Echoes 1998 Debt Crisis (Guardian)
Russia Says NATO Destabilizes North Europe, Aid Draws Ire (Bloomberg)
North Korea Refuses To Deny Sony Pictures Cyber-Attack (BBC)
Kim Dotcom Avoids Jail After Bail Hearing (NZ Herald)

The threat here is not about the oil, it’s about the financing. Junk bonds, loans, oil stocks etc. The whole industry is leveraged up to its neck. It’s an extremely brittle system that can’t take shocks.

Canadian Natural Resources Chairman Sees Oil Touching $30 A Barrel (NatPost)

Canada’s oil industry faces a year of “tough slugging,” including the deferment of many projects, as oil prices collapse to as little as US$30 a barrel then likely stabilize around US$70 to US$75 a barrel, oil entrepreneur Murray Edwards predicted Friday. Because of its high costs, the Canadian sector will be impacted more than many oil-producing jurisdictions around the world by OPEC’s decision Thursday to not cut oil production, said Mr. Edwards, the chairman of Canadian Natural Resources and one of Canada’s single biggest oil investors. Prices could spike down to $30, $40. It got down to $35 in 2008, for a very short period of time “On a given day you can have market fluctuations where prices fluctuate far more than the underlying economic value of the unit,” Mr. Edwards told reporters on the sidelines of a business forum here.

“Prices could spike down to $30, $40. It got down to $35 in 2008, for a very short period of time,” he said. “I don’t believe that if it spikes down that low, that it will stay that low for long, because you will see increased demand and supply respond. “The better question is where does it stabilize, and that $70-$75 area is probably not a bad place to stabilize for a period of time until you get more balance in term of growth in demand and some supply response.” Mr. Edwards said industry projects that are already under way, particularly oil sands projects with a long-term horizon and capital already invested, will likely continue. But others will be shelved until there is more clarity around future oil prices. There will also be a slowdown in conventional oil projects, particularly those that tend to produce a lot at the front end, he predicted.

Weak oil prices will force the industry to refocus and look at new way of doing things to cut costs, he said. Canadian Natural Resources, one of Canada’s top oil and gas producers, will adjust its capital spending next year to reflect weaker oil prices, he said. The company recently approved an $8.5-billion capital budget for 2015, including $2-billion in flexible capital, based on oil averaging around US$81 for West Texas Intermediate. Overtime, markets will find a new balance as low oil prices stimulate demand. “Right now we have more supply than we have demand for a period of time,” he said. “The market is now going to find a price which best reflects what it costs to produce a barrel of oil … nothing solves low prices like low prices.”

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” .. a collapse in the oil price is far more dangerous for the banks than it would have been only a few years ago.”

Banks’ $650 Billion Bet On Oil Backfires As Brent Prices Slump (Telegraph)

British banks face losses of more than £2bn as risky loans to the oil and gas industry go sour amid the plummeting price of crude. Banks have piled into the sector over the last three years, with oil and gas accounting for £11 of every £100 of high-yield debt on the back of America’s booming shale industry. However, oil’s precipitous decline since June has left many of the lenders looking at heavy losses. Brent Crude prices fell to a low of $67.53 yesterday, the lowest level for almost five years. The price rebounded by around 2pc as of Monday afternoon but remains almost 40pc down since June. Last week, Opec leaders decided against restricting output in an attempt to squeeze North America’s shale producers – many of whom have borrowed heavily to invest. Although much of the banks’ exposure will have been hedged off, Barclays, RBS, HSBC and Standard Chartered could face a combined $3.4bn (£2bn) of impairment charges related to oil and gas exposures in the fourth quarter of the year, according to Chirantan Barua, an analyst at Bernstein.

“Nearly $650bn of high yield debt has been issued in the sector since 2011,” Mr Barua said. “While the broader high yield market is down [around] 20pc year-to-date, oil and gas has been flat with issuance running straight up to the OPEC event. [This] can’t be a good thing for a sudden stress in the market if oil prices stay at this level.” When you see $650bn of high yield issuance in a sector that has been levering up across the supply chain, any shocks in the underlying business will have risk ripples across the financial system.” While Barclays, HSBC and RBS could be sitting on losses of $1bn each, and Standard Chartered faces $400m of impairments, banks in North America could face much bigger impairment charges. US and Canadian banks that have lent heavily to the sector on the back of the US shale boom, and high-yield debt to less stable oil companies has increased substantially. This means a collapse in the oil price is far more dangerous for the banks than it would have been only a few years ago.

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“They’ll pull back and won’t drill it until the price recovers. That’s the way it ought to be.”

Billionaire Shale Pioneer Sees Drilling Slowdown on Oil Price Drop (Bloomberg)

Billionaire wildcatter Harold Hamm, a founding father of the U.S. shale boom whose personal fortune has fallen by more than half in the past three months, said U.S. drilling will slow as producers cut back amid falling oil prices. Declining activity from Texas to North Dakota won’t be as harmful to the industry as some have feared, the chairman and chief executive officer of Continental Resources Inc. said. OPEC’s refusal to curb output last week bodes well for U.S. producers that can outlast countries in the cartel, which depend on higher oil prices. “Will this industry slow down? Certainly,” Hamm said yesterday in a telephone interview. “Nobody’s going to go out there and drill areas, exploration areas and other areas, at a loss. They’ll pull back and won’t drill it until the price recovers. That’s the way it ought to be.”

Investors have been spooked as oil has declined to a five-year low. The downturn comes after prices above $100 a barrel sparked a boom in output from U.S. shale formations that helped create a glut of supply. Hamm’s wealth, which is largely tied to the fate of Oklahoma City-based Continental, has fallen by more than $12 billion in three months, according to the Bloomberg Billionaires Index. Hamm, who helped discover the potential of North Dakota’s Bakken formation, predicted a swift recovery in oil prices, which have declined more than 36 percent since June as Saudi Arabia and its allies in the Organization of Petroleum Exporting Countries refused to cut production last week to help re-balance the market. The company said last month it’s sold nearly all its hedges through 2016, in a bet on a recovery in prices. West Texas Intermediate, the U.S. benchmark, fell below $65 a barrel yesterday before settling up 4.3 percent to $69.

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Well, we all like a little competition, don’t we?

US Shale Crude Exports To Asia Grind To Halt On Flood Of Mideast Oil (Reuters)

An aggressive strategy by Mideast Gulf producers to exploit the lowest oil prices in five years to defend market share is showing signs of bearing fruit as U.S. crude exports to Asia grind to halt. Asian refineries have suspended imports of condensate, a light crude oil produced from the U.S. shale boom, just four months after they began in favor of cheaper Middle East grades, according to trade and industry sources. The suspension illustrates how competition between suppliers has heated up following a more than 40% decline in oil prices since June.

Last week Ali al-Naimi, the oil minister of OPEC kingpin Saudi Arabia, warned his fellow OPEC members they must combat the U.S. shale boom. He argued against cutting OPEC production so as to keep prices depressed and undermine the profitability of North American producers. “There’s so much oversupply that Middle East crudes are now trading at discounts and it is not economical to bring over crudes from the U.S. anymore,” said Tushar Tarun Bansal of consultancy FGE in Singapore. U.S. oil became uncompetitive against similar grades from Qatar, Saudi Arabia and the United Arab Emirates after Gulf producers began dropping prices in August to maintain their market share in an oil market glut.

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We’ll see a lot more restructuring and defaults, a lot less financing, and a lot less exploration and drilling.

October Oil Shale Permits Drop 15%: Is The Slowdown Here? (Reuters)

U.S. oil producers have been racing full-speed ahead to drill new shale wells in recent years, even in the face of lower oil prices. But new data suggests that the much-anticipated slowdown in shale country may have finally arrived. Permits for new wells dropped 15% across 12 major shale formations last month, according to exclusive information provided to Reuters by DrillingInfo, an industry data firm, offering the first sign of a slowdown in a drilling frenzy that has seen permits double since last November. OPEC last week agreed to maintain its production quota of 30 million-barrels-per-day, despite a 30% drop in oil prices since June, triggering an additional 10% decline. That move, many analysts believe, was squarely aimed at U.S. oil producers driving the country’s energy resurgence: can they continue drilling at the current pace if prices don’t rise? “Currently, the market is focused on U.S. shale as the place where spending and production must be curtailed,” Roger Read, a Wells Fargo analyst, said in a note Friday.

“There is little doubt, in our view, that lower oil and gas prices will result in lower spending and lower shale production in 2015 to 2017.” A cutback of U.S. production could play into the hands of Saudi Arabia, which has suggested over the past few months that it is comfortable with much lower oil prices. Most analysts predict U.S. oil producers can maintain their healthy production rates in the first half of 2015 – thanks in part to investments made months ago. Some oil service companies have suggested that a slowdown might be held off, as they continue to buy key drilling components. But, the data suggests that production is likely to eventually succumb to lower prices. “The first domino is the price, which causes other dominos to fall,” said Karr Ingham, an economist who compiles the Texas PetroIndex, an annual analysis of the state’s energy economy. One of the first tiles to drop: the number of permits issued, Ingham said.

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“The day rate for a top specification drillship, which can work in water up to 12,000 feet (3,658 meters) deep, was recently quoted at as low as $400,000, down from $600,000 last year.” [..] “The global fleet of jackup rigs is forecast to grow 9% in 2015 and another 7% in 2016 .. ” Overinvestment is what you get when credit is too cheap. It turns the whole world into a casino, and everyone into a gambler. And then they all lose.

As Crude Tumbles, Oil Drillers Seek To Temporarily Idle More Rigs (Reuters)

Offshore drillers globally are increasingly considering “warm stacking” their rigs to take them temporarily off the market, as they gear up for a slowdown in the hunt for oil with crude prices sliding to five-year lows. Rigs in warm stack maintain basic operations and most of the crew, and can be put to use once the owner gets a contract. Drillers put rigs in warm stacks to lower operational costs and also to keep them sufficiently ready for quick deployment, meaning they are hopeful a downturn won’t be a prolonged one. Rigs can also be “cold stacked”, or shut down, which typically happens when an owner does not expect to find work for an extended period of time.

“Six months ago, no one talked about stacking rigs,” said Thomas Tan, chief executive officer at Kim Heng Offshore & Marine Holdings, a Singapore-based oilfield service firm, “In the last few weeks, things have become scarier and the talk of stacking started.” Tan said his firm has received enquiries to stack dozens of rigs over the past few weeks. Kim Heng currently services four rigs in warm stack around Singapore. The company serves about 60 rigs a year in different stage of operations, including providing repair, maintenance and logistics services. “A lot of people are looking at warm stack, as they hope that the market will turn around quickly,” Tan said. “Cold stack is on their mind… but they haven’t given up hope yet.” [..]

The day rate for a top specification drillship, which can work in water up to 12,000 feet (3,658 meters) deep, was recently quoted at as low as $400,000, down from $600,000 last year. Even rates for jack-up rigs, generally working in water depth below 400 feet, have started to weaken in recent months after holding up relatively well earlier in the year. Rig orders soared in recent years when oil prices topped $100 per barrel, making it more profitable to explore in hard-to-reach underwater areas. The global fleet of jackup rigs is forecast to grow 9% in 2015 and another 7% in 2016, Oslo-based investment bank Pareto Securities estimated.

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Darwin looms over fossils. Sort of fitting.

For Oil Companies, It’s Survival Of The Fittest (MarketWatch)

It looks like it may be a long winter on the oil patch. Companies are dusting off contingency plans that may have seemed far-fetched when oil was trading above $100 a barrel in the summer. Oil-well and land portfolios are coming under renewed scrutiny as they decide where to wait it out and where to continue production. Survival of the fittest is the term being used by investors and analysts as they try to figure out what’s next after the Organization of the Petroleum Exporting Countries last week decided to keep its production levels unchanged, sending crude futures down 10% on Friday. Prices recovered some of those losses on Monday, with New York-traded oil closing at $69 a barrel after testing lows below $65 a barrel earlier in the session. “We are on the edge of what people are comfortable with,” said Meredith Annex, an analyst with research firm Bloomberg New Energy Finance. U.S. drilling is likely to continue if prices hold around $70 to $75 a barrel, she said.

Below $65, however, companies will cut production and move away from the newer, less developed shale plays in the U.S., and even from the fringes of the more established shale areas like the Permian basin in Texas and North Dakota’s Bakken basin, she said. The U.S. would then import more crude until prices come back up again. Analysts at Tudor Pickering Holt told investors to find shelter in “liquid names with high quality assets and healthy balance sheets that can weather the 2015 storm.” Tudor and others are expecting oil prices to stabilize around $70 a barrel in the coming weeks or months. Last week’s steep decline was probably exaggerated by thin U.S. trading around Thursday’s Thanksgiving holiday, they said. [..]

Energy is a cyclical business, and adjusting production to lower prices and lower demand is not uncommon — companies did exactly that in 2008 and 2009, when oil prices collapsed during the recession. This year, however, companies were convinced in the spring and summer that prices would remain around $90 a barrel, said Reid Morrison, energy consultant with PwC. U.S. companies are likely poring over their portfolios now to figure out which wells they can afford to shut down, to ditch, or even to sell. Idling a well, from a purely technical viewpoint, is relatively easy. But it gets complicated when companies have to factor in the financing structure and tens of thousands of land leases, each carrying different obligations and time frames, said Morrison. “Every exploration and production company is doing a detailed review of their leases and rationalizing their portfolio as we speak,” Morrison said. In some cases, selling the land lease might be the answer, he said.

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Check your pension plans!

Beware the Vulnerable Oil Debt That Lurks in Your Junk-Bond ETFs (Bloomberg)

It pays to look a little closer at your investments in exchange-traded high-yield funds right now to find out just how exposed you are to plunging oil prices. Take State Street’s $9.8 billion junk-bond ETF that trades under the ticker JNK. It’s lost almost twice as much as a broad index of high-yield debt since the end of August, partly because its bigger allocation to energy companies has been a drag as oil prices plummet to the lowest since 2009. Individuals and institutions alike have gravitated toward ETFs as a quick way to enter infrequently-traded bond markets. Those who piled into speculative-grade bonds may not have realized their fortunes are, more than ever, tied to the outlook for oil given energy companies account for a record proportion of the market. “As oil prices have fallen further, reality has struck,” UBS analysts Matthew Mish and Stephen Caprio wrote in a Nov. 26 report. “For high yield, we expect that spreads and flows will be quite sensitive to oil prices at these levels. Further price declines would significantly raise expected default rates.”

Oil has collapsed into a bear market as the U.S. pumps crude at the fastest rate in three decades at the same time that global growth is slowing. OPEC resisted calls from members including Venezuela and Iran to reduce its production target when it met last week in Vienna, prompting West Texas Intermediate crude to fall below $65 dollars a barrel from more than $80 at the end of October and a high of $107 in mid-June. While some still like riskier U.S. bonds — such as Morgan Stanley (MS) analysts who today recommended buying the securities — the debt has suffered losses in the past five months as concern mounts that dropping energy costs will leave speculative shale drillers unable to meet their obligations.

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The stranded assets issue due to climate agreements is starting to make people nervous. Investors are preparing to get out. Lower prices might (should) be just what they need to make the decision.

Oil Investors May Be Running Off a Cliff They Can’t See (BW)

A major threat to fossil fuel companies has suddenly moved from the fringe to center stage with a dramatic announcement by Germany’s biggest power company and an intriguing letter from the Bank of England. A growing minority of investors and regulators are probing the possibility that untapped deposits of oil, gas and coal – valued at trillions of dollars globally – could become stranded assets as governments adopt stricter climate change policies. The concept gaining traction from Wall Street to the City of London is simple. Limits on emissions of carbon dioxide will be necessary to hold temperature increases to 2 degrees Celsius, the maximum climate scientists say is advisable. Without technologies to capture the waste gases from combusting fossil fuels, a majority of known oil, gas and coal deposits would have to stay underground. Once that point is reached, they become stranded.

With representatives from more than 190 countries gathered to discuss climate rules in Lima, the argument that burning all the world’s known oil, gas and coal reserves would overwhelm the atmosphere is moving beyond the realm of environmental activists. Storebrand), a Scandinavian financial services company managing $74 billion of assets, announced last year that it would divest from 19 fossil fuels companies. That list has since expanded to 35, including 15 coal producers, 10 oil-sand miners and 10 utilities that predominantly use coal. “It was a financial and climate-related decision, and there was very much a consideration of stranded assets,” Christine Torklep Meisingset, Storebrand’s head of sustainable investments, said by phone from Oslo. “Companies that specialize in carbon-intense projects are very vulnerable to climate policy and shifting regulations.”

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“In May, Carbon Tracker reported that over $1 trillion is currently being gambled on high-cost oil projects that will never see a return if the world’s governments fulfil their climate change pledges.”

Bank Of England Investigating Risk To Banks Of ‘Carbon Bubble’ (Guardian)

The Bank of England is to conduct an enquiry into the risk of fossil fuel companies causing a major economic crash if future climate change rules render their coal, oil and gas assets worthless. The concept of a “carbon bubble” has gained rapid recognition since 2013, and is being taken increasingly seriously by some major financial companies including Citi bank, HSBC and Moody’s, but the Bank’s enquiry is the most significant endorsement yet from a regulator. The concern is that if the world’s government’s meet their agreed target of limiting global warming to 2C by cutting carbon emissions, then about two-thirds of proven coal, oil and gas reserves cannot be burned. With fossil fuel companies being among the largest in the world, sharp losses in their value could prompt a new economic crisis. Mark Carney, the bank’s governor, revealed the enquiry in a letter to the House of Commons environment audit committee (EAC), which is conducting its own enquiry. He said there had been an initial discussion within the bank on “stranded” fossil fuel assets.

“In light of these discussions, we will be deepening and widening our enquiry into the topic,” he said, involving the financial policy committee which is tasked with identifying systemic economic risks. Carney had raised the issue at a World Bank seminar in October. News of the Bank’s enquiry comes on the day that global negotiations on climate change action open in Lima, Peru, and as one of Europe’s major energy companies E.ON announced it was to hive off its fossil fuel business to focus on renewables and networks. The UN’s Intergovernmental Panel on Climate Change recently warned that the limit of carbon emissions consistent with 2C of warming was approaching and that renewable energy must be at least tripled. “Policy makers and now central banks are waking up to the fact that much of the world’s oil, coal and gas reserves will have to remain in the ground unless carbon capture and storage technologies can be developed more rapidly,” said Joan Walley MP, who chairs the EAC.

“It’s time investors recognised this as well and factored political action on climate change into their decisions on fossil fuel investments,” she told the Financial Times. Anthony Hobley, chief executive of thinktank Carbon Tracker which has been prominent in analysing the carbon bubble, said the bank’s latest move could lead to important changes. “Fossil fuel companies should be disclosing how many carbon emissions are locked up in their reserves,” he said. “At the moment there is no consistency in reporting so it’s difficult for investors to make informed decisions.” Both ExxonMobil and Shell said earlier in 2014 that they did not believe their fossil fuel reserves would become stranded. In May, Carbon Tracker reported that over $1tn is currently being gambled on high-cost oil projects that will never see a return if the world’s governments fulfil their climate change pledges.

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“The sharp drop in oil prices will help boost consumer spending ..” I don’t understand that: we’re talking about money that would otherwise also have been spent, only on gas. There is no additional money, so where’s the boost?

Fed’s Dudley Says Oil Price Decline Will Strengthen US Recovery (Bloomberg)

The sharp drop in oil prices will help boost consumer spending and underpin an economy that still requires patience before interest rates are increased, Federal Reserve Bank of New York President William C. Dudley said. “It is still premature to begin to raise interest rates,” Dudley said in the prepared text of a speech today at Bernard M. Baruch College in New York. “When interest rates are at the zero lower bound, the risks of tightening a bit too early are likely to be considerably greater than the risks of tightening a bit too late.” Dudley expressed confidence that, although the U.S. economic recovery has shown signs in recent years of accelerating, only to slow again, “the likelihood of another disappointment has lessened.”

Investors’ expectations for a Fed rate increase in mid-2015 are reasonable, he said, and the pace at which the central bank tightens will depend partly on financial-market conditions and the economy’s performance. Crude oil suffered its biggest drop in three years after OPEC signaled last week it will not reduce production. Lower energy costs “will lead to a significant rise in real income growth for households and should be a strong spur to consumer spending,” Dudley said. The drop will especially help lower-income households, who are more likely to spend and not save the extra real income, he said. Lower energy prices have already helped speed U.S. growth. Manufacturing in the U.S. expanded in November at a faster pace than projected, according to the Institute for Supply Management’s factory index.

[..] He also tried to disabuse investors of the notion that the Fed would, in times of sharp equity declines, ease monetary conditions, an idea known as the “Fed put.” “The expectation of such a put is dangerous because if investors believe it exists they will view the equity market as less risky,” Dudley said. That could cause investors to push equity markets higher, contributing to a bubble, he said. “Let me be clear, there is no Fed equity market put,” he said.

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It’s simply a balloon deflating.

Why The Commodities Selloff May Continue In 2015 (CNBC)

Several of the world’s key commodities – including oil, gas, gold and corn – have been suffering the worst months of trading since the commodities crash of 2008. Back then, the main reason for downturn in prices was obvious: the credit crisis and subsequent panic about global economic growth. Yet today, while global growth is more sluggish than hoped in certain parts of the world – particularly in China – the overall economic picture seems much brighter than in 2008. In 2014, the focus seems to have switched to supply, as OPEC pledges to keep supply constant despite plunging oil prices. As well as being interpreted as throwing down the supply gauntlet to the shale-rich U.S., the OPEC move has been criticised for apparently penalizing several of its members.

Ultimately, it looks like investment decisions in the developed world may be causing the commodities glut. “Increasingly the supply side counts more, as investment cycles are creating persistent gluts in some areas (e.g. oil, natural gas, iron ore, grains) and lagging investment is starting to result in tightening elsewhere (industrial metals in general, copper in particular),” commodities analysts at Citi wrote in a research note. Despite the focus on emerging markets, the Citi analysts argue that continuing weakness in 2015 will have a “Made in America” quality, and called an end to “the era of $100 a barrel oil.” With grains, better weather conditions than for years meant better-than-expected crops, which “should leave inventories chock-a-block for a good year or two,” according to Citi.

The classic, straightforward analysis of commodity supply-demand dynamics would argue that, with cheaper commodities and cheaper prices, demand from consumers who feel like they’re getting a bargain will subsequently grow, sending prices up again. Unfortunately for miners and other commodities-linked companies, who have seen share price falls already this week, this may not be the case in 2015. “This fall in prices seems demand rather than supply led and so any benefit (to consumers) will be negated by the declining world growth outlook,” Rabobank strategists argue.

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Anyone still keeping count?

Europe Debates Third Bailout Package for Greece (Spiegel)

It’s no accident that “pathos” is a Greek word. Greek Prime Minister Antonis Samaras, at least, is a politician who is fond of sprinkling his speeches with the kind of emotional appeal that Aristotle long ago identified as an effective stylistic device. “The era of bailout packages is ending,” Samaras promised in September during an appearance in Thessaloniki. “Greece is now welcoming the new Greece.” Samaras knew the line would guarantee him applause from his audience, but the promise also came a bit prematurely. Following the announcement, Greece got a small taste of what it might mean were Greece were released from the oversight of the troika, comprised of the European Commission, the ECB and the IMF. The more often Samaras spoke of a “clean solution,” the more yields rose on long-term Greek government bonds. At the beginning of September, the rates had been 5.8%, but they soon climbed to almost 9%. It was the financial markets’ way of hinting that it is still too early to grant Greece full fiscal independence.

One high-ranking EU official compared the situation to a patient who has survived intensive care but wants to leave the hospital early. A relapse is certain and the subsequent care will be much more involved than if the patient had stayed in the hospital long enough for full recovery. Greece’s second bailout package officially ends in a month’s time, but it is already certain that the country will require additional funding from its EU partners. Last Wednesday in Paris, there was a minor uproar when troika officials made it known that they felt Greece hadn’t fulfilled conditions for the payout of the final tranche from the second bailout package. Athens’ international creditors determined the country will fall around €2 billion ($2.5 billion) short of reaching its commitment of not exceeding a budget deficit of 3% of gross domestic product. The Greeks, for their part, accused the troika of being overly critical, arguing that in the past, the situation had developed more positively than predicted by pessimists.

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More creative accounting. And another completely useless stress test. A new capitalization standard that goes into effect in 2015 was not applied to banks in 2014. Idiots.

European Banks Seen Afflicted by $82 Billion Capital Gap (Bloomberg)

Europe’s latest bank stress test was flawed, and dozens of the region’s lenders, including Deutsche Bank and BNP Paribas, aren’t sufficiently capitalized to improve the economy’s anemic growth or withstand a repeat of the 2008 financial crisis. Those are the conclusions of analysts at Keefe, Bruyette & Woods and the Danish Institute for International Studies who looked at what would have happened if the ECB had applied a leverage minimum that will be introduced next year. A third study by the Centre for European Policy Studies showed Deutsche Bank and BNP Paribas above the cutoff, while 28 other banks that passed the stress test failed. The new standard requires banks around the world to have capital equal to 3% of total assets, complementing a system that weights them for risk.

If the ECB had used that yardstick and demanded the highest quality capital, 12 big European banks that passed the stress test would need to raise an additional €66 billion ($82 billion), according to Jakob Vestergaard, a senior researcher at the Danish institute. “Relying on risk-based measures only isn’t enough because it’s always what we thought wasn’t risky that ends up blowing up during a crisis,” said Vestergaard, who examined data collected by the ECB at the request of Bloomberg News and has published papers on leverage. “The ECB wanted to appear tough, but it still couldn’t show big German, French banks as undercapitalized for political reasons.”

The ECB didn’t subject bank leverage ratios to the stress test’s adverse economic scenario because European lenders only have to report those numbers on an informational basis starting next year, a spokeswoman for the central bank in Frankfurt said. The new international standard approved by the Basel Committee on Banking Supervision won’t be fully binding until 2018. When it released test results on Oct. 26, the ECB provided leverage data that showed 14 lenders, including Deutsche Bank, were below the 3% minimum. Three more fell short after the central bank’s asset-quality review determined how many loans should be considered nonperforming. Combining the results of the independent studies, almost three times as many banks would fail the stress test if the leverage standard were used.

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And why does it take 2 years to get this out into the open?

Leak at Federal Reserve Revealed Confidential Bond-Buying Details (ProPublica)

The Federal Reserve sprung a previously unreported leak in October 2012, when potentially market-moving information about highly confidential monetary deliberations made its way into a financial analyst’s private newsletter. The leak occurred the day before the scheduled public release of meeting minutes that shed new light on the Fed’s decision to embark on a third round of bond buying to boost the economy, ProPublica has learned. The newsletter revealed what the minutes would say the next day as well as fresh details about the Fed’s internal plans and deliberations – information that could have provided traders with an edge. Leaks from inside the Fed are considered a serious matter. In the past, they have prompted Congressional concern and triggered the involvement of federal law enforcement. In this instance, then Fed Chairman Ben Bernanke instructed the central bank’s general counsel to look into the matter.

The Federal Reserve has faced criticism in recent years for its information security practices, with some in Congress questioning whether it operates under sufficient oversight. The October 2012 leak involved deliberations of the Federal Open Markets Committee, which holds eight regularly scheduled meetings per year to set policies that control inflation and keep the economy growing. Since the 2008 economic crisis, it has involved itself more deeply in financial markets. Minutes of the committee’s meetings are released promptly at 2 p.m. three weeks after it meets. Fed watchers eagerly await the event and parse every word for clues on how financial markets will move. The Fed tightly guards nonpublic information about deliberations by the committee and the select staffers who are privy to them, about five dozen people in all. Doing so is critical to “reinforce the public’s confidence in the transparency and integrity of the monetary process,” the Fed’s policy on external communications says. [..]

The newsletter containing the leaked material came from an economic policy intelligence firm called Medley Global Advisors whose clients include hedge funds, institutional investors and asset managers. On Oct. 3, 2012, Regina Schleiger, an analyst with the firm, sent clients a “special report” titled “Fed: December Bound.” The report focused on the Sept. 12-13 open market committee meeting, where the panel had approved what’s called “QE3,” a new program of large-scale purchases of mortgage-backed and Treasury securities. Typically, the Fed chairman holds a news conference following the meetings to help explain the committee’s actions. But when Bernanke did this on Sept. 13, he did not reveal the depth of disagreement within the committee about how effective the bond-buying program would be and whether it was worth the cost. Schleiger wrote, however, that the minutes due out the next day would reveal “intense debate between Federal Open Market Committee participants.”

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Roubini’s not much of an analyst anymore, it’s all Keynes ‘austerity killed the cat’ all the way, a one dimensional focus on growth that is so abundant today. To claim, for example, that Japan’s sales tax hike in April ‘killed the recovery’ is an opinionated opinion, at best. Japan’s problems are far too deep to be either solved or aggravated by a 3% extra sales tax. But it’s the sort of opinion that gets Nouriel re-invited to Basel and all those places where the rich meet.

The Return Of Currency Wars Will Strengthen The US Dollar Even More (Roubini)

The recent decision by the Bank of Japan to increase the scope of its quantitative easing is a signal that another round of currency wars may be under way. The BOJ’s effort to weaken the yen is a beggar-thy-neighbor approach that is inducing policy reactions throughout Asia and around the world. Central banks in China, South Korea, Taiwan, Singapore and Thailand, fearful of losing competitiveness relative to Japan, are easing their own monetary policies or will soon ease more. The European Central Bank and the central banks of Switzerland, Sweden, Norway and a few Central European countries are likely to embrace quantitative easing or use other unconventional policies to prevent their currencies from appreciating. All of this will lead to a strengthening of the U.S. dollar, as growth in the United States is picking up and the Federal Reserve has signaled that it will begin raising interest rates next year.

But if global growth remains weak and the dollar becomes too strong, even the Fed may decide to raise interest rates later and more slowly to avoid excessive dollar appreciation. You can lead a horse to liquidity, but you can’t make it drink. The cause of the latest currency turmoil is clear: In an environment of private and public deleveraging from high debts, monetary policy has become the only available tool to boost demand and growth. Fiscal austerity has exacerbated the impact of deleveraging by exerting a direct and indirect drag on growth. Lower public spending reduces aggregate demand, while declining transfers and higher taxes reduce disposable income and, thus, private consumption. In the eurozone, a sudden stop of capital flows to the periphery and the fiscal restraints imposed, with Germany’s backing, by the European Union, the IMF and the ECB have been a massive impediment to growth.

In Japan, an excessively front-loaded consumption-tax increase killed the recovery achieved this year. In the U.S., a budget sequester and other tax-and-spending policies led to a sharp fiscal drag in 2012-2014. And in the United Kingdom, self-imposed fiscal consolidation weakened growth until this year. Globally, the asymmetric adjustment of creditor and debtor economies has exacerbated this recessionary and deflationary spiral. Countries that were overspending, under-saving and running current-account deficits have been forced by markets to spend less and save more. Not surprisingly, their trade deficits have been shrinking. But most countries that were over-saving and under-spending have not saved less and spent more; their current-account surpluses have been growing, aggravating the weakness of global demand and, thus, undermining growth.

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Wages have been falling for much longer.

Japanese Workers See Wages Drop for 16th Month (Bloomberg)

Japanese wages adjusted for inflation dropped for a sixteenth straight month as Prime Minister Shinzo Abe faces an election focused on his efforts to spur economic growth. Earning declined 2.8% in October from a year earlier, the labor ministry said today, following data last week showing households cut spending for a seventh month. Abe’s call for companies to use their cash holdings on salaries and investment has been partially met, with capital spending among manufacturers rising while wages change little. He faces voters on Dec. 14 with an economy that fell into recession following a sales-tax increase and opposition parties highlighting the difficulties of low-income earners.

“With the effect of the sales tax hike, I don’t see real wages rising in the financial year through April,” said Toru Suehiro, an economist at Mizuho Securities. “People will be asking themselves whether they feel better off, and there probably aren’t that many who think the economy has got better.” Before adjusting for inflation, average monthly pay in October rose 0.5% from a year earlier to 267,935 yen ($2,260). Large Japanese companies will raise winter bonuses by 5.8% this year, according to the preliminary results of a survey by the Keidanren business lobby group. Abe said yesterday that Keidanren has promised to lift pay next year.

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The EU shoots itself in the foot. And Russia gets angrier. Gazprom spent billions preparing the South Stream line. Dmitry Orlov said from now on to expect things from Russia that no-one expects.

Putin: EU Stance Forces Russia To Withdraw From South Stream Project (RT)

Russia is forced to withdraw from the South Stream project due to the EU’s unwillingness to support the pipeline, and gas flows will be redirected to other customers, Vladimir Putin said after talks with his Turkish counterpart, Recep Tayyip Erdogan. “We believe that the stance of the European Commission was counterproductive. In fact, the European Commission not only provided no help in implementation of [the South Stream pipeline], but, as we see, obstacles were created to its implementation. Well, if Europe doesn’t want it implemented, it won’t be implemented,” the Russian president said. According to Putin, the Russian gas “will be retargeted to other regions of the world, which will be achieved, among other things, through the promotion and accelerated implementation of projects involving liquefied natural gas.”

“We’ll be promoting other markets and Europe won’t receive those volumes, at least not from Russia. We believe that it doesn’t meet the economic interests of Europe and it harms our cooperation. But such is the choice of our European friends,” he said. The South Stream project is at the stage when “the construction of the pipeline system in the Black Sea must begin,” but Russia still hasn’t received an approval for the project from Bulgaria, the Russian president said. Investing hundreds of millions of dollars into the pipeline, which would have to stop when it reaches Bulgarian waters, is “just absurd, I hope everybody understands that,” he said. Putin believes that Bulgaria “isn’t acting like an independent state” by delaying the South Stream project, which would be profitable for the country.

He advised the Bulgarian leadership “to demand loss of profit damages from the European Commission” as the country could have been receiving around €400 million annually through gas transit. Putin said that Russia is ready to build a new pipeline to meet Turkey’s growing gas demand, which may include a special hub on the Turkish-Greek border for customers in southern Europe. For now, the supply of Russian gas to Turkey will be raised by 3 billion cubic meters via the already operating Blue Stream pipeline, he said. Last year, 13.7 bcm of gas were supplied to Turkeyvia Blue Stream, according to Reuters. Moscow will also reduce the gas price for Turkish customers by 6% from January 1, 2015, Putin said. “We are ready to further reduce gas prices along with the implementation of our joint large-scale projects,” he added.

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And announced a 0.8% growth shrinkage for 2015.

Russia Intervenes As Crumbling Ruble Echoes 1998 Debt Crisis (Guardian)

Russia’s central bank was forced to step in to defend the ruble on the foreign exchanges on Monday after fears over the economy’s vulnerability to a weak oil price sent the currency to a record low against the dollar. Moscow was forced to abandon its hands-off policy towards the ruble amid heavy selling, unmatched since the Russian debt default of 1998. The Russian central bank intervened when the ruble was down 6.5% on the day against the US dollar, and by the close of trading the currency had recouped more than half its earlier losses. A bounce in the oil price from a fresh five-year low and a sense that the sell-off since last week’s meeting of the Opec cartel has been overdone helped sentiment towards the Russian currency, which has been badly buffeted by a plunge of almost 40% in the cost of crude since the summer.

Data from the US suggesting that drilling activity in the shale oil sector is being affected by lower oil prices also helped the ruble by pushing down the value of the dollar. Oil is denominated in dollars, so when the US currency falls oil becomes cheaper and more attractive for holders of other currencies. With Moscow fearful that the drop in the value of the ruble makes Russia vulnerable to capital flight, Ksenia Yudaeva, the Russian central bank’s deputy chairwoman, told newswires that households should not panic. She said the rise in interest rates to 9.5% should encourage them not to convert savings into euros or dollars. “It’s necessary to explain to people that the yield they get on their deposits at the moment will guarantee a high degree of safety for their savings with regards to inflation. They should think twice before rushing out, losing the yield on their deposits, taking on currency risks and losing money on their currency conversions.”

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NATO is putting ever more attack weapons in countries it had been agreed would be neutral terrain.

Russia Says NATO Destabilizes North Europe, Aid Draws Ire (Bloomberg)

Russia accused NATO of trying to destabilize northern Europe as the alliance’s chief said the latest aid convoy for Ukraine was another sign of Russian disrespect for its neighbor’s border. NATO military drills and its transfer of warplanes capable of carrying nuclear weapons to the Baltic states are a “reality which is extremely negative,” Interfax reported Russian Deputy Foreign Minister Aleksey Meshkov as saying today. “They are trying to shake up the most stable region in the world, the north of Europe,” Meshkov said. “In this regard, Russia’s leadership is and will be taking all steps to ensure the security of Russia and its citizens.” Ukraine and its allies blame Russia for stoking the conflict in the east of Ukraine, which has killed more than 4,300 people and left at least 10,000 wounded. The government in Moscow denies involvement. After delivering more than 1,200 metric tons of cargo to the Donetsk and Luhansk regions without consulting the government in Kiev yesterday, Russia may soon dispatch a ninth aid convoy, Tass reported, citing the Emergencies Ministry.

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Stranger than fiction. Then again, if a country seen as hostile to the US produces a movie in which the plot evolves around a plan to kill the American President, how amused would Washington be?

North Korea Refuses To Deny Sony Pictures Cyber-Attack (BBC)

North Korea has refused to deny involvement in a cyber-attack on Sony Pictures that came ahead of the release of a film about leader Kim Jong-un. Sony is investigating after its computers were attacked and unreleased films made available on the internet. When asked if it was involved in the attack a spokesman for the North Korean government replied: “Wait and see.” In June, North Korea complained to the United Nations and the US over the comedy film The Interview. In the movie, Seth Rogen and James Franco play two reporters who are granted an audience with Kim Jong-un. The CIA then enlists the pair to assassinate him. North Korea described the film as an act of war and an “undisguised sponsoring of terrorism”, and called on the US and the UN to block it. California-based Sony Pictures’ computer system went down last week and hackers then published a number of as-yet un-released films on online download sites.

Among the titles is a remake of the classic film Annie, which is not due for release until 19 December. The Interview does not appear to have been leaked. When asked about the cyber-attack, a spokesman for North Korea’s UN mission said: “The hostile forces are relating everything to the DPRK (North Korea). I kindly advise you to just wait and see.” On Monday Sony Pictures said it had restored a number of important services that had to be shut down after the attack. It said it was working closely with law enforcement officials to investigate the matter but made no mention of North Korea. The FBI has confirmed that it is investigating. It has also warned other US businesses that unknown hackers have launched a cyberattack with destructive malware.

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It’s good to see the NZ justice system has a degree of independence. But this isn’t over. They’ll keep on trying.

Kim Dotcom Avoids Jail After Bail Hearing (NZ Herald)

Kim Dotcom has had bail conditions tightened, although the judge who did so said there was no evidence he had breached any of the court-ordered conditions. Dotcom now has to report twice a week, rather than once, and is banned from travelling on private aircraft or sea-going vessels. Dotcom lambasted the United States and the Crown lawyers acting for it outside court, saying both seized the opportunity to have his bail revoked after he split from his former gold-plated legal team. “The court has found I have no breached any of my bail conditions. I have been probably the most compliant, exemplary candidate of bail in NZ and I am surprised, even though I am going home right now, that my bail conditions have been tightened given my excellent bail compliance.

“I think this is another case of harassment and bullying by the United States government in concert with the New Zealand government. I think this whole application was only made because my lawyers decided to resign because of a lack of funds on my part because Hollywood has seized the new family assets that have been made after the raid. “The Crown and US government have used this opportunity at a weak moment to make up the bogus case for me having breached my bail conditions.” He accused the FBI of being deceitful bringing allegations he had tried to sell a Rolls Royce or been in contact with banned co-accused. He said the evidence showed – as he claimed was true in other branches of the case – that the US would not act with openness and honesty.

“I’m now going home to play with my kids.” Judge Nevin Dawson dismissed the arguments put by the US, saying there was “no proof” he had been in contact with former Megaupload staff who are free in Europe but also facing criminal copyright charges. He said he was not compelled by accusations Dotcom acted with a “lack of candour” by using a driver licence under the name Kim Schmitz in 2009 when stopped for dangerous driving. He said “it appears to be a legitimate use of the name Kim Schmitz”. Other claims also failed to find traction with Judge Dawson, who said he was tightening conditions to take account of the wealth Dotcom had accrued since his arrest and the approaching extradition trial, set for June.

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