Wednesday, January 20, 2016

Today's Links

1--Oil: Too much supply?, Bloomberg

“It is the third year in a row we have more supply than demand,” Fatih Birol, executive director of the International Energy Agency, told Francine Lacqua in a Bloomberg Television interview. “When we look at the 2016 supply and demand situation, prices will be still under pressure. I don’t see any reason why we have a surprise increase in the price in 2016.”

Things won’t get better until energy markets have weathered the “supply shock,” said Tony Hayward, chairman of Glencore Plc, one of the world’s largest trading houses. Quite simply, there’s “too much oil,” he said....

10-year slips to Recession level

Treasuries climbed, pushing 10-year yields to the lowest since October, as investors sought the safety of sovereign debt. The benchmark 10-year note yield fell nine basis points to 1.97 percent, according to Bloomberg Bond Trader data. That’s the biggest drop since Dec. 11.

2--Oil slump rocks markets again in historic equity rout

U.S. crude wallowed at its lowest since 2003 after the world's energy watchdog warned the market could "drown in oversupply". U.S. futures shed 2.9 percent to $27.63 while Brent crude lost 2.5 percent, having slipped below $28 earlier in the session.

3--Canadian dollar slips to $.68 on the dollar

Without precedent” — that’s what National Bank of Canada’s chief economist Stéfane Marion called the wholesale destruction of the loonie.

The Canadian dollar is in a tailspin. Rarely has it tumbled so far so fast, and against so many currencies. The steepness of the CAD’s depreciation against the USD is without precedent, -33%, or 3.5 standard deviations, in 24 months.

4--Mexico warns of severe shock from impending credit crunch, Mish

Carstens now warns of a "Potentially Severe Shock".

“Emerging markets need to be ready for a potentially severe shock,” Mr Carstens told the Financial Times. “The adjustment could be violent and policymakers need to be ready for it.” ...

 Many EM companies have filled up on cheap credit over the past decade, after a commodities boom and ultra-loose monetary policies led by the US Federal Reserve resulted in very low borrowing costs. As investors pull out, those costs are set to soar.

Mr Carstens said the required policy response from EM central bankers would stop short of outright “quantitative easing” or QE — the large-scale buying of financial assets undertaken by the Fed and other developed market central banks.

 But it would include exchanging high risk, long-dated assets held by investors for less risky, shorter-dated central bank and government liabilities.

5--China confirms economic slowdown as IMF cuts global growth forecast

With oil prices having fallen by 75 percent over the last 18 months, one of the biggest impacts of a continuing fall will be in corporate bond markets, where debts incurred when oil was $100 per barrel are no longer viable...

This resistance is being fuelled by deepening social inequality, of which further evidence emerged this week with the publication of a report by the aid agency Oxfam. The study showed that that just 62 people held as much wealth as the bottom half of the world’s population.

As the report noted: “Far from trickling down, income and wealth are instead being sucked upwards at an alarming rate.”

6--Someone's not telling the truth? U.S. Growth and Employment Data Tell Different Stories, NYT

“It is a real mystery how you can have nearly 300,000 new jobs created in December with the economy growing by 1 percent or less,” said Torsten Slok, chief international economist for Deutsche Bank Securities in New York. “We can’t have this discrepancy for a long period of time.”....

President Obama’s rosy take on the economy in his State of the Union address relied largely on the fact that hiring over the last two years was the healthiest it has been since the late-1990s boom. But the bleak mirror image presented in the Republican debate last week is also based on some hard-to-dismiss economic data: The proportion of Americans in the labor force is the lowest since the 1970s, and wage gains for most workers in the recovery have been scant....

President Obama’s rosy take on the economy in his State of the Union address relied largely on the fact that hiring over the last two years was the healthiest it has been since the late-1990s boom. But the bleak mirror image presented in the Republican debate last week is also based on some hard-to-dismiss economic data: The proportion of Americans in the labor force is the lowest since the 1970s, and wage gains for most workers in the recovery have been scant......

With the annual pace of growth in the current recovery averaging 2 percent — well below the trajectory of past expansions — and future projections not looking much better, some prominent economists say the United States has settled into a lengthy period of what they term “secular stagnation.”

7---World faces wave of epic debt defaults, fears central bank veteran

The global financial system has become dangerously unstable and faces an avalanche of bankruptcies that will test social and political stability, a leading monetary theorist has warned.

"The situation is worse than it was in 2007. Our macroeconomic ammunition to fight downturns is essentially all used up," said William White, the Swiss-based chairman of the OECD's review committee and former chief economist of the Bank for International Settlements (BIS). ...

Mr White said Europe's creditors are likely to face some of the biggest haircuts. European banks have already admitted to $1 trillion of non-performing loans: they are heavily exposed to emerging markets and are almost certainly rolling over further bad debts that have never been disclosed.

The European banking system may have to be recapitalized on a scale yet unimagined, and new "bail-in" rules mean that any deposit holder above the guarantee of €100,000 will have to help pay for it. ...

Mr White said the Fed is now in a horrible quandary as it tries to extract itself from QE and right the ship again. "It is a debt trap. Things are so bad that there is no right answer. If they raise rates it'll be nasty. If they don't raise rates, it just makes matters worse," he said.

There is no easy way out of this tangle. But Mr White said it would be a good start for governments to stop depending on central banks to do their dirty work. They should return to fiscal primacy - call it Keynesian, if you wish - and launch an investment blitz on infrastructure that pays for itself through higher growth.

"It was always dangerous to rely on central banks to sort out a solvency problem when all they can do is tackle liquidity problems. It is a recipe for disorder, and now we are hitting the limit," he said

8--Inflation falls again in December, CPI finds

Consumer prices fell again in December owing mostly to falling costs of food and gasoline.

The consumer price index declined by seasonally adjusted 0.1% last month, the Bureau of Labor Statistics said Wednesday.

For all of 2015 inflation rose just 0.7%, the second slowest rate in 50 years.

9--The Problem with "The Big Short", naked capitalism

The other problem is that the narrative is, paradoxically, that it doesn’t directly nail the fraud committed by the banks and hedge fund managers. Mike Konczal has an incomplete piece in which he points out that the housing bubble happened not because people suddenly wanted to buy homes, but because Wall Street wanted to supply people with money. And not only did Wall Street want to supply people with money, but it wanted to supply bad credit risks with money. This was known – it was why all those trip wires that Lewis pretends didn’t exist were going off. Konzcal, however, doesn’t ask the next logical question, which is, why? Why did the banks want to lend to people who wouldn’t pay them back? And the answer is, as securitization lawyer Tom Adams pointed out years ago, because of the people who went short the housing market, who needed suckers to bet against. The shorts inflated the bubble so they could profit on the downside, using extreme leverage and derivatives. Every dollar put forward by a short-seller ended up generating, at a conservative estimate, one hundred dollars of mortgage loans. This is known; it was covered first in Yves Smith’s book ECONNED, by securitization expert Tom Adams, and then by Jesse Eisinger in a Pulitzer Prize winning story for ProPublica.

These shorts were not the shorts portrayed in Lewis’s book, who are by and large good ethical people, if side players. These were not iconoclastic weirdos, and they didn’t struggle emotionally with betting against America These are the ones that Lewis doesn’t talk about, hedge fund manager John Paulson, the hedge fund Magnetar, and banks like Goldman Sachs. They rigged markets, and went big. Paulson, for example, made $15 billion, far more than any of the characters in the Big Short. All three entities have settled with the SEC. This was the real Big Short. These were the ones who didn’t just bet against America, but committed arson to collect the insurance money. Other hedge funds piggybacked on this gruesome trade, from Deutsche Bank to George Soros to Kyle Bass to Phil Falcone.

In 2010, the SEC sued Goldman Sachs for helping Paulson structure a CDO named Abacus, which was designed to fail. Fraud statutes are simple; you are not allowed to create a security vehicle that you know will fail, and you can’t do it while leaving out critical information to your customer (like that you created the instrument so you could bet against it). That’s fraud, even if the entity is a sophisticated investor. In 2010, when the Abacus lawsuit was initiated, I got an email from one of the heroes of the Big Short, who wrote that this lawsuit was aimed at the heart of the crisis. Someone in authority, he said, knows exactly what happened. Someone understood that it was not about Axe body spraying real estate agents, but that trillion dollar markets were rigged by pinstripe wearing con artists

10--Planet of Fear,  Pepe Escobar

In the real  world though all the cackle is about the age of old-fashioned oil. Which brings us to the myriad effects of the cheap oil strategy deployed by the House of Saud under Washington’s command.  Persian Gulf traders, off the record, are adamant that there is no longer any real global oil surplus of consequence as all shut-in oil has been dumped on the market based on that Washington command.

Petroleum Intelligence Weekly estimates the surplus is at a maximum 2.2 million a day, plus 600,000 barrels a day coming from Iran later this year. The US consumption of oil – at 19,840,000 barrels a day, 20% of world production – has not increased; it’s the other 80% that have been mostly absorbing the dumped oil.

Some key Persian Gulf traders are adamant that oil should be surging by the second half of 2016. That explains why Russia is not panicking with oil plunging towards $30 a barrel. Moscow is very much aware of the «partners» that are carrying oil market manipulation against Russia, and at the same time is anticipating this won’t last too long....The Masters of the Universe – just like the Russians – have realized their oil manipulation cannot last. ...
The original Masters of the Universe strategy would eventually lead to regime change in Russia and the usual oligarch suspects back in the saddle re-conducting the massive looting operation Russia suffered during the 1990s. ...A fearful House of Saud is a mere pawn in this strategy. ...
So the Masters of the Universe strategy essentially boils down to regime-change in Russia, Iran and Saudi Arabia, leading to Exceptionalistan-friendly elites/vassals; in sum, the ultimate chapter in the global Resource Wars.

11---"What the Fed did and why: supporting the recovery and sustaining price stability", Ben Bernanke, WA Post

 (Bernanke admits there is no transmission mechanism to get money circulating in the real economy, but that only stock prices increase with QE)

The FOMC intends to buy an additional $600 billion of longer-term Treasury securities by mid-2011 ....
... Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action. Easier financial conditions will promote economic growth. .... Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. (and) further support economic expansion. ....

"Critics have worried that (asset purchases) will lead to excessive increases in the money supply and ultimately to significant increases in inflation.  Our earlier use of this policy approach had little effect on the amount of currency in circulation or on other broad measures of the money supply, such as bank deposits. Nor did it result in higher inflation....

... Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action.

12--The true meaning of “In the long run we are all dead” Simon Taylor

The long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is past the ocean is flat again.

13--Aleppo is Arabic for "Little Big Horn"--Syrian endgame could begin with Aleppo

 ...the battle for Aleppo could determine Syria’s fate. It is worth reflecting on the meaning of Aleppo for Syria and the region. Aleppo, Syria’s largest city and its commercial hub, was also known as the “city of light” for its refined people and culture.....

The tide may be turning. If the Syrian army, backed by its Iranian and  Russian allies, retakes Aleppo, the city’s liberation will come by directly defeating terrorists and armed groups that are already deserting the battlefield. A government victory would be of a different order and have a different impact than the negotiated departures of besieged armed opposition forces in Homs and around Damascus. The people of Aleppo would experience a flat-out victory by the government and a defeat, and exodus, by the armed groups....

A Syrian government victory in Aleppo could be the beginning of the end of the sectarian mindset that would have been alien to the city prior to 2011. There is no more appropriate city to begin Syria’s healing. A Syrian government victory in Aleppo will make it harder to rationalize Western backing for jihadi groups who want to keep up the fight against long odds in the rest of the country. IS and al-Qaeda may prefer, over time, to begin to relocate to Libya and other countries where they can avoid the pounding from the US-led anti-IS coalition and Russian- and Iranian-backed Syrian forces. This may already be happening, and if so, it is to be cheered by those who seek a unified, secular and nonsectarian Syria, as outlined in the Vienna Communique, and as is Aleppo’s tradition.


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