Thursday, January 28, 2016

Today's Links

1--Russian energy minister says S Arabia proposed oil output cuts by up to 5 pct

2--Hysteria over China has become ridiculous

3--Durable Goods Devastation: Capital Goods Orders Crash To Fresh Crisis Lows, Scream Recession

4--Office of Financial Research Warns of Corporate Debt Defaults, Particularly Related to Energy Loans, as Stability Risk

5--How The Energy Crash Revealed A Weak Global Economy

The central banks can't control commodity prices the way they control money and credit. For that reason, I think commodities are a better overall gauge of strength in the economy.

The question for investors this year will be something like this: Can central banks keep stock markets around the world afloat despite poor fundamentals? I'm doubtful. They didn't prevent a crash in 2001 or 2008, the first the result of a tech bubble and the second the result of a housing bubble. Both bubbles were caused by easy credit due to low-interest rate policies by central banks that stoked overinvestment. With short-term interest rates near zero for seven years in major economies, central banks are repeating the same mistake again.

Contrary to popular belief, central banks are not omnipotent. The oil and commodity bubbles they helped to blow have already burst. Most of the world's stocks markets are already in bear territory as of January 20. Before the late-week bounce, the U.S.-based S&P 500 Index was down 14 percent from its high in May last year. The Nasdaq Composite was off 16 percent. It's doubtful that any major stock market will simply continue to ignore what is happening in the real economy for too much longer....

The Dallas Federal Reserve Bank was reported to have encouraged banks in its jurisdiction to forebear on energy loans. Essentially, the Dallas Fed was telling banks to ignore losses in their energy portfolios until further notice so as not to cause a panic. The reserve bank quickly denied any such guidance to member banks.

The truth in this particular instance may not matter since what we do know--that energy-related junk bond losses are at 2008 crisis levels--could suggest that energy-related losses at the world's banks may end up being the size associated with the subprime mortgage crisis that brought the global economy to its knees in 2008. It is worth remembering that in 2007 then-Federal Reserve Chairman Ben Bernanke assured the U.S. Congress that "the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained."

6--Robert Samuelson and the Great Stock Crash of 2015

. Consumers are spending a larger share of their income than at any point in the last three decades, except at the peak of the housing and stock bubbles. If they have become more risk averse, it is not showing up in their spending.

The same applies to business managers. Investment spending as a share of GDP is back to its pre-recession level. It would be great if businesses would invest more, but why would we expect them to?

The source of weakness in the economy is the unmentionable elephant in the center of the room, the trade deficit. We have an annual trade deficit of more than $500 billion (@3 percent of GDP). This is a gap that must be made up by increased spending in one of the other components of GDP. (This is basic accounting – it is inescapably true. If you don’t like it, then you have a problem with logic.)

In the late 1990s we filled the hole in demand with demand created by the stock bubble. In the last decade we filled the hole in demand with demand created by the housing bubble. In the absence of bubble-driven demand we could get back to full employment with larger budget deficits, but that is not fashionable with the politicians and policy wonks in Washington. Therefore, we have to spin out wheels and pretend that the weak economy is a big mystery and come up with all sorts of convoluted stories like Samuelson’s about the trauma of the Great Recession.  

One more thing, we owe our large trade deficits to the huge over-valuation of the dollar that we got in the wake of the bailout from the East Asian financial crisis in the late 1990s. This was all the doings of the Clinton administration, which directed the I.M.F.’s bailout of the region.

The failure of the bailout and bubble-driven growth path on which it set the country is why many of us cringe when they hear Hillary Clinton talk about turning to her husband for economic advice in her administration. The last thing we need is another round of bubble-driven growth

7--Is Bank of America on Life Support?

The oncoming recession is going to challenge all four  money centers, but it represents an existential crisis for Bank of America because it's going to move from dealing with mortgage legacy issues to dealing with oil-sector loan defaults without any way of cutting costs or buying revenue by offering lower-cost C&I loans than the other three money centers.

And that assumes the federal loan modification programs that are scheduled to expire at the end of this year are extended.

If that doesn't happen, the bank will have to accelerate the process of resolution for nonperforming mortgages, taking the requisite losses at the same time it's incurring losses on the oil-sector loans, which is an imminent issue.

In that environment, the companies borrowing the C&I loans that have propped Bank of America up for the past seven years become the same ones producing losses on those loans for themselves and the bank, and also precluding new offsetting loans from being originated.

The bank has already steadily reduced its labor force for the past seven years, resulting in a 30% cut in total and the smallest number of full-time employees of all the money centers.

Bank of America is on the verge of having investors realize that the bank is in runoff mode

8--Wall Street falls on global growth fears

So far this year, there has been a near one-to-one correlation between oil prices and the movement of the share market. The fall in the oil price, now down to around $30 per barrel, affects the markets in two key areas—finance and industry.

On the financial side, this is raising concerns in the high-yield or junk bond markets, where the viability of debts incurred when oil was around $100 per barrel are called into question now that the price has plunged by more than 70 percent. “Significantly stressed” US energy companies—that is, companies whose bonds exceed the comparable rates on treasury bonds by 7 to 10 percentage points—are estimated to account for about 20 percent of the high-yield bond market.

Banks could also be directly affected because of write-downs on the loans they have made to oil companies. Even large banks, such as Wells Fargo, Bank of America and JPMorgan Chase, have expressed concern over this possibility—an indication that smaller, regional banks may face bigger problems.

Apart from expressing the general tendency of lower growth, and even recession, falling oil prices also hit major industrial firms that supply the oil producers and exploration companies.

No upturn is expected. ...

9--US-NATO Invade Libya to Fight Terrorists of Own Creation

10--The U.S. Intervention in Libya Was Such a Smashing Success That a Sequel Is Coming

Since then, Libya — so predictably — has all but completely collapsed, spending years now drowning in instability, anarchy, fractured militia rule, sectarian conflict, and violent extremism. The execution of Saddam Hussein was no vindication of that war nor a sign of improved lives for Iraqis, and the same was true for the mob killing of Qaddafi. As I wrote the day after Qaddafi fled Tripoli and Democratic Party loyalists were prancing around in war victory dances: “I’m genuinely astounded at the pervasive willingness to view what has happened in Libya as some sort of grand triumph even though virtually none of the information needed to make that assessment is known yet, including: how many civilians have died, how much more bloodshed will there be, what will be needed to stabilize that country, and, most of all, what type of regime will replace Qaddafi? … When foreign powers use military force to help remove a tyrannical regime that has ruled for decades, all sorts of chaos, violence, instability, and suffering — along with a slew of unpredictable outcomes — are inevitable...

Just as there was no al Qaeda or ISIS to attack in Iraq until the U.S. bombed its government, there was no ISIS in Libya until NATO bombed it. Now the U.S. is about to seize on the effects of its own bombing campaign in Libya to justify an entirely new bombing campaign in that same country

11---Pentagon to release almost 200 photos of tortured Afghan, Iraqi prisoners under court order

After a long-running court battle, the US District Court Judge Alvin Hellerstein ruled that the government should “disclose each and all the photographs” referring to the ACLU’s lawsuit in last March.

However, only 198 images out of some 2,100 pictures will be released on Friday. The major part of the evidence comprising approximately 1,900 photos will remain concealed after US Defense Secretary Ash Carter had invoked his authority under 2009 exemption provision last November.

 “I have determined that public disclosure of any of the photographs would endanger citizens of the United States, members of the United States Armed Forces, or employees of the United States Government deployed outside the United States,”he wrote in the certification renewal in support of his decision to appeal the ruling on November 7

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