- Hybrid Wars Part 1: Disrupting Multipolarism Through Provoked Conflict
Submitted by Andrew Korybko via OrientalReview.org,
The Law Of Hybrid Warfare
Hybrid War is one of the most significant strategic developments that the US has ever spearheaded, and the transitioning of Color Revolutions to Unconventional Wars is expected to dominate the destabilizing trends of the coming decades. Those unaccustomed to approaching geopolitics from the Hybrid War perspective might struggle to understand where the next ones might occur, but it’s actually not that difficult to identify the regions and countries most at risk of falling victim to this new form of aggression. The key to the forecast is in accepting that Hybrid Wars are externally provoked asymmetrical conflicts predicated on sabotaging concrete geo-economic interests, and proceeding from this starting point, it’s relatively easy to pinpoint where they might strike next.
The series begins by explaining the patterns behind Hybrid War and deepening the reader’s comprehension of its strategic contours. Afterwards, we will prove how the previously elaborated framework has indeed been at play during the US’ Wars on Syria and Ukraine, its first two Hybrid War victims. Next part reviews all of the lessons that have been learned thus far and applies them in forecasting the next theaters of Hybrid War and the most vulnerable geopolitical triggers within them. Subsequent additions to the series will thenceforth focus on those regions and convey why they’re so strategically and socio-politically vulnerable to becoming the next victims of the US’ post-modern warfare.
Patterning The Hybrid War
The first thing that one needs to know about Hybrid Wars is that they’re never unleashed against an American ally or anywhere that the US has premier preexisting infrastructural interests. The chaotic processes that are unleashed during the post-modern regime change ploy are impossible to fully control and could potentially engender the same type of geopolitical blowback against the US that Washington is trying to directly or indirectly channel towards its multipolar rivals. Correspondingly, this is why the US won’t ever attempt Hybrid War anywhere that it has interests which are “too big to fail”, although such an assessment is of course contemporaneously relative and could quickly change depending on the geopolitical circumstances. Nevertheless, it remains a general rule of thumb that the US won’t ever intentionally sabotage its own interests unless there’s a scorched-earth benefit in doing so during a theater-wide retreat, in this context conceivably in Saudi Arabia if the US is ever pushed out of the Mideast.
Geostrategic-Economic Determinants:
Before addressing the geo-economic underpinnings of Hybrid War, it’s important to state out that the US also has geostrategic ones as well, such as entrapping Russia in a predetermined quagmire. The “Reverse Brzezinski”, as the author has taken to calling it, is simultaneously applicable to Eastern Europe through Donbass, the Caucasus through Nagorno-Karabakh, and Central Asia through the Fergana Valley, and if synchronized through timed provocations, then this triad of traps could prove lethally efficient in permanently ensnaring the Russian bear. This Machiavellian scheme will always remain a risk because it’s premised on an irrefutable geopolitical reality, and the best that Moscow can do is try to preempt the concurrent conflagration of its post-Soviet periphery, or promptly and properly respond to American-provoked crises the moment they emerge. The geostrategic elements of Hybrid War are thus somewhat inexplicable from the geo-economic ones, especially in the case of Russia, but in making the examined pattern more broadly pertinent to other targets such as China and Iran, it’s necessary to omit the “Reverse Brzezinski” stratagem as a prerequisite and instead focus more on the economic motivations that the US has in each instance.
The grand objective behind every Hybrid War is to disrupt multipolar transnational connective projects through externally provoked identity conflicts (ethnic, religious, regional, political, etc.) within a targeted transit state.
This template can clearly be seen in Syria and Ukraine and is the Law of Hybrid Warfare. The specific tactics and political technologies utilized in each destabilization may differ, but the strategic concept remains true to this basic tenet. Taking this end goal into account, it’s now possible to move from the theoretical into the practical and begin tracing the geographic routes of various projects that the US wants to target. To qualify, the multipolar transnational connective projects being referred to could be either energy-based, institutional, or economic, and the more overlap that there is among these three categories, the more likely it is that a Hybrid War scenario is being planned for a given country.
Socio-Political Structural Vulnerabilities:
Once the US has identified its target, it begins searching for the structural vulnerabilities that it will exploit in the coming Hybrid War. Contextually, these aren’t physical objects to be sabotaged such as power plants and roads (although they too are noted, albeit by different destabilization teams), but socio-political characteristics that are meant to be manipulated in order to attractively emphasize a certain demographic’s “separateness” from the existing national fabric and thus ‘legitimize’ their forthcoming foreign-managed revolt against the authorities.
The following are the most common socio-political structural vulnerabilities as they relate to the preparation for Hybrid War, and if each of them can be tied to a specific geographic location, then they become much more likely to be used as galvanizing magnets in the run-up to the Color Revolution and as preliminary territorial demarcations for the Unconventional Warfare aspect afterwards:
* ethnicity
* religion
* history
* administrative boundaries
* socio-economic disparity
* physical geography
The greater the overlap that can be achieved among each of these factors, the stronger the Hybrid War’s potential energy becomes, with each overlapping variable exponentially multiplying the coming campaign’s overall viability and ‘staying power’.
Preconditioning:
Hybrid Wars are always preceded by a period of societal and structural preconditioning. The first type deals with the informational and soft power aspects that maximize key demographics’ acceptance of the oncoming destabilization and guide them into believing that some type of action (or passive acceptance of others’ thereof) is required in order to change the present state of affairs. The second type concerns the various tricks that the US resorts to in order to have the target government unintentionally aggravate the various socio-political differences that have already been identified, with the goal of creating cleavages of identity resentment that are then more susceptible to societal preconditioning and subsequent NGO-directed political organizing (linked in most cases to the Soros Foundation and/or National Endowment for Democracy).
To expand on the tactics of structural preconditioning, the most commonly employed and globally recognized one is sanctions, the implicit goal of which (although not always successful) has always been to “make life more difficult” for the average citizen so that he or she becomes more amenable to the idea of regime change and is thus more easily shepherded into acting upon these externally instilled impulses. Less known, however, are the more oblique, yet presently and almost ubiquitously implemented, methods of achieving this goal, and this surrounds the power that the US has to affect certain budgetary functions of targeted states, namely the amount of revenue that they receive and what precisely they spend it on.
The global slump in energy and overall commodity prices has hit exporting states extraordinarily hard, many of which are disproportionately dependent on such selling such resources in order to satisfy their fiscal ends, and the decrease in revenue almost always leads to eventual cuts in social spending. Parallel with this, some states are facing American-manufactured security threats that they’re forced to urgently respond to, thus necessitating them to unexpectedly budget more money to their defense programs that could have otherwise been invested in social ones. On their own, each of these ‘tracks’ is designed to decrease the government’s social expenditure so as to incubate the medium-term conditions necessary for enhancing the prospects of a Color Revolution, the first stage of Hybrid Warfare. In the event that a state experiences both limited revenue intake and an unexpected need to hike its defense budget, then this would have a compound effect on cutting social services and might even push the Color Revolution timeframe forward from the medium- to short-term, depending on the severity of the resultant domestic crisis and the success that the American-influenced NGOs have in politically organizing the previously examined identity blocs against the government.
* * *
Andrew Korybko's book: "Hybrid Wars: The Indirect Approach To Regime Change" can be downloaded here.
- Mystery HFT "Dude" Is Crushing The Turkey Stock Market
"There’s a giant bull in the [Turkey stock market] china shop," exclaims one trader, but (unsually for Turkey), "nobody knows anything for sure" about who he, she, or it is. As Bloomberg reports, a mystery investor who first appeared a year and a half ago with $450 million of bets on a single day, almost double the market average, is now executing major transactions with increasing frequency, scaring away competitors who can’t figure out when he or she will strike next, traders and bankers said.
Turgay Ozaner and his partners at Istanbul Portfolio have been scouring the official daily trading recap for months for signs of the shadowy figure’s identity, but it’s a code they’ve yet to crack. As Bloomberg reports,
“Nobody knows anything for sure,” Ozaner said in his office in a picturesque neighborhood on the shores of the Bosporus. “And this is Turkey, where usually we all know what’s going on.”
At least one European bank’s clients have stopped taking short-term positions in Turkish stocks after concluding the investor is using an algorithmic system in which complex formulas decide trades, while others are avoiding the market until they have more information, a person familiar with the matter said.
“Herif,” or “the dude,” has helped lift the average daily trading volume on the Borsa Istanbul almost 8 percent this year, compared with a 15 percent decline on the main exchange in Warsaw and a 27 percent plunge in Moscow, data compiled by Bloomberg show.
The Borsa Istanbul 100 Index has advanced 13 percent in the period, outpacing Russia’s Micex and Poland’s WIG20.
It’s not rare in emerging markets for a single player to move an index via short-term trades, especially in countries like Turkey that depend on foreign inflows. But nobody in Istanbul has seen anything like what is happening now.
“There’s a giant bull in the china shop,” said Kerem Baykal, a fund manager who oversees about $610 million at Ak Portfoy. “He’s got deeper pockets than anyone else in the game and can move the market in any direction.”
Whoever it is seems to have skipped from one local brokerage to the next honing his system and turning the latest, Yatirim Finansman, into the biggest net buyer on the market by far.
Closely held Yatirim Finansman, which handled less than 2 percent of all trades two years ago, now accounts for the majority on some days.
On Feb. 22, for example, the brokerage placed buy orders for 486 million liras ($167 million) of shares, about 15 times more than Merrill Lynch, the second-biggest dealer that day, according to official data. And in the 16 trading days to March 8, it registered almost 1 billion liras of buy orders for Turkey’s six largest banks and Turkish Airlines — helping push the Borsa index to consecutive three-month highs.
In all of January and February, Yatirim Finansman bought a net 1.23 billion liras of stock, almost 70 percent more than the next largest buyer, UBS Menkul Degerler AS. This is why Istanbul Portfolio’s Ozaner said the secretive buyer is now “making the market.”
However, as Bloomberg concludes, the bigger issue may not be who "the dude" is, but what it is, according to Isik Okte, an investment strategist at TEB Invest/BNP Paribas.
One thing the three brokerages have in common is an ability to accommodate high-frequency traders — firms that rely on algorithms rather than humans to execute their trading ideas.
Borsa Istanbul moved its servers to a new data center late last year in the hope of attracting business from automated traders before it restarts its long-delayed initial public offering. HFT firms often place their servers in the same center to get the fastest possible connection to an exchange’s computers.
Okte said he’s convinced the unknown investor is doing just that.
“This algo guy just discovered a new market and he’s running his own show because there’s not enough competition, but it will come,” Okte said. “We are in the very early stages, but we know from developed markets that machines always win this game.”
Making us wonder if that is the new 'game' – seek smaller, younger algo-friendly markets to exploit… but we thought these were liquidity-providers? We assume – until Borsa istanbul has a flash-crash – Erdogan's totalitarian administration will allow (and encourage) "the dude" to lift the stock market, after all, a higher stock market proves he is doing everything right.
- Energy Wars Of Attrition – The Irony Of Oil Abundance
Authored by Michael Klare via TomDispatch.com,
Three and a half years ago, the International Energy Agency (IEA) triggered headlines around the world by predicting that the United States would overtake Saudi Arabia to become the world’s leading oil producer by 2020 and, together with Canada, would become a net exporter of oil around 2030. Overnight, a new strain of American energy triumphalism appeared and experts began speaking of “Saudi America,” a reinvigorated U.S.A. animated by copious streams of oil and natural gas, much of it obtained through the then-pioneering technique of hydro-fracking. “This is a real energy revolution,” the Wall Street Journal crowed in an editorial heralding the IEA pronouncement.
The most immediate effect of this “revolution,” its boosters proclaimed, would be to banish any likelihood of a “peak” in world oil production and subsequent petroleum scarcity. The peak oil theorists, who flourished in the early years of the twenty-first century, warned that global output was likely to reach its maximum attainable level in the near future, possibly as early as 2012, and then commence an irreversible decline as the major reserves of energy were tapped dry. The proponents of this outlook did not, however, foresee the coming of hydro-fracking and the exploitation of previously inaccessible reserves of oil and natural gas in underground shale formations.
Understandably enough, the stunning increase in North American oil production in the past few years simply wasn’t on their radar. According to the Energy Information Administration (EIA) of the Department of Energy, U.S. crude output rose from 5.5 million barrels per day in 2010 to 9.2 million barrels as 2016 began, an increase of 3.7 million barrels per day in what can only be considered the relative blink of an eye. Similarly unexpected was the success of Canadian producers in extracting oil (in the form of bitumen, a semi-solid petroleum substance) from the tar sands of Alberta. Today, the notion that oil is becoming scarce has all but vanished, and so have the benefits of a new era of petroleum plenty being touted, until recently, by energy analysts and oil company executives.
“The picture in terms of resources in the ground is a good one,” Bob Dudley, the chief executive officer of oil giant BP, typically exclaimed in January 2014. “It’s very different [from] past concerns about supply peaking. The theory of peak oil seems to have, well, peaked.”
The Arrival of a New Energy Triumphalism
With the advent of North American energy abundance in 2012, petroleum enthusiasts began to promote the idea of a “new American industrial renaissance” based on accelerated shale oil and gas production and the development of related petrochemical enterprises. Combine such a vision with diminished fears about reliance on imported oil, especially from the Middle East, and the United States suddenly had — so the enthusiasts of the moment asserted — a host of geopolitical advantages and fresh life as the planet’s sole superpower.
“The outline of a new world oil map is emerging, and it is centered not on the Middle East but on the Western Hemisphere,” oil industry adviser Daniel Yergin proclaimed in the Washington Post. “The new energy axis runs from Alberta, Canada, down through [the shale fields of] North Dakota and South Texas… to huge offshore oil deposits found near Brazil.” All of this, he asserted, “points to a major geopolitical shift,” leaving the United States advantageously positioned in relation to any of its international rivals.
If the blindness of so much of this is beginning to sound a little familiar, the reason is simple enough. Just as the peak oil theorists failed to foresee crucial technological breakthroughs in the energy world and how they would affect fossil fuel production, the industry and its boosters failed to anticipate the impact of a gusher of additional oil and gas on energy prices. And just as the introduction of fracking made peak oil theory irrelevant, so oil and gas abundance — and the accompanying plunge of prices to rock-bottom levels — shattered the prospects for a U.S. industrial renaissance based on accelerated energy production.
As recently as June 2014, Brent crude, the international benchmark blend, was selling at $114 per barrel. As 2015 began, it had plunged to $55 per barrel. By 2016, it was at $36 and still heading down. The fallout from this precipitous descent has been nothing short of disastrous for the global oil industry: many smaller companies have already filed for bankruptcy; larger firms have watched their profits plummet; whole countries like Venezuela, deeply dependent on oil sales, seem to be heading for receivership; and an estimated 250,000 oil workers have lost their jobs globally (50,000 in Texas alone).
In addition, some major oil-producing areas are being shut down or ruled out as likely future prospects for exploration and exploitation. The British section of the North Sea, for example, is projected to lose as many as 150 of its approximately 300 oil and gas drilling platforms over the next decade, including those in the Brent field, the once-prolific reservoir that gave its name to the benchmark blend. Meanwhile, virtually all plans for drilling in the increasingly ice-free waters of the Arctic have been put on hold.
Many reasons have been given for the plunge in oil prices and various “conspiracy theories” have arisen to explain the seemingly inexplicable. In the past, when prices fell, the Saudis and their allies in the Organization of the Petroleum Exporting Countries (OPEC) would curtail production to push them higher. This time, they actually increased output, leading some analysts to suggest that Riyadh was trying to punish oil producers Iran and Russia for supporting the Assad regime in Syria. New York Times columnist Thomas Friedman, for instance, claimed that the Saudis were trying to “bankrupt” those countries “by bringing down the price of oil to levels below what both Moscow and Tehran need to finance their budgets.” Variations on this theme have been advanced by other pundits.
The reality of the matter has turned out to be significantly more straightforward: U.S. and Canadian producers were adding millions of barrels a day in new production to world markets at a time when global demand was incapable of absorbing so much extra crude oil. An unexpected surge in Iraqi production added additional crude to the growing glut. Meanwhile, economic malaise in China and Europe kept global oil consumption from climbing at the heady pace of earlier years and so the market became oversaturated with crude. It was, in other words, a classic case of too much supply, too little demand, and falling prices. “We are still seeing a lot of supply,” said BP’s Dudley last June. “There is demand growth, there’s just a lot more supply.”
A War of Attrition
Threatened by this new reality, the Saudis and their allies faced a painful choice. Accounting for about 40% of world oil output, the OPEC producers exercise substantial but not unlimited power over the global marketplace. They could have chosen to rein in their own production and so force prices up. There was, however, little likelihood of non-OPEC producers like Brazil, Canada, Russia, and the United States following suit, so any price increases would have benefitted the energy industries of those countries most, while undoubtedly taking market share from OPEC. However counterintuitive it might have seemed, the Saudis, unwilling to face such a loss, decided to pump more oil. Their hope was that a steep decline in prices would drive some of their rivals, especially American oil frackers with their far higher production expenses, out of business. “It is not in the interest of OPEC producers to cut their production, whatever the price is,” the Saudi oil minister Ali al-Naimi explained. “If I reduce [my price], what happens to my market share? The price will go up and the Russians, the Brazilians, U.S. shale oil producers will take my share.”
In adopting this strategy, the Saudis knew they were taking big risks. About 85% of the country’s export income and a staggeringly large share of government revenues come from petroleum sales. Any sustained drop in prices would threaten the royal family’s ability to maintain public stability through the generous payments, subsidies, and job programs it offers to so many of its citizens. However, when oil prices were high, the Saudis socked away hundreds of billions of dollars in various investment accounts around the world and are now drawing on those massive cash reserves to keep public discontent to a minimum (even while belt-tightening begins). “If prices continue to be low, we will be able to withstand it for a long, long time,” Khalid al-Falih, the chairman of Saudi Aramco, the kingdom’s national oil company, insisted in January at the World Economic Forum in Davos, Switzerland.
The result of all this has been an “oil war of attrition” — a struggle among the major oil producers for maximum exposure in an overcrowded energy bazaar. Eventually, the current low prices will drive some producers out of business and so global oversupply will assumedly dissipate, pushing prices back up. But how long that might take no one knows. If Saudi Arabia can indeed hold out for the duration without stirring significant domestic unrest, it will, of course, be in a strong position to profit when the price rebound finally occurs.
It is not yet certain, however, that the Saudis will succeed in their drive to crush shale producers in the United States or other competitors elsewhere before they drain their overseas investment accounts and the foundations of their world begin to crumble. In recent weeks, in fact, there have been signs that they are beginning to get nervous. These include moves to reduce government subsidies and talks initiated with Russia and Venezuela about freezing, if not reducing, output.
An Oil Glut Unleashes “World-Class Havoc”
In the meantime, there can be no question that the war of attrition is beginning to take its toll. In addition to hard-hit Arctic and North Sea producers, companies exploiting Alberta’s Athabasca tar sands are exhibiting all the signs of an oncoming crisis. While most tar sands outfits continue to operate (often at a loss), they are now postponing or cancelling future projects, while the space between the future and the present shrinks ominously.
Just about every firm in the oil business is being hurt by the new price norms, but hardest struck have been those that rely on “unconventional” means of extraction like Brazilian deep-sea drilling, U.S. hydro-fracking, and Canadian tar sands exploitation. Such techniques were developed by the major companies to compensate for an expected long-term decline in conventional oil fields (those close to the surface, close to shore, and in permeable rock formations). By definition, unconventional or “tough oil” requires more effort to pry out of the ground and so costs more to exploit. The break-even point for tar sands production, for example, sometimes reaches $80 per barrel, for shale oil typically $50 to $60 a barrel. What isn’t a serious problem when oil is selling at $100 a barrel or more becomes catastrophic when it languishes in the $30 to $40 range, as it has over much of the past half-year.
And keep in mind that, in such an environment, as oil companies contract or fail, they take with them hundreds of smaller companies — field services providers, pipeline builders, transportation handlers, caterers, and so on — that benefitted from the all-too-brief “energy renaissance” in North America. Many have already laid off a large share of their workforce or simply been driven out of business. As a result, once-booming oil towns like Williston, North Dakota, and Fort McMurray, Alberta, have fallen into hard times, leaving their “man camps” (temporary housing for male oil workers) abandoned and storefronts shuttered.
In Williston — once the epicenter of the shale oil boom — many families now line up for free food at local churches and rely on the Salvation Army for clothes and other necessities, according to Tim Marcin of the International Business Times. Real estate has also been hard hit. “As jobs dried up and families fled, some residential neighborhoods became ghost towns,” Marcin reports. “City officials estimated hotels and apartments, many of which were built during the boom, were at about 50-60% occupancy in November.”
Add to this another lurking crisis: the failure or impending implosion of many shale producers is threatening the financial health of American banks which lent heavily to the industry during the boom years from 2010 to 2014. Over the past five years, according to financial data provider Dealogic, oil and gas companies in the United States and Canada issued bonds and took out loans worth more than $1.3 trillion. Much of this is now at risk as companies default on loans or declare bankruptcy. Citibank, for example, reports that 32% of its loans in the energy sector were given to companies with low credit ratings, which are considered at greater risk of default. Wells Fargo says that 17% of its energy exposure was to such firms. As the number of defaults has increased, banks have seen their stock values decline, and this — combined with the falling value of oil company shares — has been rattling the stock market.
The irony, of course, is that the technological breakthroughs so lauded in 2012 for their success in enhancing America’s energy prowess are now responsible for the market oversupply that is bringing so much misery to people, companies, and communities in North America’s oil patches. “At the beginning of 2014, [the U.S.] was pumping so much oil and gas that experts foresaw a new American industrial renaissance, with trillions of dollars in investments and millions of new jobs,” commented energy expert Steve LeVine in February. Two years later, he points out, “faces are aghast as the same oil instead has unleashed world-class havoc.”
The Geopolitical Scorecard From Hell
If that promised new industrial renaissance has failed to materialize, what about the geopolitical advantages that new oil and gas production was to give an emboldened Washington? Yergin and others asserted that the surge in North American output would shift the center of gravity of world production to the Western Hemisphere, allowing, among other things, the export of U.S. liquefied natural gas, or LNG, to Europe. That, in turn, would diminish the reliance of allies like Germany on Russian gas and so increase American influence and power. We were, in other words, to be in a new triumphalist world in which the planet’s sole superpower would benefit greatly from, as energy analysts Amy Myers Jaffe and Ed Morse put it in 2013, a “counterrevolution against the energy world created by OPEC.”
So far, there is little evidence of such a geopolitical bonanza. In Saudi attrition-war fashion, for instance, Russia’s natural gas giant Gazprom has begun lowering the price at which it sells gas to Europe, rendering American LNG potentially uncompetitive in markets there. True, on February 25th, the first cargo of that LNG was shipped to foreign markets, but it was destined for Brazil, not Europe.
Meanwhile, Brazil and Canada — two anchors of the “new world oil map” predicted by Yergin in 2011 — have been devastated by the oil price decline. Production in the United States has not yet suffered as greatly, thanks largely to increased efficiency in the producing regions. However, pillars of the new industry are starting to go out of business or are facing possible bankruptcy, while in the global war of attrition, the Saudis have so far retained their share of the market and are undoubtedly going to play a commanding role in global oil deals for decades to come (assuming, of course, that the country doesn’t come apart at the seams under the strains of the present oil glut). So much for the “counterrevolution” against OPEC. Meanwhile, the landscapes of Texas, Pennsylvania, North Dakota, and Alberta are increasingly littered with the rusting detritus of a brand-new industry already in decline, and American power is no more robust than before.
In the end, the oil attrition wars may lead us not into a future of North American triumphalism, nor even to a more modest Saudi version of the same, but into a strange new world in which an unlimited capacity to produce oil meets an increasingly crippled capitalist system without the capacity to absorb it.
Think of it this way: in the conflagration of the take-no-prisoners war the Saudis let loose, a centuries-old world based on oil may be ending in both a glut and a hollowing out on an increasingly overheated planet. A war of attrition indeed.
- "There Won't Be A Wave Of Layoffs," "No Stimulus Is Needed": China Insists That No One Panic
It would funny to watch as Chinese policymakers attempt to pull off the impossible if it weren’t so downright frightening.
Beijing, long the global engine for growth and trade, finds itself at a rather vexing crossroads. NBS protestations to the contrary, the Chinese economy is decelerating rapidly in the face of a massive rebalancing towards consumption and services-led growth. The country’s move away from a smokestack economy has for all intents and purposes reset assumptions regarding how we think about global trade.
When the perpetual commodities bid from China disappeared, it became quickly apparent that sluggish growth may simply be something the world has to live with for the foreseeable future – especially considering the malaise gripping Brazil and Russia and uncertainties around whether or not India will be able to carry the entirety of the BRICS’ burden.
The problem for the Chinese is that although they have far greater counter-cyclical policy room than does the US or Europe, they’re effectively hamstrung by a massive debt burden that amounts to more than 250% of GDP. You don’t necessarily want to go adding more leverage at a time when an acute overcapacity problem and the attendant slump in commodities has created a situation wherein entire swaths of the industrial sector aren’t able to service their existing debt.
But without more leverage, the economic deceleration becomes even more acute. Which leads us to the conclusion we drew long ago: China is attempting to deleverage and re-leverage at the same time – and that’s obviously impossible. You can see examples of this policy schizophrenia everywhere. For instance, in January, TSF grew by a massive $500 billion and yet meanwhile, Beijing is busy discussing how to kill off unprofitable, highly indebted “zombie companies.”
The proverbial cherry on top is the yuan devaluation debacle which makes it difficult for the PBoC to ease further if they want to avoid exacerbating expectations of a much weaker currency – expectations that led directly to massive capital outflows last year.
It’s with all of that in mind that we bring you comments from two prominent Chinese officials, People’s Bank of China Governor Zhou Xiaochuan and Xiao Yaqing, who oversees the government commission that looks after state assets.
Speaking on the state of the Chinese economy and whether the PBoC will ultimately be forced to do more if things continue on the trajectory they’re on, Zhou did his best to put on a brave face. “Excessive monetary policy stimulus isn’t necessary to achieve the target,” he said, referring to the country’s 6.5% growth goal over five years. “If there isn’t any big economic or financial turmoil, we’ll keep prudent monetary policy,” he added.
Someone apparently forgot to tell Zhou that there indeed is quite a bit of “big economic and financial” turmoil and it emanates from China in the form of the collapsing economy and the carnage wrought in global markets by the bank’s bungled attempt to devalue the RMB.
In any event, he had other soothing words for a market that increasingly looks at China more as a source of turmoil than as the bedrock of the global economy. “There’s no need,” he said, “for anyone to buy dollars in a rush” even though the PBoC is “unable to forecast if the yuan’s volatility will end.” Further, “China won’t rely on exports for GDP growth, [but will instead] depend on domestic demand.” Good luck with that. It’s going swimmingly so far.
(Zhou)
If all of that doesn’t make you feel better about China’s prospects, then just ask the abovementioned Mr. Xiao how things are going with the effort to avoid bankruptcies and thus massive layoffs at SOEs.“The results have been quite good,” he told reporters on Saturday. “Over the past year, the government engineered the merging of 12 big state firms into six entities, mostly in energy and transportation,” WSJ writes, adding that “Mr. Xiao said his agency would press ahead with ‘more mergers and acquisitions’ in the state sector while de-emphasizing bankruptcies.”
China definitely “won’t experience a wave of layoffs,” Xiao promised.
Over the past several weeks, China has been keen to play down the extent to which eliminating excess capacity would trigger sweeping job losses after Li Xinchuang, head of China Metallurgical Industry Planning and Research Institute told Xinhua that solving the overcapacity problem would likely cost 400,000 jobs and could plunge the country into social unrest.
As WSJ goes on to note, reforming and restructuring won’t be easy: “In years past, Beijing has sought to improve state companies’ efficiency through consolidation, with little success. For example, the government of Hebei province, which rings Beijing, merged two major steelmakers to create Hebei Iron and Steel Group. That firm went on to scoop up more companies but is now mired in losses and debt.”
(Xiao)
“[There are] unprecedented difficulties and challenges,” Zhang Xiwu, one of Xiao’s deputies admits.
Amusingly, an Op-Ed by Joe Zhang that appeared in FT this week argues that SOEs may be a better answer than QE, ZIRP, and NIRP when it comes to shoring up the economy. “But there are other ways of stimulating demand. Why, for instance, do western governments refuse to set up state-owned enterprises that will create jobs?,” Zhang asks. “Are they really so much worse than QE and low or negative interest rates?”
Well, maybe not – except when they become massively indebted, fail, and everyone gets fired. When that happens then yes, yes they probably are “so much worse” despite the many perils of unconventional monetary policy.
As we wrote when discussing Li Xinchuang’s comments regarding employment in the steel industry, “just how disconnected from reality China’s official unemployment rate is, both now and one year from today, will ultimately determine how violent the social upheaval will be when – as part of its hard-landing – China proceeds to lay off (tens of) millions of low-skilled workers leading to the inevitable violent response.”
It would be a small (actually scratch that, a “very large”) miracle if Beijing is able to restructure the economy’s collection of elephantine SOEs without creating an employment crisis. And if, as Zhou says, China intends to depend on domestic consumption rather than exports to fuel growth, then the PBoC had better get to explaining how exactly it is that hundreds of thousands of recently jobless factory workers are going to be able to be power the hoped-for but still nascent transformation.
- Japan Is "Fixed" – Machine Orders Suddenly Spike By Most In Over 13 Years
The Aussies did it with their employment data (and then admitted it), and now we see Japan’s Economic and Social reserch Institute post the most ridiculous macro print ever. Over 4 standard deviations from expectations and almost double the highest expectations, Japan Machinery Orders spiked 15.0% MoM – the biggest since Jan 2003.
Up 15% MoM versus expectations for a 1.9% rise… the biggest beat since Feb 2009 (oddly coincidental given everything that is going on)
Core machine orders Rise 8.4% y/y; est. -3.8%, Cabinet Office announces figures in Tokyo.
Some context…
We presume this means that Japan is “fixed” and there will be no need for additional extraordinarily idiotically experimental monetary policy this week?
- BeeR HaLL PuTZ…
- Much More Than Just Trump
Authored by StraightLineLogic's Robert Gore via The Burning Platform blog,
It started in Vietnam. The men who chose to fight for America on Vietnam’s front lines did so for honorable reasons. While there was no immediate threat to the US, some were concerned about falling dominoes and the march of communism. Some were animated by an idealistic desire to secure democracy and liberty in a land that had never known those blessings. Perhaps some went believing that if the leaders of the country said this war was in America’s best interests, it must be so. For those who were drafted, they did, perhaps reluctantly, what they perceived to be their duty.
Whatever their motivations, those who fought found their idealism shattered. Many of the South Vietnamese they thought they were fighting “for” despised the US as the latest in a succession of imperial powers using a corrupt, puppet government as the cat’s paw for its domination. Short of total immolation of both friend and foe—it was often impossible to differentiate the two—there was no effective strategy against guerrilla warfare waged by the enemy fighting on its home turf. The Vietcong proved as difficult to vanquish as hordes of ants and mosquitos at a picnic. The victory the generals and politicians insisted was just another few months and troop deployments down the road never came, and the soldiers knew it never would, long before reality was acknowledged and the troops brought home.
Brutal disillusionment gave way to abject disgust when they returned stateside. They cynically, but understandably, concluded that the antiwar protests had more to do with fear of the draft (there were no major protests after Nixon ended it), and readily available sex and drugs than heartfelt opposition to the war. That conclusion was buttressed by their reception from the antiwar crowd. If they were expecting support and understanding, they didn’t get it. The US victims of the war, those who fought it—the wounded, the physically and psychologically maimed, the dead—were branded as subhuman thugs and baby killers. It was the first time in the history of the US that a substantial swath of the population turned on those who had fought its wars. Those who fought regarded (or, in the case of the dead, would have regarded) those doing the branding as preening, posturing, spoiled children. A subterranean fault line split into a gaping fissure, since widened to a yawning chasm.
The idea that the elite—by dint of their education, intelligence, rarified social circle, and moral sensibility— should rule had reached full florescence during the New Deal, when FDR and his so-called brain trust promised change that most Americans could believe in. Although the elite failed, prolonging the Great Depression, it seemingly redeemed itself directing World War II, leaving the US at an unprecedented pinnacle of global power. Forgetting the failures of the Depression and basking in the hubristic glow, a bipartisan coterie from Washington, Wall Street, industry, the military, and the Ivy League set out to order the world according to their dictates. The US would lead a confederated empire opposing the Soviet alliance. The epochal nature of the struggle justified, in their minds, whatever means were necessary to wage it, including propaganda, espionage, subversion, regime change, and war.
While the Kennedy assassination offered the American public a glimpse into the heart of darkness, only a few independent-minded skeptics challenged the Warren Commission whitewash. Vietnam was different; hundreds of thousands returned knowing not just that the so-called best and brightest couldn’t win the war, but that for years they had lied to the American public. In the following decades, it had to have been especially galling for the Vietnam veterans that the hippies, draft-deferred campus protesters, the “fortunate sons” (google Credence Clearwater) whose numbers never came up, and the mockers of the values they held dear ended up among the elite. The Clintons, of course, became the prime example.
Disaffected veterans were the core of a group that would grow to millions, their “faith” in government and the people who ran it obliterated by its repeated failures and lies. Revolutions dawn when an appreciable number of the ruled realize their rulers are intellectual and moral inferiors. The mainstream media is filled with vituperative, patronizing, and insulting explanations of what’s “behind” the Trump phenomenon. It all boils down to revulsion with the self-anointed, incompetent, pretentious hypocritical, corrupt, prevaricating elite that presumes to rule this country. It is, in a word, inferior to the populace on the other side of the yawning chasm, the ones they have patronized and insulted for decades, and the other side knows it.
Peggy Noonan is one of the few mainstream writers who has tried to understand, rather than insult or condemn, the Trump phenomenon. In a widely cited article, she ascribed it to the split between the “protected,” those who run the government and its allied institutions, and the “unprotected,” the government’s and its allies’ victims (“Trump and the Rise of the Unprotected, The Wall Street Journal, 2/25/16). It was a nice try, but Ms. Noonan is trying to straddle a chasm that cannot be straddled. She writes for the Journal, an establishment organ, some of whose writers have been either so clueless or disingenuous that they have denied the existence of an establishment. And ultimately, the protected-unprotected differentiation doesn’t fly.
Most Trump supporters don’t want the government to do something for them; they want the government to quit doing things to them. They viscerally revile the elite—it’s personal—and they want no part of that class or its government. They know how to take care of themselves, and many know the government hurts the most those whom it ostensibly protects.
Elite sons and daughters have not been in the ranks of front line military that have fought the elite’s disastrous wars. The top and bottom of the service economy swell—lobbyists, political operatives, debt merchants, Internet wizards, lawyers, bureaucrats, waiters, bartenders, nurses, orderlies, sales clerks—while what used to be the heart of the economy—manufacturing—shrinks. The bailouts from the last financial crisis went to Wall Street, not the homeowners with underwater mortgages facing foreclosure. Whose pockets were picked to fund those bailouts? And whose pockets were picked to pay the higher insurance premiums necessary to fund the Obamacare disaster?
It doesn’t take an Ivy League degree to know that the national debt, $19 trillion and counting, is a big, scary number, and that the unfunded Social Security and medical care liabilities coming due are even bigger, scarier numbers. It does, apparently, take an Ivy League degree to believe that more debt is the answer to our economic problems, or that microscopic or negative interest rates will do anything but fund carry-trade speculators and screw those trying to fund their own postponed retirements, or that the limping economy since the financial crisis has “recovered.” Idiotic blather fills the elite, mainstream media, while much truth is suppressed and debate stifled in the name of political correctness.
Not much has changed since Vietnam. The decent besieged are taking fire from all sides, valiantly fighting their way through it, while preening, posturing, spoiled idiots congratulate themselves for running a once great country into the ground. It is a mark of the decent besieged’s decency that they are turning to the ballot box, the politically correct way to change a democratic government. The idiot class should be grateful for their forbearance. Instead, it resorts to means fair and foul to subvert them and maintain its power. Whether Trump does or does not make it all the way to the White House, the wave he’s riding will only grow stronger, tsunami-strength when the economy collapses and the world descends into war. If the idiot class and its rabble subvert him, a quote from John F. Kennedy, recently featured on SLL, will surely come back to haunt them.
Those who make peaceful revolution impossible will make violent revolution inevitable.
- Throwing Off The Industrial Age Shackles
By Chris at www.CapitalistExploits.at
It was my daughter’s 10th birthday on the weekend and, aside from a raft of giggling girls high on sugar, there was a standout gift from Mum and Dad that featured.
A pair of soccer boots? Yeah, I know. She’s a girl and soccer is a boys’ sport, but this girl loves soccer and I’m all for it. Anything that gets her kicking something other than her brother features strongly on my list.
Problem with these boots is that they’re actually a teensy bit small. She loves them to bits and insists they’re perfect but truth is they’re not really. A size up would probably be better but not perfect either as they’d be a wee bit big. Then there is the fact that her foot shape isn’t exactly shaped for the boot, a problem solved by wearing them in.
All of this is understandable since they’re produced in some Chinese factory on a production run and we can’t expect the Chinese factory to be able to tweak the machine to make my daughters’ pair just a little bit wider than usual and a teensy bit longer.
Industrial manufacturing was never designed for this. And as much as I love my daughter I’m not getting tailor made soccer boots made for her either. That would cost a fortune and I’d be forced to sell one of my children for medical experiments to pay for it.
Complexity in the industrial age was an issue. For every complex product produced a complex manufacturing machine or set of machines is required for only one or two products to be manufactured.
All of this is changing thanks to Chuck Hull, the original inventor of 3D printing.
A couple of years ago Nike began 3D printing football cleats for soccer boots and this is of course the tip of the proverbial iceberg.
Complexity with 3D printing is free. The computer doesn’t care about how complex any design is. This is turning design and manufacturing on its head.
In the not too distant future shoes along with other garments are going to be tailor-made based on your foot shape, arch, posture, stance, and any other variables which make your foot unique.
Making Sense of It All
Now anytime the human mind encounters some concept which it hasn’t seen before the reference points are difficult to find. And it is those reference points which help us to understand our world.
Let me therefore provide a reference point.
Dial back the clock to, say, 1990.
Your mates are telling you all about something called a “Game Boy” which sounds amazing; you’ve just watched the latest episode of Seinfeld; Kirsty Alley hasn’t turned into a ball of lard yet; and flicking through a newspaper you find a photograph of Princess Diana in a bikini. You love it and want it. You’ll get it blown up and framed above your new bar.
You hunt down the photographer and thankfully you can actually buy a print. This is then packaged and sent to you and two weeks later you are excitedly opening your package to reveal your prized photograph.
Quaint!
Of course, today we have Flickr, Instagram, Pickit and a dozen other sites where you will simply download any photo and have it printed. And if it’s not quite right you’ll Photoshop it till it is.
Digital Distribution World
Just as we no longer pick up a physical CD to play music (or a DVD from a video store), but instead stream or download what we want so, too, will go the way of manufactured goods. When a part for your car snaps, manufacturers will be sending you a digital file to download and print a new part. Digital distribution of physical items to be printed is no leap of the imagination.
Sitting on our collective horizon is printing of mixed material products. So for example, today you can print a toy car complete with the rubber tyres, a plastic see-through windshield, and a metal chassis.
Where this gets really interesting is when electronics can be included with circuits and sensors and logic. Couple this with the advances made in robotics and you’ll see why we’re on the brink of some of the most amazing disruptive and exciting changes the world’s seen.
Speaking of which… We’ve been working hard over the last few months at putting together a truly amazing event and disruptive technology such as 3D printing is featured strongly.
We have limited seats available so if you want to attend then I suggest going to the event website and booking now in order to avoid missing out what will be an orgy of intellectual brainpower.
– Chris
“Mass production keeps the world divided between consumer and producer. Demassification of production may hasten the speed towards an era of prosumers.” ? Michael Petch
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- 'Bust' Town Texas – "We Never Expected The Good Times To End"
The residents of West Texas are accustomed to a life dependent on hydrocarbons. As Bloomberg reports, the small communities built into the flat desert are dotted with oil pumps and rigs, and the chemical smell of an oil field hangs in the air.
Here the economy rises and falls on drilling.
When the drilling is good, everyone in the town benefits. When it's bad, most of West Texas feels the pinch.
Oil prices have plunged as much as 75 percent since June 2014. That drop has dismal consequences for residents, and not just the ones working in oil fields. Bloomberg spoke with some of the people trying to endure the historic dip in oil prices. This video tells some of their stories….
- "X-Rated" Markets Expose A Gaggle Of Fantasy-Enablers
It was U.S. Supreme Court Justice Potter Stewart’s candor which famously described his test in an obscenity trial (“…I know it when I see it,”) when arguments were posed as to why something did, or did not, meet the threshold exceeding the Roth test. Today, the obscenity as to just how adulterated the very fabric of the financial markets have become was ripped clean and laid bare for all to see this past week.
The markets were sent screaming first down, then up, by nothing more than some economic two-bit fantasy both during, and after, the latest ECB’s monetary dictates. These perversions are so visibly adulterating they can no longer be denied by anyone with a modicum of business, or common sense. They are both fiscally and economically disgusting perversions. Period.
As shameful as this has become, what’s just as disgraceful is the cohort of so-called “smart people” arguing why not only is all this trash good, but also, giving detailed explanations of economic theories, equations, formulas, extrapolations, causation, blah, blah, blah as to explain the nuances of it all. I have just one statement for the so-called “smart crowd.” Please stop it. You are now not only embarrassing yourselves ever the more (if it were even possible at this stage) You are now annoying everyone with any decency of what free markets are supposed to represent. You’ve gone past the once laughable stage to the outright vulgar. So please – spare us.
Today’s Ph.D’s within the Ivory Towers of academia, along with their minions throughout Wall Street, have shown they are nothing more than a gaggle of fantasy enablers and promoters as to perpetuate the delusion that there will be financial ecstasy in the end. Just like there always is for the “whomever” that knocks on the door in all those adult movies. Problem here is: this is the world economy they’re screwing with. Not the entertainment industry.
Today, if you’re trying to run a business of any size just how can one use, or view, the latest move in the markets for possible insights on what to do next? Hint – you can’t. Nothing of it made any sense at all, let alone gave one clues as to whether or not one could properly take meaningful advantage for gains or de-risk accordingly. Want just one example?
Hedged your exposure to volatility via the FX markets? How’d that work out last week? I thought things like that only happened in EM (emerging market) currencies? Well, look no further because the €uro just joined that cast with size and swings that would make an adult star proud.
I have a question for all the “Ph.D” styled economists currently touting their interpretations of why this, and that, or, why that, and not this, will equate into monetary bliss. After all; all I hear, read, or watch is one after another giving their hypothesis and back it up with the implied insinuation others should listen because they’re called “Dr.” more times during an interview than a real doctor is addressed at a hospital. Here’s that question:
What does R²+D/K-(34/8√)X52=? Hint: Absolutely nothing. Just like all the current equations, hypothesis and examples of economic theories spewed across most of the financial media as well as prevalent in Ivy Leagues across the globe. It’s all made up, meaningless, gibberish now shown as the outright alchemy it always was.
Today, it’s all about “the printing press.” (e.g., central bank interventionism) Economy falling off the cliff? Answer: Print. Need to cover over all those troubling data points? Print. Want to keep your place as “player” in the political hierarchy and remain on the “VIP” list? Print. Want to remain in the world spotlight? Print. Want to pick who wins or who loses? Trick question: Print and go deeper into NIRP. (negative interest rates) This way you get them both coming and going. (Sorry, the pun was unavoidable)
However, just when this pornographic display of adulteration into everything financial was thought to be contained on just the “pay per view” terminals. It’s now so endemic it’s reached the mass media as they watch in horror their 401K’s along with their hard-earned savings being exposed to this perversion no matter how far they try to remove themselves from its insidious effects or, even shield their eyes. Today it’s everywhere. And it’s being propagated in ways that would make Larry Flint proud.
It is now being not only acknowledged, but rather, cheered that the “Full Monty” most certainly will include the move into the outright purchasing of corporate bonds. And one thought that was only for the theaters of a “banana republic.” Again, the pun just writes itself. It would be funny if it weren’t so tragic.
I hear from friends, family members, along with others at events that are beginning to show the early stages of outright panic as to what is happening. Many (just like those addicted to porno) constantly now look at their screens whether it be on their phones, terminals et al, more times a day than ever before just to watch their balances go up and down in moves that would make a porn star blush. Why? Absolutely no other reason than a most likely intentional, well manufactured, and placed attention grabbing headline that may, or may not, be proved factual.
Another variation of this outright, blatantly manipulative theater is the latest full-frontal-assault now commonly used by many a central banker that takes to the stage and iterates incoherent remarks resembling “This was not that. Unless it’s this or that. However, be that as it may, it certainly will not be that, unless that is what we need, or not.”
Again, all gibberish as to say nothing more than possibly give the headline reading algorithmic, HFT (high frequency trading) parasites a cue to rip through whatever stop losses deemed “harmful” to the narrative, and clear the sheets of any so-called “true price discovery” that’s somehow discovering the wrong price that the bankers want.
You don’t need to be told what you’re viewing and just how debouched it has now become. It makes it all clear on its very own.
This was once perfectly summarized years ago by Themis Trading™ co-founder Joseph Saluzzi in response to the now routinely used “ambush styled” questioning when demanded he back up his insinuation there was manipulation taking place within the markets. He succinctly replied (I’m paraphrasing) “Proof? All I have to do is look at my screens!”
And there you have it as to explain the “markets” of today. Just like the former Justice once implied: All you need to do is acknowledge what you’re seeing – for what it is. No matter who is arguing differently.
So now the markets are all breathless awaiting the next release in this series of manipulative, market moving, economic dogma to be contemplated, then released, for the markets viewing pleasure (or horror) via this weeks FOMC meeting. All I’ll say is this.
For the sake of civility, refinement and taste – I’ll end here.
- What Happens Next?
Draghi dead-cat-bounce deja-vu all over again…
And what happened next?
Trade accordingly…
- Peak Online Lending? SoFi Starts Hedge Fund Just To Buy Loans From Itself
We’ve written quite a bit about P2P or, more accurately, “marketplace” lending over the years.
Most recently, we noted that write-offs for five-year LendingClub loans were coming in at between 7% and 8% as opposed to the forecast range of between 4% and 6%. “Their business is to take data and use that to underwrite risk,” Compass Point’s Michael Tarkan told Bloomberg by phone. “If you’re an investor in the loans on the platform, this creates a concern around that underwriting model.”
Or, as we put it, “the algorithms LendingClub uses to assess credit risk aren’t working. Plain and simple.”
We also recently checked in on Prosper, the P2P site that inadvertently (we hope) financed Syed Farook and Tashfeen Malik’s San Bernardino jihad with a $28,000 loan. Prosper is raising rates to an average of 14.9% from 13.5% and last month told investors in a letter that estimated losses on loans have been increasing over the last six months.
That came on the heels of a warning from Moody’s who said some Prosper-linked bonds could face downgrades as the loans backing the deals began to go sour. “Charge-offs have been coming in at a higher rate than expected, very simply,” Amy Tobey, a senior credit officer at the ratings agency remarked at the time. “It is not a two-month blip,” she added.
No, it’s not, and concerns about the health of the US economy and the true state of the labor market will likely mean that demand for marketplace-backed paper won’t exactly be what one would call “robust” going forward. Of course that’s a problem for lenders like SoFi, which pools its loans and sells them to free up space on the books for still more loans. It’s the same “originate to sell” model that was used in the lead-up to the housing crisis and that’s now a part of the subprime auto space (although Citi will tell you that it’s not endemic there).
These companies need to be able to offload the loans in order to keep the model running, and if they can’t tap the securitization market, their ability to lend will suffer. But don’t worry, because SoFi – which originates billions in personal loans – has an idea. They will start a hedge fund and buy their own loans.
No, really.
“Social Finance Inc., a rapidly growing online lender, is hoping to stoke investor demand for the debt it originates by starting a hedge fund that will buy its own loans — and potentially those of its competitors,” Bloomberg reports.
The fund, called SoFi Credit Opportunities Fund, has raised $15 million so far. “It’s seeking to attract more money from wealthy individuals, funds of hedge funds and other institutional investors that may not want to buy whole loans directly from the company or securities backed by the debt,” Bloomberg goes on to note.
According to a company spokeswoman, there’s no annual fee and the fund will simply charge 25% on anything above a 3% return. The fund may also look to buy loans sold by other online lenders, in what certainly sounds like the beginning of an absurd P2P merry-go-round where everyone is selling loans to each each other.
SoFi Credit Opportunities could eventually grow to a $500 million to $1 billion fund, WSJ, who originally reported the story said. The company brought its first ABS deal of the year to market this month, but the rate investors demanded on the highest rated tranche was notably higher than it was last year, reflecting market angst. Rather than argue with the market, the company figures it can get around the issue with the hedge fund idea. “[This is] a real chance to solve the balance-sheet problems facing the industry,” Chief Executive Mike Cagney said. Along with CFO Nino Fanlo, Cagney worked at Wells’ prop trading desk, and still works part-time at macro-focused Cabezon Investment Group.
(Cagney)
Now obviously, there are any number of things that can and probably will go wrong here. First the incestuous relationship not just among the fund and Sofi itself, but between the fund and the rest of the industry (assuming they do indeed decide to buy loans from other P2P lenders) means the entire thing is self-referential.
If losses on these loans continue to rise, the hedge fund obviously shouldn’t keep buying them, but they’re putting themselves in a position where they’ll have to, unless lending at SoFi were to grind to a halt. ABS issuance in the space will dry up altogether in a stress scenario and so, the only way for the model to keep going will be for Sofi to keep giving itself money to loan to other people. That will embed more and more bad loans in the hedge fund, which would then invariably see an investor exodus on poor performance. After that, if the securitzation market is slammed shut, it’s not clear what happens next.
Further, although as WSJ goes on to write, “Mr. Cagney said the fund has an independent trustee who must approve purchases of SoFi’s loans to head off conflicts of interest,” both he and Fanlo “sit on an investment committee that must approve trades.”
Obviously, when the going gets tough, Cagney’s not going to not favor SoFi if his company needs money to keep making loans. As a reminder, this entire thing depends on non-deposit funding.
At the end of Q4, Peer IQ wrote that the Marketplace ABS market was hardly shutting down. In fact Q4 was “a busy one” for securitizations.
But that won’t continue in perpetuity if charge-offs continue to rise.
It’s worth noting that LendingClub has a subsidiary called LC Advisors which does something similar to what SoFi is doing, but technically, LC isn’t a hedge fund. We hope LC hasn’t been buying the parent’s five-year loans.
Consider the following excerpts from EuroMoney:
Take the peer-to-peer lending industry, which is often anything but. As the size and number of participants has grown, it has morphed into marketplace lending with banks originating the loans, selling them to marketplace intermediaries who subsequently sell to institutional investors. If that doesn’t sound a million miles away from originate-to-distribute, it is because it isn’t.
There are now more than 100 marketplace lenders in the US, the largest of which are Lending Club and Prosper Marketplace. Both of these firms have relied on a small, Salt Lake City-based lender, WebBank, for much of their business. Lending Club disbursed more than $4 billion in 2014, most of which was originated by WebBank and Prosper Marketplace used WebBank to source $1.6 billion of lending last year.
The bank, which has an ROE of 44%, originates the loan but immediately sells the risk on to the marketplace lender. It all sounds eerily reminiscent of banks originating sub-prime mortgages and selling them to third party vehicles to securitise.
Exactly. And now, in addition to the securitizations which are likely to experience waves of downgrades, you have the lenders starting their own hedge funds just to keep the model going.
This will one day seem like a laughably bad idea in retrospect. Especially when people start figuring out what the borrowers were spending the loans on.
Finally, if you needed another reason to not trust SoFi’s new hedge fund, here you go (again, from Bloomberg): “Last month, SoFi said it had hired former Deutsche Bank AG co-Chief Executive Officer Anshu Jain as an adviser.”
- Trump Threatens "Communist Friend" Bernie, Swamps Rubio In Florida
Amid the maelstrom of Sunday's political show machinations over Trump's rallies, one awkward fact remains – The Donald's lead increases. The latest NBC/Marist polls show Trump 'swamping' Rubio in his home state of Florida (43% to 21%), a solid lead in Illinois (34% to Cruz's 25%), and is closing the gap on Kasich in Ohio (33% to Kasich's 39%). However, as Reuters reports, despite the growing social unrest, The Donald shows no sign of toning down his rhetoric, theatening to send his supporters to the campaign rallies of "Communist friend" Bernie Sanders and hammering Kasich's "Ohio recovery" narrative.
Donald Trump took a defiant tone in response to criticism that his fiery language is inciting violence, denying that anyone has been injured at his campaign events and threatening to send his supporters to disrupt Senator Bernie Sanders’s rallies.
“I don’t accept responsibility,” the 2016 Republican presidential front-runner said Sunday on NBC’s “Meet The Press” broadcast. “We had somebody that was punching and vicious and had gone crazy. They’re not protesters. They’re professionals.”
Trump, appeared unchastened after simmering discord between his supporters and protesters angry over his positions on immigration and Muslims turned into a palpable threat on Friday, forcing him to cancel a Chicago rally and shadowing his campaign appearances on Saturday.
Trump blamed supporters of Democratic candidate Sanders for the incidents in Chicago, where scuffles broke out between protesters and backers of the real estate magnate. He called the U.S. senator from Vermont "our communist friend".
On Sunday, he went a step further in an early morning post on Twitter:
Bernie Sanders is lying when he says his disruptors aren't told to go to my events. Be careful Bernie, or my supporters will go to yours!
— Donald J. Trump (@realDonaldTrump) March 13, 2016
The scenes in Chicago followed several weeks of violence at Trump rallies, in which protesters and journalists have been punched, tackled and hustled out of venues, raising concerns about security leading into the Nov. 8 presidential election to replace Democratic President Barack Obama.
The disturbances continued on Saturday at a Trump rally in Dayton, Ohio, where Secret Service officers scrambled to surround the candidate after a man charged the stage.
Trump scheduled rallies on Sunday in Illinois, Ohio and Florida before the next five presidential nominating contests on Tuesday, which could cement his lead over Republican rivals U.S. Senators Ted Cruz and Marco Rubio and Ohio Governor John Kasich.
Trump, who has harnessed the discontent of white, working class voters angry over international trade deals that cost them jobs, has made his opposition to the 1993 North American Free Trade Agreement and proposed 12-nation Trans-Pacific Partnership a centerpiece of his campaign.
He has hammered Kasich on the issue before Tuesday's vote.
Ohio Gov.Kasich voted for NAFTA, from which Ohio has never recovered. Now he wants TPP, which will be even worse. Ohio steel and coal dying!
— Donald J. Trump (@realDonaldTrump) March 13, 2016
But as Politico reports, Donald Trump is swamping Sen. Marco Rubio in his home state of Florida, while John Kasich is holding on to a lead in Ohio, according to new NBC/Marist polls released Sunday morning.
Trump is winning 43 percent of the vote in Florida, compared to just 22 percent for Rubio.
Texas Sen. Ted Cruz is essentially tied with Rubio, earning 21 percent, while Kasich brings up the rear with a mere 9 percent. Florida is winner-take-all and awards 99 delegates.
Kasich has a significant lead in Ohio, earning 39 percent of the vote to 33 percent for Trump. Cruz has 19 percent and Rubio has just six percent. Kasich's campaign has long pegged Ohio as a must-win on the governor's Midwestern-centric path to the nomination. Ohio, like Florida, is winner-take-all.
Trump also leads in Illinois with 34 percent of the vote to Cruz's 25 percent. Kasich has 21 percent and Rubio has 16 percent.
All three states vote Tuesday, along with the states of Missouri and North Carolina. Establishment Republicans have said denying Trump a win there is crucial to preventing him from earning a majority of delegates at the Republican National Convention.
- Goldman Warns Its Clients They Are Overlooking "The Largest Macro Market Risk"
In the aftermath of Friday’s market “reassessment” and subsequent surge, when the ECB’s “bazooka” was found quite stimulative for risk assets after all (as opposed to the Thursday post-kneejerk reaction) one would think that Goldman which still has a 2,100 year end target on the S&P500, would be delighted. Oddly enough, just like Bank of America, Goldman’s reaction is somber, and instead of joining the euphoria unleashed by the surge in energy, momentum and corporate debt-related risk, the firm’s chief strategist David Kostin says the bounce won’t last as it is on the back of firms with “Weak Balance Sheet”, and that both energy and momentum stocks will return their downward trajectory once the dollar it rise as soon as the week when the Fed reverts to a far more hawkish stance.
As Kostin explains, a big part of the unwind of the recent renormalization in value-vs-momentum factors, is on the back of the spike in oil:
Earlier in the week commodity prices, and specifically crude oil, caused violent swings in market momentum that has dominated investor focus. After rising by 31% in 2015, our momentum factor (ticker: GSMEFMOM) has declined by 5% YTD, with its volatility leaping to the highest levels since 2009. This month alone the factor has experienced daily returns falling in the 2nd percentile (-3%) and 99th percentile (+5%) since 1980. Energy firms currently account for 25% of the factor’s short leg. Since bottoming at $26 on February 11, WTI crude has risen by $12 (44%) and driven the S&P 500 Energy sector to outperform the broad market by 265 bp (12% vs. 9%).
These unprecedented whipsawed moves have caught most by surprise:
The correlation between major macro trends has caught many popular investment themes in the momentum spin cycle. In 2015 and the first weeks of this year, lower oil prices were accompanied by lower Treasury yields and downward revisions to US growth expectations, boosting the performance of popular growth stocks and defensive equities while weighing on banks. At the same time, the US dollar, which carries a strong negative correlation with oil, strengthened by nearly 15% and presented another headwind to the US economy. The combination of growth concerns and low oil prices widened credit spreads to recessionary levels and benefitted the performance of stocks with strong balance sheets. All of these trends have reversed sharply in recent weeks (see Exhibits 1 and 2).
Kostin warns, just as Jeff Currie did earlier this week, that the oil rally is not sustainable and is actually counterproductive to eliminating near term supply imbalances, as the higher the bear market rally pushes oil, the more production will go back online, ultimately defeating the purpose of the Saudi shale “cleanse”, perhaps forcing the Saudis to boost output once again.
Our commodity strategists believe that the surge in commodity prices is premature and unsustainable. They believe that an extended period of lower prices is necessary to force the financial stress that will cause a reduction in supply, rebalance the market and lead to an eventual sustainable rally. They continue to forecast a trendless but volatile oil market, with spot crude prices in 2Q 2016 ranging between $25 and $45/bbl.
Which brings us to the main point of this post: what Goldman thinks is not being priced in by investors: a return to a hawkish Fed, and a resumption in the climb of the dollar.
While investors focus on oil and the ECB, they overlook the largest current macro market risk – and opportunity – which centers on the Fed. Next Wednesday the FOMC will announce a rate decision, release its revised projections, and hold a press conference. Although our economists expect rates will remain unchanged, a credible argument can be made for the FOMC to proceed with the “flight path” it had previously outlined. The unemployment rate stands at 4.9%, and core inflation has surprised to the upside, with PCE rising to 1.7% in February. Our economists expect three 25 bp funds hikes in 2016. However, despite the Fed standing within striking distance of its dual mandate, investors have rejected this forecast. Fed futures prices currently imply less than a 50% chance of a hike in June, and only two full rate hikes through the end of 2017.
The punchline: “The market’s eventual acceptance of the Fed tightening path will spur some parts of the momentum trade to resume and others to unwind.“
In other words, just as we took the elevator up after taking it down just as fast in February, and then again in early January, the whole process may repeat, especially if the stronger USD leads to the now well-known retaliation by the PBOC. To wit:
Fed tightening, especially contrasted with easing by the ECB and BOJ, should drive the dollar higher and benefit domestic-facing US stocks. As we discussed last week, our FX strategists expect policy divergence and interest rate differentials will drive the USD higher by 8% this year.
Who knows, maybe Goldman’s FX strategist Robin Brooks will finally get one right.
As for Kostin’s forecast…
We forecast a tightening Fed and lower oil prices will return upward momentum to the performance of stocks with strong balance sheets. Strong balance sheet stocks began to outperform their weak balance sheet counterparts as QE ended. We believe the trend will continue as the Fed normalizes policy given that leverage for the median S&P 500 stock stands at the highest level in a decade
For Goldman to be warning about the market’s near record leverage ratio (when coupled with the ECB’s scramble to unlock the debt/buyback issuance channel) things must be perilously close to getting unhinged.
In summary:
Although the recent oil rally tightened credit spreads and eased the pressure on weak balance sheet stocks, we expect high leverage and tighter financial conditions will support strong balance sheet stocks as the cycle matures. The reversal in crude oil prices expected by our commodity strategists should hasten the dynamic.
How to trade this? For the Goldman faders (after all Goldman got exactly one of its Top 6 trades for 2016 right) it means buy momentum and sell value; for those who believe that the market will actually appreciate the fundamentals that not only we, but even Goldman is now pounding the table on, the time to fade the momentum and energy rally has arrived, and the best trade to put on is long companies with less net debt, while shorting those companies which continue to see their leverage rise, mostly as a result of another year of record debt-funded stock buybacks.
Here’s the problem though: while this trade would have worked easily before the ECB decided to start buying corporate debt, now that the European central bank is backstopping bond issuers, it will almost certainly lead to even more outperformance by weak balance sheet companies as yet another central bank intervention unleashes another divergence between fundamentals and central planning.
- Oil Prices Should Fall, Possibly Hard
Submitted by Art Berman via ArtBerman.com,
Oil prices should fall, possibly hard, in coming weeks. That is because fundamentals do not support the present price.
Prices should fall to around $30 once the empty nature of an OPEC-plus-Russia production freeze is understood. A return to the grim reality of over-supply and the weakness of the world economy could push prices well into the $20s.
Saudi Arabia’s Minister of Petroleum & Mineral Resources Ali Al-Naimi speaks at the annual IHS CERAWeek global energy conference Tuesday, Feb. 23, 2016, in Houston.
A Production Freeze Will Not Reduce The Supply Surplus
An OPEC-plus-Russia production cut would be a great step toward re-establishing oil-market balance. I believe that will happen later in 2016 but is not on the table today.
In late February, Saudi oil minister Ali Al-Naimi stated categorically, “There is no sense in wasting our time in seeking production cuts. That will not happen.”
Instead, Russia and Saudi Arabia have apparently agreed to a production freeze. This is meaningless theater but it helped lift oil prices 37% from just more than $26 in mid-February to almost $36 per barrel last week. That is a lot of added revenue for Saudi Arabia and Russia but it will do nothing to balance the over-supplied world oil market.
The problem is that neither Saudi Arabia nor Russia has greatly increased production since the oil-price collapse began in 2014 (Figure 1). A freeze by those countries, therefore, will only ensure that the supply surplus will not get worse because of them. It is, moreover, doubtful that Saudi Arabia or Russia have the spare capacity to increase production much beyond present levels making the proposal of a freeze cynical rather than helpful.
Figure 1. Incremental liquids production since January 2014 by the United States plus Canada, Iraq, Saudi Arabia and Russia. Source: EIA & Labyrinth Consulting Services, Inc. (click image to enlarge)
Saudi Arabia and Russia are two of the world’s largest oil-producing countries. Yet in January 2016, Saudi liquids output was only ~110,000 bpd more than in January 2014 and Russia was actually producing ~50,000 bpd less than in January 2014. The present world production surplus is more than 2 mmbpd.
By contrast, the U.S. plus Canada are producing ~1.9 mmbpd more than in January 2014 and Iraq’s crude oil production has increased ~1.7 mmbpd. Also, Iran has potential to increase its production by as much as ~1 mmbpd during 2016. Yet, none of these countries have agreed to the production freeze. Iran, in fact, called the idea “ridiculous.”
Growing Storage Means Lower Oil Prices
U.S. crude oil stocks increased by a remarkable 10.4 mmb in the week ending February 26, the largest addition since early April 2015. That brought inventories to an astonishing 162 mmb more than the 2010-2014 average and 74 mmb above the bloated levels of 2015 (Figure 2).
Figure 2. U.S. crude oil stocks. Source: EIA and Labyrinth Consulting Services, Inc. (click image to enlarge)
The correlation between U.S. crude oil stocks and world oil prices is strong. Tank farms at Cushing, Oklahoma (PADD 2) and storage facilities in the Gulf Coast region (PADD 3) account for almost 70% of total U.S. storage and are critical in WTI price formation. When storage exceeds about 80% of capacity, oil prices generally fall hard. Current Cushing storage is at 91% of capacity, the Gulf Coast is at 87% and combined, they are at a whopping 88% of capacity (Figure 3).
Figure 3. Cushing and Gulf Coast crude oil storage. Source: EIA and Labyrinth Consulting Services, Inc. (click image to enlarge)
Prices have fallen hard in step with growing storage throughout 2015 and early 2016. Since talk of a production freeze first surfaced, however, intoxicated investors have ignored storage builds and traders are testing new thresholds before they fall again.
The truth is that prices will not increase sustainably until storage volumes fall, and that cannot happen until U.S. production declines by about 1 mmbpd.
Despite extreme reductions in rig count and catastrophic financial losses by E&P companies, production decline has been painfully slow. The latest data from EIA indicates that February 2016 production will fall approximately 100,000 bpd compared to January (Figure 4).
Figure 4. U.S. crude oil production and forecast. Source: EIA STEO, EIA This Week In Petroleum, and Labyrinth Consulting Services, Inc. (click image to enlarge)
That is an improvement over the average 60,000 bpd monthly decline since the April 2015 peak. It is not enough, however, to make a difference in storage and storage controls price.
EIA and IEA will publish updates this week on the world oil market balance and I doubt that the news will be very good. IEA indicated last month that the world over-supply had increased almost 750,000 bpd in the 4th quarter of 2015 compared with the previous quarter. EIA data corroborated those findings and showed that the surplus in January 2016 had increased 650,000 bpd from December 2015.
Oil Prices and The Value of the Dollar
Why, then, have oil prices increased? Partly, it is because of hope for an OPEC production freeze and that sentiment is expressed in the OVX crude oil-price volatility index (Figure 5).
Figure 5. Crude oil volatility index (OVX) and WTI price. Source: EIA, CBOE and Labyrinth Consulting Services, Inc. (click image to enlarge)
The OVX reflects how investors feel about where oil prices are going. It is sometimes called the “fear index.” That suggests that investors are feeling pretty good and less fearful about the oil markets than in the last quarter of 2015 when oil prices fell 47%. Since mid-February, prices have increased 37%.
But there is more to it than just hope and that may be found in the strength of the U.S. dollar. The negative correlation between the value of the dollar and world oil prices is well-established. The oil-price increase in February was accompanied by a decrease in the trade-weighted value of the dollar (Figure 6).
Figure 6. U.S. Dollar value vs. WTI NYMEX futures price. Source: EIA, U.S. Federal Reserve Bank and Labyrinth Consulting Services, Inc. (click to enlarge)
Now, that trend has reversed. The U.S. jobs report last week was positive so continued strength of the dollar is reasonable for awhile. Assuming the usual correlation, that means that oil prices should fall.
Oil Prices Should Fall Hard
It is a sign of how bad things have gotten in oil markets that we feel optimistic about $35 oil prices. It should also be a warning that the over-supply that got us here has not gone away.
Oil storage volumes continue to grow and that is the surest indication that production has not declined enough yet to make a difference. It is impossible to imagine oil prices rising much beyond present levels until storage starts to fall. In fact, it is difficult to understand $35 per barrel prices based on any measure of oil-market fundamentals.
The OPEC-plus-Russia production freeze is a cynical joke designed to increase their short-term revenues without doing anything about production levels. An output cut would make a difference but a freeze on current Saudi and Russian production levels means nothing. It apparently made some investors feel better but it didn’t do anything for me. Iran got this one right by calling it ridiculous.
No terrible economic news has surfaced in recent weeks but that does not change the profound weakness of a global economy that is burdened with debt and weak demand. The announcement last week by the People’s Bank of China that it sees room for more quantitative easing may have comforted stock markets but it only added to my anxiety about reduced oil consumption and future downward shocks in oil prices.
I hope that oil prices increase but cannot find any substantive reason why they should do anything but fall. As market balance reality re-emerges in investor consciousness and the false euphoria of a production freeze recedes, prices should correct to around $30. A little bad economic or political news could send prices much lower.
- Nassim Taleb Sums Up America's Election In 17 "Black Swan" Words
Sometimes, less is more, and in infamous “Black Swan” philosopher Nassim Taleb’s case, summing up the chaos that is enveloping America, and its forthcoming election was as simple as the following:
“The *establishment* composed of journos, BS-Vending talking heads with well-formulated verbs, bureaucrato-cronies, lobbyists-in training, New Yorker-reading semi-intellectuals, image-conscious empty suits, Washington rent-seekers and other “well thinking” members of the vocal elites are not getting the point about what is happening and the sterility of their arguments.”
To which he appended the following 17 perfectly succinct words:
“People are not voting for Trump (or Sanders). People are just voting, finally, to destroy the establishment.”
- "Let Them Come For Me!" Maduro Defiant As Thousands Protest In Venezuela
Some Venezuelans aren’t happy with Nicolas Maduro, and it’s easy to see why.
Inflation in the socialist paradise is projected to run at a mind boggling 720% this year after topping 200% in 2015. Long queues are common at grocery stores, where the country’s beleaguered citizens wait in hopes of grabbing the last of increasingly scarce basic staples like rice and, famously, toilet paper. According to a trade group of drug stores, 90% of medicines are now scarce.
As we documented last month, the acute economic crisis – Venezuela is the worst performing economy in the world – is the result of years of disastrous policies pursued by the socialist government which has pushed out private industry and badly mismanaged the country’s oil wealth. Default is now virtually assured, as 90% of crude revenue needs to be diverted to debt payments. Thanks to rising imports and falling oil sales, the CA deficit has worsened, forcing Caracas to liquidate assets to fund a budget deficit that’s projected to hover near 20% of GDP for the foreseeable future.
The economic malaise has fueled a political crisis. Last month, Maduro used a Supreme Court stacked with allies to push through a decree granting the presidency “emergency powers.” Opposition lawmakers – who, you’re reminded, in December won 99 of 167 seats that were up for grabs in what amounted to the worst defeat in history for Hugo Chavez’s leftist movement – were livid and decided to accelerate plans to remove to the hapless leader.
Those plans will include a recall referendum and an amendment aimed at reducing the length of the President’s term. Oh, and those plans also include inciting mass protests.
“Venezuela’s opposition held a national day of protest Saturday, the opening salvo in its new strategy to oust President Nicolas Maduro, who responded with a rally of his own,” AFP reports. “With shouts of ‘Resign now!’ thousands of Venezuelans demonstrated against Maduro in northeast Caracas, as the socialist president gathered thousands of his own red-clad supporters in the center of the capital to chants of ‘Maduro won’t go!’”
As AFP goes on to note, it’s a small miracle no one was killed considering the tension and what happened in 2014 when anti-government protests left dozens dead. Here are the visuals from the capital:
“Venezuela is in chaos … more misery, more crime and more destruction,” one law student among opposition supporters told Reuters. “I came because what we want is change, because we cannot continue standing in line to buy medicine, food, for everything, for car parts, for everything,” another demonstrator said.
Maduro was predictably defiant, giving a “thundering” speech to supporters at what he called an “anti-imperialist rally.” “Let them come for me. Nobody’s giving up here!” he said. “I imagine him in Miraflores (presidential palace.) My God, save us from that! There’d be a national insurrection a week later,” he added, referencing opposition leader Henry Ramos.
Of course there’s already a “national insurrection” – and he’s the target.
“My opponents,” Maduro boomed, “have gone crazy [and I will] hang on to power until the final day.” Here’s an amusing picture from the speech:
Although some in the opposition crowds said they were “expecting more people,” you can bet the groundswell of support for the anti-Maduro movement will only grow – especially now that a majority of lawmakers want to President gone.
There’s only so long the populace is going to tolerate inflation that appears as though it may eventually top 1,000% and without higher oil prices, the country’s reserves (along with its gold) will be gone in a matter of months. A desperate attempt on Energy Minister Eulogio Del Pino’s part to convince fellow OPEC members to come to an agreement on lifting prices was a miserable failure last month and as documented earlier today, Iran isn’t about to budge.
Perhaps it will take a sovereign default for the parts of the population who still buy Maduro’s “blame the imperialists” rhetoric to finally wake up, but make no mistake, Maduro’s pledge to “hang to power until the final day” will be put to the test in relatively short order. Whether or not that test comes from lawmakers or angry, torch-waving Venezuelans demanding toilet paper remains to be seen.
- Martin Armstrong Exclaims "Central Bankers Are Crazy & The Public Is Out Of Its Mind"
Submitted by Martin Armstrong via ArmstrongEconomics.com,
The central bankers are simply crazy, not evil.
They are trying to steer the economy by utilizing this simpleton theory that if you make something cheaper, someone will buy it. Japanese and German cars managed to get a major foothold in the U.S. because the quality of U.S. manufacturers collapsed, thanks to unions. The socialist battle against corporations forgot something important – the ultimate decision maker is the consumer. The last American car I bought in the 1970s simply caught on fire while parked in my driveway. Another friend bought a brand-new American car and there was a terrible rattle. When they took the door panel off, there was an empty bottle of Coke inside.
Cheaper does not always cut it. Gee, shall we cheer if the stock market goes down by 90%? It would be a lot cheaper. Why does the same theory not apply?
Then we have the trading public.
If the central bankers have gone crazy with this whole negative interest rate theory, then the public is simply out of their minds. The euro rallied because Draghi cut rates further, extended the stimulus another year, increased the amount by another 33%, and then declared rates would stay there for years to come. And these insane traders cheer. Unbelievable! They are celebrating the public admission of Draghi that all his efforts to date have failed, so let’s do even more of the same. And they love this nonsense?
Negative interest rates have become simply a tax on saving money and the stupid traders and media writers love it. The Fed tries to raise rates and they say – NO! This is a stunning combination of admission and stupidity that one would expect from a pretty but clueless girl and her drunk college boyfriend who can’t say no to any girl: “I asked John if he slept with Karen and got his admission!”…“I told him, Oh that’s cool, I think it’s probably about time you stopped drinking.”
All they see is that lower interest rates “should” stimulate but ignore the fact that they never do. They are too stupid to grasp the fact that raising taxes cannot be offset by lower interest rates. People judge everything by the bottom-line and not some crazy theory that’s just stupid. A simple correlation study by a high school student in math class would prove this theory does not correlate to the expected outcome. And we cheer this insanity confirming our own overall stupidity and one is left wondering who is crazier?
I suppose it is just that central bankers are crazy and the public, as well as the media, are just out of their minds.
It reminds me of the old TV commercial by Wendys:
- "They Should Leave Us Alone": Iran Wants No Part Of Oil Freeze Until Output Higher
On Tuesday, Kuwait’s oil minister Anas al-Saleh delivered a rather stark warning to the rest of OPEC when he said the following about the much ballyhooed crude output freeze: “I’ll go full power if there’s no agreement. Every barrel I produce I’ll sell.”
That was a response to a question about what Kuwait would do if all major producers failed to agree to the freeze. Of course “all major producers” includes Iran and having just now begun to enjoy the financial benefits of being free to sell its oil without the overhang of crippling international sanctions, Tehran isn’t exactly thrilled about the idea of capping production at the current run rate of around 3 million b/d.
As soon as sanctions were lifted, Iran immediately committed to boosting production by 500,000 b/d and said that by the end of the year, it would bring an additional 500,000 b/d of supply online. That would put Iranian production at around 4 million b/d total and, as we noted back in January, would mean the country will be raking in between $3 and $5 billion every month by the end of 2016.
Whether or not those numbers are ultimately achievable is debatable, but the point is, Iran came back to market at a rather inauspicious time. President Hassan Rouhani is attempting to rebuild his country’s economy and Tehran is attempting to attract tens of billions in investments. Taking the foot off the pedal now would be a bitter pill to swallow.
On Sunday, we got the latest from Iranian Oil Minister Bijan Zanganeh and the message was unequivocal: “They should leave us alone as long as Iran’s crude oil has not reached 4 million. We will accompany them afterwards.”
So based on January’s ouput of 2.93 barrels, we’ve got a ways to go here. One can hardly blame Tehran. After all, the Saudis are producing at a record pace. So are the Russians. And so are the Iraqis. As Reuters writes, “sanctions had cut crude exports from a peak of 2.5 million bpd before 2011 to just over 1 million bpd in recent years.” There’s a lot of lost time (and money) to recover here and if everyone else gets to “go full power” – to quote Anas al-Saleh – then Tehran thinks they should as well.
Zanganeh went on to say that $70 was a “suitable” price for oil. He’ll meet Russian Energy Minister Alexander Novak on Monday. No details about the meeting were available.
So, as we said on Tuesday, “one can forget about a production freeze well into 2017 if not forever since by then at least one if not more OPEC members will be bankrupt.”
This comes as analysts are increasingly split over the prospects for prices. For their part, Goldman called any sustained bounce “self-defeating” as “energy needs lower prices to maintain financial stress to finish the rebalancing process.”
The IEA on Friday called Iran’s return to market “less dramatic” than anticipated and suggested prices may have bottomed. “For prices there may be a light at the end of what has been a long, dark tunnel, but we cannot be precisely sure when in 2017 the oil market will achieve the much-desired balance,” the agency said.
We can’t either. But what we can be sure of is that even if one wants to characterize Iran’s move to ramp production as “less dramatic” than Tehran might have anticipated, their refusal to cap that “less dramatic” production hike at 3 million b/d will cause the likes of Kuwait – which itself churns out 3 million b/d – to refuse to support what is already an exceptionally tenuous proposal to freeze output. And the cumulative effect of the enitre effort breaking down could prove to be quite “dramatic” indeed.
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