by Raul Ilargi Meijer via The Automatic Earth blog
There are many things I don’t understand these days, and some are undoubtedly due to the limits of my brain power. But at the same time some are not. I’m the kind of person who can no longer believe that anyone would get excited over a 5% American GDP growth number. Not even with any other details thrown in, just simply a print like that. It’s so completely out of left field and out of proportion that you would think by now at least a few more people understand what’s really going on.
And Tyler Durden breaks it down well enough in Here Is The Reason For The “Surge” In Q3 GDP (delayed health-care spending stats make up for 2/3 of the 5%), but still. I would have hoped that more Americans had clued in to the nonsense that has been behind such numbers for many years now. The US has been buying whatever growth politicians can squeeze out of the data and their manipulation, for many years. The entire world has.
The 5% stat is portrayed as being due to increased consumer spending. But most of that is health-care related. And economies don’t grow because people increase spending on not being sick and/or miserable. That’s just an accounting trick. The economy doesn’t get better if we all drive our cars into a tree, even if GDP numbers would say otherwise.
All the MSM headlines about consumer confidence and comfort and all that, it doesn’t square with the 43 million US citizens condemned to living on food stamps. I remember Halloween spending (I know, that’s Q4) was down an atrocious -11%, but the Q3 GDP print was +5%? Why would anyone volunteer to believe that? Do they all feel so bad any sliver of ‘good news’ helps? Are we really that desperate?
We already saw the other day that Texas is ramming its way right into a recession, and North Dakota is not far behind (training to be a driller is not great career choice going forward), and T. Boone Pickens of all people confirmed today at CNBC what we already knew: the number of oil rigs in the US is about to do a Wile E. cliff act. And oil prices fall because global demand is down, as much as because supply is up. A crucial point that few seem to grasp; the Saudis do though. Good for US GDP, you say?
What I see more than anything in the 5% print is a set-up for a Fed rate hike, through a variation on the completion backward principle, i.e. have the message fit the purpose, set up a narrative that makes it make total sense for Yellen to hike that rate. And Wall Street banks (that’s not just the American ones) will be ready to reap the rewards of the ensuing chaos.
And I also don’t understand why nobody seems to understand what Saudi Arabia and OPEC have consistently been saying for ever now. They’re not going to cut their oil production. Not going to happen. The Saudis, probably more than anyone, are the guys who know what demand is really like out there (they see it and track it on a daily basis), and that’s why they’ll let oil drop as far as it will go. There’s no other way out anymore, no use calling a bottom anywhere.
In the two largest markets, US demand is down through far less miles driven for a number of years now, while domestic supply is way up; at the same time, real Chinese demand is way below what anybody projects, and oil is just one of many industries that have set their – corporate – strategies to fit expected China growth numbers that never materialized. Just you watch what other – industrial – commodities fields are going to do and show in 2015. Or simply look at prices for iron ore, copper etc. today.
In an unusually frank interview, Ali al-Naimi, the Saudi oil minister, tore up OPEC’s traditional strategy of keeping prices high by limiting oil output and replaced it with a new policy of defending the cartel’s market share at all costs. “It is not in the interest of OPEC producers to cut their production, whatever the price is,” he told the Middle East Economic Survey. “Whether it goes down to $20, $40, $50, $60, it is irrelevant.” He said the world may never see $100 a barrel oil again.
The comments, from a man who is often described as the most influential figure in the energy industry, marked the first time that Mr Naimi has explained the strategy shift in detail. They represent a “fundamental change” in OPEC policy that is more far-reaching than any seen since the 1970s, said Jamie Webster, oil analyst at IHS Energy. “We have entered a scary time for the oil market and for the next several years we are going to be dealing with a lot of volatility,” he said. “Just about everything will be touched by this.”
Saudi Arabia is desperate alright, but not nearly as much as most other producers: they have seen this coming, they’ve been tracking it hour by hour, and then made their move. And they have some room to move yet. Many other producers don’t. Not inside OPEC, and certainly not outside of it. Russia should be relatively okay, they’re smart enough to see these things coming too, and adapt accordingly. Many other nations don’t and haven’t, perhaps simply because they have no room left. Anatole Kaletsky makes quite a bit of sense at Reuters:
… the global oil market will move toward normal competitive conditions in which prices are set by the marginal production costs, rather than Saudi or OPEC monopoly power. This may seem like a far-fetched scenario, but it is more or less how the oil market worked for two decades from 1986 to 2004.
Whichever outcome finally puts a floor under prices, we can be confident that the process will take a long time to unfold. It is inconceivable that just a few months of falling prices will be enough time for the Saudis to either break the Iranian-Russian axis or reverse the growth of shale oil production in the United States. It is equally inconceivable that the oil market could quickly transition from OPEC domination to a normal competitive one.
The many bullish oil investors who still expect prices to rebound quickly to their pre-slump trading range are likely to be disappointed. The best that oil bulls can hope for is that a new, and substantially lower, trading range may be established as the multi-year battles over Middle East dominance and oil-market share play out. The key question is whether the present price of around $55 will prove closer to the floor or the ceiling of this new range. [..]
… the demarcation line between the monopolistic and competitive regimes at a little below $50 a barrel seems a reasonable estimate of where one boundary of the new long-term trading range might end up. But will $50 be a floor or a ceiling for the oil price in the years ahead?
There are several reasons to expect a new trading range as low as $20 to $50, as in the period from 1986 to 2004. Technological and environmental pressures are reducing long-term oil demand and threatening to turn much of the high-cost oil outside the Middle East into a “stranded asset” similar to the earth’s vast unwanted coal reserves. [..]
The U.S. shale revolution is perhaps the strongest argument for a return to competitive pricing instead of the OPEC-dominated monopoly regimes of 1974-85 and 2005-14. Although shale oil is relatively costly, production can be turned on and off much more easily – and cheaply – than from conventional oilfields. This means that shale prospectors should now be the “swing producers” in global oil markets instead of the Saudis.
In a truly competitive market, the Saudis and other low-cost producers would always be pumping at maximum output, while shale shuts off when demand is weak and ramps up when demand is strong. This competitive logic suggests that marginal costs of U.S. shale oil, generally estimated at $40 to $50, should in the future be a ceiling for global oil prices, not a floor.
As Kaletsky also suggests, there is the option of a return to an OPEC monopoly and much higher prices, but I personally don’t see that. It would need to mean a return to prolific global economic growth numbers, and I simply can’t see where that would come from.
Meanwhile, there’s the issue of ‘anti-Putin’ sanctions hurting western companies, with an asset swap between Gazprom and German chemical giant BASF that went south, and a failed deal between Morgan Stanley and Rosneft as just two examples, and that leads me to think pressure to lift or ease these sanctions will rise considerably in 2015. Why Angela Merkel is so set on punishing her (former?) friend Putin, I don’t know, but I can’t see how she can ignore domestic corporate pressure to wind down much longer. Russia is part of the global economic system, and excluding it – on flimsy charges to boot – is damaging for Germany and the rest of Europe.
Finally, still on the topic of oil and gas, Wolf Richter provides another excellent analysis and breakdown of US shale.
It’s showing up everywhere. Take Samson Resources. As is typical in that space, there is a Wall Street angle to it. One of the largest closely-held exploration and production companies, Samson was acquired for $7.2 billion in 2011 by private-equity firms KKR, Itochu Corp., Crestview Partners, and NGP Energy Capital Management. They ponied up $4.1 billion. For the rest of the acquisition costs, they loaded up the company with $3.6 billion in new debt. In addition to the interest expense on this debt, Samson is paying “management fees” to these PE firms, starting at $20 million per year and increasing by 5% every year.
KKR is famous for leading the largest LBO in history in 2007 at the cusp of the Financial Crisis. The buyout of a Texas utility, now called Energy Future Holdings Corp., was a bet that NG prices would rise forevermore, thus giving the coal-focused utility a leg up. But NG prices soon collapsed. And in April 2014, the company filed for bankruptcy. Now KKR is stuck with Samson. Being focused on NG, the company is another bet that NG prices would rise forevermore. But in 2011, they went on to collapse further. In 2014 through September, the company lost $471 million, the Wall Street Journal reported, bringing the total loss since acquisition to over $3 billion. This is what happens when the cost of production exceeds the price of NG for years.
Samson has used up almost all of its available credit. In order to stay afloat a while longer, it is selling off a good part of its oil-and-gas fields in Oklahoma, North Dakota, Wyoming, and Colorado. It’s shedding workers. Production will decline with the asset sales – the reverse of what investors in its bonds had been promised. Samson’s junk bonds have been eviscerated. In early August, the $2.25 billion of 9.75% bonds due in 2020 still traded at 103.5 cents on the dollar. By December 1, they were down to 56 cents on the dollar. Now they trade for 43.5 cents on the dollar. They’d plunged 58% in four months.
The collapse of oil and gas prices hasn’t rubbed off on the enthusiasm that PE firms portray in order to attract new money from pension funds and the like. “We see this as a real opportunity,” explained KKR co-founder Henry Kravis at a conference in November. KKR, Apollo Global Management, Carlyle, Warburg Pincus, Blackstone and many other PE firms traipsed all over the oil patch, buying or investing in E&P companies, stripping out whatever equity was in them, and loading them up with piles of what was not long ago very cheap junk bonds and even more toxic leveraged loans.This is how Wall Street fired up the fracking boom.
PE firms gathered over $100 billion in their energy funds since 2011. The nine publicly traded E&P companies that represent the largest holdings have cost PE firms at least $12.7 billion, the Wall Street Journal figured. This doesn’t include their losses on the smaller holdings. Nor does it include losses from companies like Samson that are not publicly traded. And it doesn’t include losses pocketed by bondholders and leveraged loan holders or all the millions of stockholders out there.
Undeterred, Blackstone is raising its second energy-focused fund; it has a $4.5 billion target, Bloomberg reported. The plunge in oil and gas prices “has not created a lot of difficulties for us,” CEO Schwarzman explained at a conference on December 10. KKR’s Kravis said at the same conference that he welcomed the collapse as an opportunity. Carlyle co-CEO Rubenstein expected the next 5 to 10 years to be “one of the greatest times” to invest in the oil patch.
The problem? “If you have an asset you already own, it’s probably going to go down in value,” Rubenstein admitted. But if you’ve got money to invest, in Carlyle’s case about $7 billion, “it’s a great time to buy.” They all agree: opportunities will be bountiful for those folks who refused to believe the hype about fracking over the past few years and who haven’t sunk their money into energy companies. Or those who got out in time.
We live in a new world, and the Saudis are either the only or the first ones to understand that. Because they are so early to notice, and adapt, I would expect them to come out relatively well. But I would fear for many of the others. And that includes a real fear of pretty extreme reactions, and violence, in quite a few oil-producing nations that have kept a lid on their potential domestic unrest to date. It would also include a lot of ugliness in the US shale patch, with a great loss of jobs (something it will have in common with North Sea oil, among others), but perhaps even more with profound mayhem for many investors in US energy. And then we’re right back to your pension plans.
Experts say institutions will grab deposits without warning28 Sep 2013 by Clark Kent
With the United States facing a $17 trillion debt and an acidic debate in Washington over raising that debt limit on top of a potential government shutdown, Congress could mimic recent European action to let banks initiate a “bail-in” to blunt future failures, experts say.
Previously the federal government has taken taxes from consumers, or borrowed the money, to hand out to troubled banks. This could be a little different, and could allow banks to reach directly into consumers’ bank accounts for their cash.
Authority to allow bank “bail-ins” would be in lieu of approving any future taxpayer bailouts of banks that would be in dire need of recapitalization in order to survive.
Some financial experts contend that banks already have the legal authority to confiscate depositors’ money without warning, and at their discretion.
Financial analyst Jim Sinclair warned that the U.S. banks most likely to be “bailed-in” by their depositors are those institutions that received government bail-out funds in 2008-2009.
Such a “bail-in” means all savings of individuals over the insured amount would be confiscated to offset such a failure.
“Bail-ins are coming to North America without any doubt, and will be remembered as the ‘Great Leveling,’ of the ‘great Flushing’ (of Lehman Brothers),” Sinclair said. “Not only can it happen here, but it will happen here.
“It stands on legal grounds by legal precedent both in the U.S., Canada and the U.K.”
Sinclair is chairman and chief executive officer of Tanzania Royalty Exploration Corp. and is the son of Bertram Seligman, whose family started Goldman Sachs, Solomon Brothers, Lehman Brothers, Bache Group and other major investment banking firms.
Some of the major banks which received federal bailout money included Bank of America, Citigroup and JPMorgan Chase.
“When major banks fail, they are going to bail them out by grabbing the money that is in your bank accounts,” according to financial expert Michael Snyder. “This is going to absolutely shatter faith in the banking system and it is actually going to make it far more likely that we will see major bank failures all over the Western world.”
Given the dire financial straits the U.S. finds itself in, these financial experts say that Congress could look at the example of the European Parliament, which recently started to consider action that would allow banks to confiscate depositors’ holdings above 100,000 euros. Generally, funds up to that level are insured.
Finance ministers of the 27-member European Union in June had approved forcing bondholders, shareholders and large depositors with more than 100,000 euros in their accounts to make the financial sacrifice before turning to the government for help with taxpayer funds.
Depositors with less than 100,000 euros would be protected. Considering protection of small depositors a top priority, the E.U. ministers took pride in saying that their action would shield them.
“The E.U. has made a big step towards putting in place the most comprehensive framework for dealing with bank crises in the world,” said Michel Barnier, E.U. commissioner for internal market and services.
The plan as approved outlines a hierarchy of rescuing struggling banks. The first will be bondholders, followed by shareholders and then large depositors.
Among large depositors, there is a hierarchy of whose money would be selected first, with small and medium-sized businesses being protected like small depositors.
“This agreement will effectively move us from ad hoc ‘bail-outs’ to structured and clearly defined ‘bail-ins,’” said Michael Noonan, Ireland’s finance minister.
The European Parliament is expected to finalize the plan by the end of the year.
The purpose of this “bail-in,” patterned after the Cyprus model, is to offset the need for continued taxpayer bailouts that have come under increasing criticism of the more economically well-off countries such as Germany.
Last March, Cyprus had agreed to tap large depositors at its two leading banks for some 10 billion euros in an effort to obtain another 10 billion European Union bailout.
While this action prevented the collapse of Cyprus’ two top banks, the Bank of Cyprus and Popular Bank of Cyprus, it greatly upset depositors with savings more than 100,000 euros.
WND recently revealed that the practice of “bail-ins” by Cyprus a year ago was beginning to spread to other nations as large depositors began to see their balances plunge literally overnight.
A “bail-in,” as opposed to a bailout that countries especially in Europe have been seeking from the International Monetary Fund and the European Union, is a recognition that such outside monetary injections won’t be forthcoming.
Sinclair said that the recent confiscation of customer deposits in Cyprus was not a “one-off, desperate idea of a few Eurozone ‘troika’ officials scrambling to salvage their balance sheets.”
“A joint paper by the U.S. federal Deposit Insurance Corporation (FDIC) and the Bank of England (BOE) dated December 10, 2012 shows, that these plans have been long in the making, that they originated with the G20 Financial Stability Board in Basel, Switzerland, and that the result will be to deliver clear title to the banks of depositor funds,” Sinclair said.
He pointed that while few depositors are aware, banks legally own the depositors’ funds as soon as they are put in the bank.
“Our money becomes the bank’s, and we become unsecured creditors holding IOUs or promises to pay,” Sinclair said.
“But until now, the bank has been obligated to pay the money back on demand in the form of cash,” he said. “Under the FDIC-BOE plan, our IOUs will be converted into ‘bank equity.’ The bank will get the money and we will get stock in the bank.”
“With any luck,” Sinclair said, “we may be able to sell the stock to someone else, but when and at what price? Most people keep a deposit account so they can have ready cash to pay the bills.”
Such plans already are being used, or under consideration, in New Zealand, Poland, Canada and several other countries.
by Tyler Durden
Whenever the annual change in core capex, also known as Non-Defense Capital Goods excluding Aircraft shipments goes negative, the US has traditionally entered a recession. Where is this number now: +0.8%, and declining fast. Feeling lucky?
Of course, in no other previous recession, was the US Fed holding $3.5 trillion in securities and increasing at a pace of $85 billion per month.
Source: Dept of Commerce
Falling oil prices halted a 30-month growth spurt in Texas’ oil and gas industry boom in June, a new industry report shows.
The Texas Petro Index, which has measured job numbers, rig activity, production totals, wells completed and other related figures across nearly two decades, dropped for the first time since a rush to draw oil from shale caused a surge of drilling in Texas.
The index fell to 270.4 in June from its recent peak in May of 271.5, which was the highest since rapid industry growth pushed it to a record 287.8 in October 2008.
A trend of declining oil prices added to already low natural gas prices to push the Petro Index down, said Karr Ingham, an economist for the Texas Alliance of Energy Producers, which released the study Tuesday.
He said the number of active oil and gas rigs in Texas has fallen further in recent weeks to 900, the lowest level since September 2011, as companies have reassessed expensive operations that are no longer yielding high returns.
Not coincidentally, he said, oil prices have fallen from near $100 in early 2012 to about $79.08 in June. Benchmark crude lost $1.72 Tuesday to end the day at $88.06 per barrel.
Companies may have grown more cautious about aggressive drilling operations, but the leveling off doesn’t necessarily mean a bust is on the horizon, said Michelle Michot Foss, chief energy economist for the University of Texas Center for Energy Economics.
“They’re trying to get a feel for what the price trajectory could be and it’s affecting decisions,” Foss said. But, she added, “I think you would need a much, much more substantial fall in prices to see a really serious drop in activity.”
Texas employment in the fossil-fuel exploration and production industry hit a record of 251,600 in June, Ingham said. But he noted some indicators that point to possible contraction ahead. Texas crude oil production is at its highest level since 1999, but the weakening world economy is pushing demand down, he said.
That has left resource prices languishing.
The recent 30-month rise in the Texas Petro Index was almost exclusively fueled by oil drilling because low prices have curtailed natural gas production relative to its levels in previous expansions.
The monthly average value of Texas oil and gas production exceeded $9 billion in 2008 but has been around $6 billion during the most recent peak in the index, Ingham said.
During the current shale-driven boom, however, employment has soared well above levels in October 2008, he said.
If declining prices bring about a further reduction in drilling activity, Ingham said, “employment will ultimately be affected and there’s of course no way it could not be.”
Turmoil in Europe and a weakening domestic economy have also affected the industry by depressing oil prices, Ingham said.
“All of these terrible things happened in the second quarter and sort of threw a little bit of rain into our parade,” he said.
But Texas oil prices and drilling activity may not be as influenced by broad economic trends as they may have been by recent pipeline developments, said Ed Hirs, a professor of energy economics at the University of Houston.
A recent increase of pipeline capacity bringing oil to the U.S. Gulf Coast may also be pushing prices down, he said.
“Right now you’ve got more domestic supply coming online than the country is accustomed to handling,” Hirs said.
The alliance’s index dates to 1995, when the index was set at a base level of 100.
- Texas oil, gas producers on the cusp of a slowdown? (fuelfix.com)
- Government departments told to prepare for budget revamp if oil prices stay low (calgaryherald.com)
- Drilling activity trending down (mysanantonio.com)
- Eagle Ford a contender for top U.S. play (mb50.wordpress.com)
We first noticed the first signs that the economy was beginning to soften about three months ago. Now the evidence of a slowdown has become so overwhelming that it is difficult to avoid the conclusion that we are headed for a recession. We cite the following as evidence.
Retail sales (both total and non-auto) have dropped for three consecutive months. This has happened only five times since 1967—-four times in 2008, and one now. Vehicle sales have tapered off with May and June being the two weakest months of the year. Consumer confidence for both the Conference Board index and the University of Michigan Survey are at their lowest levels of 2012.
On the labor front, June payroll numbers were weak once again and averaged only 75,000 in the second quarter. The latest weekly new claims for unemployment insurance jumped back up to 386,000 and the last two months have been well above the numbers seen earlier in the year.
The ISM manufacturing index for June fell 3.8 points to 49.7, its first sub-50 reading in the economic recovery. The ISM non-manufacturing index for June dropped to its lowest level since January 2010. Most recently the Philadelphia Fed Survey for July was negative (below zero) for the third consecutive month.
The small business confidence index declined in June to its lowest level since October and has now dropped in three of the last four months. Plans for capital spending and new hiring have dropped sharply.
Despite all of the talk about a housing bottom, June existing home sales fell 5.4% to its lowest level since the fall of last year. In addition mortgage applications for home purchases have been range-bound since October.
Core factory orders, while volatile on a month-to-month basis, have declined 2.6% since year-end, and the ISM numbers cited above indicate the weakness is likely to continue.
The Conference Board Index of leading indicators has declined for two of the last three months and is now up only 1.4% over a year earlier, the lowest since November of 2009, when it was climbing from recessionary numbers. The ECRI Weekly Leading Index is indicating a recession is either here now or will begin in the next few months.
The breadth and depth of the slowdown are greater than the growth pauses experienced in mid-2010 and mid-2011, and indicate a strong likelihood of recession ahead. In addition the foreign economies will be a drag as well. A number of European nations are already in recession and others are on the cusp. The debt, deficit and balance sheet problems of the EU’s southern tier are a long way from any solution, and will not remain out of the news for long. China is coming down from a major real estate and credit boom, and is not likely to avoid a hard landing. The Shanghai Composite is in a major downtrend, declining 28% since April 2011. The view that China is immune because of their unique economic system reminds us of what people were saying about Japan in 1989.
The stock market is ignoring these fundamentals as it did in early 2000 and late 2007 in the belief that the Fed can pull another rabbit out its hat. It couldn’t do it in 2000 or 2007 when it had plenty of weapons at its disposal. Now there is little that the Fed can do, although it will try since it will not get any help, as Senator Schumer so aptly pointed out at Bernanke’s Senate testimony. In sum, we believe that the stock market is in store for a huge disappointment.
- Index of U.S. Leading Indicators Falls More Than Forecast – Bloomberg (bloomberg.com)
- Economic data add to signs of slowing recovery (rep-am.com)
- 12 Signs That The Next Recession In The United States Has Already Begun (judgementofamerica.wordpress.com)
- This is what a recession really is (business.financialpost.com)
- 12 Signs Showing The Next Recession In The U.S. Is Underway (GLD, TZA, FAZ, FAS, INDEXSP:.INX) (etfdailynews.com)
- Recession Now More Likely (blogs.wsj.com)
- 12 Signs That The Next Recession In The United States Has Already Begun (investmentwatchblog.com)