Oil And Debt: The BIS Examines The Consequences Of Financialization

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Posted By The Bank for International Settlements
Since mid-2014, after remaining relatively stable for four years at close to $100, the price of crude oil has dropped by roughly 50% in US dollar terms.1
Changes in production and consumption seem to fall short of a fully satisfactory explanation of the abrupt collapse in oil prices. The last two episodes of comparable oil price declines (1996 and 2008) were associated with sizeable reductions of oil consumption and, in 1996, with a significant expansion of production. This seems to be in stark contrast to developments since mid-2014, during which time oil production has been close to prior expectations and oil consumption has been only a little weaker than forecast (Graph 1, left-hand panel). Rather, the steepness of the price decline and very large day-to-day price changes are reminiscent of a financial asset. As with other financial assets, movements in the price of oil are driven by changes in expectations about future market conditions. In this respect, the recent OPEC decision not to cut production has been key to the fall in the oil price.
However, other factors could have exacerbated the fall in oil prices. One important new element is the substantial increase in debt borne by the oil sector in recent years. The greater willingness of investors to lend against oil reserves and revenue has enabled oil firms to borrow large amounts in a period when debt levels have increased more broadly. Issuance by energy firms of both investment grade and high-yield bonds has far outpaced the already substantial overall issuance of debt securities (Graph 1, right-hand panel).

This post was published at David Stockmans Contra Corner on February 7, 2015.

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The End of the Line Report Feb 6 2015

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The following video was published by InvestmentResearchDynamics on Feb 6, 2015
The End of the Line Report (working title) is a joint venture between Dave Kranzler and Rory Hall to deliver multiple updates throughout the week. Our focus will be on what is happening right now. What broke today, what lies surfaced today, what is happening with the market today. Did another banker “suicide” himself with a nail gun? The items that are at the top of the list. We hope to deliver an informative and entertaining look at the deceitful market action along with a variety of hot button items.
The videos will be short and to the point, but lengthy enough to provide a little flavor of what actually happened and how it could possibly impact you and your family.

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A Very Pernicious Partnership: Keynesian Money Printers And Wall Street Gamblers

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No sooner than the January jobs report was released than the Wall Street Journal posted a succinct headline: ‘Hiring, Wages Pick Up as Job Market Nears Full Health’.
Whether the job market is actually as red hot as the BLS’ headline numbers is a debatable topic, but it is absolutely clear that the ‘emergency’ the Fed cited 73 months ago when its pegged the money market rate a zero has long since vanished. Indeed, by the standards of all prior history, ZIRP was a death bed remedy. Prior to December 2008, the Fed had never, ever pegged the funds rate at zero – not even during the Great Depression.
So if the US economy did generate new jobs at the 4 million annual rate implicit in the November-January average, how is it that not only is the money market still pinned to the zero bound, but that the Fed continues to energetically waffle over how many more months it will remain there? Don’t these people know what the words ‘emergency’ and ‘extraordinary measures’ mean in plain English?
Not that it really matters. The truth is, the stubborn and unaccountable continuance of a crisis era monetary policy in the face of a purportedly booming labor market reflects something altogether different than economic common sense. Namely, it is the product of a pernicious partnership of convenience between the Keynesian money printers who dominate the Fed and the gamblers who inhabit the Wall Street casino. Together they virtually smoother any recognition that the current juxtaposition is just plain nuts.
As it happened, not more than 60 minutes after the WSJ headline appeared the usual suspects were at work explaining a condition that seemed anomalous even to the cheerleaders on CNBC.
First, the Fed’s PR man at the WSJ posted a ‘Hilsenramp’, reminding the gamblers that the ‘whopping increases in payroll employment in recent months’ don’t necessarily mean that the party will end any time soon. You need to understand the code words, he explained:

This post was published at David Stockmans Contra Corner by David Stockman ‘ February 6, 2015.

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China’s Monumental Debt Trap – -Why It Will Rock The Global Economy

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Bloomberg News finally did something useful this morning by publishing some startling graphs from McKinsey’s latest update on the worldwide debt tsunami. If you don’t mind a tad of rounding, the planetary debt total now stands at $200 trillion compared to world GDP of just $70 trillion.
The implied 2.9X global leverage ratio is daunting in itself. But now would be an excellent time to recall the lessons of Greece because the true implications are far more ominous.

This post was published at David Stockmans Contra Corner by David Stockman ‘ February 5, 2015.

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The Great Global Dollar Short – – Clearing Some Misconceptions

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Every once in a while, you get the sense that the officialdom is starting to come around to the legion of finance as it actually exists rather than the one printed inside the dusty textbooks still crowded within the halls of academia. The ‘rising dollar’ of the past six months has left its mark of bewilderment, as so many economists are rushing to see it as they want to not as it actually makes sense with the world around us. A ‘strong dollar’ is assumed to be testament to the successes of monetarism, especially when the US is breeding GDP where others cannot seem to gain any traction whatsoever.
If the US is the cleanest dirty shirt, then the Fed did something very right, and the ‘dollar’ supposedly recognizes that. So it was interesting to see in Barron’s, of all places, a roundtable discussion about the subject that actually alluded to the ‘dollar’ rather than the dollar.
The dollar was strong against every major currency in the world last year. That hasn’t happened in at least 25 years.
Mainstream economists are telling us that the dollar is strong because of growth differentials among countries, and an impending interest-rate hike in the U. S. They don’t understand the true reasons for the strong dollar.
So far so good.
The Federal Reserve, under Alan Greenspan and Ben Bernanke, pursued a monetary policy that kept interest rates too low. It weakened the U. S. currency, which became a funding currency around the world. Corporations issued dollar-denominated debt. According to the Bank of International Settlements, there is $9 trillion of dollar-denominated debt outstanding in the private sector around the world. That is the short position.

This post was published at David Stockmans Contra Corner by Jeffrey P. Snider ‘ February 5, 2015.

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Sequester the Empire: The Pentagon Is A Swamp Of Waste And Its Bombs/Drones A Fount Of Blowback

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The fake debate over the misnamed ‘defense’ budget underscores everything that’s wrong with our foreign policy, our political system, and the crooks who rule the roost in Washington.
This Washington Post piece on the politics surrounding the issue tells us everything we need to know about how the political class – and its journalistic camarilla – operates. Although the authors cite a figure – $561 billion – nowhere do we read that this is an all-time high. Yet that’s just the beginning of what’s wrong with Washington.
In any debate, one would reasonably expect the two sides to disagree, but not in this case. Both the President and his Republican opposition agree that the military budget must be radically expanded – and that the Congress needs to break its own sequestration law in order to do it. As the Post puts it:
‘There’s broad consensus in both parties that the military needs more money to modernize its forces and meet its responsibilities in a world that seems to have grown more chaotic and dangerous in the past 12 months. It’s unclear, however, how Congress and the White House can come to an agreement on where to find the additional funds.’
No one in Washington is willing to admit that the rising chaos is a direct result of the US ‘meeting its responsibilities’ to conquer Iraq, occupy Afghanistan, and undertake regime change operations in Libya, Syria, andUkraine. That’s because they all had a hand in it.
Instead of facing reality – a political no-no in the District of Columbia – an elaborate fantasy is constructed within the framework of an illusory partisan ‘debate.’ ‘The battle over the budget that President Obama will submit Monday,’ the Post breathlessly informs us, ‘is emerging as a preview of the 2016 presidential election on national security, an area that for now appears to be the greatest vulnerability of Obama and the Democrats.’
How so? After all, the President is asking Congress to disregard the spending caps he himself put in place in order to eke out an extra $38 billion for the military. Doesn’t this prove his militarist bona fides? Not by Washington standards it doesn’t:

This post was published at David Stockmans Contra Corner by Justin Raimondo ‘ February 4, 2015.

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Hong Kong is doomed – foolishly lowering and even eliminating taxes

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The government committee was clear – if nothing was to be done, the government’s finances would be doomed in as little as seven years.
The Finance Secretary had some tough decisions to make. Raising more revenue for the government over the next few years is crucial.
He was also being targeted and mocked because his ministry’s predictions for economic performance and taxes raised have been consistently wrong every year since 2007.
This is common for government agencies in pretty much every country, but Hong Kong is possibly the worst – they continually underestimate the numbers.
The government will finish the fiscal year ending next month, for example, with a surplus of at least HK$60 billion (probably more, given how horrible they are at forecasting), which is six times more than the finance ministry projected.
A surplus! Who does that anymore??
Couldn’t they find something else to spend money on? Armored vehicles and combat gear for the police (they did face a massive uprising just a few months ago after all)? Welfare? Crony subsidies? Drones? New government committees and agencies? Surveillance?

This post was published at Sovereign Man on February 5, 2015.

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THE GOLDEN AGE OF QE and the FIAT ENDGAME…

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As you are doubtless aware we are living in a new paradigm – the age of global QE has arrived. Amongst the major power blocs it started with the US, spread to Japan, which adopted it with a particular gusto, after suffering from deflation for decades, and just has been taken up by Europe in a big way, after waiting for half its young people in many constituent countries to become unemployed due to the ravages of deflation. Smaller countries will have to join in or their currencies will soar and they will become uncompetitive.
It is vital to understand that, having become a universal policy, QE is here to stay – this is a genie that can’t be put back into the bottle. The reason is that any attempt to reverse course and rein it in would quickly lead to soaring interest rates because of immense debt levels, a global market crash and a liquidity crisis, in other words a deflationary implosion. Another important to note is that in this ‘Golden Age of Fiat’ where money does not have to be backed by anything and where our masters are accountable to no-one, they can indulge in as much QE as they like.
QE has a number of huge advantages for the ruling elites. First of all it allows them to remain in power indefinitely, because credit crises and the social strife that follows can be avoided by the simple expedient of printing ever more money – the European elites were slow to grasp this point, but judging from the magnitude of their just announced QE, they definitely understand this now. As we know, one of the maxims of the elites is to ‘privatize profits and socialize losses’ – put crudely and simply, when they make money they keep it all to themselves, but when they goof up and lose money, they will push the bill onto the general population, the middle and lower classes – a brazen and glaring example of this being when the ‘too big to fail’ banks and other big institutions in the US got society at large to bail them out at the height of the financial crisis via TARP, the Troubled Asset Relief Program, which of course was not put to a vote.
QE is just another enormous scam, a principal objective of which is to socialize bank and government debt by inflating it onto the masses. They print money (QE), hand as much of it as they please to their crony pals in banks and other powerful elite controlled institutions, and then the increase in money supply reduces the relative magnitude of government debt, since while the debt is nominally the same, there is much more money in existence to service it or pay it off. The public then picks up the tab in the form of inflation as the increased money supply drives up prices.

This post was published at Clive Maund on January 29th, 2015.

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The Great PE Multiple Expansion Of 2011-2014: Why The Market Must Eventually Crater

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The earnings season is all over except for the shouting, but the outcome doesn’t remotely validate Wall Street’s happy times narrative. Reported Q4 earnings for the S&P 500 companies (with about two-thirds reporting) stand at $25.02 per share compared to $26.48 in the year ago quarter. That’s right. So far Q4 profits are down 5% but shrinking corporate profits is something that you most definitely have not heard about on bubble vision.
That’s because the talking heads invariably reference ‘adjusted’ or ‘ex-items’ earnings, which, almost by definition, exclude charges for every imaginable business mistake and bonehead executive action – -such as soured M&A deals and ‘restructuring’ expense – – that could possibly cause earnings to go down. For the four-year period 2007-2010, as I outlined in the Great Deformation, the ex-items profit figure hawked by the Wall Street analysts was a cool one-half trillion dollars or 30% higher than the GAAP profits reported to the SEC on penalty of jail time.
But that’s just the tip of the iceberg. The real truth coming out of this earnings season is that we have had a tremendous inflation of PE multiples during the last three years in anticipation, apparently, of the US economy hitting escape velocity and the overall global economy continuing to power onwards and upwards. As is evident from the financial news and ‘incoming’ data, however, that presumption is not remotely correct.
So when Wall Street calls a great multiple expansion party that doesn’t pan out – – what happens next doesn’t require a labored explanation. The untoward course of market action in the year after 1999 and 2007, respectively, speaks for itself. But the point here is that the eventual market correction this time could be a doozy. The magnitude of PE multiple expansion triggered when the Fed and other central banks went all in with ZIRP and QE has been enormous, and it has also gone largely unremarked upon.

This post was published at David Stockmans Contra Corner by David Stockman ‘ February 4, 2015.

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Here We Go Again: The Robo Machines Are Raging

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Here we go again. The robo machines have been raging for the past two days, and by mid-afternoon we were hovering around 2045 on the S&P 500. Since that’s only 2.3% below the all-time high reached at the end of December, bubblevision’s amen chorus was back out in force, pronouncing that all is well, the momentary headwinds are fading and, yes, the bottom’s in.
Not exactly. The robo machines are actually drunk. The S&P 500 first shot through 2045 back on about November 13th, and was then on its way to 2070 by early December. It then reversed course and plunged through 2045 from above on December 10, reaching a low of 1989 a few days later. Shortly thereafter the market erupted back over 2045 on December 18th – -as it soared along an upward path to its year-end and all-time peak of 2090.
As is evident in the chart below, the zigzagging has only gotten more intense and frequent since the turn of the year. By January 2, the S&P 500 plunged back below the 2045 mark, but five days later was back above it; then it was down again on January 9, back up on January 21, and back down on January 26. So here we are on February 3 back above 2045 – – virtually the same spot as early November.
The market is cycling, but the economic facts on the ground are not. Everywhere the trends are getting worse, and not by trivial or debatable increments. Were the stock market an actual discounting device engaged in price discovery, it would be heading south – not in circles.

This post was published at David Stockmans Contra Corner by David Stockman ‘ February 3, 2015.

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Nestl’s New Treat: Draghi’s Negative-Yield Vortex Draws in Corporate Bonds

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(Bloomberg) – Credit markets are being so distorted by the European Central Bank’s record stimulus that investors are poised to pay for the privilege of parking their cash with Nestle SA.
The Swiss chocolate maker’s securities, which have the third-highest credit ranking at Aa2, may be among the first corporate bonds to trade with a negative yield, according to Bank of America Corp.’s London-based strategist Barnaby Martin. Covered bonds, which are bank securities backed by loans, started trading with yields below zero at the end of September.
With the growing threat of falling prices menacing the euro-area’s fragile economy, some investors are calculating it’s worth owning Nestle bonds, even with little or no return. That’s because yields on more than $2 trillion of the developed world’s sovereign debt, including German bunds, have turned negative and the ECB charges 0.2 percent interest for cash deposits.
‘In the same way that bunds went negative, there’s nothing, in theory, to stop short-dated corporate bond yields going slightly negative as well,’ Martin said. ‘If investors want to park some cash, the problem with putting it in a bank or money market fund is potential negative returns, because of the negative deposit rate policy of the ECB.’

This post was published at David Stockmans Contra Corner on February 3, 2015.

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History In the Balance: Why Greece Must Repudiate Its ‘Banker Bailout’ Debts And Exit The Euro

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Now and again history reaches an inflection point. Statesman and mere politicians, as the case may be, find themselves confronted with fraught circumstances and stark choices. February 2015 is one such moment.
For its part, Greece stands at a fork in the road. Syriza can move aggressively to recover Greece’s democratic sovereignty or it can desperately cling to the faltering currency and financial machinery of the Euro zone. But it can’t do both.
So by the time the current onerous bailout agreement expires at month end, Greece must have repudiated its ‘bailout debt’ and be on the off-ramp from the euro. Otherwise, it will have no hope of economic recovery or restoration of self-governance, and Syriza will have betrayed its mandate.
Moreover, the stakes extend far beyond its own borders. If the Greeks do not take a stand for their own dignity and independence at what amounts to a financial Thermopylae, neither will the rest of Europe ever escape from the dysfunctional, autocratic, impoverishing superstate regime that has metastasized in Brussels and Frankfurt under cover of the ‘European Project’.
Indeed, the crony capitalist corruption and craven appeasement of the banks and financial markets that have become the modus operandi there are inexorably destroying the EU and single currency. By fleeing the euro and ECB with all deliberate speed, therefore, the Greeks will give-up nothing except the opportunity to be lashed to the greatest monetary train wreak ever recorded.
So Greek Finance Minister Yanis Varoufakis has the weight of history on his shoulders as he makes the rounds of European capitals this week. His task in not merely to renounce the ham-handed ‘austerity’ dictated by the Troika. Apparently even the French are prepared to acknowledge that the hideous suffering that has been imposed on Greece’s less fortunate citizens must be alleviated. Yet the latter is only a symptom of what’s wrong and what stands in the way of a real solution.

This post was published at David Stockmans Contra Corner by David Stockman ‘ February 2, 2015.

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Memo To Yellen: What ‘Escape Velocity’ – -The Q4 GDP Report Was Not ‘Solid’

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Janet Yellen and her band of money printers think they are driving the GDP forward toward the nirvana of full employment and the achievement of every last dime of ‘potential GDP’. What they are actually doing, instead, is inflating the Wall Street bubble to ever more dangerous heights because their monetary injections never make it to the real main street economy; they just whirl around in the canyons of Wall Street where they enable speculators to wildly inflate the price of risk assets.
Now comes another GDP report card, this one ‘disappointing’. Not only does it refute the claim of the Wall Street Keynesian chorus that the U. S. economy hit ‘escape velocity’ last spring and summer, but it is also chock-a-block full of evidence that the Fed’s machinations have nothing to do with the performance of the real economy.
As usual, the seasonally adjusted numbers on a annualized basis are full of noise – -the most significant being inventory fluctuations. The latter flattered the 5% number that so excited the headline writers last quarter, but had the opposite impact this time. The actually gain in real financial sales, therefore, was only 1.8% – -even more tepid than the headline.
But the annualized quarterly figures just don’t cut it, in any event. National defense spending in Q4 declined at a whopping 13.2% annualized rate, but unfortunately, it did not reflect the actual hard-chop to the Pentagon’s budget that is long over-due. It was just the payback for the anomalous annualized growth of 15% in Q3. The latter period tracks the fiscal year-end in September, and therefore the big figure which ballooned Q3 GDP did not reflect economic growth at all – – just the usual scramble of bureaucrats to waste money at year end before appropriations lapse.

This post was published at David Stockmans Contra Corner by David Stockman ‘ January 30, 2015.

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Fed Statement: Not Dovish, Not Hawkish – -Just Gibberish

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Call it 529 words of gibberish and be done!
All of the FOMC’s platitudes about the economy ‘expanding at a solid pace’, labor market conditions which have ‘improved further’, household spending which is ‘rising moderately’ and business fixed investment which is ‘expanding’ are not simply untruthful nonsense; they are a smokescreen for the Fed’s actual intention. Namely, to keep the Wall Street gamblers in free money in the delusional hope that ever rising stock prices will generate a trickle down of ‘wealth effects’ in the main street economy.
But in equivocating still another time about when they intend to get the Fed’s big fat ZIRP thumb off the money market, the denizens of the Eccles Building have shown their true colors. The FOMC is not really comprised of economists or central bankers. It is simply a groupthink posse of spineless cowards who are petrified of a Wall Street hissy fit – – and are therefore willing to dispense whatever spurious word clouds they judge may be necessary to keep the gamblers hitting the ‘bid’ until the next meeting.
After all, how can it possibly be true that notwithstanding all the ‘solid’ economic advances it crowed about in the opening paragraph, the Fed still intends to maintain zero interest rates through mid-year – or for what will be an out-of-this-world 80 months running? As recently as 10 years ago that incredulous juxtaposition – -a solid economy coupled with desperate policy measures – -would have been laughed out of court by even the Fed’s own economists.
In fact, we don’t have a solid economy at all, and the halting advances of recent years have absolutely nothing to do with Fed policy. Instead, the utterly trite macroeconomic commentary contained in its meeting statements is a form of Keynesian ritual incantation based on a delusional conceit. Namely, that left to its own devices the US economy would chronically sink into a recessionary stupor, and that it is only the deft interventions of the central bank which nudge the $18 trillion US economy back onto the path toward full employment and the realization of ‘potential GDP’.

This post was published at David Stockmans Contra Corner by David Stockman ‘ January 29, 2015.

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Alexis Tsipras’ Open Letter Nails The Stupendous Folly Of Brussels’ ‘Extend And Pretend’

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Alexis Tsipras’ ‘open letter’ to German citizens published on Jan.13 in Handelsblatt, a leading German language business newspaper
Most of you, dear Handesblatt readers, will have formed a preconception of what this article is about before you actually read it. I am imploring you not to succumb to such preconceptions. Prejudice was never a good guide, especially during periods when an economic crisis reinforces stereotypes and breeds biggotry, nationalism, even violence.
In 2010, the Greek state ceased to be able to service its debt. Unfortunately, European officials decided to pretend that this problem could be overcome by means of the largest loan in history on condition of fiscal austerity that would, with mathematical precision, shrink the national income from which both new and old loans must be paid. An insolvency problem was thus dealt with as if it were a case of illiquidity.
In other words, Europe adopted the tactics of the least reputable bankers who refuse to acknowledge bad loans, preferring to grant new ones to the insolvent entity so as to pretend that the original loan is performing while extending the bankruptcy into the future. Nothing more than common sense was required to see that the application of the ‘extend and pretend’ tactic would lead my country to a tragic state. That instead of Greece’s stabilization, Europe was creating the circumstances for a self-reinforcing crisis that undermines the foundations of Europe itself.
My party, and I personally, disagreed fiercely with the May 2010 loan agreement not because you, the citizens of Germany, did not give us enough money but because you gave us much, much more than you should have and our government accepted far, far more than it had a right to. Money that would, in any case, neither help the people of Greece (as it was being thrown into the black hole of an unsustainable debt) nor prevent the ballooning of Greek government debt, at great expense to the Greek and German taxpayer.

This post was published at David Stockmans Contra Corner on January 29, 2015.

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How ‘Mr. Dig Dig’ Buried Wuhan In Debt: Local Government Financing Vehicles Are At The Heart Of China’s Ponzi

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WUHAN, China – A little over a year ago, a Chinese credit agency downgraded a government-owned financing company in this dusty industrial city. Default – nearly unheard-of in China on government bonds – was a possibility, it said.
But during discussions with lenders, city officials made sure Wuhan Urban Construction Investment & Development Corp. could keep borrowing, officials with knowledge of the matter say. The city during those discussions said it backed the finance firm, essentially guaranteeing the debt, and helped the company restructure its assets to entice investors to lend more.
Borrowing by firms like Wuhan Urban is a big reason China’s debt load is expanding. The International Monetary Fund says China’s debt is growing more rapidly than debt in Japan, South Korea and the U. S. did before they tumbled into deep recessions. Local-government borrowing is responsible for one-fourth of the buildup in China’s overall domestic debt since 2008.
Beijing in early December took a step to rein in rampant borrowing by local-government firms. China’s clearing agency for bonds surprised the market on Dec. 8 with new rules to prohibit investors from using low-grade debt to borrow cash. The order contributed to a selloff in mainland-Chinese securities ranging from government bonds to stocks, as investors sold liquid assets – including bonds from local-government financing companies – to raise cash. China’s markets have since rebounded but remained volatile.

This post was published at David Stockmans Contra Corner on January 28, 2015.

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The Wreck Of The Monetary Hesperus

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For 73 months running the Fed has lashed the money markets to the gross financial anomaly of ZIRP. Never before in the history of the world has any central bank or other monetary authority decreed that overnight money shall be indefinitely free to gamblers or that liquid savers should have their hard earned wealth chronically confiscated by negative returns after inflation and taxes. And, needless to say, never have savers and borrowers in a free market struck a bargain night after night after night at 0% for six years running, either.
Yet now comes another Fed meeting and announcement that our monetary overlords will be ‘patient’ with zero cost money for several more meetings. Indeed, there are even hints that the era of ZIRP could extend beyond mid-summer – that is, for more than 80 months.
So an urgent question screams out. Don’t these obstinate zealots realize that zero cost overnight money has only one use, and that is to fund the carry trades of Wall Street gamblers?
Accordingly, are they not even more culpable than Longfellow’s skipper, who perished along with the fair daughter he lashed to his ship’s mast because he insouciantly belittled a ferocious storm made by nature? By contrast, these benighted folks at the Fed are actually fueling their own hellish financial storm, thereby leaving in mortal danger the main street economy which they, too, have foolishly nailed to the mast of ZIRP.
The reason that ZIRP is of exclusive benefit to financial gamblers is straight forward. No businessman in his right mind would fund equipment, inventories or even receivables with borrowings under a one-day or even one-week tenor. The risk of fatal business disruption resulting from the need to precipitously liquidate working assets if funding can not be rolled-over at or near the existing interest rates is self-evident.
Likewise, no sane householder would buy a home, automobile or even toaster on overnight borrowings, either. And, yes, financial institutions experiencing the daily ebb and flow of cash excesses and deficiencies do use the money market. But managing fluctuating cash balances does not require ZIRP – -especially when most banks alternate between being suppliers and users of funds on practically an odd/even day basis. Cash balances in the financial system can be cleared at 0.2%, 2% or 5% with equal aplomb.

This post was published at David Stockmans Contra Corner by David Stockman ‘ January 28, 2015.

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It’s A 3-Peat: Escape Velocity Went Missing In December, Again

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There may be something to December after all. It was credit markets that shifted downward (bearish yield curves and credit spreads) dramatically around the end of November and the first few days of December. Given the persistence of large players moving credit and funding markets, this may not be all that hard to fathom with the close proximity of credit desks next to, say, lending desks or high yield trading. If high yield issuance is any good proxy about marginal conditions, the erosion there is as much about an economic trend as it is some semblance of restoration of fundamental sanity.
It is too early to define the shape of the economy right at this moment, though needless to say that there is far more uncertainty than there was even a few months ago – just before the Christmas letdown.
The Dow Jones Industrial Average plunged more than 350 points on Tuesday after weaker-than-expected data on durable-goods orders and disappointing earnings reports from bellwethers, such as Microsoft Corp. and Caterpillar Inc. sparked fears that economic growth is slowing.
Durable-goods orders fell 3.4% in December, raising questions about whether businesses are really ready to ramp up investment in 2015.
This will all be very ‘unexpected’ to economists who have spent the better part of 2014 vehemently assured about that growth trend. In the case of durable goods, there was certainly a pickup in mid-year, but any extrapolation from that was always misplaced since it was the same mini-cycle that plagued 2013. What looked like growth to those who pay no attention to context was instead artificial, and thus unsustainable, in every way.

This post was published at David Stockmans Contra Corner by Jeffrey P. Snider ‘ January 27, 2015.

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The Central Banks’ Cheap Money Deflation Cycle: Iron Ore Supply Soaring, China Demand Faltering, Prices &Profits Collapsing

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Economists may teach that low prices and declining demand encourage producers to decrease supply, but the iron ore industry appears to have skipped class that day.
‘The combination of a further increase in global iron ore supply this year and only subdued demand growth suggests iron ore prices will continue to drift lower,’ said Caroline Bain, an analyst at Capital Economics, in a note Monday. She forecasts iron ore prices at $60 a tonne by year-end, with risks to the downside. Iron ore touched a more than five-year low Monday of around $63.30 a tonne, although some forward contracts are already pricing it under $60.
Output has picked up over the past few years, encouraged by expectations China demand would continue to post strong growth and by low production costs in Australia and Brazil, she said. She noted Rio Tinto and BHP Billitonput their average production cost in Pilbara, where most of Australia’s iron-ore production is located, at around $25 a tonne, compared with 2010-13 average market prices at $145 a tonne. Even at current prices, these producers are still profitable, Bain noted. Australia is the world’s second-largest iron-ore producer after China.
Despite 2014′s around 50 percent decline in iron ore prices, the big four producers – Vale, Rio Tinto, BHP Billiton and Fortescue – continue to expand production and other companies are also bringing projects on line this year, she said, forecasting Australian production will rise 6 percent this year, although that’s down from 2014′s 20 percent rise.

This post was published at David Stockmans Contra Corner on January 27, 2015.

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