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Monoeconomies, Debt, and False Growth

by coldwarrior ( 2 Comments › )
Filed under Debt, Economy, Energy, Open thread at February 8th, 2016 - 6:00 am

 This is a rather dense article, please read, if yinz have any questions I’ll answer them when I get home this afternoon.

Oil market spiral threatens to prick global debt bubble, warns BIS

An ‘illusion of sustainability’ has blinded borrowers and debtors, lulling them into a false of security. The BIS says liquidity is now drying up

The global oil industry is caught in a self-feeding downward spiral as falling prices cause producers to boost output even further in a scramble to service $3 trillion of dollar debt, the world’s top watchdog has warned.

The Bank for International Settlements fears that a perverse dynamic is at work where energy companies in Brazil, Russia, China and parts of the US shale belt are increasing production in defiance of normal market logic, leading to a bad “feedback-loop” that is sucking the whole sector into a destructive vortex.

“Lower prices have not removed excess capacity from the market, but instead may have exacerbated it. Production has been ramped up, rather than curtailed,” said Jaime Caruana, the general manager of the Swiss-based club for central bankers.

The findings raise serious questions about the strategy of Saudi Arabia and the core Opec states as they flood the global crude market to knock out rivals in a cut-throat battle for export share. The process of attrition may take far longer and do more damage than originally supposed.

Oil exporters are embracing austerity and slashing government spending, leading to a form of fiscal tightening that is slowing the global economy.

Speaking at the London School of Economics, Mr Caruana said the sheer scale of leverage in the oil and gas industry is amplifying the downturn since companies are attempting to eke out extra production to stay afloat. The risk spreads on high-yield energy bonds have jumped from 330 basis points to 1,600 over the past 18 months, amplifying the effects of the oil price crash itself.

The industry has issued $1.4 trillion of bonds and taken out a further $1.6 trillion in syndicated loans, driving up the combined energy debt threefold to $3 trillion in less than a decade.

While US shale frackers hog the limelight in the Anglo-Saxon press, many of these energy groups are giant “parastatals”, such as Rosneft, Petrobras or China National Offshore Oil Corporation (CNOOC).

The BIS said state-owned oil companies increased debt at annual rate of 13pc in Russia, 25pc in Brazil and 31pc in China between 2006 and 2014, much it in the form of dollar debt through offshore subsidiaries. These oil companies do not respond to pure market pressures since they are cash cows for government budgets.

The nexus of oil and gas debt is just one part of an over-stretched financial system, increasingly exposed to the dangers of a “maturing financial cycle” and to punishing moves in the global currency markets.

Mr Caruana said an “illusion of sustainability” has blinded borrowers and debtors, lulling them into a false of security when credit was easy and asset prices were rising. This illusion can die in the blink of an eye. “The turning of the financial cycle can be quite abrupt,” he said.

The BIS calculates that debt in US dollars outside the United States has surged to $9.8 trillion, a fivefold rise since 2000 and an unprecedented level for the global monetary system as a whole.

While some of this dollar debt is matched by dollar assets and dollar earnings, a big chunk has been used to play the local property markets of east Asia, Latin America or eastern Europe, and another chunk has been gobbled up by “non-tradable” sectors that have no natural currency hedge if it all goes wrong.

The BIS estimates that 23pc of every dollar raised in bonds by emerging market companies has been diverted into the “carry trade”, stoking internal credit bubbles.

The average level of private credit in these countries has jumped from 75pc to 125pc of GDP since 2009. Corporate leverage is now more extreme than in the US and Europe. Profit ratios have dropped from 16pc to 9pc in four years, a clear warning sign.

The carry trade was highly profitable in the heyday of zero interest rates and quantitative easing by the US Federal Reserve, when credit was temptingly cheap and the falling dollar generated a currency windfall.

What looked like a one-way bet has proved to be a Faustian Pact now that the Fed is turning off the spigot, especially in countries such as Brazil, South Africa, Turkey, Russia, Malaysia or Azerbaijan, which have seen their currencies plummet. The “broad” dollar index has soared by 32pc since July 2011, the steepest and most sustained rise since the Second World War.

Mr Caruana said there is now clear evidence that this liquidity is drying up. Dollar loans to emerging markets peaked at $3.3 trillion and began to fall in the third quarter of last year, as chastened debtors pared back their exposure. Chinese companies have slashed their dollar liabilities to $877bn from $1.1 trillion in late 2014.

We may be approaching the eye of the storm. “The feedback loop between deleveraging and emerging market currency depreciation presents challenges that should not be underestimated. The policy room for manoeuvre has been shrinking,” he said.

“The temptation may be to try to keep the financial booms going, or to give them a new lease of life, but this will be just a palliative unless the stock of debt is adjusted,” he said.

The BIS seems to be telling us that reckoning can still be orderly if we face up to reality, or end in a chaotic wave of defaults if we do not. Either way, the debt must clear.

America’s Lost Decade

by coldwarrior ( 44 Comments › )
Filed under Economy, Open thread at February 1st, 2016 - 5:35 am

012916gdpUS real GDP growth was just 0.7% annualized in the fourth quarter, a weak way to end 2015. Never like to see the Zero Handle.

Not that it was such a great full year, either. The American economy remained stuck in meh mode, expanding at just 2.4%, the same as in 2014. Now, from the end of World War II through 2005, the economy grew at an average annual rate of 3.5%. So 3%-ish growth has been what’s normal.

Wait for it … welcome to the new normal. The economy hasn’t managed a single year of even 3% growth since 2005. A lost decade, at least by American standards. (We’re not Japan, after all.)  The rundown: Real GDP growth for 2015 was 2.4%; 2014, 2.4%; 2013, 1.5%; 2012, 2.2%; 2011, 1.6%; 2010, 2.5%; 2009, -2.8%; 2008, -0.3%; 2007, 1.8%; and 2006, 2.7%.

But that’s what happens when you get a near-depression followed by an anemic recovery and expansion. Digging into the numbers, you find a combo of slowing labor force growth and weak productivity to blame. And it’s for those deeper structural reasons many forecasters, such as the Congressional Budget Office, think the US is now a permanent 2% economy rather than a more vigorous 3% economy.

It may not seem like such a big difference but it is. It’s the difference between having a $21 trillion economy in 2026 or a $23 trillion economy. (That $2 trillion difference, by the way, is the size of the entire Italian economy.) And that gap grows larger year after year, decade after decade. And with that growth gap come fewer jobs, lower incomes, and less opportunity.

Just growing as fast as we used to, much less at the accelerated rate suggested by some politicians, will be really hard. Boosting productivity and labor force growth as America ages will be really hard. But not impossible. Social Security reform and immigration could help with the former. Policy also is hardly optimal for innovation, whether it’s taxes, regulation, education, infrastructure, housing, or basic research. Immigration plays a role here, too. So there is room for improvement.

One bit of good news is that there is some evidence suggesting we are under-measuring productivity and real GDP growth. As Goldman Sachs recently argued:

Measured productivity growth has slowed sharply in recent years … But is the weakness for real? We have our doubts. Profit margins have risen to record levels, inflation has mostly surprised on the downside, overall equity prices have surged, and technology stocks have performed even better than the broader market. None of this feels like a major IT-led productivity slowdown. One potential explanation that reconciles these observations is that structural changes in the US economy may have resulted in a statistical understatement of real GDP growth. There are several possible areas of concern, but the rapid growth of software and digital content—where quality-adjusted prices and real output are much harder to measure than in most other sectors—seems particularly important.

If Team Goldman is correct, we might already be at roughly 3% growth. Even so, we can do better. And must.

Now GDP growth isn’t everything, of course. A changing economy might mean even a faster rising tide might not lift all boats — at least not enough. Broadly experienced prosperity should be the goal. And that’s not happening either.

The above is all well and good, Shadow Stats says otherwise

Alternate Gross Domestic Product Chart

The SGS-Alternate GDP reflects the inflation-adjusted, or real, year-to-year GDP change, adjusted for distortions in government inflation usage and methodological changes that have resulted in a built-in upside bias to official reporting.

Annual Growth (Year-to-Year Percent Change) in GDP is shown in the chart on the right. This is not the annualized quarterly rate of change that serves as the headline number for the series.

Note: The GDP headline number refers to the most-recent quarter’s annualized quarter-to-quarter rate of change (what that quarter’s percent quarter-to-quarter change would translate into if compounded for four consecutive quarters).

This can mean that the latest quarter can be reported with a positive annualized growth rate, while the actual annual rate of change is negative.  Such was the case for the 3rd quarter of 2009.

That graph is what a Depression looks like my friends. DC lies to us again.

Add Open Thread, Dorothy

by coldwarrior ( 325 Comments › )
Filed under Economy, Open thread at January 26th, 2016 - 7:26 am

Ol’ Dor didn’t have to deal with this

 

PLASMA TORNADO: Solar activity is low, but it is not zero. On Jan. 24th, a curled plume of magnetized plasma near the sun’s southeastern limb untwisted itself and exploded. NASA’s Solar Dynamics Observatory recorded the tornado action:

The mouth of the twister was wide enough to swallow two planets Earth. As powerful as the storm was, however, it was overcome by the gravity of the sun. Debris from the helical explosion fell back to the stellar surface and did not form a CME.

She DID have to deal with economics tho.

And What of Shale?

by coldwarrior ( 156 Comments › )
Filed under Economy, Energy, Open thread at January 25th, 2016 - 6:00 am

SO now that we have reached the near bottom of oil prices, there is still room to go down, what will happen to American Shale?

The good news is that it is here to stay…might be time for an Escalade instead of that responsible 4 door sedan.

 

Saudis ‘will not destroy the US shale industry’

Energy guru Daniel Yergin says rich investors have $60bn war chest to buy up distressed fracking assets after Opec war of attrition

 

Hedge funds and private equity groups armed with $60bn of ready cash are poised to snap up the assets of bankrupt US shale drillers, almost guaranteeing that America’s tight oil production will rebound as soon as prices start to recover.

Daniel Yergin, founder of IHS Cambridge Energy Research Associates, said it is impossible for OPEC to knock out the US shale industry though a war of attrition even if large numbers of frackers fall by the wayside over coming months.

Mr Yergin said groups with deep pockets such as Blackstone and Carlyle will take over the infrastructure when the distressed assets are cheap enough, and bide their time until the oil cycle turns.

“The management may change and the companies may change but the resources will still be there,” he told the Daily Telegraph.

“It takes $10bn and five to ten years to launch a deep-water project. It takes $10m and just 20 days to drill for shale,” he said, speaking at the World Economic Forum in Davos.

In the meantime, the oil slump is pushing a string of exporting countries into deep social and economic crises. “Venezuela is beyond the precipice. It is completely broke,” said Mr Yergin.

Iraq’s prime minister, Haider al-Abadi, said in Davos that his country is selling its crude for $22 a barrel, and half of this covers production costs. “It’s impossible to run the country, to be honest, to sustain the military, to sustain jobs, to sustain the economy,” he said.

This is greatly complicating the battle against ISIS, now at a critical juncture after the recapture of Ramadi by government forces. Mr al-Albadi warned that ISIS remains “extremely dangerous”, yet he has run out of money to pay the wages of crucial militia forces.

It is understood that KKR, Warburg Pincus, and Apollo are all waiting on the sidelines, looking for worthwhile US shale targets. Major oil companies such as ExxonMobil have vast sums in reserve, and even Saudi Arabia’s chemical giant SABIC is already nibbling at US shale assets through joint ventures.

Mr Yergin is author of “The Prize: The Epic Quest for Oil, Money and Power”, and is widely regarded as the guru of energy analysis.

He said shale companies have put up a much tougher fight than originally expected and are only now succumbing to the violence of the oil price crash, fifteen months after Saudi Arabia and the Gulf states began to flood the global market to flush out rivals.

“Shale has proven much more resilient than people thought. They imagined that if prices fell below $70 a barrel, these drillers would go out of business. They didn’t realize that shale is mid-cost, and not high cost,” he said.

Right now, however, US frackers are in the eye of the storm. Some 45 listed shale companies are already insolvent or in talks with creditors. The fate of many more will be decided over the spring when an estimated 300,000 barrels a day (b/d) of extra Iranian crude hits an already saturated global market.

Shale hedges on the futures markets – a life-saver in the early months of the price collapse – are largely exhausted. IHS estimates that hedges covered 28pc of output in the second half of last year for the companies it covers. This will fall to 11pc in 2016.

The buccaneering growth of the shale industry was driven by cheap and abundant credit. The guillotine came down even before the US Federal Reserve raised rates in December, leaving frackers struggling to roll over loans. Many shale bonds are trading at distress level below 50 cents on the dollar, even for mid-risk companies.

Banks are being careful not to push them into receivership but they themselves are under pressure. Regulators fear that the energy industry may be the next financial bomb to blow up on a systemic scale. The Fed and the US Federal Deposit Insurance Corporation have threatened to impose tougher rules on leverage and asset coverage for loans to fossil fuel companies.

Yet even if scores of US drillers go bust, the industry will live on, and a quantum leap in technology has changed the cost structure irreversibly. Output per rig has soared fourfold since 2009. It is now standard to drill multiples wells from the same site, and data analytics promise yet another leap foward in yields.

“$60 is the new $90. If the price of oil returns to a range between $50 and $60, this will bring back a lot of production. The Permian Basin in West Texas may be the second biggest field in the world after Ghawar in Saudi Arabia,” he said.

Zhu Min, the deputy director of the International Monetary Fund, said US shale has entirely changed the balance of power in the global oil market and there is little Opec can do about it.

“Shale has become the swing producer. Opec has clearly lost its monopoly power and can only set a bottom for prices. As soon as the price rises, shale will come back on and push it down again,” he said.

The question is whether even US shale can ever be big enough to compensate for the coming shortage of oil as global investment collapses. “There has been a $1.8 trillion reduction in spending planned for 2015 to 2020 compared to what was expected in 2014,” said Mr Yergin.

et oil demand is still growing briskly. The world economy will need 7m b/d more by 2020. Natural depletion on existing fields implies a loss of another 13m b/d by then.

Adding to the witches’ brew, global spare capacity is at wafer-thin levels – perhaps as low 1.5m b/d – as the Saudis, Russians, and others, produce at full tilt.

“If there is any shock the market will turn on a dime,” he said. The oil market will certainly feel entirely different before the end of this decade.

The warnings were widely echoed in Davos by luminaries of the energy industry. Fatih Birol, head of the International Energy Agency, said the suspension of new projects is setting the stage for a powerful spike in prices.

Investment fell 20pc last year worldwide, and is expected to fall a further 16pc this year. “This is unprecedented: we have never seen two years in a row of falling investment. Don’t be misled, anybody who thinks low oil prices are the ‘new normal’ is going to be surprised,” he said.

Ibe Kachikwu, Nigeria oil minister and the outgoing chief of Opec, said the ground is being set for wild volatility.

“The bottom line is that production no longer makes any sense for many, and at this point we’re going to see a lot of barrels leave the market. Ultimately, prices will shoot back up in a topsy-turvey movement,” he said.

Mr Kachikwu said Opec needs to call an emergency meeting to sort out what the purpose of the cartel now is.

Saudi Arabia has made it clear that there can be no Opec deal to cut output and stabilize prices until the Russians are on board, and that is very difficult since Russian companies are listed and supposedly answerable to shareholders.

Besides, the Gulf states are convinced that Russia cheated last time there was an accord in 1998.

Mr Yergin said those hoping for a quick rescue from Opec are likely to be disappointed. “This is only going to happen if the crisis gets even worse,” he said.