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Possibly driving an already weak economy into recession.

Every day, we have investment banks and others telling us that the Australian housing party is over. Estimates for price declines over the next year or so vary from 7.5% to a plunge of 25%.

Even the Reserve Bank of Australia is in on the act. But it is trying to put a positive spin on any downturn after having for years encouraged new house and apartment construction as being “good for the economy.”

The full impact of new housing supply will not be felt for a year or so. It is almost certain that there will be a major surplus when everything now under construction is complete. This is a bad omen for the Australian economy, where building and selling of houses and apartments has been playing an outsized role.

Macquarie Bank has estimated that new supply will be greater than 200,000 dwellings, whereas demand will be 170,000 to 180,000.

The effect: downward pressure on both house prices and rents; and possibly, an already weak economy driven into recession. There are many signs of a coming downturn:

For Sale signs are springing up everywhere.
Auction clearance rates continue to decline. In parts of Sydney it is down to 40%.
More properties are now being bought by investors, mostly domestic, than by owner-occupiers.
Household debt has soared, it is now around 140% of income.
The house-price-to-income ratio is a stratospheric 6.4 times.
Rental yield is now around 1% after costs.
Some banks have raised mortgage rates in an attempt to calm the market and are charging investors more than owner-occupiers.
The big four banks have recently raised $18 billion to help cover potential losses from the housing market.
Some sell-side analysts now have the big four banks as a sell because of housing exposure.

…click on the above link to read the rest of the article…

What’s up with the global economy, and where do we go from here?

October 27, 2015

What’s up with the global economy, and where do we go from here?

A deflationary spiral, such as is now becoming evident globally, acts as a natural poison.

It now appears that the grand yearly addition to total human wealth, the global GNP, is no longer growing. If so, this means the world is headed toward a global deflationary spiral, a contraction in the global economy similar in nature to the trade slump that spread globally during the era of the Great Depression.

There really is no other explanation but a global trade slump that can account for the steep decline in the prices of basic essential commodities like oil and copper, and also the decreased demand for shipping capacity reflected in the Baltic Dry Index.

The troubled Chinese economy, its reduced demand for commodities, the devaluation of its currency to try to capture more trade, and the Chinese support for a new trade alliance in competition with the new U.S./Japanese TPP alliance — all these are symptoms that indicate that aggregate global buying power has stalled out. That means that investment capital is unable to find new profitable investments in the global marketplace, which is very bad news for finance capitalism as a global system.

At this point let me refer readers to Gail Tverberg and her blog, Our Finite World, which focuses on the key interactions between energy and economics. In fact we now see just the sort of troubled global economy that we might anticipate from a world that peaked in production of historically cheap conventional oil almost a decade ago in 2006. Tverberg is able to explain the global economic situation so clearly, so convincingly, and so persistently that she has attracted a huge popular economic following. One of her recent posts drew over a thousand reader responses; “Low Oil Prices – Why Worry?.”

…click on the above link to read the rest of the article…

Is The Oil And Gas Fire Sale About To Start?

October 16, 2015

Is The Oil And Gas Fire Sale About To Start?

Much has been written about the mounting pile of debt for U.S. oil companies (not to mention the well-known Brazilian oil giant).

Not that long ago, many oil and gas companies secured at least a part of their revenue by hedging contracts. Bloomberg already reported in June that many of these companies saw their artificial safety nets vanishing as oil prices failed to recover. One month later, we heard such morale boosting terms as ‘frack now, pay later,’ which were merely a bold move by struggling oil services companies to encourage cash strapped oil and gas companies to continue operations.

Simultaneously, we witnessed the bankruptcies of companies such as Samson Resources, Hercules Offshore and Sabine Oil & Gas Corp. These bankruptcies put the industry on notice. The cash flow situation for the entire oil and gas sector looks outright grim. Credit rating agency Moody’s expects a sector wide negative cash flow of $80 billion and is expecting spending cuts to continue next year. See figure 1 below for an overview of industry income and spending.

Image source: Reuters

(Click to enlarge)

Summing it up, debt, negative cash flows and the outlook for oil prices have led weak companies with balance sheets to a divest in a big way.

Although we have witnessed a couple of noteworthy acquisitions in the last months, which put 2015 in the books as a year with high volume takeovers, we cannot yet speak about an absolute M&A boom.

One of the most important reasons holding back takeovers of entire companies is the oil price volatility we have seen in the last few weeks. Financially stronger oil and gas companies seem to have postponed takeover plans and are now focusing on the acquisition of promising land holdings. Nonetheless, it seems that both buyers and sellers are preparing themselves for what could turn out to be a fire sale.

…click on the above link to read the rest of the article…

Macroeconomic Instability For Emerging Markets Thanks To Commodity Bust

October 12, 2015

Macroeconomic Instability For Emerging Markets Thanks To Commodity Bust

The bust in commodity prices is sending ripples through the world of emerging markets.

Countries depending on resource extraction and exports of commodities have run into a brick wall this year the prices collapsed for all sorts of materials – oil, gas, coal, gold, copper, and more. The bust presents macroeconomic risks to these countries, and the risks are greater for economies that are less diversified and more dependent on commodities.

Already, we have seen the sharp loss in value for currencies in emerging markets. China devalued its currency over the summer, sending a wave of panicthrough emerging markets. The currencies of commodity exporters (Russia, Brazil, Mexico, Nigeria, and Iraq, just to name a few) were already under pressure before China’s devaluation, but China’s decision threw the weaknesses of emerging markets into sharp relief.

Related: Has Oil Finally Bottomed?

Commodities tend to go through booms and busts. The seeds of the latest “supercycle” for commodities were planted around a decade ago. Capitalizing off of the scorching growth in China, capital-intensive resource extraction projects were planned around the world. Between 2005 and 2014, a staggering $745 billion worth of investment flowed into new oil, gas, and mining projects. The sum peaked in 2008 and 2009, when petroleum and mining projects accounted for 10 to 12 percent of total foreign direct investment around the world.

Of course, an oil project, or a new coal mine takes several years to build and to bring online. That explains the massive volume of new capacity for all types of commodities that came online in the last two years or so. In other words, the run up in commodity prices between 2005 and 2010 sparked a wave of investment, but all that new capacity came online in 2013-2014, popping the bubble in commodity prices.

…click on the above link to read the rest of the article…

How Big an Oil Glut is There Really?

October 10, 2015

How Big an Oil Glut is There Really?

Revisiting Crude Oil

Beginning in late August we have frequently discussed the possibility that a significant low in crude oil prices could be imminent in spite of the “obvious” lousy fundamentals. As blind luck would have it, the first of these articles (entitled “Is Crude Oil Close to a Low?”) was posted exactly one trading day before the low to date was actually put in. Well, you know what they say about blind chickens :).

Image credit: freshidea – Fotolia

Note here that we are not saying it was the low, although this cannot be ruled out either. It seems very likely though that it was at least a low of medium term significance.

From a technical perspective, the action in crude oil since late August is so far consistent with a medium term low. The recent advance looks actually somewhat healthier than the previous one, due to the lengthy consolidation after the initial strong rally leg – click to enlarge.

To summarize our train of thought on the topic: We noted for one thing that commodities always bottom out at a point in time when their fundamentals still look atrocious. This is simply due to the fact that prices will at some point have declined sufficiently to discount all the (by then widely known) negative factors.

For another thing, we have pointed out that the prices of commodities are ultimately not only determined by their specific supply-demand characteristics, but also by the money relation. For instance, no-one would seriously expect crude oil prices to revert back to their level of 1933 ($ 0.67 annual average), no matter how bad crude oil’s supply-demand fundamentals become. After all, since May of 1933, the Fed has managed to devalue the US dollar by nearly 95% (based on the government’s own dubious CPI statistics).

…click on the above link to read the rest of the article…

Bernanke’s Balderdash

October 8, 2015

Bernanke’s Balderdash

The US and world economies are drifting inexorably into the next recession owing to the deflationary collapse of commodities, capital spending and world trade. These are the inevitable “morning after” consequence of the 20-year global credit binge which has now reached its apogee.

The apparent global boom during that period was actually a central bank driven excursion into the false economics of household borrowing to inflate consumption in the DM economies; and frenzied, uneconomic investing to inflate GDP in China and the EM.

The common denominator was falsification of financial prices. By destroying honest price discovery in the financial markets, the world’s convoy of money-printing central banks led by the Fed elicited a huge excess of financialization relative to economic output.

The central manifestation of that was $185 trillion of debt growth during the past two decades——a stupendous explosion of credit which amounted to 3.7X the expansion of global GDP.

And even that ratio is an understatement. That’s because measured GDP has been artificially bloated by the monumental worldwide malinvestment and excess capacity arising from the credit bubble. That is, phony “growth” which under the laws of economics will be liquidated in due course.

But you wouldn’t have known that the global economy is about to hit the skids from Monday’s action. Bernanke kicked off the day in a Wall Street Journal op ed taking a bow for “saving the world”.

Then the stock market completed a rally from Friday’s post-NFP low, which amounted to 84 points (4.5%) on the S&P 500 during a seven-hour span of trading. That was even less time to “mission accomplished” than last October’s three-day Bullard Rip.

So here we are again circling the 2000 mark on the S&P 500—a level first crossed 440 days ago. Undoubtedly, the casino is knee-jerking upward because Goldman has already made an unsecret audible call, instructing the Fed to substantially defer lift-off well into next year.

…click on the above link to read the rest of the article…

With a Collapse in Commodity Prices, What Happens Next?

October 7, 2015

With a Collapse in Commodity Prices, What Happens Next?

This has to be a scary time for virtually all commodities investors, whether one is talking about investing in commodities directly or in commodities companies. From oil to aluminum, nearly all commodities are not just trading near multi-year lows, but multi-decade lows. Bloomberg recently noted that commodities are now trading at the same level they were at in the mid-1990s after a major run-up in the late 1990’s and throughout much of the new millennium.

This begs the question: ‘what will it take for commodities to recover?’

To get to the answer, one first has to understand two important things about commodities prices in recent years. First, in recent years and up to the present, China has been consuming the vast majority of commodities. As economics website the Visual Capitalist showed in a stark chart recently, despite making up only 20 percent of the world’s population and less than 15 percent of global GDP, China consumes 60 percent of all concrete, 49 percent of all coal, 46 percent of all steel, and 54 percent of all aluminum among other commodities.

(Click to enlarge)

The point here is that China’s infrastructure boom has had a massive and unparalleled effect on global commodities demand. So much so, that China was able to temporarily offset the second important point about commodities – they have largely been declining in price not just for the last few years, but for decades. In current dollar terms – that is, non-inflation adjusted terms, commodity prices have often risen over the last century, but in real terms have generally fallen substantially over time. The 2000’s led many investors to forget this trend as numerous commodities rose rapidly in price.

…click on the above link to read the rest of the article…

IMF downgrades Canadian growth outlook to 1% for 2015

October 7, 2015

IMF downgrades Canadian growth outlook to 1% for 2015

Risks for the world include low commodities prices, China’s slowdown and rate hikes

The IMF has downgraded its outlook for Canadian growth to one per cent this year because of the impact of lower oil and commodities prices.

It also has revised its expectations for global growth downwards to 3.1 per cent, the lowest since 2009.

In a report Tuesday in advance of the IMF-World Bank annual meetings this week in Lima, Peru, it highlights the downside risks to the world economy from the economic slowdown in China and low prices for commodities.

The recovery it expected earlier in the year has become uneven, it said in its World Economic Outlook with marginal advances in developed economies and slowing in most emerging economies.

“Six years after the world economy emerged from its broadest and deepest postwar recession, the holy grail of robust and synchronized global expansion remains elusive,” said Maurice Obstfeld, IMF director of research.

Growth slower in most nations

“Despite considerable differences in country-specific outlooks, the new forecasts mark down expected near-term growth marginally but nearly across the board.”

It has revised its estimate for Canadian GDP growth downward by half a percentage point from its July forecast to one per cent this year, and to 1.7 per cent in 2016. Last year, the IMF was forecasting 2.2 per cent growth for the Canadian economy.

A side report explores how the sharp decline in commodity pricesover the last three years has hurt economies dependent on commodities, including Canada, Chile and Australia.

“The weak commodity price outlook is estimated to subtract almost one percentage point annually from the average rate of economic growth in commodity exporters over 2015–17 as compared with 2012–14,” the IMF said.

“In exporters of energy commodities, the drag is estimated to be larger: about 2¼ percentage points on average over the same period.”

…click on the above link to read the rest of the article…

Six Reasons Natural Gas Prices Are Staying Down

October 6, 2015

Six Reasons Natural Gas Prices Are Staying Down

The critical natural gas transit country, Ukraine, reached a supply agreement in the last week of September with the EU’s largest fuel supply partner: Russia.

One could argue that this agreement could actually have come too late. Natural gas supply to Europe heading into winter 2015 seems more secure than ever before, a sharp contrast to the icy winters of 2006 and 2009, in which Russia cut off natural gas supply to Eastern Europe over a conflict with the Ukraine. The following factors have turned the European natural gas market from a ‘’beggars can’t be choosers” into a true “buyers’ market’’.

1. Declining European demand

In spite of the current surge in natural gas imports from Russia, Norway and Qatar (described in point 4 below), the IEA foresees a decline in European demand for natural gas because of a decline in ’thermal generation growth,’ increased energy efficiency and the shift to renewables. Natural gas demand could, however, be partially rescued by a colder than expected winter or the accelerated shutdown of coal-fired electricity plants. The below chart demonstrates the fall in natural gas demand across the EU.

(Click to enlarge)

2. Better connected networks

After the 2006 and 2009 natural gas supply disruptions, the European Union decided to decrease its natural gas import dependence from Russia (ironically enough, natural gas imports from Russia are surging at the time of writing. More on that below) by improving its natural gas infrastructure. Ever since, over €50 billion (≈U.S$55.8) was invested in 107 gas projects with one important goal: sharing energy resources. This sharing of energy resources can potentially limit the direct demand for natural gas on the short-term and therefore prevent a quick hike in natural gas prices.

…click on the above link to read the rest of the article…

How Bad Can This Get, And How Fast?

October 3, 2015

How Bad Can This Get, And How Fast?

There’s so much negative real bad economic and financial news out there that it’s hard to choose a ‘favorite’, but I guess I’m going to have to go with what underlies and ‘structures’ it all, the IIF stating that for the first time since 1988 and the Reagan presidency, there’s more money flowing out of emerging markets than there’s flowing in. That is for sure a watershed moment.

And no, that trend is not going to be reversed either anytime soon. Emerging economies, even if they wouldn’t include China -but they do-, have relied exclusively on selling ‘stuff’ to the rich world which combined cheap commodities with cheap labor, and now they see their customer base shrink rapidly just as they were preparing to harvest the big loot.

Now, I hope I can be forgiven for thinking from the get-go that this was always a really dumb model. That emerging nations would provide the cheap labor, and the west would kill of its manufacturing base and turn into a service economy.

This goes very predictably wrong if and when we figure out that A) economies that don’t manufacture anything can’t buy much of anything, and B) that we can sell those services our economies are ‘producing’ only to ourselves, as long as the emerging nations maintain a low enough pay model to make their products worth our while to import.

It makes one wonder how many 6 year-olds would NOT be able to figure this out. In the same vein, how many of them would be hard put to understand that our economies, overwhelmed by, and drowning in, debt, cannot be rescued by more debt? Here’s thinking the sole reason so many of us don’t get it is that we’ve been told it’s terribly hard to grasp, and you need a 10-year university course to ‘get it’.

…click on the above link to read the rest of the article…

A Hapless Brazil Incurs Massive Losses On FX Swaps Amid Currency Carnage

October 2, 2015

A Hapless Brazil Incurs Massive Losses On FX Swaps Amid Currency Carnage

As we’ve documented extensively of late, a host of idiosyncratic political factors have served to exacerbate what was already a very, very bad situation for emerging markets.

This dynamic is most readily apparent in Brazil and Turkey, and although Ankara probably has a leg up in the race for “most at risk from domestic turmoil”, Brazil isn’t far behind as President Dilma Rousseff battles abysmal approval ratings and a recalcitrant Congress in an effort to shore up the country’s finances by convincing lawmakers to sign off on much needed austerity measures.

Meanwhile, a confluence of exogenous shocks that include slumping commodity prices, depressed Chinese demand, the PBoC yuan devaluation, and the threat of an imminent Fed hike have conspired with country-specific political turmoil to send the BRL plunging and that, in turn, has put Copom in what former Treasury secretary Carlos Kawall calls “crisis mode.”

Of course crises are often costly to combat, especially when you’re an emerging market in the current environment and when it comes to Brazil, the use of alternative measures (like effectively selling dollars in the futures market) to avoid FX reserve liquidation is now weighing heavily on the fiscal outlook. As Goldman noted earlier this week on the heels of the latest monthly budget data, “the overall fiscal deficit is tracking at a disquieting 9.2% of GDP, driven in part by the surging net interest bill, which was exacerbated by the large losses on the central bank stock of Dollar-swaps.” Here’s what Capital Economics had to say after an emergency swaps auction was called by Copom in a desperate attempt to shore up the BRL last week:

…click on the above link to read the rest of the article…

Chinese Cash Flow Shocker: More Than Half Of Commodity Companies Can’t Pay The Interest On Their Debt

October 2, 2015

Chinese Cash Flow Shocker: More Than Half Of Commodity Companies Can’t Pay The Interest On Their Debt

Earlier today, Macquarie released a must-read report titled “Further deterioration in China’s corporate debt coverage”, in which the Australian bank looks at the Chinese corporate debt bubble (a topic familiar to our readers since 2012) however not in terms of net leverage, or debt/free cash flow, but bottom-up, in terms of corporate interest coverage, or rather the inverse: the ratio of interest expense to operating profit. With good reason, Macquarie focuses on the number of companies with “uncovered debt”, or those which can’t even cover a full year of interest expense with profit.

The report’s centerprice chart is impressive. It looks at the bond prospectuses of 780 companies and finds that there is about CNY5 trillion in total debt, mostly spread among Mining, Smelting & Material and Infrastructure companies, which belongs to companies that have a Interest/EBIT ratio > 100%, or as western credit analysts would write it, have an EBIT/Interest < 1.0x.

As Macquarie notes, looking at the entire universe of CNY22 trillion in corporate debt, the “percentage of EBIT-uncovered debt went up from 19.9% in 2013 to 23.6% last year, and the percentage of EBITDA-uncovered debt up from 5.3% to 7%. Therefore, there has been a further deterioration in financial soundness among our sample.”

To be sure, both the size (the gargantuan CNY22 trillion) and the deteriorating quality (the surge in “uncovered debt” companies) of cash flows, was generally known.

What wasn’t known were the specifics of just how severe this bubble deterioration was for the most critical for China, in the current deflationary bust, commodity sector.

We now know, and the answer is truly terrifying.

Macquarie lays it out in just three charts.

First, it shows the “debt-coverage” curve for commodity companies as of 2007. One will note that not only is there virtually no commodity sector debt to discuss, at not even CNY1 trillion in debt, but virtually every company could comfortably cover their interest expense with existing cash flow: only 4 companies – all in the cement sector – had “uncovered debt” 8 years ago.

…click on the above link to read the rest of the article…

Australia’s “Black Swan Moment”

October 2, 2015

Australia’s “Black Swan Moment”

Wayne Swan, Treasurer of Australia from 2007 to 2013, Deputy Prime Minister and the Deputy Leader of the Labor Party from 2010 to 2013, who thought he saved the Australian economy but just delayed the inevitable, is now blaming everyone but himself for the downward spiral:

Image source: Twitter

As I argued in my book Australia: Boom to Bust, Australia will eventually see a significant economic recession in the not too distant future. And all the data points are clearly indicating my worst fears on where the Australian economy is headed. But we have to ask who is responsible for this economic downturn, and which policy makers helped line Australia up for the collapse in capital expenditure.

Well, we can all try to blame Joe Hockey, Treasurer in the now defunct Abbott Government from September 2013 until September 2015, even though his approach was most definitely the icing on the cake, but unfortunately he was not Treasurer at the time Australia’s political elite truly made what could be two of the greatest (yet laughable)economic related mistakes in the history of Australian economics. And the blame lies with Wayne Swan, alongside the Reserve Bank of Australia (RBA), Treasury, and Australian Prudential Regulation Authority (APRA).

Mistake 1. Flawed Calculations

As per the chart above from the 2012 ‘Australia in the Asian Century White Paper,’ If there was ever such a stupid miscalculation by Australians, it was the forecast on how much iron ore Australia would need to extract from the ground to export to emerging nations such as China to fulfill their long term consumption requirements.

…click on the above link to read the rest of the article…

Brazilian Nightmare Worsens On Bad Budget Data, Record Low Confidence, Horrific Government Approval Ratings

October 1, 2015

Brazilian Nightmare Worsens On Bad Budget Data, Record Low Confidence, Horrific Government Approval Ratings

Last month, in “‘No Recovery For You!’ Brazil Officially Enters Recession, Goldman Calls Numbers ‘Disquieting’”, we outlined Brazil’s July fiscal performance and came away believing that the country had little chance of hitting its primary fiscal surplus targets. Here’s what we said:

The latest on the political front is that President Dilma Rousseff has 15 days to explain to the the Federal Accounts Court why everyone seems to think that she intentionally delayed nearly $12 billion in social payments last year in an effort to make the books look better than they actually were. And while we won’t endeavor to weigh in one way or another on that issue, what we would say is that if someone in Brazil is doctoring this year’s books, they aren’t doing a very good job because things just seem to keep going from bad to worse. Case in point, on Friday, Brazil said its primary budget deficit was R10 billion in July, far wider than expected. The takeaway: “no primary surplus for you!”

Just three days later, Brazil officially threw in the towel on the primarily surplus projection for 2016 only to reverse course a few weeks later when embattled Finance Minister Joaquim Levy promised to enact some BRL26 billion in primary spending cuts for the 2016 budget on the way to achieving in a primary surplus that amounts to 0.7% of GDP.

Of course implementing austerity in the current fractious political environment is going to be well nigh impossible which means any and all upbeat assessments of the outlook for the country’s fiscal situation should be looked upon with an appropriate degree of skepticism. Add in the abysmal outlook for commodities and you have a recipe for perpetual twin deficits on the current and fiscal accounts, a situation which portends more BRL weakness to come.

…click on the above link to read the rest of the article…

The Baby Boomer Survival Guide (Part II)

September 30, 2015

The Baby Boomer Survival Guide (Part II)

A Lehman Moment for Commodities?

LONDON – Today, we continue our philosophical look at what you should do if you are running out of time and money. (You can catch up on Part I here.)

Where do we begin? With how to add wealth? Or how to lose it? The way to lose it is simple. You buy something that is not worth the money you paid for it. You are instantly poorer, whether you know it or not.

The pleasingly plump.
Illustration by jdeer69

DJIA, daily – still unsettled – click to enlarge.

That is what is happening today to stock market investors. The stocks they bought were not worth the money; now Mr. Market is letting them know. On Monday, the Dow dropped almost 2% to 16,002 points. Next stop: 15,000.

“It’s a bear market,” says Jim Cramer. It will be a “bloodbath,” says billionaire investor Carl Icahn. We don’t know. But our guess is that 10 years from now your stocks will be worth no more than they are today.

The biggest losers on Monday were in the commodities and biotech sectors. Well, Glencore – one of the world’s largest resource companies – is one of the companies not buying them.

Glencore shares have lost 75% of their value so far this year. If commodities prices stay at these low levels, it could be worth nothing by the end of the year. Glencore could be headed the way of Lehman Brothers…

Glencore, daily. On Tuesday the stock recovered a bit, after Glencore tried to refute speculation about its imminent demise with a press release “responding to speculation”… click to enlarge.

Biotechs dragged the Nasdaq down yesterday. But the sector is still up more than 425% since 2009. Plenty of room left on the downside, in other words. Icahn, by the way, seems to have signed on as an advisor to Donald Trump. This is a good thing. The presidential hopeful needs advice.

…click on the above link to read the rest of the article…

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