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New Vehicle Sales Collapse in Canada’s Oil Patch
New Vehicle Sales Collapse in Canada’s Oil Patch
Oil spills into the broader economy.
Canada’s economy has split in two. The resource producing economy is deteriorating at a breath-taking pace, broadsided by collapsing commodity prices. For Canada, the most important commodity is crude oil.
West Texas Intermediate has plunged below $39 a barrel, not seen since the Financial Crisis, and Western Canadian Select to a catastrophic $25 (C$33.32) a barrel. Canadian tar-sands producers are particularly hard hit; they’re the globe’s high-cost producers. And the epicenter of this activity is the province of Alberta.
Then there’s the rest of the economy, which is trying not to wobble too visibly as its foundation is breaking up. It is very likely that Canada is in a “technical recession” – defined as two quarters of negative GDP growth. The first five months already outlined a shrinking economy, dragged down not only by the resource sector but also by other weak links [read… It Gets Ugly in Canada].
Now everyone is waiting for the June GDP numbers to be released. Canada is heading into a general election this fall, and the economy is front and center.
But new vehicles sales are still hanging in there. As in the US, the industry is powered by cheap and easy credit. It’s enabled by a frazzled Bank of Canada that keeps lowering the rates. Subprime customers are being aggressively courted by banks and alternative lenders that lust for the easy profits to be made on folks who think they don’t have a choice. And Wall Street makes a bundle repackaging these subprime auto loans into highly rated structured securities.
So new vehicles sales rose 0.4% in July from a strong July 2014, to 177,844 units, setting a new monthly record, for the seventh month in a row, according to the Canadian Auto Dealer. July sales were 14.8% above the past-five-year average. Year-to-date, sales rose by 2.4% over last year.
…click on the above link to read the rest of the article…
Deflationary Collapse Ahead?
Deflationary Collapse Ahead?
Both the stock market and oil prices have been plunging. Is this “just another cycle,” or is it something much worse? I think it is something much worse.
Back in January, I wrote a post called Oil and the Economy: Where are We Headed in 2015-16? In it, I said that persistent very low prices could be a sign that we are reaching limits of a finite world. In fact, the scenario that is playing out matches up with what I expected to happen in my January post. In that post, I said
Needless to say, stagnating wages together with rapidly rising costs of oil production leads to a mismatch between:
- The amount consumers can afford for oil
- The cost of oil, if oil price matches the cost of production
This mismatch between rising costs of oil production and stagnating wages is what has been happening. The unaffordability problem can be hidden by a rising amount of debt for a while (since adding cheap debt helps make unaffordable big items seem affordable), but this scheme cannot go on forever.
Eventually, even at near zero interest rates, the amount of debt becomes too high, relative to income. Governments become afraid of adding more debt. Young people find student loans so burdensome that they put off buying homes and cars. The economic “pump” that used to result from rising wages and rising debt slows, slowing the growth of the world economy. With slow economic growth comes low demand for commodities that are used to make homes, cars, factories, and other goods. This slow economic growth is what brings the persistent trend toward low commodity prices experienced in recent years.
A chart I showed in my January post was this one:
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Oil Price Collapse Triggers Currency Crisis In Emerging Markets
Oil Price Collapse Triggers Currency Crisis In Emerging Markets
Emerging market currencies are getting slammed by the collapse in commodity prices, a downturn that has accelerated in recent weeks.
The health of many middle-income and emerging market economies has been predicated on relatively strong commodity prices. A whole category of countries achieved strong growth by exporting their natural resources. For example, Brazil’s impressive economic expansion since the early 2000s, and the huge number of people that were able to jump into the middle class, was made possible by exporting oil, soy, iron ore, beef, and a variety of other resources. High prices for these goods led to more growth, a strengthening of the currency, and a real estate boom in cities like Rio de Janeiro.
The same story unfolded in many other commodity-driven economies, from Latin America, to Africa, to Central and Southeast Asia.
However, with commodity prices down dramatically from a year ago, growth in these countries has slowed, and their currencies are sharply weaker than they have been in the past.
Related: Oil Prices Must Rebound. Here’s Why
In fact, the fall of Brent crude below $50 per barrel has sparked a sudden downturn in emerging market currencies across the globe.
But it isn’t just oil prices slamming currencies. The worries over the Chinese economy, including the plunge in its main stock market this summer, have raised concerns about the vigor of emerging market economies. Worse yet, China’s surprise devaluation has sent shock waves through currency markets around the world.
Other countries now feel pressure to let their currencies depreciate, and if they have adhered to a currency peg up until now, some are being pushed to float. Kazakhstan decided to scrap its currency peg last week, and the tenge promptly lost 23 percent of its value against the dollar. Vietnam also devalued the dong.
The devaluations tend to have a cascading effect, with other emerging markets coming under increasing pressure from their competitors.
…click on the above link to read the rest of the article…
Low Oil Prices And China Pull The Rug From Under Latin America
Low Oil Prices And China Pull The Rug From Under Latin America
When China sneezes, the world gets a cold.
The world’s second largest economy is suddenly looking unstable, with economic growth slowing, the stock markets gyrating, and a surprise currency devaluation having taken worldwide markets by surprise. That could be bad news not just for China, but for a lot of countries that depend on exporting to China.
China’s phenomenal growth over the past two decades led to boom times for other countries as well. China is a voracious consumer of all sorts of commodities – oil, gas, coal, copper, iron ore, agricultural products, and more. For countries exporting these goods, the run up in commodity prices since the middle of the last decade has been extraordinary.
Nowhere is that more true than in Latin America. Countries like Brazil, Argentina, Chile, Peru, and Colombia have enjoyed strong economic growth rates because of China’s rapid expansion.
Related: Germany Struggles With Too Much Renewable Energy
But the boom times are over. Latin America is getting hit with a double whammy: the collapse in commodity prices and the sudden economic turmoil in China.
Low oil prices are hurting Latin America’s exporters. Mexico’s state-owned oil company Pemex has already slashed its budget for the year, cutting spending from $27.3 billion to $23.5 billion. Pemex has also borne the brunt of government spending cutbacks. And the much-anticipated first auction of Mexico’s offshore oil resources following a historic liberalization of its energy sector produceddisappointing results, as low oil prices scared away bidders.
Brazil has fared worse. Compounded by a colossal corruption scandal, Brazil’s Petrobras is drowning in debt as oil prices have plummeted. In late June, Petrobras announced it would slash spending by one-third, divest itself of billions of dollars in assets, and it lowered its long-term oil production target to just 2.8 million barrels per day (mb/d) by 2020, down from a previous target of 4 mb/d.
…click on the above link to read the rest of the article…
Economic Crisis Goes Mainstream – What Happens Next?
Economic Crisis Goes Mainstream – What Happens Next?
Last year, when alternative economic analysts were warning that the commodities crush and oil crash just after the taper of QE3 were blaring signals for a downshift in all other financial indicators, the general response in the mainstream was that we were overreacting and paranoid and that the commodities jolt was temporary. Perhaps the fact needs repeating that it’s not paranoia if they are really out to get you.
Only a short time later, it is truly amazing how the rhetoric from the mainstream economic yes-men is changing. The blind analysts who were cheerleading for the nonexistent global recovery are now being carefully relegated to the janitor’s closet over at The New York Times, where Paul Krugman’s office should be. Media outlets are begrudgingly admitting to global instabilities like, for instance, a U.S. interest rate hike leading to a return to recession. (Special note to the mainstream media: Take away the fruitless manipulation of indicators through Fed stimulus, and we never left the recession.) They also are now forced to acknowledge that China’s market crash and yuan devaluation have far-reaching implications for global crisis, whereas a year ago the claim was that China’s problems would stay in China. Even China’s own media are now warning of the chain of fiscally interdependent economies and what the nation’s downturn means for everyone.
The MSM are finally entertaining the obvious notion that the vast financial problems of the EUhave little to do with the crisis in Greece and more to do with crushing debt obligations and employment problems in primary nations like France and Italy.
And suddenly, pundits are once again concerned with Japan’s epidemic of mini-recessions and the truth of fiscal contraction that is not just a way of life, but an exponential dynamic that is getting worse fast, rather than staying static.
…click on the above link to read the rest of the article…
If History Is Any Indication, Junk Bonds And Copper Are Telling Us Exactly Where Stocks Are Heading Next
If History Is Any Indication, Junk Bonds And Copper Are Telling Us Exactly Where Stocks Are Heading Next
Yields on the riskiest junk bonds are absolutely soaring and the price of copper just hit a fresh six year low. To most people, those pieces of financial news are meaningless. But if you understand history, and you are aware of the patterns that immediately preceded previous stock market crashes, then you know how howhuge both of those signs are. During the summer of 2008, junk bond prices absolutely cratered as junk bond yields skyrocketed. This was a very clear signal that financial markets were about to crash, and sure enough a couple of months later it happened. Now the exact same thing is happening again. The following comes from a Wall Street On Parade article that was posted on Tuesday entitled “Keep Your Eye on Junk Bonds: They’re Starting to Behave Like ‘08“…
According to data from Bloomberg, corporations have issued a stunning $9.3 trillion in bonds since the beginning of 2009. The major beneficiary of this debt binge has been the stock market rather than investment in modernizing the plant, equipment or new hires to make the company more competitive for the future. Bond proceeds frequently ended up buying back shares or boosting dividends, thus elevating the stock market on the back of heavier debt levels on corporate balance sheets.
Now, with commodity prices resuming their plunge and currency wars spreading, concerns of financial contagion are back in the markets and spreads on corporate bonds versus safer, more liquid instruments like U.S. Treasury notes, are widening in a fashion similar to the warning signs heading into the 2008 crash. The $2.2 trillion junk bond market (high-yield) as well as the investment grade market have seen spreads widen as outflows from Exchange Traded Funds (ETFs) and bond funds pick up steam.
And right now we are seeing the most volatility in the junkiest of the junk bonds.
…click on the above link to read the rest of the article…
Canada “Getting Clocked” by Something Far Bigger than Oil
Canada “Getting Clocked” by Something Far Bigger than Oil
Canada is likely in a technical recession, after the economy shrank for the first five months of the year. It’s heavily dependent on commodities. The oil bust and the broader commodity rout have been blamed liberally. The theory goes that the problem is contained. The oil patch may be wallowing in the mire. But no problem, the rest of Canada is fine.
The swoon of the Canadian dollar against the US dollar has caused a bout of false hope that this would make Canadian exports of manufactured goods more attractive to buyers in the US and elsewhere, and that the economy could thus export its way out of trouble. This theory has now run aground.
Because the threat to manufacturing in Canada comes from Mexico.
“I think Mexico’s just a cheaper place to produce, and you have enough human capital and engineering skills to produce almost everything you can produce in Canada and do it a lot cheaper,” Steven Englander, Citibank’s global head of G-10 currency strategy, told Bloomberg.
And the multi-year swoon of the Canadian dollar against the US dollar isn’t going to help. Over the last three years, the loonie has lost 25% against the US dollar, the peso 21%. Over the past 12 months, the loonie lost 16% against the dollar, but practically in lockstep with the peso.
This chart shows the move of the two currencies against the dollar as a percentage change from three years ago. It’s like a downhill tango:
So devaluing the loonie sounds like a good old central bank solution. But it hasn’t boosted exports of manufactured goods:
The US dollar value of non-oil exports from Canada to the US reached $32 billion during the peak month in 2008, crashed during the Financial Crisis, and recovered, but by 2012 started petering out at $30 billion a month, has since lost ground, and remains below where it had been before the financial crisis.
…click on the above link to read the rest of the article…
Big Natural Gas Driller Bites Dust, ‘Smart Money’ Gets Crushed
Big Natural Gas Driller Bites Dust, ‘Smart Money’ Gets Crushed
Natural gas driller Samson Resources is planning to file for Chapter 11 bankruptcy by August 15, when a $110 million interest payment comes due on $2.25 billion of senior unsecured junk bonds, Bloomberg reported, citing “two people with knowledge of the matter.” Samson doesn’t have the money, can’t pay, and won’t pay.
The 9.75% bonds maturing February 2020 aren’t traded anymore. The last trade was on July 29 for a quarter of a cent on the dollar. They’re part of the vast high-yield bond pile, and they have become worthless. These kinds of bonds are nicknamed “junk” for a reason.
Stockholders – private equity firms, the ultimate “smart money” – are getting wiped out too.
Samson was acquired in 2011 by a KKR-led group of private equity firms for $7.2 billion. They invested $4.1 billion of equity in the deal. Debt piled on the company made up the rest. Then Samson went on to drill this cash into the ground to produce lots of natural gas and sell it below cost, losing money all along. Now its cash is running out, and new cash to drill into the ground isn’t readily forthcoming.
In the pre-packaged bankruptcy filing, these stockholders would lose their equity stakes in the company, and their shares would become worthless.
Then there are the holders of $1 billion of second-lien covenant-lite term loans. “Covenant-lite” because the debt doesn’t provide creditors the classic protections. During the credit bubble, purposefully constructed by the Fed via its zero-interest rate policy, yield-hungry investors take on just about any risk to earn a discernable yield. Borrowers gobble up the fresh cash and set the terms. And when realty hits, this “covenant-lite” debt leaves investors twisting in the wind.
Holders of these second-lien covenant-lite term loans won’t get their money back either. But their proposal to restructure the company in court and gain control over the company is beating out a competing proposal by holders of the $2.25 billion of unsecured junk bonds that are now going up in smoke.
…click on the above link to read the rest of the article…
A Reality Check For U.S. Natural Gas Ambitions
A Reality Check For U.S. Natural Gas Ambitions
Something unusual happened while we were focused on the global oil-price collapse–the increase in U.S. shale gas production stalled (Figure 1).
Figure 1. U.S. shale gas production. Source: EIA and Labyrinth Consulting Services, Inc.
(click image to enlarge)
Total shale gas production for June was basically flat compared with May–down 900 mcf/d or -0.1% (Table 1).
Table 1. Shale gas production change table. Source: EIA and Labyrinth Consulting Services, Inc.
(click image to enlarge)
Marcellus and Utica production increased very slightly over May, 1.1 and 1.5 mmcf/d, respectively. The Woodford was up 400 mcf/d and “other” shale increased 300 mcf/d. Production in the few plays that increased totaled 3.3 mmcf/d or one fair gas well’s daily production.
Related: The Broken Payment Model That Costs The Oil Industry Millions
The rest of the shale gas plays declined. The earliest big shale gas plays–the Barnett, Fayetteville and Haynesville–were down 25%, 14% and 48% from their respective peak production levels for a total decline of -4.8 bcf/d since January 2012.
The fact that Eagle Ford and Bakken gas production declined suggests tight oil production may finally be declining as well.
To make matters worse, total U.S. dry natural gas production declined -144 mmcf/d in June compared to May, and -1.2 bcf/d compared to April (Figure 2). Marketed gas declined -117 mmcf/d compared to May and -1 bcf/d compared to April.
Figure 2. U.S. natural gas production. Source: EIA and Labyrinth Consulting Services, Inc.
(click image to enlarge)
Although year-over-year gas production has increased, the rate of growth has decreased systematically from 13% in December 2014 to 5% in June 2015 (Figure 3).
Figure 3. U.S. dry gas year-over-year production change. Source: EIA and Labyrinth Consulting Services, Inc.
(click image to enlarge)
This all comes at a time when the U.S. is using more natural gas for electric power generation. In April 2015, natural gas used to produce electricity (32% of total) exceeded coal (30% of total) for the first time (Figure 4).
…click on the above link to read the rest of the article…
The South American Financial Crisis Of 2015
The South American Financial Crisis Of 2015
Most nations in South America are either already experiencing an economic recession or are right on the verge of one. In general, South American economies are very heavily dependent on exports, and right now they are being absolutely shredded by the twin blades of a commodity price collapse and a skyrocketing U.S. dollar. During the boom times in South America, governments and businesses loaded up on tremendous amounts of debt. Since much of that debt was denominated in U.S. dollars, South American borrowers are now finding that it takes much more of their own local currencies to service and pay back those debts. At the same time, there is much less demand for commodities being produced by South American nations in the international marketplace. As a result, South America is heading into a full-blown financial crisis which will cause years of pain for the entire continent.
If you know your financial history, then you know that we have seen this exact same scenario play out before in various parts of the world. The following comes from a recent CNN article…
The dollar’s gains should make history nerds shake in their boots. Its rally in the early 1980s helped trigger Latin America’s debt crisis. Fifteen years later, the greenback surged quickly again, causing Southeast Asian economies, such as Thailand, to collapse after a run on the banks ensued.
In particular, what is going on right now is so similar to what took place back in the early 1980s. At that time, Latin American governments were swimming in debt, the U.S. dollar was surging and commodity prices were falling. The conditions were perfect for a debt crisis in Latin America, and that is precisely what happened…
…click on the above link to read the rest of the article…
Deflation Is Winning – Beware!
Deflation Is Winning – Beware!
Expect the ride to get even rougher
Deflation is back on the front burner and it’s going to destroy all of the careful central planning and related market manipulation of the past 6 years.
Clear signs from the periphery indicate that a destructive deflationary pulse has been unleashed. Tanking commodity prices are confirming that idea.
Whole groups of enterprises involved in mining and energy are about to be destroyed. And the commodity-heavy nations of Canada, Australia and Brazil are in for a very rough ride.
Whether the central banks can keep all of their carefully-propped equity and bond markets elevated throughout the next part of the cycle remains to be seen. We know they will try very hard. They certainly are increasingly willing to use any all tools at their disposal to keep the status quo going for as long as possible.
Whether it’s the People’s Bank of China stepping in to the market to buy 10% stakes in major Chinese corporations in a matter of weeks, the Bank Of Japan becoming the majority owner of key ETFs in the Japanese markets, or the Swiss National Bank purchasing $100 billion of various global equities, we see the same desperation. Equity prices are being propped, jammed and extended higher and higher without regard to risk or repurcussions.
It makes us wonder: Why haven’t humans ever thought to print their way to prosperity before?
Well, that’s the problem. They have.
And it has always ended up disastrously. History shows that the closest thing that economics has to an inviolable law is: There’s no such thing as a free lunch.
Sadly, all of our decision-makers are trying their hardest to ignore that truth.
First, The Fall….
So how will all of this progress from here?
We’ve always liked the Ka-Poom! theory by Erik Janzen which we explained previously like this:
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The Latest Casualty In Energy’s Hardest Hit Industry
The Latest Casualty In Energy’s Hardest Hit Industry
Another coal company bites the dust. Again.
Patriot Coal, a miner of coal in several Appalachian states, filed for Chapter 11 bankruptcy on May 12. Patriot said it is “in active negotiations for the sale of substantially all of the Company’s operating assets to a strategic partner.”
The move comes just a year and a half after the company emerged from its previous bankruptcy. At the time, some secured creditors received repayments, but shareholders bore the brunt of the restructuring.
The initial bankruptcy came as Patriot struggled with high costs during a downturn in the coal industry. But after the company came up with a restructuring plan that included a cut in labor costs and the closure of high-cost mines, Patriot thought it would rebound. But it wasn’t to be. As Taylor Kuykendall of SNL Energy notes, “Patriot was plagued by a union strike, infrastructure failures, fatal accidents and persistently weak coal markets that ultimately resulted in the company again filing for Chapter 11 bankruptcy reorganization.”
Related: 5 Solar Stocks That Should Be On Your Radar
In one sense, the problems at Patriot Coal were unique to the company. It was originally a spin off from Peabody Energy, which unloaded healthcare liabilities onto the newfound Patriot Coal. That weighed down the company from the start, freeing Peabody from the costs. SNL’s Kuykendall chronicles a series of mishaps in 2014, from lawsuits for environmental damages to a series of safety accidents. Patriot’s CEO called it “one of the worst years in Patriot’s recent history.”
The poor performance affected output. In the first three months of this year, Patriot produced 4.1 million tons of coal, a 15.1 percent decline from the first quarter in 2014.
…click on the above link to read the rest of the article…
Australia’s Bad Bet on China
Australia’s Bad Bet on China
Wolf here: After any bubble, it’s always: “Nobody predicted the crash….” Central bankers don’t see bubbles. They’re not allowed to. At least officially, they don’t see them. And thus they can’t see the implosions coming. They can’t officially see these things because they help create them with their monetary policies.
Industry insiders and their financiers don’t see bubbles either because they get rich off them. Politicians and bureaucrats don’t see them because bubbles make them look good and bring in a lot of moolah.
But people do see the bubbles – which are huge and easy to see – and they do predict their crashes though they might not always get the timing right. Yet, they’re pushed aside and made the most unpopular folks around, and they’re expelled from the herd, and their warnings are ignored. It happens every time. And it happened during the Australian iron-ore bubble, whose spectacular crash suddenly “nobody was predicting.” Ha! Here’s Lindsay David:
By Lindsay David, Australia, author of Print: The Central Bankers Bubble, founder of LF Economics:
Late last week Bloomberg’s James Paton released an article titled, Gina Rinehart says ‘nobody was predicting the ore price crash’
Rinehart, “Australia’s richest woman” and “chairman of Hancock Prospecting,” as the article put it, is not the only mining head, politician, treasury employee, mainstream economist, or Reserve Banker “not” to predict the ore price crash. In fact, unless I am seriously mistaken, none of them saw the price crash coming. But they have indeed ignored all the warnings by those who did predict the crash in the spot price of iron ore.
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Australia Runs out of Luck, Now Needs a Miracle
Australia Runs out of Luck, Now Needs a Miracle
Australia, you have officially run out of luck.
While leveraged property investors in Sydney and Melbourne are desperately hunting for a senseless “net-yield” that makes the yield on a German 2-year bund look rewarding, the Australian mining sector is screaming towards what may be one of the greatest and colossal economic breakdowns in modern Western history.
As iron ore illustrates, this is not a downturn; this is a spectacular crash in the spot price of a commodity. And the sad news is, there is no new demand scenarios (unless China builds more apartments than its population) to suggest that more supply is needed to fulfil the demand of the global economy.
Australia made two bets.
The first bet was that China would willingly consume every ounce of iron ore Australian miners could dig from the ground and pay a premium.
Unfortunately, Australia has built an (incredibly sophisticated and streamlined) iron ore production operation so big that the world may never be able to consume all that it can supply. Our treasury, RBA, Miners and politicians assumed that China would forever grow. But they failed to calculate over the long-term that if China continues to consume all the iron ore dug from Australia’s underground, the world’s most populous nation would literally need to build a national subway network, literally an airport every 22 kilometres apart from each other and literally more dwellings than people.
…click on the above link to read the rest of the article…
The oil glut and low prices reflect an affordability problem
The oil glut and low prices reflect an affordability problem
For a long time, there has been a belief that the decline in oil supply will come by way of high oil prices. Demand will exceed supply. It seems to me that this view is backward–the decline in supply will come through low oil prices.
The oil glut we are experiencing now reflects a worldwide affordability crisis. Because of a lack of affordability, demand is depressed. This lack of demand keeps prices low–below the cost of production for many producers. If the affordability issue cannot be fixed, it threatens to bring down the system by discouraging investment in oil production.
This lack of affordability is affecting far more than oil products. A recent article in The Economist talks about LNG prices being depressed. LNG capacity ramped up quickly in response to high prices a few years ago. Now there is a glut of LNG capacity, and prices are far below the cost of extraction and shipping for many LNG suppliers. At least temporary contraction seems likely in this sector.
If we look at World Bank Commodity Price data, we find that between 2011 and 2014, the inflation-adjusted price of Australian coal decreased by 41%. In the same period, the inflation-adjusted price of rubber is down 58%, and of iron ore is down 59%. With those types of price drops, we can expect huge cutbacks on production of many types of goods.
…click on the above link to read the rest of the article…
