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Market Mythology

LONDON – Twice in the last 15 years, markets have tried to correct the mistakes and excesses of the Bubble Epoch. Each time, the Fed came back with even more mistakes and excesses. Trillions in new credit… lower lending rates… easier terms… ZIRP… QE… and the Twist!

MW-BX052_FOMC_m_MG_20140319160153 The gaggle of price-fixers the job of which is to regularly falsify one of the most important price signals in the economy. The idea that the economy can be “improved” by the interventions of a handful of people who have zero practical economic experience and rely on extremely dubious theories to guide their decisions is downright bizarre. Who can possibly believe that this works? It is a huge farce – one that is very dangerous for prosperity and economic progress.

Photo credit: Bloomberg

Over the short run, markets respond to myths. Investors are ready to believe almost anything… for a while. But over the long run, there is death and destruction – a reality outside of what we believe.

No matter how badly investors want asset prices to go up, for example, asset prices don’t always comply. On Wednesday, the Dow sank 560 points in the first few hours of trading. It then recovered half of those losses to end the day down 249 points – for a 1.5% fall.

U.S. crude oil plunged below $27 a barrel – the lowest level in 13 years. The financial media don’t know what to do. Typically, they downplay a bear market as long as they can… explaining the many reasons why the sell-off is “overdone” and why the “bottom” has already been found.

The Wall Street Journal, for example, tells us that the “market’s panic is incongruent” with economic reality. Yahoo! Finance already sees “signs of capitulation.” It offers advice on “how to trade a bear market,” too.

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

Maduro “Wake Up” Call For OPEC As Venezuela Crude Crashes To 13 Year Lows

January 22, 2016

Maduro “Wake Up” Call For OPEC As Venezuela Crude Crashes To 13 Year Lows

Venezuela’s crude oil basket price collapsed to as low as $20.20 yesterday, according to the socialist utopia’s President Maduro. Having already “passed the point of no return,” Maduro rages that OPEC producers appear to be “finally waking up” to what they have unleashed noting that, according to him, Russia’s Putin has agreed to “work on oil price issues.”

More jawboning and hope…

*VENEZUELA’S MADURO SAYS HE SPOKE W/RUSSIA’S PUTIN ON OIL
*RUSSIA’S PUTIN AGREED TO WORK ON OIL PRICE ISSUES: MADURO
*SOME OPEC PRODUCERS ‘WAKING UP’ TO OIL SITUATION: MADURO
*VENEZUELA OIL PRICE REACHED $20.20/BBL YESTERDAY, MADURO SAYS
*VENEZUELA SHOULD REPLACE OIL AS MAIN FX INCOME SOURCE: MADURO
*VENEZUELA’S MADURO SAYS HE HOPES OIL MARKET RECOVERS

“Some OPEC countries that flooded the oil market are now waking up,” President Nicolas Maduro said on state television.

Flooding oil market was “suicidal policy” by some oil producers: Maduro

Maduro said he spoke with Russia President Vladimir Putin on oil prices – “We agreed to continue working on a common vision, a common plan”

Hope is not a strategy…

As we concluded previously, what all this translates to is simple: first default, then revolution.

Which is good news for those who buy CDS. Our only hope for those who have held so far is that the counterparty you will have to novate with will still be around once the sparks fly, because once this first OPEC member goes bankrupt, things will start moving very fast.

Finally, for all those who are praying for an oil bounce, your day may be near, because nothing will send the price of crude soaring quite as fast as one entire OPEC nation suddenly entering a death spiral of chaos.

The Birth Of The PetroYuan (In 2 Pictures)

January 21, 2016

The Birth Of The PetroYuan (In 2 Pictures)

Give me that!!

It belongs to the Chinese now!

h/t @FedPorn

As we previously detailed, two topics we’ve deemed critically important to a thorough understanding of both global finance and the shifting geopolitical landscape are the death of the petrodollar and the idea of yuan hegemony.

In November 2014, in “How The Petrodollar Quietly Died And No One Noticed,” we said the following about the slow motion demise of the system that has served to perpetuate decades of dollar dominance:

Two years ago, in hushed tones at first, then ever louder, the financial world began discussing that which shall never be discussed in polite company – the end of the system that according to many has framed and facilitated the US Dollar’s reserve currency status: the Petrodollar, or the world in which oil export countries would recycle the dollars they received in exchange for their oil exports, by purchasing more USD-denominated assets, boosting the financial strength of the reserve currency, leading to even higher asset prices and even more USD-denominated purchases, and so forth, in a virtuous (especially if one held US-denominated assets and printed US currency) loop.

The main thrust for this shift away from the USD, if primarily in the non-mainstream media, was that with Russia and China, as well as the rest of the BRIC nations, increasingly seeking to distance themselves from the US-led, “developed world” status quo spearheaded by the IMF, global trade would increasingly take place through bilateral arrangements which bypass the (Petro)dollar entirely. And sure enough, this has certainly been taking place, as first Russia and China, together with Iran, and ever more developing nations, have transacted among each other, bypassing the USD entirely, instead engaging in bilateral trade arrangements.

Falling crude prices served to accelerate the petrodollar’s demise and in 2014, OPEC nations drained liquidityfrom financial markets for the first time in nearly two decades:

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

The myth of US self-sufficiency in crude oil

January 21, 2016

The myth of US self-sufficiency in crude oil

Google for “US energy independence” and you will get 134k results, “US self sufficiency” yields 10k results. Here are some examples of what the media reports:

In Aljazeera’s Inside Story, 10/1/2016, titled “How much support will Saudi Arabia win against Iran?” the delicate relationship between the US, Saudi Arabia and Iran is discussed with 3 panellists. The moderator wanted answers in the context of “the US is almost at a tipping point, is almost energy independent..”
http://www.aljazeera.com/programmes/insidestory/2016/01/saudi-arabia-iran-160110170443000.html

https://www.youtube.com/watch?v=-xvjeUKpkP8 (18:45)

In the State of the Union Address 2014 Obama proudly announced: “Today, America is closer to energy independence than we’ve been in decades”. In the latest SOUA on 12th January 2016, we hear: “Meanwhile, we’ve cut our imports of foreign oil by nearly sixty percent”

On 16/1/2016, the 7pm news of Australia’s public broadcaster ABC TV had this snippet:

http://www.abc.net.au/news/2016-01-16/benefits-of-falling-oil-prices-not-fully-passed-on-to-motorists/7091862?section=business

Let’s look at the data:

Crude imports

Fig 1: US crude oil production, imports and exports

The graph shows that crude production reached almost 9.5 mb/d in 2015, just short of the historic peak in 1970. But imports are still 7 mb/d. Exports were only around 500 kb/d (to Canada) due to an export ban (which was recently lifted). Let’s zoom into the period since 2007, the peak year of imports.

Fig 2: US crude production vs imports since 2007

We have several phases in this crude oil import history:

3 year decline of imports due to recession as oil prices went up, followed by the financial crisis
A rebound when quantitative easing started
A 2 mb/d decline 1 year after the shale oil boom started

In 2013 the growing production curve intersects with the declining import curve at around 7.5 mb/d i.e. a production/import ratio 50:50. Since then production grew another 2 mb/d but has peaked in April 2015 because of low oil prices which hit the shale oil industry. Imports did not continue to decline but remained basically flat.

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

Canada Set To Unleash Negative Rates As Oil Patch Dies, Depression Deepens

January 19, 2016

Canada Set To Unleash Negative Rates As Oil Patch Dies, Depression Deepens

This Wednesday, the Bank of Canada has a decision to make.

Canada’s oil “dream” is dying thanks to the inexorable slide in crude prices and as the IEA made clear earlier today, the pain is set to persist for the foreseeable future as the world “drowns in oversupply.”

“Lower for longer” has hit the country’s oil patch hard. We’ve spent quite a bit of time documenting the plight of Alberta, where job cuts tied to crude’s slide have led directly to rising suicide rates, soaring property crime, and increased food bank usage (not to mention booming business for repo men).

Adding insult to injury for Canadians is the plunging loonie. Because the country imports most of its fresh fruits and vegetables, the weak currency has triggered a sharp increase in the price of many items in the grocery aisle as documented in a hilarious series of tweets by incredulous Canadian shoppers.

The question for the Bank of Canada is this: is the risk of an even weaker loonie worth taking if a rate cut has the potential to head off the myriad risks facing the economy?

We’ll find out what the BOC thinks tomorrow, but in the meantime, analysts have weighed in. JP Morgan’s Daniel Hui says CAD needs to fall further lest producers should simply close up shop. “[W]ith West Canada Select (WCS) now sitting just a dollar above the average per-barrel operational cost of $20 (Canadian), the risk is that any further decline will cause a whole new host of spillovers including potential shutdown and retrenchment of energy extraction and exports (with its attendant growth and balance of payment effects) or the potential of highly leveraged companies running operational losses, and the more contagious financial impact that might have in Canada, with broader spillovers.”

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

Will Reckless Saudis Seek War with Iran?

January 16, 2016

Will Reckless Saudis Seek War with Iran?

Exclusive: Under growing economic and political pressure, the new Saudi leadership is showing a dangerous impulse toward military interventions, raising prospects for a direct and destructive confrontation with its regional rival Iran, writes Daniel Lazare.

Now that Saudi Arabia has severed diplomatic ties with Iran and reportedly bombed Iran’s embassy in Yemen, the big question is whether the Saudis are desperate and unhinged enough to launch an attack across the Persian Gulf. While Saudi leaders insist they have no such intent, there are mounting pressures pushing them in that direction.

The ruling family is under unprecedented strain. Its economy is shrinking; it’s bogged down in a seemingly endless war in Yemen; and its human-rights policies are an international scandal. If countries could have nervous breakdowns, Saudi Arabia would be well on its way. And when breakdowns occur, nations do crazy things.

King Salman the President and First Lady to a reception room at Erga Palace during a state visit to Saudi Arabia on Jan. 27, 2015. (Official White House Photo by Pete Souza)

Of course, there is always the possibility that sanity will suddenly descend upon the Saudis. But reason seems to be in increasingly short supply. Here’s a quick rundown of the reasons why Saudi Arabia is in such dire straits that war with Iran might appear to Saudi leaders as the best remaining option.

Reason #1: Economic collapse.

The 70-percent crash in oil prices since mid-2014 is not unprecedented. Crude plunged some 70 percent during and after the 2008 financial crisis, though it quickly bounced back once central bankers began cutting interest rates. But this time around the realization is growing that the prices will not be coming back anytime soon.

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

Ron Paul Says to Watch the Petrodollar

January 14, 2016

Ron Paul Says to Watch the Petrodollar

The chaos that one day will ensue from our 35-year experiment with worldwide fiat money will require a return to money of real value. We will know that day is approaching when oil-producing countries demand gold, or its equivalent, for their oil rather than dollars or euros. The sooner the better. – Ron Paul

Ron Paul is calling for the end of the petrodollar system. This system is one of the main reasons the U.S. dollar is the world’s premier reserve currency.

Essentially, Paul is saying that understanding the petrodollar system and the forces affecting it is the best way to predict when the U.S. dollar will collapse.

Paul and I discussed this extensively at one of the Casey Research Summits. He told me he stands by his assessment.

Nick Giambruno and Ron Paul

This is critically important. When the dollar loses its coveted status as the world’s reserve currency, the window of opportunity for Americans to protect their wealth from the U.S. government will definitively shut.

At that point, the U.S. government will implement the same destructive measures other desperate governments have used throughout history: overt capital controls, wealth confiscation, people controls, price and wage controls, pension nationalizations, etc.

The dollar’s demise will wipe out the wealth of a lot of people. But it will also trigger political and social consequences likely to be far more damaging than the financial fallout.

The two key takeaways are:

The U.S. dollar’s status as the premier reserve currency is tied to the petrodollar system.

The sustainability of the petrodollar system relies on volatile geopolitics in the Middle East (where I lived and worked for several years).

From Bretton Woods to the Petrodollar

The Bretton Woods international monetary system, which the Allied powers created in 1944, turned the dollar into the world’s premier reserve currency.

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

WTI Slides After API Reports Massive Build In Gasoline & Distillate Inventories

January 12, 2016

WTI Slides After API Reports Massive Build In Gasoline & Distillate Inventories

With the seasonally drawdown-prone December completed, we begin seasonally build-prone January with expectations for a 2mm barrel build. However, according to API, both total and Cushing inventory levels tumbled (-3.9mm and 300k respectively). Great news – so why is crude tumbling? Simple – massive builds in end-products again with Gasoline up a massive 7mm barrels and Distillates up 3.6mm barrels. Having ramped off sub-$30 levels aftwr NYMEX closed, and lifted by the Iran-US news, WTI is sliding back rapidly.

December saw a very flat inventory overall (despite being a seasonally extreme period for drawdowns into year-end tax planning)…

Judging from history, as Bloomberg notes, it should resume as soon as the festive season is over: Stocks have built by 3.2 million barrels on average in January since 1921.

Chart Of The Day: Canadian Heavy Crude Falls To $19.81—–Down From $100 In 2011

January 8, 2016

Chart Of The Day: Canadian Heavy Crude Falls To $19.81—–Down From $100 In 2011

For Commodities, This Is The Next Great Depression

January 7, 2016

For Commodities, This Is The Next Great Depression

While the “sell in 1973, and go away” plan had worked out for some in the commodity space, the destruction of the last decade has only one historical comparison… the middle of The Great Depression.

The 10-year rolling annualized return for commodities is -5.1% – the lowest since 1938…

During the same period Stocks are up 7.3% annualized, Bonds 6.6%, and Cash unchanged. Dip-buying opportunity? Maybe.

UBS thinks so: Tactically we can see a bounce in Q1 before the capitulation starts

Tactically, in September 2015, we actually expected a more significant oversold bounce in commodities from last year’s late September risk bottom into ideally early Q2 2016 before we anticipated more weakness into later 2016. So far, the bounce failed since particularly in the energy complex we saw further weakness into December and the metals have been actually just trading sideways. Nonetheless, according to our Q1 US dollar pullback call, we still see the chance for another rebound attempt in commodities into later Q1, and if so the move can be significant (short covering). Such a rebound would however not change our underlying cyclical roadmap for commodities, and this means that any rebound in Q1 should be limited in price and time before we expect another and potential final capitulation wave to start into H2 2016, where we expect the CCI index to minimum test its 2008 low at 350 to worst case 320.

Commodities… on the way into a multi-year buying opportunity

All in all we are sticking to our last year’s projection and strategy call that commodities are on the way into an important H2 2016/early2017 cyclical bottom. What is missing in our view is the final act in this first bear market.

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

WTI Plunges To $35 Handle As Loonie Hits 12 Year Low

January 5, 2016

WTI Plunges To $35 Handle As Loonie Hits 12 Year Low

WTI Crude prices just broke back to a $35 handle for the first time since mid-December as the combination of un-growth, Saudi price cuts, a rancorous OPEC, and production increases weigh on the world’s most important commodity. At the same time, oil producers are getting hit with the Canadian Dollar plunging above 1.4000 to its lowest since 2003…

And FX producers are getting battered…

Betting on Deflation May Be a Huge Mistake. Here’s Why…

January 5, 2016

Betting on Deflation May Be a Huge Mistake. Here’s Why…

Precious Metals Market Update

Precious metals investors heading into 2016 worry the dollar will continue marching ahead, right over the top of gold and silver prices. The Fed is telegraphing additional rate hikes throughout the year, and commodity prices – led by crude oil – are falling. There have been tremors in the biggest beneficiary markets of all when it comes to the Fed’s QE largesse – U.S. equities and real estate. And the possibility of a recession is growing, both in the U.S. and around the world.

There are plenty of reasons we might see even lower official inflation numbers and a stronger dollar in 2016. But don’t think for a second that consumer prices or living costs will fall. They haven’t, they aren’t, and they never will in a sustained way – thanks to the Fed’s creation in 1913. This is where the deflationists have it wrong.

The impact of further disinflationary forces or even a deflationary episode on precious metals prices is a bit harder to predict.

The bear case for precious metals is rather simple. Should metals trade like commodities, they are likely to follow other raw materials lower. If we get a liquidity crunch akin to the 2008 financial crisis, just about everything will be sold as investors raise cash to meet margin calls or flee to the dollar as a perceived safe-haven.

There is also the possibility that metals prices will simply be managed lower. Growing numbers of investors realize that Wall Street is not a bulwark of free markets. Major banks have admitted to rigging markets against their own customers, and the Federal Reserve aggressively intervenes in markets in its quest to centrally plan the world economy. Why wouldn’t the Fed also be active in trading precious metals? Those dismissing the notion that metals prices are manipulated are naive.

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

Protesters Storm, Set Fire To Saudi Embassy In Iran

January 2, 2016

Protesters Storm, Set Fire To Saudi Embassy In Iran

Earlier today, Saudi Arabia announced it had staged its largest mass execution in 25 years.

43 al-Qaeda conspirators were killed along with 4 Shiites accused of shooting policemen in the anti-government protests which broke out during the Arab Spring. Among the Shiites killed: prominent cleric Nimr al-Nimr.

His death drew sharp criticism from Iran and Hezbollah with the latter calling the execution a “grave mistake.” Protests erupted in the Qatif district of Saudi Arabia’s Eastern Province as well as in Bahrain, where hundreds took to the streets, burning tires and braving tear gas fired by police. As we reported earlier today, protesters had also converged on the Saudi embassy in Iran.

Now, in what looks like a repeat of the Iran Hostage Crisis, the protesters in Tehran have reportedly broken into the Saudi embassy and set it ablaze with Molotov cocktails.

Sobhan Hassanvand

✔@Hassanvand

RIGHT NOW: Saudi embassy in Tehran on fire after stormed by protesters over exec execution of Shiite leader al-Nimr pic.twitter.com/k92bTkh5hb

Sobhan Hassanvand

✔@Hassanvand

Video shows pro

protesters inside Saudi embassy in Tehran

4:26 PM – 2 Jan 2016

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

ISIS oil trucks cross into Turkey every day, captured terrorist admits

January 2, 2016

ISIS oil trucks cross into Turkey every day, captured terrorist admits

A captured Islamic State militant who spoke to Sputnik news agency has bolstered claims that Turkey is involved in illegal oil deals with the jihadist group up to the hilt.

TrendsIslamic State

24-year-old Mahmud Ghazi Tatar says he joined Islamic State (IS, previously ISIS/ISIL) from the Turkish city of Adiyaman. Together with other recruits, he was transported over the border into Syria where he received terrorist training.

Having taken part in the civil war in Syria, he was captured by Kurdish forces last June and is now imprisoned.

RT obtained interview footage with the captive from Sputnik news agency. In it, the former IS fighter reveals details about Turkey’s alleged oil links to the terror group.

“At the training camp in May 2015, our commander told us that the group sells fuel to Turkey. That income covers Islamic State’s costs. The oil trucks crossing into Turkey every day carry crude oil, as well as petrol,” Tatar said, adding that the Islamic group has “enough oil to last them a long time.”

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RT ✔@RT_com

URGENT: Russian intel spots 12,000 oil tankers & trucks on Turkey-Iraq border- General Staff http://on.rt.com/70d3

4:43 AM – 25 Dec 2015

In the words of Tatar’s commander, the oil is being sold via several businessmen and traders, although their names were not disclosed.

“ISIL also receives lots of supplies from Turkey and Arab countries,” the captured militant said.

Turkey strongly denies that it has links to the terrorists.

ISIS’s black market oil trade has come under scrutiny from the international community amid turbulent oil prices, which have fallen to half their previous level in 2015.

ISIL oil trade: step by step

Crude oil extracted at Syria’s Deir ez-Zor and Iraq’s Qayyara oil fields, which remain under under Islamic State control, is being sold for as little as $25 per barrel to smugglers, independent Syrian and Iraqi traders who transport oil using their own trucks.

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

Five energy surprises for 2016: The possible and the improbable

December 29, 2015

Five energy surprises for 2016: The possible and the improbable

Many energy analysts like to make predictions at the end of the year for the coming year. Instead, I’ll point to five possible surprises in energy–surprises because few people expect them to happen. I am not predicting that any of the following will happen, only that there is an outside chance that one or more will occur. Naturally, these surprises would move markets and policy debates in unexpected directions.

1. Crude oil ends 2016 below $30 per barrel. With oil hovering in the mid-$30 range it doesn’t seem implausible that at some point in the not-to-distant future, crude oil will dip below $30 per barrel, if only briefly. What would surprise most people is if the crude oil price finished next year below $30 per barrel. The conventional wisdom is that cheap oil is giving a boost to the economy that will lift worldwide economic growth and thus demand for oil. There is also a belief that high-cost producers will simply have to stop drilling new money-losing wells after more than a year of financial Armageddon in the oil markets. This will bring down supply just as economic growth is rising, sending prices much higher as the year progresses.

The alternate view is that oil in the mid-$30 range is a reflection of an economy that has been weakening since the middle of 2014 and foreshadows a worldwide recession which should hit in full force by the end of 2016. In addition, with Iran almost certain to add to the current oversupply as sanctions are lifted and with the continued determination of OPEC to destroy the viability of tight oil deposits in the United States, the oil price could surprise on the downside, even testing $20 per barrel.

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

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