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How Big an Oil Glut is There Really?
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…
Legal Fictions and new Battlegrounds in the War on Cash
Legal Fictions and new Battlegrounds in the War on Cash
Greece – Ground Zero in the War on Cash?
We believe it was our friend Claudio Grass of Global Gold in Switzerland who first mentioned that the eurocracy may possibly have plans to use the Greek crisis as an opportunity to expand the ongoing war on cash. It stands to reason: Greece is well known for its extremely large “shadow economy” (the name for economic activity that flies under the radar of the greedy grasp of the State). Greece’s citizens not unreasonably regard the State as akin to a mafia organization which they are trying to avoid as much as possible (unless it promises them free goodies to buy their votes – they do of course gladly accept those).
We vividly recall an interview with a Greek shipping magnate about the constitutional provision that has relieved the country’s shipping industry from income tax. The interviewer asked (we are paraphrasing) whether the magnate thought it “fair” that this was so, and if he wasn’t troubled by his conscience in light of the Greek government debt crisis. The shipping magnate replied (again paraphrasing) along the lines of: “Just look at the government in Athens. They’re nothing but a bunch of crooks. Would you hand over your money voluntarily to Al Capone? Surely not. Well, neither do I.”
Not someone you want to hand your money to…
Photo credit: Bettmann / Corbis
A great many ordinary Greeks undoubtedly agree with the shipping magnate. They have a very cynical, but ultimately quite well-informed view of the political class and the State. The reason why the Greeks are way ahead of most other European citizens in this department is rooted in history. Greece had been under Ottoman occupation from the 15th century until 1821. The so-called millet system led to the Orthodox Christian Greek community remaining a fairly cohesive group. However, the Greeks certainly chafed under Ottoman rule.
…click on the above link to read the rest of the article…
Faith in Central Banks Dwindles
Faith in Central Banks Dwindles
Even Bloomberg Notices that Something is Amiss
As anyone who hasn’t been in a coma knows, assorted central bank interventions have failed to achieve their stated goals over the past several years. A recent article at Bloomberg focuses on their failure to reach their “inflation” targets.
Of course, this particular failure is actually reason to celebrate, as it means that consumers have at least been spared an even sharper decline in their real incomes than has been underway in spite of relatively tepid increases in consumer prices (whereby it should always be kept in mind that whether or not such price increases are considered “tepid” depends on on the composition of the basket of goods and services relevant to each individual).
Market-based inflation expectations in the major currency areas have crashed again – click to enlarge.
Of course central banks have succeeded in blowing up the money supply at truly astonishing rates since 2008, so prices in the economy have certainly been vastly distorted. The devastating effects of such price distortions are currently being visited on the oil patch, where credit-financed malinvestment on a stunning scale has occurred as a result of an erroneous appraisal of future oil prices. A slowdown in money supply growth in the US and China between 2011 and 2014 was all it took to take the wind out of the sails of this particular collective hallucination.
Inflating the euro alone wasn’t enough to keep oil prices afloat …
Illustration by David Simonds
To the delight of the financial industry, asset prices have been the main beneficiaries of money supply inflation, but deep down many market participants are presumably aware that the “wealth” ostensibly created by artificially pushing the prices of titles to capital to the stratosphere is just as ephemeral – it is ultimately nothing but phantom wealth. If everybody tried to cash in, it would disappear in a flash.
…click on the above link to read the rest of the article…
The Phrase that Initiates Recessions
The Phrase that Initiates Recessions
It Can’t Get Any Worse?
On Friday, shortly after the release of the payrolls report, we asked half in jest whether the time had finally come for the market to interpret bad news as bad news, and not as an opportunity to speculate on more central bank largesse. As someone remarked to us later: “You had to ask”.
Photo credit: Paul Cross
Apparently a slightly later released news item informing us that “factory orders hit the skids” was taken as a buy signal of the “it can’t get any worse” sort. Normally it is considered bullish when the market rises on ostensibly bad news – and very often, this is actually the correct interpretation of such market action. However, one must be careful when the fundamental backdrop is subject to severe deterioration. Readers may recall that commentary on the markets was brimming over with the same type of argument in late 2007 and early 2008. In October 2007, the market in its unending wisdom priced the shares of Fannie Mae at $73 for instance.
SPX, 10 minute chart – after initially sliding on Friday, the market quickly recovered and has rallied quite a bit since then – click to enlarge.
The point is this: Although as a trader one must always respect market action, especially in the short term, one must at the same time avoid to ascribe to the mass of market participants a degree of wisdom they simply don’t possess. The market very often “knows” nothing and frequently tends to get things completely wrong. If that were not so, there would never be any buying or selling opportunities, but plenty of those obviously exist.
The “Throwing of the Light Switch”
Anyway, over the weekend we caught up a little on our reading, and inter alia came across an article at Wolfstreeta friend had pointed out to us, which discusses the recent weakness in US manufacturing data.
…click on the above link to read the rest of the article…
EU Moloch in a Fresh Bid to Inflate
EU Moloch in a Fresh Bid to Inflate
Brussels Alters Capital Requirements to “Spur Lending”
Saints preserve us, the central planners in Brussels are giving birth to new inflationist ideas. Apparently the 2008 crisis wasn’t enough of a wake-up call. It should be clear by now even to the densest observers that a fractionally reserved banking system that flagrantly over-trades its capital is prone to collapse when the tide is going out. 2008 was really nothing but a brief reminder of this fact.
The political and bureaucratic classes will certainly never go back to sound money or free banking. The State’s paws will remain firmly embedded in the business of money, as the modern-day welfare/warfare states and the ever-growing hordes of cronies and zombies they have to keep well-fed have become utterly dependent on fiat money inflation. This will continue until the bitter end. New measures are now being designed to hasten its arrival.
Designed by Bjarke Ingels
Before we continue, ask yourself if the euro zone actually needs more monetary inflation – even from the perspective of those who erroneously believe inflation to be an economic panacea:
The euro area’s money supply over time. We are on purpose using the narrow aggregate M1, which is the closest approximation to money TMS. The broader aggregates include items that are actually not money, but credit transactions. This leads to double-counting. Money= the means of final payment for goods and services in the economy, chart via ECB – click to enlarge.
It is fair to say that this expansion of the money supply hasn’t made society at large any more prosperous; quite the contrary in fact. It has however been beneficial to the State and others with first dibs on newly created money, as real wealth has been redistributed to these privileged groups.
…click on the above link to read the rest of the article…
Abe Reaches his Militarist Goal
Abe Reaches his Militarist Goal
Japan’s House of Councilors Briefly Transforms into Rada Outpost
Pictures such as those below used to primarily reach us from Ukraine’s Rada, back before Poroshenko’s “lustration law” banned about four million Ukrainian citizens from the political process forever. In Ukraine, brawls regularly broke out between Western Ukrainian nationalists and representatives of Eastern Ukrainian ethnic Russians.
Last week we received similar imagery from the upper house of Japan’s Diet, a.k.a. the House of Councilors.
A brawl breaks out in the usually quite reserved upper house of Japan’s Diet
Photo credit: Toru Hanai / Reuters
A few close-ups:
Alain Delonakawa dishes out an an uppercut
Photo credit: Yuya Shino / Reuters
Take that you bastard! Lawmakers are piling on in scrum-fashion
Photo credit: Yuya Shino / Reuters
So what has happened? Why are Japan’s notoriously consensus-prone and bushido-inhibited lawmakers suddenly trading fisticuffs and one presumes, matching verbal insults?
Dulce et Decorum est pro Patria Mori?
As our long-time readers know, we have posted a portrait of Japan’s nationalist-socialist prime minister Shinzo Abe a while back, entitled “Shinzo Abe’s True Agenda”. In brief: “fixing” Japan’s economy with even more inflation and deficit spending is only a side-show for Abe. He is convinced that he has a quasi-divine mission to bring Japan back to its glorious militaristic past. In this, he appears to be influenced by the philosophy of his grandfather Nobusuke Kichi, who actually served as a minister in Japan’s war cabinet during WW2 and became prime minister in the late 1950s.
US Credit Growth – the First Cracks?
US Credit Growth – the First Cracks?
Inflationary Bank Lending and Money Supply Growth
Given that there is currently no “QE” program underway – with the exception of the reinvestment scheme designed to prevent the Fed’s balance sheet from shrinking (if it were to shrink, the money supply would decline as well) – money supply growth depends primarily on the amount of fiduciary media created ex nihilo by commercial banks.
Putting it differently, it depends on the growth in bank lending, since new uncovered deposit money comes into being by the extension of credit by banks. This deposit money is a money substitute that is only partially covered by standard money, or potential standard money (i.e., bank reserves). However, it has to be regarded as part of the money supply, given that it is used for the final payment of goods and services. From the perspective of its users, it is money.
Photo credit: .Kai
Since the crisis of 2008 and the collapse of the mortgage credit bubble, the following trends have been in evidence: lending to corporations has quickly reached growth rates usually associated with boom conditions. Consumer lending has by contrast been more subdued, with mortgage credit growth not surprisingly only very slowly moving back into positive territory. Most of the acceleration in bank lending could be observed once “QE” was tapered and ended – as a result, broad US money supply growth has remained brisk, even though it is far below its peak levels of recent years.
…click on the above link to read the rest of the article…
Confusion in Fantasy Land
Confusion in Fantasy Land
Triangle Breakout Failure?
The stock market’s initial reaction to the FOMC announcement was interesting, to say the least. After receiving the umpteenth excuse as to why rates can still not be raised, coupled with a promise that they eventually will be, the market initially rallied on Thursday. And why wouldn’t it? More free money is good for stocks, right?
The Eccles Building, home of the FOMC – Meetings
Photo credit: AgnosticPreachersKid
The rally only lasted for one hour though. In the final hour of trading, the market sold off and closed in negative territory. On Friday, the sell-off intensified somewhat. By Friday’s close, the SPX had lost more than 60 points from its Thursday intra-day high, a sizable chunk over such a brief time period. Below is a chart showing the triangle from which it initially broke out to the upside (ahead of the announcement) and a Fibonacci grid – resistance was encountered right between the traditional 50% and 61.8% retracement levels.
S&P 500 Index, daily: the breakout from the triangle seems to have failed – click to enlarge.
As we are writing these words on Monday, the index is rallying again from the apex of the triangle to which it had returned as of Friday. So one cannot be certain yet that the breakout attempt will really turn out to be a failure – a clear break below the apex would however strongly indicate that a retest of the August lows was likely in the cards (at a minimum).
A Case of Cognitive Dissonance
Anyway, we have tried to come up with an explanation to the market’s sudden reassessment of the FOMC announcement. What is driving market psychology at the moment? One obvious point is technical: When major indexes return to the vicinity of a previously broken support level, some selling pressure will tend to emerge from traders/investors who were caught by surprise when the break below support originally occurred.
…click on the above link to read the rest of the article…
Crude Oil – a “Ray of Hope”
Crude Oil – a “Ray of Hope”
Why Technical Developments Shouldn’t be Ignored
This is a little addendum to our recent comments on the crude oil market (which you can see here, here andhere, in chronological order). Apparently Goldman Sachs just published a research report calling for $20 oil – which strikes us as a bookend to their infamous $200 call in 2008, which preceded the ultimate peak at $149 by just one or two weeks if memory serves (readers may remember this call by GS – it did get a lot of press at the time).
Photo credit: fmh
The recent sharp reversal after a seeming break of support definitely deserves attention, especially as everybody seems certain that after having declined some 75% from its peak, the price of oil can only go down further. Obviously, no such certainties were in evidence anywhere near the peak or when WTI crude was still trading near $100 a year ago (even though the supply-demand situation had quite obviously deteriorated gravely already).
WTIC crude, weekly – a lateral support level was broken amid a price/RSI divergence, and then prices reversed back up. There hasn’t been any follow-through buying since then, so this reversal may yet fail, but it seems to us that the market is ripe for an upward correction even if the longer term bear market isn’t over yet – click to enlarge.
Anyway, we wanted to briefly come back to the reasons why we think such technical signals shouldn’t be ignored. For one thing, experience shows that price lows are put in long before the “fundamentals” indicate they should. In fact, price lows are routinely put in while the fundamental backdrop is seemingly still at its very worst. This is so because market prices are discounting negative fundamentals in advance to some extent; so even though the fundamental backdrop may still get worse, it offers no guarantee that prices will go even lower.
…click on the above link to read the rest of the article…
It Wasn’t a Crash – But it Could Become One
It Wasn’t a Crash – But it Could Become One
A Reminder by John Hussman
In light of the Nikkei Index soaring by more than 1,300 points (!) overnight – a single day gain of 7.7% – it is time to briefly review the current market situation. As to the Nikkei, we would note two things: 1. it was “catching up” to what other markets have been doing, after having been the only stock market index that was significantly down the previous day (whereas all other markets soared after the close of trading in Japan) and 2. such enormous volatility – regardless of its direction – is usually not a bullish sign. Quite the contrary, in fact.
The Nikkei jumps by 1,343 points overnight – click to enlarge.
In his weekly market comment, John Hussman tries to defuse the hysteria surrounding the recent market break a bit, by reminding everybody that a 10% correction is not a “crash”, but actually a quite normal occurrence. The only reason why it felt abnormal was that there hasn’t been any market volatility for such a long time. It is this long absence of market volatility that was abnormal, not the 10% decline. He writes:
“The market decline of recent weeks was not a crash. It was merely an air-pocket. It was probably just a start. Such air pockets are typical when overvalued, overbought, overbullish conditions are joined by deterioration in market internals, as we’ve observed in recent months. They are the downside of the “unpleasant skew” that typically results from that combination – a series of small but persistent marginal new highs, followed by an abrupt vertical decline that erases weeks or months of gains within a handful of sessions (see Air Pockets, Free-Falls, and Crashes).
…click on the above link to read the rest of the article…
Europe’s Banks – Insolvent Zombies
Europe’s Banks – Insolvent Zombies
The Walking Dead
Now that Europe’s fractionally reserved banking system has been regulated into complete inertia, it is a good time to assess the current bottom line, so to speak. We should mention here that there are essentially two ways of dealing with the banking system. One is to introduce an unhampered free market banking system based on strong property rights and nothing else. Such a system would work best if it were based on sound money, i.e., a market-chosen medium of exchange. The regulations governing such a system would fit on a napkin.
Image credit: Warner Bros, processing fmh
The Euro-Stoxx bank index, weekly, over the past 10 years. Recently the index has been unable to overcome resistance in the 160-162 area. The bust and the reaction of the authorities to the bust has made zombies out of Europe’s big banks – click to enlarge.
The other way is to construct what we have now: a banking cartel administered and backstopped by a central bank, based on fiat money the supply of which can be expanded at will and involving continual violations of property rights. Fractional reserve banking represents a violation of property rights, because it is based on the assumption that two or more persons can have a legally valid claim on the same originally deposited sum of money (for an extensive backgrounder on this, see our series on FR banking – part 1, part 2 and part 3). This legal fiction is very convenient for the banks and the State, but it sooner or later renders the banking system inherently insolvent (a de facto, but not a de iure insolvency).
Given this system’s inherent insolvency, the regulations governing it obviously won’t fit on a napkin. Instead they fill several volumes the size of telephone directories and keep growing like weeds.
…click on the above link to read the rest of the article…
Institutional Aggression, Superfluous Planners and Predictions
Institutional Aggression, Superfluous Planners and Predictions
Pretense of Knowledge
Wall Street breathlessly awaits the newest payrolls report, which is widely held to contain the information needed for the FOMC to decide whether or not it should raise the overnight interbank lending rate from zilch to zilch plus a few basis points later this month.
photo via plantsbrookschool.co.uk
The payrolls report is going to be revised umpteen times after its initial release, is in many ways driven by statistical artifacts (such as the “birth-death” model) and concerns a lagging economic indicator – in other words, its “signal to noise” ratio makes it utterly useless, even if one erroneously ascribes a lot of meaning to economic statistics describing the past.
Change in monthly non-farm payrolls in 1000ds, via Saint Louis Federal Reserve Research, click to enlarge.
And yet, this utterly devoid of informational content data point is what the central planning bureaucrats are held to need to decide on their next steps in terms of interest rate manipulation! We are continually surprised by the fact that people can discuss this obvious nonsense with a straight face.
In this context we have recently come across an interesting article at Forbes, by sound money and free market advocate Ralph Benko. It is entitled “If The Fed Is Always Wrong How Can Its Policies Ever Be Right?” and is well worth the read. As Mr. Benko points out, the Fed’s economic forecasts leave a lot to be desired, primarily because they tend to be dead wrong with unwavering regularity.
He proceeds to ask how a bureaucracy that couldn’t forecast its way out of a paper bag can possibly know what policies it should implement. It seems totally absurd to expect it to be able to ever get it right, except perhaps by sheer accident.
…click on the above link to read the rest of the article…
Real Wealth and Phantom Wealth – Secular Boom and Bust
Real Wealth and Phantom Wealth – Secular Boom and Bust
The Things that Produce Real Wealth vs. Phantom Wealth
Our friend Michael Pollaro, the keeper of long-term data on the true money supply and author at Forbes as well as occasionally a guest author on this site, recently sent us the following chart of a relationship he keeps a close eye on. It depicts the annual change rate in new orders for non-defense capital goods and compares this series to the Wilshire total market index.
Photo via thedailysheeple.com
Annual change rate in new orders for non-defense capital goods and the Wilshire total market index – click to enlarge.
As you can see, there are slight leads and lags discernible near turning points, but there is no regularity to those that would allow us to make any definitive pronouncements on which trend is likely to lead the other. It is however clear that the two series are often directionally aligned (or to put it more simple: economic expansions and contractions often coincide with rising and falling stock prices).
What is interesting about the current situation is that the stock market is usually supposed to be forward-looking (it isn’t, at least not anymore, but this is still widely assumed – see our previous missive on this topic), but evidently, people are buying fewer of the things that are actually needed for future real wealth generation. Further below you will see that things are a bit more complicated than they look at first glance though – what is at work here is that in some industries, businessmen have just realized that they have malinvested their capital. Anyway, a noticeable gap has opened up between these two series, and it will likely be closed one way or the other. Note by the way the eerie similarity in the recent behavior of new orders and the stock market to what happened near the end of the 1990s stock market mania.
…click on the above link to read the rest of the article…
Jackson Hole – Meeting of the Physics Envy Brigade
Jackson Hole – Meeting of the Physics Envy Brigade
Planners Meet to Discuss the Impossible
The Jackson Hole pow-wow takes place this weekend. A more revolting get-together of actual and armchair central planners (i.e., the advisors to the planners, many of whom see themselves as planners-in-waiting) could hardly be imagined. One has to wonder how much more damage they will be allowed to inflict before someone finally says “enough!”. The parlous state of the global economy and the series of booms and busts we have experienced over the past 20 to 30 years are almost exclusively their doing (some of the responsibility has to be shared by politicians and other bureaucrats, who have hopelessly over-regulated and overtaxed economies, especially in the developed world).
Fed vice chairman Stanley Fischer, one of the keynote speakers at the Jackson Hole conference – more on him further below
Photo credit: Simon Dawson/Bloomberg
In their conceit these supposed “wise men” (we prefer the more fitting term “high IQ morons”, h/t Bill Bonner) seem to believe that bureaucrats can actually plan the economy and will deliver an outcome that is superior to that the free market would provide. In spite of all the evidence to the contrary that has amassed over what are by now centuries, they actually appear to be buying their own BS, which makes them especially dangerous.
As Ludwig von Mises has shown in 1920 already (in his seminal monograph Economic Calculation in the Socialist Commonwealth), central planning of the economy is literally impossible. Mises focused on the lack of a price system once the material factors of production are under government control and no longer freely tradable. Without proper prices, it is impossible to engage in rational economic calculation and hence it is no longer possible to properly allocate scarce resources.
…click on the above link to read the rest of the article…
The Stock Market’s Panic Potential
The Stock Market’s Panic Potential
The Odds Favor a “Warning Shot” Scenario – but there is a “But”
As regular readers have probably noticed, we have upped the frequency of our “caution is advised” posts on the stock market in recent weeks in light of the market’s increasingly deteriorating internals. Although one never knows when exactly such warning signs may begin to matter, it is always a good bet that they eventually will. Last week the market delivered a little wake-up call to the hitherto rather complacent majority of market participants, by essentially wiping out 9 months worth of gains in more or less just four trading days.
The S&P 500, daily – obviously, this chart doesn’t look good – click to enlarge.
The sheer speed of this decline masks the fact that the S&P 500 is actually only 163.83 points or 7.67% below its all time high made in May. In other words, this decline doesn’t even amount to a routine 10% correction yet. And yet, as Zerohedge reports, cries for intervention by the Fed are amusingly already going up. We actually don’t believe that the federal purveyors of Anglo-Saxon central banking socialism will jump into the breach thatquickly.
Last week’s sudden “1-800-get-me-out” moment certainly wasn’t widely expected, not least because it was an options expiration week, and expiration weeks normally tend to follow certain patterns. Either there is little net volatility, or if the market has a weak close on Wednesday, it tends to rise on Thursday and Friday. This even happened in the October 2014 sell-off, which ended on a Wednesday in an expiration week (with the SPX gaining 80 points between the Wednesday intraday low and the Friday intraday high, rendering a great many puts, VIX calls, etc. that were bought earlier in the week worthless).
…click on the above link to read the rest of the article…
