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Volcker, Greenspan, Bernanke and Yellen.

Which one does not belong? Logic dictates that Volcker should have been odd man out. After all, there is no legendary “Volcker Put.”

The towering monetarist made no bones about never being bound by the financial markets. The same can certainly not be said of his three successors. And yet, history contrarily suggests it is to Volcker above all others that the financial markets will forever be beholden.

Many of you will be familiar with Michael Lewis’ memoir, Liar’s Poker. Yours truly first read the book in a Wall Street training program much like the one Lewis survived to describe in his autobiographical work. The take-away then, in late 1996, was that Gordon Gekko was right — greed was good.

Recently, a second reading of Liar’s Poker, following nearly a decade inside the Federal Reserve, delivered a much different message than did that first youthful reading and was nothing short of an epiphany: Paul Volcker, albeit certainly inadvertently, created the bond market.

On Saturday, October 6, 1979. Volcker held a press conference and announced that interest rates would no longer be fixed and that further the Fed would begin to target the money supply in order to curb inflation and “speculative excesses in financial, foreign exchange and commodity markets.”

Alas, this new regime was not meant to be. In trying to introduce an alternative to interest rate targeting, the Fed replaced one guessing game with another. Predicting the demand for reserves and then buying or selling securities based on that demand proved to be just as dicey as a similar exercise to target a given level of interest rates had been.

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

Will The Fed Follow The BoJ Down The NIRP Rabbit Hole?

March 17, 2016

Will The Fed Follow The BoJ Down The NIRP Rabbit Hole?

On Monday, in “JPM Looks At Draghi’s ‘Package,’ Finds It ‘Solid’ But Underwhelming,” we noted that according to Mislav Matejka, investors would do well to fade the ECB’s latest attempt to jumpstart inflation, growth, and of course asset prices with Draghi’s version of a Keynesian kitchen sink.

“Overall, we believe the latest package is far from a game changer,” Matejka opined.

What was especially interesting about that particular note was the following graph and set of tables which show just how “effective” NIRP has been for the five central banks that have tried it so far.

As you can see, once you go NIRP, it’s pretty much all downhill from there whether you’re talking inflation, the economy, or even equities.

Given that, and given that the entire idea is absurd on its face for a whole laundry list of reasons, one wonders why any central banker would chase down this rabbit hole only to find themselves the protagonist in the latest retelling of “Krugman in Wonderland”.

In any event, for those wondering whether the Fed will join the ECB, the BoJ, the Riksbank, the SNB, and the NationalBank in this increasingly insane monetary experiment, below, courtesy of Bloomberg, find a chronological history of Fed and analyst commentary on NIRP in America.

FED COMMENTARY

March 16: Yellen said during post-FOMC press conference Fed isn’t actively considering negative rates, studying effects in other nations
March 2: San Francisco President Williams said “we’re not doing negative interest rates”; Williams Feb. 25 said negative rates are “potentially in the toolbox” but may have “unintended consequences”
March 1: Former Fed Chairman Alan Greenspan said on Bloomberg Radio and TV negative interest rates, if pursued for an extended period of time, will eventually distort saving and investment…click on the above link to read the rest of the article…

The Liquidity Endgame Begins: Whiting’s Revolver Cut By $1.2 Billion As Banks Start Slashing Credit Lines

March 15, 2016

The Liquidity Endgame Begins: Whiting’s Revolver Cut By $1.2 Billion As Banks Start Slashing Credit Lines

Earlier today we reminded readers about the circular (and why note fraudulent conveyance) scheme hatched by JPMorgan to reduce its secured loan exposure to Weatherford, when just two weeks ago none other than JPM underwrote an WFT equity offering in which it sold equity in the company, and which proceeds were promptly used by the company to repay the JPMorgan revolver.

We then showed that it wasn’t just Weatherford: most of the “uses of funds” from the recent record surge in oil and gas equity offerings, have been used to repay the secured debt/revolver facilities, thereby eliminating funded and unfunded balance sheet exposure of major US banks.

But while lender banks are all too eager to take advantage of the brief surge in equity prices just so they can “help” their clients dilute their shareholder base so to repay the very same lender banks, they know quite well that the equity offering window is rapidly closing; in fact it will slam shut as soon as the price of oil resumes its downward trajectory.

That does not mean they are out of options to reduce their exposure to US shale, however. Quite the contrary, and in fact the “exposure reduction” is about to begin in earnest. We hinted at what it would look like in early January when we reported that already some 25 of the most distressed shale companies have seen their revolving bases slashed by as much as 50%.

These were just the beginning. As Bloomberg wrote earlier, U.S. exploration and production companies must brace for further cuts to their borrowing-base credit lines this spring, as part of the spring 2016 borrowing base redeterminations.

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

The Oil Short Squeeze Explained: Why Banks Are Aggressively Propping Up Energy Stocks

March 8, 2016

The Oil Short Squeeze Explained: Why Banks Are Aggressively Propping Up Energy Stocks

Last week, during the peak of the commodity short squeeze, we pointed out how this default cycle is shaping up to be vastly different from previous one: recovery rates for both secured and unsecured debts are at record low levels. More importantly, we noted how this notable variance is impacting lender behavior, explaining that banks – aware that the next leg lower in commodities is imminent – are not only forcing the squeeze in the most trashed stocks (by pulling borrow) but are doing everything in their power to “assist” energy companies to sell equity, and use the proceeds to take out as much of the banks’ balance sheet exposure as possible, so that when the default tsunami finally arrives, banks will be as far away as possible from the carnage. All of this was predicated on prior lender conversations with the Dallas Fed and the OCC, discussions which the Dallas Fed vocally deniedaccusing us of lying, yet which the WSJ confirmed, confirming the Dallas Fed was openly lying.

This was the punchline:

[Record low] recovery rate explain what we discussed earlier, namely the desire of banks to force an equity short squeeze in energy stocks, so these distressed names are able to issue equity with which to repay secured loans to banks who are scrambling to get out of the capital structure of distressed E&P names. Or as MatlinPatterson’s Michael Lipsky put it: “we always assume that secured lenders would roll into the bankruptcy become the DIP lenders, emerge from bankruptcy as the new secured debt of the company. But they don’t want to be there, so you are buying the debt behind them and you could find yourself in a situation where you could lose 100% of your money.“

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

Dallas Fed Unplugs Oil Bulls, Warns of Liquidity Crunch, Contagion

March 4, 2016

Dallas Fed Unplugs Oil Bulls, Warns of Liquidity Crunch, Contagion

“Negative ripple effects”

The rally in crude oil has been red hot. In the three weeks since February 11, WTI shot up a short-crushing 34% to $34.69 a barrel at the moment. Now the talk in the oil patch is at what price these desperate shale oil drillers will once again increase production.

Continental Resources CEO John Hart and Whiting Petroleum CEO Jim Volker told analysts this week that they’d step on the accelerator once oil reaches the $40 to $45 range. After all, drillers have to produce oil to be able to service their mountain of debts. They can’t just switch to selling T-shirts.

Alas, that looming increase in production won’t help deal with the glut. And a glut it is.

Dallas Fed President Robert Kaplan hammered this home as part of a wide-ranging speech today. And he wasn’t speaking only for himself or stating his own wayward opinion. Instead, he started out his comments concerning oil with this: “It is our view at the Dallas Fed that….” So this is official.

The Dallas Fed, whose district in addition to Texas includes northern Louisiana and southern New Mexico, figured that global oil production in 2016 will exceed consumption by an average of 1 million barrels per day. So that would amount to adding another 300 million barrels by year-end to the already ballooning crude oil inventories around the world.

In OECD countries, inventories continue to rise, he said, and are now at “roughly 400 million barrels above the historical five-year average.”

But the excess of production over consumption is coming down to 500,000 barrels per day by the end of the year, not because production will decline, but because consumption in 2016 is expected to grow by about 1.2 million barrels per day:

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

Is This the Beginning of the Next Recession?

February 26, 2016

Is This the Beginning of the Next Recession?

“Significant risk” of “falling into contraction” with “worse to come.”

The US economy is largely service based. So when the “manufacturing renaissance” and “on-shoring” that everyone had been waiting for turned into no-shows, and when instead manufacturing started slowing in early 2015, it was no big deal, according to the meme.

OK, it was terrible for the folks who lost their jobs. But manufacturing accounts for only 12% of the US economy and employs only about 9% of the workforce. So overall, it’s not the end of the world, we heard constantly. And besides, we could always make it up with fast food.

Manufacturing alone can’t drag the US into a recession, we were assured. And the service economy would continue to be strong. That was the meme.

Then, a few days ago, Evan Koenig, Senior Vice President at the Dallas Fed, gave a presentation that showed that manufacturing contractions preceded service contractions in the run-up of the past two recessions. When service sector growth begins to dwindle – so still growth, but slower growth – after the manufacturing sector has already begun to shrink, that’s the point he called “prelude to recession.” And when the service sector begins to actually shrink, that event marks what officials will later call the beginning of the recession [read… “Prelude to Recession”: the Dallas Fed’s Unsettling Charts].

That “prelude to a recession” happened a few months ago. At the time, manufacturing was already shrinking; and the services index had just started heading south. But now the services index entered a contraction as well. So this could mark the beginning of what will much later be officially called a recession.

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

After The European Bank Bloodbath, Is Canada Next?

February 8, 2016

After The European Bank Bloodbath, Is Canada Next?

Back in the summer of 2011, when we reported that Canadian banks appear dangerously undercapitalized on a tangible common equity basis…

… the highest Canadian media instance, the Globe and Mail decided to take us to task. To wit:

Were the folks at Zerohedge.com looking at the best numbers when they argued that Canadian banks were just as levered as troubled European banks?

In a simple analysis that generated a great deal of commentary, a blogger at Zerohedge.com, an oddball but widely followed financial site, suggested that Canadian banks were as leveraged as European banks because they have low ratios of tangible common equity to total assets.

But there’s an argument that looking at that ratio is the wrong way to judge a bank’s strength because it ignores the composition of the assets.

Sadly, the folks at Zerohedge.com were looking at the best numbers, and even more sadly, in the interim nearly 5 years, Canada’s banks took absolutely no action to bolster their capital ratios; in fact, these have only deteriorated.

The Globe and Mail, however, was right about one thing: the TC ratio did not capture the full risk embedded in Canadian bank balance sheets: it was merely a shorthand as to how much capital said banks have in case of a rainy day.

Sadly for Canada, it’s not only raining, it’s pouring for the country’s energy industry, a downpour which is about to migrate into its banking sector. Which is why it is indeed time to take a somewhat deeper dive into the Canadian banks’ balance sheets, where we find something very troubling, and something which prompts us to wonder if the time of freaking out about European banks is about to be replaced with comparable panic about Canadian banks.

The following chart from an analysis by RBC shows that when compared to US banks’ (artificially low) reserves for oil and gas exposure, Canadian banks are…not.

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

Dallas Fed “Responds” To Zero Hedge FOIA Request

January 29, 2016

Dallas Fed “Responds” To Zero Hedge FOIA Request

Two weeks ago, Zero Hedge reported an exclusive story corroborated by at least two independent sources, in which we informed our readers that members of the Dallas Federal Reserve had met with bank lenders with distressed loan exposure to the US oil and gas sector and, after parsing through the complete bank books, had advised banks to i) not urge creditor counterparties into default, ii) urge asset sales instead, and iii) ultimately suspend mark to market in various instances.

The Dallas Fed took the opportunity to respond (on Twitter), when in a tersely worded statement it said the following:

Dallas Fed ✔@DallasFed

No truth to this @zerohedge story. The Dallas Fed does not issue such guidance to banks. https://twitter.com/zerohedge/status/688441021986959361 …

12:07 PM – 18 Jan 2016

We thanked the Fed for answering even if its response was in itself a lie, and further since we fully stood by our story, we asked the Federal Reserve chaired by Goldman Sachs veteran, Robert Kaplan, to answer several follow up questions regarding this matter which is of significant public interest. To wit:

Has the Dallas Fed, or any other members and individuals of the Federal Reserve System, met with U.S. bank and other lender management teams in recent weeks/months and if so what was the purpose of such meetings?
Has the Dallas Fed, or any other members and individuals of the Federal Reserve System, requested that banks and other lenders present their internal energy loan books and loan marks for Fed inspection in recent weeks/months?
Has the Dallas Fed, or any other members and individuals of the Federal Reserve System, discussed options facing financial lenders, and other creditors, who have distressed credit exposure including but not limited to:

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

Why A Former Fed Official Fears A Global Meltdown

January 26, 2016

Why A Former Fed Official Fears A Global Meltdown

Authored by Gerald O’Driscoll, former vice president at The Dallas Fed, posteed op-ed at The Wall Street Journal,

Are we headed for another global financial crisis? The market convulsions of the past week reflected a continuation of a market selloff that began on the first trading day of 2016. Investors have reasons to be fearful—but not terrified.

This year is likely to be one of financial crises in industries and countries around the world. Whether those turn into a global financial crisis is an open question, and the answer will likely turn on the health of the U.S. financial industry and broader economy. No crisis is global if American financial markets hold up. The best I can foresee, at this moment, is that a true global financial crisis is not likely.

Pundits are focused on collapsing oil prices, which reflect the technological revolution in production among nimble private producers, combined with weakening global demand for their product. The result has been layoffs in the energy industry, and there will be more. Weak and highly leveraged energy firms have gone bankrupt and more will. But bankruptcy doesn’t necessarily mean that production will decline.

Creditors who lent to these energy producers will suffer losses on their loans, and they too might become financially impaired. If past is prologue, those lenders will be reluctant to fully realize their losses, and they will continue to view future energy prices through too-rosy glasses. Banks will be reluctant to mark down the value of nonperforming loans and book losses, or even set aside sufficient loan loss reserves. They will instead “extend and pretend”—i.e., extend maturities and pretend they expect the loans to be paid back. Will federal and state banking regulators aid and abet the process?

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

Texas Economy Collapses – Dallas Fed Survey Crashes To 6-Year Lows As “D” Word Is Uttered

January 25, 2016

Texas Economy Collapses – Dallas Fed Survey Crashes To 6-Year Lows As “D” Word Is Uttered

For the 13th month in a row, The Dallas Fed Manufacturing Outlook was contractionary with a stunning -34.6 print following December’s already disastrous collapse back to -20.1, post-crisis lows. With “hope” having plunged back into negative territory (-2.2) in December, January saw a complete collapse to -24.0 as one respondent exclaimed, “we expect the continued depression in the oil and gas industry to negatively impact our customer base and result in significant demand reduction.“

Bloodbath…

And its across the board with production, employment, and shipments all collapsing…

As hope is crushed…

Chart: Bloomberg

But the punchline was the respondents, virtually all of whom confirm the recession, and one even casually tossed in the “D”(epression) word:

Primary Metal Manufacturing

The impact of the continued decline in the energy sector, compounded with several new regulations from both the Environmental Protection Agency and Occupational Safety and Health Administration, is depressing economic conditions even further from 2015. Our top 10 customers continue to indicate declines in manufacturing and new capital expenditures for 2016. Outlooks continue to be adjusted down from six months ago, and we are seeing several foundry closings in our industry due to the state of our industry and strong offshoring projects.
Our projected increase in business is related to market-share gains at the expense of our main competitor (foreign owned) who is having service problems.

Fabricated Metal Product Manufacturing

We expect the continued depression in the oil and gas industry to negatively impact our customer base and result in significant demand reduction.
I believe that if the stock market continues to deteriorate, spending on housing replacement products will decrease. Large purchases on housing seem to parallel consumers’ 401k performance.
It is getting pretty ugly, and the strength of the dollar is really making us noncompetitive.

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

Moody’s Just Put Over Half A Trillion Dollars In Energy Debt On Downgrade Review

January 22, 2016

Moody’s Just Put Over Half A Trillion Dollars In Energy Debt On Downgrade Review

One week ago, in the aftermath of the dramatic downgrade to junk of Asian commodity giant Noble Group, we showed readers the list of potential “fallen angel” companies, those “investment “grade companies (such as Freeport McMoRan whose CDS trades at near-default levels) who are about to be badly junked, focusing on the 18 or so US energy companies that are about to lose their investment grade rating.

Perhaps inspired by this preview, earlier today Moody’s took the global energy sector to the woodshed, placing 175 global oil, gas and mining companies and groups on review for a downgrade due to a prolonged rout in global commodities prices that it says could remain depressed indefinitely.

The wholesale credit rating warning came alongside Moody’s cut to its oil price forecast deck. In 2016, it now expects the Brent and WTI to average $33 a barrel, a $10 drop for Brent and $7 for WTI.

Warning of possible downgrades for 120 energy companies, among which 69 public and private US corporations, the rating agency said there was a “substantial risk” of a slow recovery in oil that would compound the stress on oil and gas firms.

As first reported first by Reuters, the global review includes all major regions and ranges from the world’s top international oil and gas companies such as Royal Dutch Shell and France’s Total to 69 U.S. and 19 Canadian E&P and services firms. Notably absent, however, were the two top U.S. oil companies ExxonMobil and Chevron.

Moody’s said it was likely to conclude the review by the end of the first quarter which could include multiple-notch downgrades for some companies, particularly in North America, in other words, one of the biggest event risks toward the end of Q1 is a familiar one: unexpected announcements by the rating agencies, which will force banks to override their instructions by the Dallas Fed and proceed to boost their loss reserves dramatically.

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

A Glimpse Of Things To Come: Bankrupt Shale Producers “Can’t Give Their Assets Away”

January 20, 2016

A Glimpse Of Things To Come: Bankrupt Shale Producers “Can’t Give Their Assets Away”

Over the course of the last several weeks, we’ve spent quite a bit of time sounding the alarm bells on America’s growing list of bankrupt oil and gas drillers.

We’ve also been keen to point out that the long list of cash flow negative US producers has only managed to stay in business this long because Wall Street has thus far been willing to plug the sector’s funding gap with cheap financing thanks to ZIRP and investors’ insatiable demand for anything that looks like it might offer some semblance of yield.

It is not a matter of “if” but rather a matter of “when” the entire complex goes under and when that happens, the relatively paltry sums banks have set aside against losses in their energy books will balloon as everyone on Wall Street simultaneously pulls a BOK Financial.

Indeed, we’re already hearing the not-so-distant rumblings of this oncoming default freight train as JP Morgan raises its net loan loss reserves for the first time in 22 quarters, Wells Fargo discloses $17 billion in “mostly” junk energy exposure, and Citi dodges questions about the reserves it’s holding against a $58 billion energy book that the bank may or may not be marking to market depending on what the Dallas Fed “didn’t” tell banksearlier this month.

M2M or no, higher provisions or not, the end of America’s oil “miracle” is coming and there’s nothing Wall Street can do to stop it. At this point in the game, no one is going to finance these companies’ cash flow deficits and the fundamentals in the oil market are laughably bad. Storage is overflowing, demand is withering, and supply is, well, “drowning” us all, to quote the IEA.

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

Negative Oil Prices Arrive: Koch Brothers’ Refinery “Pays” -$0.50 For North Dakota Crude

January 18, 2016

Negative Oil Prices Arrive: Koch Brothers’ Refinery “Pays” -$0.50 For North Dakota Crude

Do you have some extra space in your garage or attic? Or perhaps you own an oil tanker you aren’t currently using. Or maybe you have a storage unit that’s got a little extra room next to an old mattress and box springs.

If so, you may want to call up oil producers in North Dakota and ask if they’d care to send you some free oil, because the crude glut is now so acute that the Koch brothers are actually charging $0.50/bbl to take low grade oil at their Flint Hills Resources refining arm.

North Dakota Sour is a high-sulfur grade of crude and “is a small portion of the state’s production, with less than 15,000 barrels a day coming out of the ground,” Bloomberg notes, citing John Auers, executive vice president at Turner Mason & Co. in Dallas. “The output has been dwarfed by low-sulfur crude from the Bakken shale formation in the western part of the state, which has grown to 1.1 million barrels a day in the past 10 years.”

High-sulfur grades are more expensive to refine and thus fetch lower prices at market. As Bloomberg goes on to note, “Enbridge stopped allowing high-sulfur crudes on its pipeline out of North Dakota in 2011, forcing North Dakota Sour producers to rely on more expensive transport such as trucks and trains [and] the price for Canadian bitumen — the thick, sticky substance at the center of the heated debate over TransCanada Corp.’s Keystone XL pipeline — fell to $8.35 last week, down from as much as $80 less than two years ago.”

So there you have it. The global deflationary supply glut has now reached the point that the market is effectively forcing producers to pay to give their oil away or else see it sit in bloated storage facilities until Riyadh decides enough is enough and until the world comes to terms with the return of Iranian supply.

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

What Just Happened With OIL?

January 17, 2016

What Just Happened With OIL?

Yesterday, we reported exclusively how the Dallas Fed is pulling strings behind the scenes to conceal the fallout from the oil market crash. As Dark-Bid.com’s Daniel Drew notes, by suspending mark-to-market on energy loans and distorting the accounting, they are postponing the inevitable as long as possible. The current situation is eerily reminiscent to the heyday of the mortgage market in 2007, when mortgage defaults started to pick up, and yet the credit default swaps that tracked them continued to decline, bringing losses to those brave enough to trade against the crowd.

Amidst the market chaos on Friday, a trader brought something strange to my attention. He asked me exactly what the hell was going on with this ETN he was watching. I took a closer look and was baffled. It took me awhile to put the pieces together. Then when I saw the story about mark-to-market being suspended, it all made sense.

Here is the daily premium for the last 6 months on the Barclays iPath ETN that tracks oil:

Initially, Dark-Bid.com’s Daniel Drew thought this was merely a sign of retail desperation. As they faced devastating losses on their oil stocks, small investors turned to products like oil ETNs as they tried to grasp the elusive oil profits their financial adviser promised them a year ago. Oblivious to the cruel mechanics of ETNs, they piled in head first, in spite of the soaring premium to fair value. After all, Larry Fink is making the rounds to convince the small investor that ETFs are indeed safer than mutual funds. Because nothing says “safe” like buying an ETN that is 36% above its fair value.

Sure, there are differences between ETFs and ETNs, particularly regarding their solvency in the event of an issuer default, but the premium/discount problem plagues ETFs and ETNs alike. Nonetheless, widely trusted retail sources of investment information perpetuate the myth that ETNs do not have tracking errors.

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

Exclusive: Dallas Fed Quietly Suspends Energy Mark-To-Market On Default Contagion Fears

January 16, 2016

Exclusive: Dallas Fed Quietly Suspends Energy Mark-To-Market On Default Contagion Fears

Earlier this week, before first JPM and then Wells Fargo revealed that not all is well when it comes to bank energy loan exposure, a small Tulsa-based lender, BOK Financial, said that its fourth-quarter earnings would miss analysts’ expectations because its loan-loss provisions would be higher than expected as a result of a single unidentified energy-industry borrower. This is what the bank said:

“A single borrower reported steeper than expected production declines and higher lease operating expenses, leading to an impairment on the loan. In addition, as we noted at the start of the commodities downturn in late 2014, we expected credit migration in the energy portfolio throughout the cycle and an increased risk of loss if commodity prices did not recover to a normalized level within one year. As we are now into the second year of the downturn, during the fourth quarter we continued to see credit grade migration and increased impairment in our energy portfolio. The combination of factors necessitated a higher level of provision expense.”

Another bank, this time the far larger Regions Financial, said its fourth-quarter charge-offs jumped $18 million from the prior quarter to $78 million, largely because of problems with a single unspecified energy borrower. More than one-quarter of Regions’ energy loans were classified as “criticized” at the end of the fourth quarter.

It didn’t stop there and and as the WSJ added, “It’s starting to spread” according to William Demchak, chief executive of PNC Financial Services Group Inc. on a conference call after the bank’s earnings were announced. Credit issues from low energy prices are affecting “anybody who was in the game as the oil boom started,” he said. PNC said charge-offs rose in the fourth quarter from the prior quarter but didn’t specify whether that was due to issues in its relatively small $2.6 billion oil-and-gas portfolio.

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

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