Swiss franc Archives - The Automatic Earth

Billionaires and politicians gathering in Switzerland this week will come under pressure to tackle rising inequality after a study found that – on current trends – by next year, 1% of the world’s population will own more wealth than the other 99%. Ahead of this week’s annual meeting of the World Economic Forum in the ski resort of Davos, the anti-poverty charity Oxfam said it would use its high-profile role at the gathering to demand urgent action to narrow the gap between rich and poor. The charity’s research, published today, shows that the share of the world’s wealth owned by the best-off 1% has increased from 44% in 2009 to 48% in 2014, while the least well-off 80% currently own just 5.5%. Oxfam added that on current trends the richest 1% would own more than 50% of the world’s wealth by 2016.

Winnie Byanyima, executive director of Oxfam International and one of the six co-chairs at this year’s WEF, said the increased concentration of wealth seen since the deep recession of 2008-09 was dangerous and needed to be reversed. In an interview with the Guardian, Byanyima said: “We want to bring a message from the people in the poorest countries in the world to the forum of the most powerful business and political leaders. “The message is that rising inequality is dangerous. It’s bad for growth and it’s bad for governance. We see a concentration of wealth capturing power and leaving ordinary people voiceless and their interests uncared for.”

Oxfam made headlines at Davos last year with a study showing that the 85 richest people on the planet have the same wealth as the poorest 50% (3.5 billion people). The charity said this year that the comparison was now even more stark, with just 80 people owning the same amount of wealth as more than 3.5 billion people, down from 388 in 2010. Byanyima said: “Do we really want to live in a world where the 1% own more than the rest of us combined? The scale of global inequality is quite simply staggering and despite the issues shooting up the global agenda, the gap between the richest and the rest is widening fast.”

“Almost no investors believe this is the end of the party ..”

• Shanghai Rally Faces Stress Test After 7.7% Market Tumble (FT)

Fevered rallies and dramatic falls go with the territory of investing in mainland China. But even by Shanghai’s wild standards, Monday’s plunge was one to remember. By the close of trading, the Shanghai Composite had tumbled 7.7% — its biggest fall in five years — erasing all its January gains. Having been the best performing market in the world last year, China’s volatile streak has been swiftly exposed once more. The immediate trigger was a move by the China Securities Regulatory Commission (CSRC) to clamp down on margin lending at the big brokerages, which all saw their stocks down by the daily limit of 10%. Borrowing to invest in equities has been a key driver of Shanghai’s charge upwards, with margin financing almost tripling between June and December to hit Rmb767bn ($124bn) last week.

Hong Hao, strategist at Bank of Communications, described the curb on margin trading as a “nasty surprise”, and one that could send the market into a tailspin. “With less incremental liquidity flow into stocks and damped sentiment, the market will correct in the near term, and the move can be violent,” Mr Hong wrote in a note to clients. Separately on Friday, the banking regulator issued draft rules that would limit the use of intercompany loans. Loans between non-financial companies, in which a bank serves as intermediary, have exploded in recent years, with new loans hitting Rmb2.5tn in 2014. Local media reports say some of those funds have flowed into the stock market. The question now facing investors is whether the market can bounce back quickly without more credit-fuelled speculation.

Many remain bullish, seeing the new regulations as simply a stress test for the market. Jin Mi at China Merchants Securities, a top 10 brokerage by assets, said the CSRC was sending “a warning to the market against excessive optimism”. “Almost no investors believe this is the end of the party,” he wrote in a report. Many analysts believe Shanghai’s bull run is a government-induced phenomenon, designed to give Chinese savers an alternative to the wobbly housing market or risky shadow banking products . That has drawn in millions of retail punters, who have been opening new trading accounts at a record pace. “The government has been urging people to buy stocks, which gives people a sense of a put on the market,” says David Cui, strategist at Bank of America Merrill Lynch.

Deflation is a real threat in China now. The dollar peg makes that a lot worse.

• Will China Be The Next Forex Peg To Break? (MarketWatch)

The surprise move by Switzerland to scrap its currency ceiling against the euro last week is a reminder there can be unexpected collateral damage from central banks waging currency wars. As markets digest last week’s turmoil, expect focus to turn to other fault lines on the global currency map. Here China stands out, as like the Swiss, it runs an implicit currency peg that is becoming increasingly painful to maintain. Due to its longstanding crawling peg to the U.S. dollar, the yuan has increasingly found itself pulled higher against just about every major currency. The world’s largest exporter has already had to endure two years of aggressive yen devaluation since the introduction of Abenomics and its accompanying quantitative easing. Now comes a new front, as the ECB looks ready to green-light its own QE next week. The move by Switzerland also means the Swiss National Bank ceases its purchases of euros needed to maintain its peg, again meaning the euro will all but certainly head lower.

Further currency strength is likely to be distinctly unwelcome for the Chinese economy. Later this week, gross domestic product figures for 2014 are widely expected to show growth at its slowest pace in 24 years if, as some predict, the government’s 7.5% annual growth target is missed. This comes at the same time that the economy is flirting with outright deflation and amid a new trend of foreign capital exiting China. Last week’s currency ructions present a new headwind to growth as exports will be harder to sell across Europe, China’s second biggest market after the U.S. The other danger looming for China is that a strong currency exacerbates deflationary forces. Producer prices have been falling for almost three years, and the plunge in crude-oil prices adds a further disinflationary bent. The property market looks as if it could also push prices decisively lower. Prices of new homes in big cities fell 4.3% in December from a year earlier, according to new government data released over the weekend.

The difficulty for Beijing is that these external movements in currencies are outside its control. If moves to depreciate the euro trigger another round of competitive deprecations, just how much more yuan appreciation can China withstand? While the policy actions of both the Swiss and European central banks last week appear quite different, they share a common feature: Both acted with reluctance only when the pain became too much to bear. The reason deflation is public enemy No. 1 for central banks is that debt becomes much harder to service and can stall growth and employment as consumers put off purchases and business put off investment. China certainly has debt levels that would make deflation worrisome. Total debt levels are now estimated to be in excess of 250% of GDP. Lower-than-expected bank loan growth in December also suggests demand in the economy is already weak.

Beijing had no choice but to curb the mad influx in stocks.

• China Brokers Fall as Regulator Curbs New Margin Accounts (Bloomberg)

Chinese brokerages’ shares plunged after the securities regulator suspended three of the biggest firms from adding margin-finance and securities lending accounts for three months following rule violations. Citic Securities, the nation’s biggest broker, fell 14% as of 9:35 a.m. in Hong Kong. Haitong Securities and Guotai Junan Securities were among others whose shares tumbled. The trio were suspended after letting customers delay repaying financing for longer than they were supposed to, the China Securities Regulatory Commission said on its microblog on Jan. 16, without giving more details. Regulators may have been concerned that stock gains, partly driven by margin financing, are too rapid, according to Hao Hong, a strategist at Bocom International in Hong Kong.

The move came after the Shanghai Composite Index surged 63% in six months and brokers including Citic and Haitong announced plans to raise more money to lend to clients.“Brokerage shares are likely to get hit,” Hong said before the market opened today. “After all, margin financing is one of the reasons for people to be bullish on brokerage stocks, and these stocks have run particularly hard.” Citic and Haitong, the nation’s biggest brokers by market value, announced plans for share sales that will help fund an expansion of businesses including margin financing. Those two and Guotai Junan were the three largest by assets in a 2013 ranking by the Securities Association of China. “The regulators are doing this to cool down the stock market,” said Castor Pang, head of research at Core-Pacific Yamaichi in Hong Kong. “Stock market sentiment will definitely go down.”

But did Beijing oversee what the effect would be? How about when the 3-month ban is over, what will happen then?

• China Brokers Face Double-Whammy on 3-Month Margin Finance Ban (Bloomberg)

China’s biggest brokerages are getting squeezed on two fronts as regulators curb loans to equity traders. Not only does the three-month ban on new margin-trading accounts at Citic Securities and Haitong Securities reduce their potential earnings from lending to clients, it also curbs one of the biggest buyers of the firms’ own shares: margin traders. The brokerages are among the top five holdings of investors using borrowed money, according to Shao Ziqin, analyst for Citic, who cited calculations as of Jan. 15. Of the top 20, six were brokers and seven were banks. They all plunged today as the Shanghai Composite Index headed for the biggest drop since 2008. “Bank and brokerage stocks will definitely be the hardest hit since leveraged funds helped to push up their share prices in the first place,” said Zhang Yanbing, an analyst at Zheshang Securities in Shanghai.

Investors borrowed 32.6 billion yuan ($5.2 billion) to buy Citic Securities shares as of Jan. 15, accounting for about 3% of outstanding margin loans, according to Shao, who cited Wind Information data. Haitong purchases had attracted 14.8 billion yuan of margin loans. The total amount of shares purchased on margin has surged more than tenfold in the past two years to a record 1.1 trillion yuan, or about 3.5% of the nation’s market capitalization. In a margin trade, investors use their own money for just a portion of their stock purchase, borrowing the rest from a broker. The loans are backed by the investors’ equity holdings, meaning that they may be forced to sell when prices fall to repay their debt. Citic Securities said in an e-mail that its operations remain unchanged, including a plan to sell shares via a private placement in Hong Kong.

While shares of both brokerages tumbled by the daily 10% limit in mainland trading today, they’re still sitting on gains of more than 100% in the past 12 months. That compares with a 56% increase in the Shanghai Composite. Brokerage shares will remain under pressure in the next few days, according to Ryan Huang at IG Ltd. Regulators are concerned the world-beating gains in the country’s equity market have been too fast, he said. Citic and Haitong let customers delay repaying financing for longer than they were supposed to, the China Securities Regulatory Commission said on its microblog Friday, without giving more details. Guotai Junan Securities was also suspended from adding margin accounts, while the regulator punished nine other securities companies for offenses including allowing unqualified investors to open margin finance and securities lending accounts.

China real estate is in deep doodoo.

• China December New Home Prices Slip, Somber Omen For 2014 GDP (Reuters)

China’s new home prices fell significantly in December for a fourth straight month even as year-end sales volumes surged – a somber omen for fourth-quarter 2014 economic growth data due out later in the week. Sunday’s gloomy National Burea of Statistics’ data foreshadowed weak economic figures set for Tuesday, with expansion expected to slow to 7.2%, the weakest since the depths of the global financial crisis. Falling property prices are likely to keep pressure on policymakers to head off a sharper slowdown this year. The expected slowdown in growth of the world’s second-largest economy, from 7.3% in the July-September quarter, means the full-year figure would undershoot the government’s 7.5% target and mark the weakest expansion in 24 years.

If the GDP data proves worse than expected, some analysts say the People’s Bank of China could cut interest rates further or lower reserve requirement ratios (RRR) for all banks. A reserve ratio cut would give banks greater capacity to lend, but many market watchers question if they would be willing to increase their exposure as economic conditions deteriorate. With real-estate investment accounting for about 15% of China’s GDP growth, a 9% decline in new floor space under construction in the first 11 months of 2014 could take a heavy toll. “We expect China’s GDP growth to slow further in 2015 to 6.8%, as the ongoing property downturn leads to further weakness in construction and industrial production, and related investment,” Tao Wang, China economist at UBS, wrote in a note.

“.. at risk of being the first Chinese real estate company to default on its dollar-denominated bonds.”

• Kaisa on Brink of Dollar Default Spooks World’s Money Managers (Bloomberg)

As Europe grapples with terrorism and Switzerland scrapped a currency peg, the troubles of a Chinese developer that’s never reached $3 billion in market value became something investors from New York to London couldn’t ignore. A missed $23 million interest payment by Kaisa earlier this month puts it at risk of being the first Chinese real estate company to default on its dollar-denominated bonds. That may signal deeper risks for China’s already fragile and corruption-prone property market, which according to World Bank estimates accounts for about 16% of economic growth. Chinese companies comprised 62% of all U.S. dollar bond sales in the Asia-Pacific region ex Japan last year, issuing $244.4 billion of the $392.5 billion total, Bloomberg data show.

BlackRock, the world’s biggest asset manager, owned Kaisa’s 8.875% securities due 2018 and the ones the subject of the missed coupon payment, the 10.25% 2020s, its latest filing on Jan. 14 shows. Funds managed by JPMorgan, Fidelity and ING also held some of Kaisa’s debt at the end of October, according to filings. Kaisa’s woes began late last year when the government in Shenzhen, less than 15 from Hong Kong, blocked approvals of its property sales and new projects in the city. It’s also being probed over alleged links to Jiang Zunyu, the former security chief of Shenzhen who was taken into custody as part of a graft probe, two people familiar with the matter said last week, asking not to be named because the connection hasn’t been made public.

Kaisa missed an interest payment due Jan. 8 on its $500 million of 2020 bonds. The notes were sold to investors at par, or 100 cents on the dollar, in January 2013. In December, when some of Kaisa’s projects were blocked and key executives quit, the debentures lost 40.1%. They continued to fall in January, slumping to 29.901 cents on the dollar on Jan. 7, a record low, however have since recovered to trade at about 34.6 cents. Concern is mounting that increasing financial stress among builders could spill over into a broader credit crisis in China. New-home prices fell in 65 of the 70 cities monitored in December and were unchanged in four, the National Bureau of Statistics said in a statement yesterday. Shenzhen recorded higher prices, the first city to see an increase in four months.

“Loan investors are shunning Chinese property developers amid speculation the government will target more builders after pledging to step up anti-graft probes.”

• Kaisa Stress Spreads to Loans as Nomura Sees Big Selling Push (Bloomberg)

Loan investors are shunning Chinese property developers amid speculation the government will target more builders after pledging to step up anti-graft probes. Loans from Shimao Property, Country Garden, Evergrande Real Estate and Greentown China, maturing within four years are at levels that indicate impending stress, according to offered prices compiled by Bloomberg from two traders. President Xi Jinping last week said there’ll be no let-up in his “fierce and enduring” battle against corruption, which has already embroiled thousands of senior officials. Kaisa, a homebuilder based in the southern city of Shenzhen, roiled credit markets after founder Kwok Ying Shing quit as chairman Dec. 31, triggering a loan default.

“There’s selling pressure coming from people who want to trim their portfolios to better manage any outsized concentration in developers,” Andrew Tan at Nomura in Singapore, said by phone on Jan. 15. “I haven’t seen such a big motivation to sell in Chinese property loans for some time.” Shimao’s June 2018 loans are currently pricing at about 90 cents on the dollar, with offers at between 85 and 95 cents, compared with 92 cents in December and 96 cents in November, according to two people familiar with the matter.

Country Garden’s December 2018 loans were also offered in the 88 cents to 95 cents range, versus about 95 cents a month ago, two traders said. Offers on Evergrande’s first-lien loan and Greentown’s loan signaled a 5-cent weakening from their levels in December, they said. While China’s banking system outlook is stable, asset quality metrics will likely deteriorate in the coming 12 to 18 months, in line with slower economic growth, Moody’s Investors Service said in a report today. Problem loans from the real-estate sector may start increasing from a small base if the property market downturn continues, it said.

Set to be a classic line all over: “It was just like a dream: I had everything but when I woke up it was all gone.”

• China Dream Ends for Handan as Steel Slump Spurs Property Losses (Bloomberg)

Five months ago, Hao Liwei was living the good life, funded by a 36% annual return on a property investment. Then her nightmare began. Interest payments ceased in August and attempts to recover her money failed. Her home town, the steel-production city of Handan, 450 kilometers (280 miles) southwest of Beijing in Hebei province, was grappling with plunging demand for steel and plummeting prices. Economic growth slumped to 5.5% in the first nine months of last year, from 10.5% in 2012. “The sky collapsed and I thought of killing myself,” said Hao, 40, now a taxi driver. “It was just like a dream: I had everything but when I woke up it was all gone.”

Hao is among the collateral damage as China reins in years of debt-fueled investment-led growth that’s evoked comparisons to the period preceding Japan’s lost decades. As policy shifts China toward greater consumption and innovation-led growth, Handan’s reliance on the steel industry for expansion has left it among cities feeling the brunt of adjustment pain. “Steel towns have been decimated many times before, in Pittsburgh, in the U.K., in France, in Belgium,” said Junheng Li, founder of researcher JL Warren Capital in New York. “Handan has a choice: cling to steel and suffer an inexorable decline or invest in the future, wherever it may be.”

Handan’s woes deepened in September, when local authorities sent work teams into 13 property developers to contain risks after a failure to repay funds raised illegally from the public sparked panic, Xinhua News Agency reported. Thirty-two homebuilders had raised a combined 9.3 billion yuan ($1.5 billion) in illegal fundraising or high-return deposits, causing police to detain 94 people, Xinhua reported. In freezing, pollution-darkened air that exceeded the World Health Organization’s safety limit by more than 14 times, Wu Ren waited last week outside a property development in downtown Handan in hope of recovering funds he invested in a developer named Century in Gold. Wu, in his mid-40s, said he invested 500,000 yuan for a return exceeding 18% a year. The developer’s boss disappeared in August, he said.

“That would be linked to massive negative effects on the labor market.”

• ECB’s Nowotny: Deflation To Have Dangerous Political, Social Impact (Reuters)

The European Central Bank has limited options left to counter long-term stagnation in the euro zone, ECB Governing Council member Ewald Nowotny was quoted as saying in an interview published on Monday. The ECB faces a crucial test of its resolve to do “whatever it takes” to preserve the euro when it decides this week on buying government bonds to combat deflation and revive the economy. Asked to what extent the ECB’s arsenal was exhausted and what it could still do, Nowotny told Austrian newspaper Tiroler Tageszeitung: “Our possibilities are limited.” He did not elaborate. Inflation in the euro zone is well below the ECB’s mid-term target of just under 2% but Nowotny said he did not expect a protracted period of deflation.

“We had negative inflation rates in December and perhaps we will have them in the first months of this year, but I do not believe we can expect deflation for 2015 overall. But the margin of safety has become smaller,” he was quoted as saying in the interview. Asked if it would be difficult to pull out of deflation if it set in, he said yes. “We see the danger from Japan, which for two decades has low growth, low inflation and low interest rates, thus long-term stagnation. For Europe, lasting low growth is not a (desired) prospect,” he said. “That would be linked to massive negative effects on the labor market. And it would certainly have dangerous political and social impact.”

This will continue for a while yet.

• Bank Losses From Swiss Currency Surprise Seen Mounting (Bloomberg)

The $400 million of cumulative losses that Citigroup, Deutsche Bankand Barclays are said to have suffered from the Swiss central bank’s decision to end the cap on the franc may be followed by others in coming days. “The losses will be in the billions — they are still being tallied,” said Mark T. Williams at Boston University. “They will range from large banks, brokers, hedge funds, mutual funds to currency speculators. There will be ripple effects throughout the financial system.” Citigroup, the world’s biggest currencies dealer, lost more than $150 million at its trading desks, a person with knowledge of the matter said last week. Deutsche Bank lost $150 million and Barclays less than $100 million, people familiar with the events said..

Marko Dimitrijevic, the hedge fund manager who survived at least five emerging-market debt crises, is closing his largest hedge fund, which had about $830 million in assets at the end of the year, after losing virtually all its money on the SNB’s decision… FXCM, the largest U.S. retail foreign-exchange broker, got a $300 million cash infusion from Leucadia after warning that client losses threatened its compliance with capital rules. FXCM, which handled $1.4 trillion of trades for individuals last quarter, said it was owed $225 million by customers. Shorting the franc was a popular trade and most firms would leverage their positions some 20 times or more, said Williams, who consults for hedge funds.

With such leverage a 5% move against the position wipes out all the value, yet the trades were seen as relatively low-risk by models used by financial institutions because volatility of the franc was reduced by the SNB’s cap, he said. Citigroup had reported an average total trading value-at-risk, a measure of how much the company could lose in trading in one day, of $105 million in the third quarter, of which $32 million was attributed to foreign-exchange risks. Deutsche Bank’s so-called stressed value-at-risk, which measures possible daily losses in market turmoil, averaged 109 million euros ($126 million) in the first nine months, with 27 million euros related to foreign-exchange risks.

Swiss banks, which haven’t announced any losses so far, will probably also suffer in the longer term, said Arturo Bris, a professor at IMD business school. “The negative effects for the Swiss banks come in two ways,” Bris said. “First, it will reduce the flow of assets from the outside and will encourage the exit of Swiss money to other countries. Secondly, they will be hurt by the negative impact on the Swiss economy.” Pain from wrong-way bets may not be limited to just the financial industry. “We’re just hearing about financial institutions now,” Philip Guarco at JPMorgan Private Bank, said in an interview on Bloomberg TV. “Remember what happened back in 2009, when the dollar rallied? You actually had major corporates in Mexico and Brazil, where the treasury departments were taking positions in FX. So we haven’t heard the end of it yet.”

“Mr. Jordan said the franc remains “greatly overvalued.”

• Switzerland Could Act on Currency Again, Central Banker Says (WSJ)

The Swiss central bank is ready to intervene in the currency markets again to weaken the franc if necessary, the bank’s head said, just two days after the removal of a cap on the franc triggered a surge in the currency’s value. Swiss National Bank President Thomas Jordan said the central bank was forced to scrap its policy of keeping minimum exchange rate of 1.20 Swiss francs a euro due to divergent economic developments and mounting risk from its euro-buying operations. The bank will continue to monitor the situation and act if necessary, Mr. Jordan said in an interview with Swiss newspaper Neue Zuercher Zeitung.

“We have said goodbye to the minimum exchange rate,” Mr. Jordan said in the interview published Saturday. “But we will continue to consider the exchange-rate situation in our decisions and intervene in the foreign-exchange market if necessary.” The SNB’s surprise decision on Thursday to ax the minimum exchange rate roiled markets and caused the Swiss franc to gain around 30% at one stage before settling 15% higher against the euro to trade near one Swiss franc to the euro, from around 1.20 before the announcement. The Swiss stock market swooned and shares in companies such as food giant Nestlé and pharmaceuticals maker Novartis had billions wiped from their values as shareholders sought to cash in on the sudden appreciation of the currency.

Stocks in some Swiss companies including watchmaker Swatch slumped as analysts reduced their sales and profit forecasts as a result of the franc’s rise. The higher value of the Swiss franc reduces the value of sales made in the eurozone, which accounts for more than half of its exports. The minimum exchange rate had been in place since September 2011 and was intended to head off deflation and protect the competitiveness of Swiss companies. Mr. Jordan said the franc remains “greatly overvalued.” He said he expects negative interest rates introduced by the SNB to make the franc less attractive, but ruled out introducing capital controls to further weaken demand for the currency.

“.. non-residential construction and specifically physical structures, which is where roughly 90% of energy capex is..”

• The Next Victim Of Crashing Oil Prices: US Housing (Zero Hedge)

While a record amount of ink has been spilled praising the benefits of plunging crude price on the US consumer, so far this has manifested merely in soaring consumer confidence, if not in an actual boost to retail sales. In fact, as the Census Bureau reported last week, December retail sales were the biggest disappointment and suffered the steepest monthly drop since the polar vortex.

It appears that instead of doing what so many economists thought, and immediately using their “savings” to boost discretionary income, households are either i) saving the lower gas price windfall (and considering the unprecedented savings rate revision gimmick used by the US Department of Commerce to boost Q3 GDP to 5.0% this is completely understandable), or ii) as we explained some time ago, instead of spending on discretionary purchases, households are forced to spend more on far less pleasant, if just as GDP-boosting staples, such as soaring health insurance premiums courtesy of Obamacare (those who benefit from Obamacare most likely don’t have any work commute-related expenditures in the first place). Less has been written about the adverse side-effects of plunging oil, even though by now even the most “undisputed” permabulls have been forced to admit that the imminent collapse in capital spending is truly “unprecedented”, a phrase Goldman uses in the chart below.

So what does plunging CapEx actually mean for the economy, aside from a substantial haircut to 2015 GDP, and what other areas of the economy will be affected by the Saudi Arabian scorched earth war on the US shale industry? First, we look at the impact of plunging crude on non-residential construction and specifically physical structures, which is where roughly 90% of energy capex is — namely outlays for exploration and wells. Spending there tracked an annualized rate of $140bn in the first three quarters of 2014, a sum that accounts for a whopping 30% of total non-residential private fixed investment in structures, or about a 1% of GDP. So what about residential construction?

Coal, iron ore output still rises and prices dive.

• OPEC’s Future Reflected in Mining Slump as Oil Price Pummeled (Bloomberg)

Oil producers reluctant to curb output even as prices tumble to five-and-a-half year lows don’t need to guess what the future holds. They can ask a miner. In coal to iron ore markets, suppliers have raised volumes even as prices slumped, boosting global gluts and jeopardizing profits as the most dominant players seek to maintain revenue and squeeze out higher cost rivals. Prices of thermal coal, used to generate electricity, and metallurgical coal, a key ingredient in steel, have tumbled more than half since 2011 on supply additions and slowing demand in China, the biggest commodities consumer. With OPEC insistent that it won’t curb crude output, and U.S. production rising to its fastest weekly pace in more than 30 years, oil markets may be in line for similar prolonged pain.

“If OPEC every now and again looks over their shoulder at what is happening in other commodities you’d think it would be a warning,” said David Lennox at Fat Prophets. OPEC, which pumps about 40% of the world’s oil, agreed to maintain its production target at 30 million barrels a day at a Nov. 27 meeting in Vienna. The group is wagering that U.S. shale drillers will be first to curb output as prices drop, echoing a strategy played out by the largest miners. “The current prices are not sustainable,” Suhail Al Mazrouei, energy minister of OPEC member the United Arab Emirates said Jan. 14 in Abu Dhabi. “Not for us but for the others.”

Iron ore producers who predicted a swift exit by higher cost suppliers as their commodity entered a bear market last March were caught out as curbs to global output proved slower than anticipated, Nev Power, CEO of Australian iron ore producer Fortescue said in October. Coal exporters, too, have kept increasing supply as prices slid. Global output rose about 3% between 2011 and 2013 as prices declined, according to World Coal Association data. In Australia, the biggest exporter of metallurgical coal, production is forecast to rise again in the year to July, according to the nation’s government. “Oil will have more similarities to both thermal and metallurgical coal,” Morgan Stanley analyst Joel Crane said. “Those prices have been weakening for more than three years now, yet we’ve seen very little in terms of shutdowns.”

“.. quarterly earnings for his firm that fell 82% on more than $1 billion in charges including those related to downsizing.”

• Oil Boss Says More Job Cuts Ahead (WSJ)

Energy companies aren’t finished shedding jobs due to crude oil prices that are half what they were about six months ago, the world’s biggest oil-field-services provider warned soon after disclosing 9,000 job cuts. Paal Kibsgaard, chief executive of Schlumberger, said on Friday U.S. oil producers that focus on shale fields are worse off than rivals elsewhere because of their higher costs. “The new oil prices are clearly going to test the resilience of several North American land producers going forward,” he said, citing “their ability to get financing, their ability to continue to drive efficiencies and reduce costs and their ability to maintain production at current levels.”

Some of the largest U.S. oil-and-gas producers have cut 2015 capital spending budgets by 20% or more. Investment bank Cowen said international firms would cut spending by 20% this year and by another 10% in 2016. Schlumberger, Halliburton and Baker Hughes will need to shrink further as clients demand price cuts and dial back spending on wells, Mr. Kibsgaard said while discussing quarterly earnings for his firm that fell 82% on more than $1 billion in charges including those related to downsizing. The three companies help energy producers drill and frack their wells.

“Yields have fallen so low that analysts no longer have any historical risk models to fall back on..”

• BOJ Puts Japan Bond Yields On Road To Nowhere (CNBC)

The Bank of Japan’s (BOJ) massive asset purchase program has put government bond yields on a relentless slide into negative territory, and while some analysts insist a U.S. rate hike will reverse the trend later this year, others expect a slide into unchartered territory. “Yields have fallen so low that analysts no longer have any historical risk models to fall back on,” said Shinichi Tamura, Barclays’ Japan bank analyst, noting that rates strategists are going on blind faith that yields will stop falling. Japan’s short-term yields, of less than three years, turned negative last year, and last week the 5-year Japanese government bond (JGB) slipped close to zero several times. As of Monday morning Asian time, the yield was quoted at 0.018%, up from 0.005 basis points after market close on Thursday.

Most worrying, Tamura said, is the flattening of the yield curve with long-term government bond yields also on a relentless downward trend. On Monday morning, the 10-year was quoted at 0.242 basis points — above the historical low of 0.228% hit early last Friday -, and the 30-year is at 1.105%. “Bond investors are uncomfortable with what they see as an abnormal situation,” said Mana Nakazora, chief credit analyst at BNP Paribas. If the current levels hold, the price of new corporate bonds will be benchmarked against negative government bond yields. So, “they can’t see where they are going to secure returns after 2015 and beyond, or when the BOJ will end the current round of quantitative easing and stop buying up JGBs.”

Let’s see when the euro reaches parity with the dollar.

• Banks Battle Speculation Denmark’s Euro Peg at Risk (Bloomberg)

Banks in Scandinavia are joining the Danish government in trying to persuade offshore investors that the Nordic country isn’t about to copy Switzerland and drop its euro peg. SEB, the Nordic region’s largest currency trader, said it’s been fielding calls from hedge funds wondering whether Denmark might be next after the Swiss National Bank shocked markets by exiting a three-year-old euro cap on Jan. 15. Economy Minister Morten Oestergaard a day later sought to silence doubts surrounding Denmark’s currency peg, which he said remains “secure.”

Carl Hammer, chief currency strategist at SEB in Stockholm, says he’s been trying to make clear to callers that it’s “highly unlikely” Denmark will alter its exchange-rate regime. Speculation Denmark will follow the SNB has forced bankers across Scandinavia to provide offshore investors with a crash course in Danish monetary policy. Hedge funds calling SEB, Danske Bank and other Nordic banks have been urged to consider that Denmark’s peg has existed for more than three decades and is backed by the European Central Bank, unlike the SNB’s former system. “Obviously, we think it’s completely unrealistic” that Denmark will abandon its peg, Jan Stoerup Nielsen, an economist at Nordea Markets in Copenhagen, said by phone. “But that doesn’t seem to be stopping the speculation.”

Not enough yet. Be brave, my Greek friends.

• Greece’s Syriza Party Widens Lead Over Ruling Conservatives (Reuters)

Greece’s anti-bailout Syriza party is solidifying its opinion poll lead over the ruling conservatives eight days before the country’s election, a survey on Saturday. The survey by pollster Kapa Research for Sunday’s To Vima newspaper showed the radical leftists’ lead widening to 3.1%age points from 2.6 points in a previous poll earlier in the month. The national vote on Jan. 25 will be closely watched by financial markets, nervous that a Syriza victory might trigger a standoff with Greece’s European Union and IMF lenders and unleash a new financial crisis.

The survey, conducted on Jan. 13-15, showed that Syriza, which is running on a pledge to end austerity policies and renegotiate the country’s debt, would win 31.2% of the vote if the election was held now, versus 28.1% for Prime Minister Antonis Samaras’ New Democracy conservatives. The centrist party To Potami (River) ranked third with 5.4%. The leading party must generally receive between 36 and 40% of the vote to win outright, though the exact threshold depends on the share of the vote taken by parties that fail to reach a 3% threshold to enter parliament. The electoral system automatically gives the winning party an extra 50 seats to make it easier to form a government.

“.. such attempts coupled with the apparent provocation (similar to the situation with the Malaysian Boeing and the incident with a bus in Volnovakha) come, as a rule, on the eve of the European Union and other Western states meetings”

• Kremlin Links Kiev’s ‘Massive Fire’ Order To Upcoming EU Council Meeting (RT)

Kiev resumed its military assault in eastern Ukraine on Sunday despite receiving a proposal Thursday night from the Russian president that both sides of the conflict withdraw their heavy artillery, Putin’s press secretary said. “In recent days, Russia has consistently made efforts to mediate the conflict. In particular, on Thursday night, Russian President Vladimir Putin sent a written message to Ukrainian President Poroshenko, in which both sides of the conflict were offered a concrete plan for removal of heavy artillery. The letter was received by President of Ukraine on Friday morning,” president’s press secretary, Dmitry Peskov, said as cited by RIA Novosti news agency. “The latest developments in Ukraine connected with the renewed shelling of populated areas in the Donetsk and Lugansk regions cause grave alarm and put in jeopardy the peace process based on the Minsk memorandum,” Putin’s letter reads.

Putin suggested the immediate withdrawal of artillery with a caliber more than 10mm to the distance defined by the Minsk agreements.Russia is ready to monitor the fulfillment of these moves jointly with the OSCE, the letter concludes. However, Peskov stressed, the Ukrainian leader rejected the plan without offering alternatives and “moreover started military actions all over again,” resulting in an “absolute degradation of the situation in the southeast of Ukraine.” Russia’s Foreign Ministry accused Kiev of using the ceasefire to “regroup its forces, trying to take a course for further escalation of the conflict with a purpose to ‘settle’ it in a military way.” “We are deeply concerned by the fact that the Ukrainian side continues to increase its military presence in the southeast of the country in violation of the Minsk agreements,” the ministry said in a statement. [..]

Russia has expressed readiness “to use its influence on militia” in southeast Ukraine so they voluntarily agree to withdraw heavy armament from the frontline, so that its geographic coordinates correspond to Kiev’s demands “to avoid more victims among the civilian population.” The Foreign Ministry has linked the deadly attacks in Donetsk and Kiev’s “massive fire” order with the upcoming EU Foreign Affairs Council meeting on January 19. It has noted that “such attempts coupled with the apparent provocation (similar to the situation with the Malaysian Boeing and the incident with a bus in Volnovakha) come, as a rule, on the eve of the European Union and other Western states meetings, which deal with the situation in Ukraine.”

“The humiliating 2007 incident saved China “25 years of research and development ..” Note: Snowden neither confirms nor denies that China is behind it.

• Snowden: Hackers Stole 50 Terabytes Of Joint Strike Fighter Blueprints (RT)

The reported theft by Chinese hackers of blueprints for the US’s F-35 Joint Strike Fighter amounted to 50 terabytes of classified information, documents leaked by NSA whistleblower Edward Snowden have revealed. The hackers are believed by many US officials to be affiliated with the Chinese government. The humiliating 2007 incident saved China “25 years of research and development,” according to a US military official cited by The Washington Post in a 2013 article covering the breach. Previous media reports said “several terabytes” of data was stolen, but according to the new documents published by the German magazine Der Spiegel last week, the actual amount was far higher, at 50 terabytes –the equivalent of five Libraries of Congress.

The data – reportedly used by China to build their own advanced fighter jets – includes detailed engine schematics and radar design. F-35 blueprints are just a fraction of what Chinese hackers have allegedly stolen from the Pentagon’s data vaults over the years. The reported haul includes some two dozen advanced weapon systems, including the AEGIS Ballistic Missile Defense System, Littoral Combat Ship designs and emerging railgun technology, a classified report revealed in 2013.

“It might be possible for human civilization to live outside Holocene conditions, but it’s never been tried before.”

• Overuse of Nitrogen and Phosphorous Could Bring About Devastation of Earth (DSJ)

The Earth is on its way to become inhabitable owing to the increased use of artificial fertilizers like phosphorus and nitrogen which are exceeding the planetary boundaries. The fact has been confirmed by the director of the Center for Limnology at the University of Wisconsin, Madison, Professor Stephen Carpenter who also stated that “We’re running up to and beyond the biophysical boundaries that enable human civilization as we know it to exist.” At the beginning of Holocene period, the Earth was a much better place to live owing to the human activities that led to refined developments in social, political and religious aspects. Carpenter commented “Everything important to civilisation took place prior to 1914.”

Some of the best things then included development of agriculture, the rise and fall of the Roman Empire and the Industrial Revolution and following that era the human activities began the destruction of Earth. Prof. Carpenter and his team carried out a research regarding the impacts of carbon-driven global warming, including biodiversity loss and sea level rise. Explaining their findings the researchers stated “We’ve (people) changed nitrogen and phosphorus cycles vastly more than any other element. (The increase) is on the order of 200 to 300%. In contrast, carbon has only been increased 10 to 20% and look at all the uproar that has caused in the climate.” They also highlighted the unnecessary use of artificial fertilizers for boosting agriculture in the US as the land is already rich in nutrients.

Excessive use of fertilizers on a land already rich in nutrients is causing negative impacts and is pushing the civilization beyond safe boundaries. Some countries have land rich in nitrogen and phosphorous while many others have soil lacking these elements and they face difficulty in growing food without artificial fertilizers. Carpenter said “We’ve got certain parts of the world that are over polluted with nitrogen and phosphorus, and others where people don’t even have enough to grow the food they need.” To avoid upsetting the ecosystem, he has advised industrial farmers to cut down the overuse of phosphorus and nitrogen. He added “It might be possible for human civilization to live outside Holocene conditions, but it’s never been tried before. We know civilization can make it in Holocene conditions, so it seems wise to try to maintain them.”

Debt Rattle January 17 2015

Jan 172015

January 17, 2015 Posted by Raúl Ilargi Meijer at 11:52 am Finance Tagged with: Charlie Hedbo, forex, FXCM, Greece, oil, rigs, Swiss franc, Ukraine 1 Response »

Russell Lee Bike rack in Idaho Falls, Idaho Aug 1942

The narrative continues: “The U.S economic underlying momentum is really very good,” Williams said.

• Low Inflation No Bar To Rate Rise, Fed Officials Say (Reuters)

The Federal Reserve is still on track for a potential mid-year interest-rate increase, a top Fed official said on Friday, citing strong U.S. economic momentum and a falling unemployment rate. “There is no need to rush to raise rates; at the same time we want to make sure that we appropriately act in a way that we don’t get behind the curve,” San Francisco Federal Reserve Bank President John Williams told reporters at the bank’s headquarters. “If the forecast evolves the way I expect, six months from now or whatever – middle of this year – I think we’ll have a better position to understand either well we need to wait longer, or maybe it’s we could act now.”

Fed officials are grappling with when to gradually wean the U.S. economy from more than six years of near-zero interest rates, now that unemployment has fallen and economic growth looks solidly above its long-term trend. But inflation has been undershooting the Fed’s 2% target, and some gauges suggest the inflation outlook is falling. That has prompted a few Fed officials to argue the Fed should defer any rate hikes until next year. “At some point you just have to give in to the data,” and respond to too-low inflation with stimulus, not tightening, Minneapolis Fed President Narayana Kocherlakota said on Friday. St. Louis Fed President James Bullard took the opposite view in a separate appearance in Chicago, saying while inflation is low, it is not low enough to justify keeping borrowing costs at zero.

Williams, who unlike Bullard and Kocherlakota votes this year on Fed policy and whose views are seen as centrist, acknowledged that dropping inflation expectations are a “negative signal,” but only about global growth prospects. Low yields on U.S. Treasuries, often tied to expectations for slowing future domestic growth, are “not about the U.S. economy and the Federal Reserve” but mostly reflect weakness in Europe and elsewhere, he said. “I don’t agree that it is sending a negative signal about the U.S. economy,” he said, forecasting GDP growth of 2.5% to 3% this year. While he does not expect inflation to be back up to 2% by the time the Fed raises rates, the inflation-subduing effects of falling oil prices should subside in six to 12 months, and it should begin to turn up as labor market slack declines further. “The U.S economic underlying momentum is really very good,” Williams said.

Regulators should stay out and let markets discover prices.

• Swiss Turmoil Hints at Future Lehman Moments (Bloomberg)

For three years, the Swiss National Bank successfully sat on its currency, selling the franc whenever it threatened to appreciate too much for the comfort of Swiss exporters. Yesterday, it tore up that policy, inciting the equivalent of a riot in the currency market and trashing retail brokerages from New York to New Zealand. While victims of the turmoil ponder whether Swiss policy makers are irresponsible or just incompetent, the scale of the damage is a timely reminder that contagion is always unpredictable, that markets always overshoot, and that traders, when they smell profit, can outgun central banks. Currency analysts all seem to assume that the Swiss central bank, after abandoning its €1.20 euro, expected its currency to settle at about €1.10 or even €1.15. Instead, the franc is trading at parity with the euro – a stunning blow for exporters. If the central bank thought that simultaneously cutting its deposit rate to -0.75% would deter franc purchasers – SNB President Thomas Jordan called negative rates “a very strong instrument” – it was badly mistaken.

Jordan also said markets “tend to strongly overreact” to surprises, and that the situation would “correct itself over time.” Maybe. But as of today, abandoning the cap rather than, say, adjusting the level seems to have been a wild miscalculation. And it contains a lesson for both U.S. and European policy makers. By the third quarter of this year, the Federal Reserve’s 0.25% interest rate is expected to at least double, according to economists surveyed by Bloomberg News. The Fed already has an idea of what the market impact will be: The so-called taper tantrum in May 2013, when then Fed Chairman Ben Bernanke first suggested the U.S. bond-purchase program would be scaled back, saw the yield on the 10-year Treasury jump half a percentage point in four weeks to end the month at 2.13%.

There’s a risk, though, that this time, having flagged the prospect of a change so far in advance, policy makers will be complacent about the probable market reaction. That’s what happened in 2008 when Lehman Brothers went bust. Treasury officials convinced themselves that the financial crisis had been rumbling on long enough for participants to have shielded themselves against the collapse of a big firm; instead, their earlier decision to contribute $29 billion to JPMorgan’s rescue of Bear Stearns had created a false sense of security about how far the government would go to support the financial system.

“You have to believe a lot of what went on yesterday and somewhat today has been short covering. There is still a whole bunch of reckoning to still go on.”

• Here’s Why Losses Triggered by Franc-Cap Removal Were So Painful (Bloomberg)

It’s easy to see why the Swiss National Bank’s surprise decision to abandon the cap on the franc versus the euro wreaked havoc on currency markets. You just have to look at data from the U.S.’s largest derivatives exchange. Speculators using futures to wager the franc would weaken versus the dollar had more than $3 billion worth of such bets as of Jan. 13, according to Bloomberg calculations based on Commodity Futures Trading Commission data. The SNB’s decision two days later to drop the cap sparked a rush for the exit as the franc surged 21% versus the greenback. “This move was so large that it would have gone through anybody’s reasonable stop level,” Robert Sinche, a strategist at Amherst Pierpont Securities LLC in Stamford, Connecticut, said by phone. “You have to believe a lot of what went on yesterday and somewhat today has been short covering. There is still a whole bunch of reckoning to still go on.”

Short covering is when traders try to buy back a security whose price is climbing after they sold it short, wagering the price would fall. Non-commercial accounts held a net short position on the franc versus the dollar of 26,444 contracts just before the SNB decision, the most since May 2013, according to CFTC data based on transactions on the CME exchange. With a contract valued at 125,000 Swiss francs ($122,537) on Jan. 13, the value of the position was $3.24 billion. The Swiss currency climbed more than 15% on Jan. 15 against all of the more-than 150 currencies tracked by Bloomberg. Dealers in London at banks including Deutsche Bank, UBS and Goldman Sachs battled to process orders after the SNB made its announcement in Zurich scrapping the three-year-old cap designed to stem the Swiss franc’s appreciation against the euro.

And Draghi’s.

• The Swiss Just Made Japan’s Job Harder (Bloomberg)

Haruhiko Kuroda’s monetary “bazooka” just got outgunned by the Swiss. Since April 2013, Japan’s central banker has been pumping trillions of dollars into the economy in an attempt to generate 2% inflation. But in a mature, aging economy like Japan’s, the effort is 95% about confidence. In order to “drastically convert the deflationary mindset,” as Kuroda puts it, the Bank of Japan must transform sentiment among households and businesses. Kuroda’s massive bond purchases mean little if the Japanese don’t trust that better days lay ahead. The Swiss National Bank’s move to abandon the franc’s cap against the euro may have blown a hole in Kuroda’s strategy.

By reneging on a promise made time and time again that he wouldn’t ditch the policy, SNB President Thomas Jordan “has undermined the credibility of central banks,” says Simon Grose-Hodge of LGT. Now, at central banks around the globe, he adds, “the unthinkable is entirely possible. You can’t rule anything out.” Even if the BOJ issues another blast of quantitative-easing after its two-day policy meeting next week, the question is how effective the move would be. Kuroda’s Oct. 31 shock-and-awe stimulus announcement worked for a time by bolstering perceptions that steady inflation was within reach. But this time, with even Economy Minister Akira Amari admitting “it will probably be difficult” for the BOJ to succeed, markets are likely to be more skeptical of the bank’s staying power.

Even aside from the Swiss decision, Kuroda has had trouble with signaling – what bankers call “open-mouth operations.” Understanding how minutely markets scrutinize their every word and deed, officials in Washington and Frankfurt have learned to use that obsessive attention to their advantage. In an April 2013 study, Federal Reserve Bank of San Francisco economists Michael Bauer and Glenn Rudebusch found “signaling effects are larger in magnitude and statistical significance” than investors appreciate. Former Fed Chairman Ben Bernanke’s skillful use of verbal winks, nods and innuendo to lead expectations helps explain why QE worked better in the U.S. than Japan.

This is just bizarre. Investors should always be left guessing, by default.

• SNB Officials Eating Words Risk Lasting Investor Aches (Bloomberg)

Switzerland’s central bank officials have just eaten their words, risking lingering indigestion in financial markets. Just three days after Swiss National Bank (SNBN) Vice President Jean-Pierre Danthine called the franc cap a “pillar” of monetary policy, the SNB yesterday dropped the minimum exchange rate of 1.20 per euro. The shock abandonment of the SNB’s primary policy of the past three years may now leave investors warier of taking officials’ words at face value, according to economists including Karsten Junius, chief economist at Bank J. Safra Sarasin. By scrapping one tool, the franc cap, SNB President Thomas Jordan risks blunting the effects of another. “The SNB’s credibility has suffered a bit,” said Junius, a former economist at the International Monetary Fund.

“Statements will get read in the future with a bit more caution. Verbal interventions will hardly work any more.” The central bank’s regular pledge to defend the franc cap with “utmost determination” had become part of the institution’s brand, not least because of the success of that policy in protecting the country’s domestic economy. “They’ve lost part of their credibility, I think, ”Han De Jong, chief economist at ABN Amro told Angie Lau on Bloomberg TV. “Whatever they will say, markets will not trust them very much.” George Buckley at Deutsche also argues the SNB’s words are hard to reconcile with the SNB’s new policy stance. “Their commentary now means nothing,” he said. “This is not utmost determination, is it?”

Bank of England Governor Mark Carney has suffered similar criticism. He was labeled an “unreliable boyfriend” by one U.K. lawmaker last year for giving conflicting messages on the possible timing of interest-rate increases in the U.K. SNB President Jordan yesterday defended his surprise move, saying that a tool like the cap would always need to be abandoned unexpectedly. Anatoli Annenkov at SocGen agrees. “It’s something we aren’t used to anymore because most central banks are talking about warning markets, improving communication, not surprising anymore,” Annenkov said by phone from London. “But in such circumstances, there’s basically no other way to do this. Markets would have speculated, positioned themselves beforehand.”

“The transaction allows FXCM, the largest U.S. retail foreign-exchange broker, to “continue normal operations ..” But why would anyone want that?

• FXCM, Brokerage Hit by Swiss Shock, Gets $300 Million From Leucadia (Bloomberg)

Leucadia gave FXCM a $300 million cash infusion, extending a lifeline to the currency brokerage hobbled by the Swiss central bank’s decision to let the franc trade freely against the euro. Leucadia, which owns New York-based investment bank Jefferies Group, extended FXCM a two-year, $300 million senior secured term loan with an initial coupon of 10%, according to a statement Friday. The transaction allows FXCM, the largest U.S. retail foreign-exchange broker, to “continue normal operations,” according to the statement. Shares of New York-based FXCM had tumbled as much as 92% to 98 cents Friday morning before they were halted. After the Leucadia deal was released, FXCM’s stock rebounded to $4.44 as of 5:40 p.m. New York time. That’s still down from the prior day’s closing price of $12.63.

Leucadia Chief Executive Officer Richard Handler has prior experience saving imperiled financial firms. Before Leucadia purchased the business, he ran Jefferies when the company was part of a group that bailed out Knight Capital Group Inc., which teetered on the brink of collapse after bombarding markets with errant trades in August 2012. FXCM had warned Thursday that client losses due to the Swiss National Bank’s action threatened the broker’s compliance with capital rules. The company, which handled $1.4 trillion of trades for individuals last quarter, said it was owed $225 million by clients.

Cloud cuckoo.

• FXCM Lobbied Against Leverage Limit Before Trades Went Bad (Bloomberg)

FXCM, the brokerage facing a shortfall of nearly a quarter-billion dollars after highly-leveraged investors made losing bets on the Swiss franc, pushed back against U.S. regulatory efforts that likely would have left it less vulnerable. In 2010, the Commodity Futures Trading Commission sought to force individual investors trading currencies to give their broker 10 cents in capital to back every $1 in positions. The regulator failed to accomplish that amid pressure from New York -based FXCM and other brokers, meaning only 2 cents must be pledged. The agency’s proposal would “have a devastating impact on the retail forex industry,” Drew Niv, FXCM’s chief executive officer, wrote in a March 2010 letter to the CFTC that was signed by eight other executives at currency dealers.

The industry relies on “electronic systems” to liquidate customer trades and protect against “currency fluctuations in the market,” they said in the letter, which is posted on the CFTC’s website. FXCM’s retail clients suffered big losses Thursday after the Swiss National Bank let the franc float freely against the euro. The franc surged as much as 41%. FXCM warned that client losses threatened the broker’s compliance with capital rules. The largest U.S. retail foreign-exchange broker, which handled $1.4 trillion of trades for individuals last quarter, said it was owed $225 million by clients. The CFTC, the main U.S derivatives regulator, is reviewing the situation at FXCM, Steve Adamske, a CFTC spokesman, said earlier.

The National Futures Association is in touch with the firm and CFTC, according to Karen Wuertz, an NFA spokeswoman. Leucadia, owner of Jefferies, said in a statement Friday that it will provide $300 million in cash to FXCM to enable the brokerage to meet regulatory capital requirements and continue normal operations. Shares of New York-based FXCM had tumbled as much as 92% Friday morning before they were halted, pending an announcement. Leucadia shares climbed 0.9% to $21.84 as of 12:24 p.m. in New York, when trading was halted. The client losses are shining a spotlight on U.S. regulators’ oversight of retail currency trading and whether they stopped short of necessary curbs to protect customers. In contrast to other markets, investors buying stock with borrowed money must put up at least 50% of the purchase price under Federal Reserve rules.

“Suddenly, many of these companies are essentially locked out of the capital markets. They have to live within their means or go under.”

• Money Dries Up for Oil & Gas, Layoffs Spread, Write-Offs Start (WolfStreet)

Larger drillers outspent their cash flows from production by 112% and smaller to midsize drillers by a breathtaking 157%, Barclays estimated. But no problem. Wall Street was eager to supply the remaining juice, and the piles of debt on these companies’ balance sheets ballooned. Oil-field services companies, suppliers, steel companies, accommodation providers… they all benefited. Now the music has stopped. Suddenly, many of these companies are essentially locked out of the capital markets. They have to live within their means or go under. California Resources, for example. This oil-and-gas production company operating exclusively in oil-state California, was spun off from Occidental Petroleum November 2014 to inflate Oxy’s share price. As part of the financial engineering that went into the spinoff, California Resources was loaded up with debt to pay Oxy $6 billion. Shares started trading on December 1.

Bank of America explained at the time that the company was undervalued and rated it a buy with a $14-a-share outlook. Those hapless souls who believed the Wall Street hype and bought these misbegotten shares have watched them drop to $4.33 by today, losing 57% of their investment in seven weeks. Its junk bonds – 6% notes due 2024 – were trading at 79 cents on the dollar today, down another 3 points from last week, according to S&P Capital IQ LCD. Others weren’t so lucky. Samson Resources is barely hanging on. It was acquired for $7.2 billion in 2011 by a group of private-equity firms led by KKR. They loaded it up with $3.6 billion in new debt and saddled it with “management fees.” Since its acquisition, it lost over $3 billion, the Wall Street Journal reported. This is the inevitable result of fracking for natural gas whose price has been below the cost of production for years – though the industry has vigorously denied this at every twist and turn to attract the new money it needed to fill the holes.

Having burned through most of its available credit, Samson is getting rid of workers and selling off a chunk of its oil-and-gas fields. According to S&P Capital IQ LCD, its junk bonds – 9.75% notes due 2020 – traded at 26.5 cents on the dollar today, down about 10 points this week alone. Halcón Resources, which cut its 2015 budget by 55% to 60% just to survive somehow, saw its shares plunge 10% today to $1.20, down 85% since June, and down 25% since January 12 when I wrote about it last. Its junk bonds slid six points this week to 72 cents on the dollar. Hercules Offshore, when I last wrote about it on October 15, was trading for $1.47 a share, down 81% since July. This rock-bottom price might have induced some folks to jump in and follow the Wall-Street hype-advice to “buy the most hated stocks.” Today, it’s trading for $0.82 a share, down another 44%. In mid-October, its 8.75% notes due 2022 traded at 66 cent on the dollar. Yesterday they traded at 45.

“The oil rig count has fallen by 209 since Dec. 5, the steepest six-week decline since Baker Hughes began tracking the data in July 1987.”

• Steepest Oil-Rig Drop Shows Shale Losing Fight to OPEC (Bloomberg)

U.S. drillers have taken a record number of oil rigs out of service in the past six weeks as OPEC sustains its production, sending prices below $50 a barrel. The oil rig count has fallen by 209 since Dec. 5, the steepest six-week decline since Baker Hughes began tracking the data in July 1987. The count was down 55 this week to 1,366. Horizontal rigs used in U.S. shale formations that account for virtually all of the nation’s oil production growth fell by 48, the biggest single-week drop. Analysts including HSBC say the decline shows that OPEC is winning its fight for market share and slowing the growth that’s propelled U.S. production to the highest in at least three decades. OPEC’s decision not to curb its output amid increasing supplies from the U.S. and other countries has driven global oil prices down 58% since June.

“OPEC’s strategy is working, and it will be obvious in U.S. production by midyear when growth from shale plays will come to a halt,” James Williams, president of energy consulting company WTRG in London, Arkansas, said by telephone Friday. “You can imagine the impact on any industry from a 50% impact on sales.” “Prices are being forced toward levels that would force outright shut-ins in high-cost areas, mainly in Canada and the U.S.,” Societe Generale SA (GLE) analysts including Mark Keenan, its head of commodities research for Asia in Singapore, said in a research note Jan. 14. The slump in oil rigs has yet to stop the unprecedented growth in U.S. oil production, which added 60,000 barrels a day in the week ended Jan. 9 to 9.19 million, Energy Information Administration data show. That’s the most in weekly data since at least 1983.

“We’ve been saying for a year now to clients,” he added, “the risks are certainly rising and have been rising.”

• Jim Chanos: Days Of Drilling For Cheap Oil Are Over (CNBC)

Jim Chanos, head of the world’s largest short-selling hedge fund, told CNBC on Friday he’s been short major oil companies for a couple years because the North American shale explosion has been “uneconomic for drillers.” “The fracking and shale revolution was propelling us to be the largest oil producer in a way that I thought was uneconomic and still is uneconomic for the drillers. But it was going to be enough supply to really disrupt the markets,” he said. Big oil companies like Exxon Mobil and Royal Dutch Shell are finding their business models challenged, he added, “because the days of finding cheap oil is over.” The founder of Kynikos Associates, with $3 billion in assets under management, has been betting against the economic situation in China for some time now. “We came across China because of our work in the mining sector in 2009.”

Chanos has also been short Caterpillar—saying the company is finding two out of its three business streams severely challenged: mining and now energy. Last year, he said mining was the sole troublemaker, but now with oil prices falling the heavy equipment marker is coming under even more pressure. He first disclosed his short position in Caterpillar at the CNBC and Institutional Investor Delivering Alpha conference in July 2013. Last month, Chanos told CNBC that 2014 was a better year for short sellers than 2013. But he said Friday that calling Kynikos the biggest short seller is damning with faint praise. “It’s sort of like being called the toughest guy in France. It’s been tough for five years.” “We’ve been saying for a year now to clients,” he added, “the risks are certainly rising and have been rising.”

“We tend to have a short memory and we tend to forget that the price of oil breached the $50 a barrel level only a decade ago.”

• Welcome to ‘Normal’ Crude Oil Price, Trading at 100-Year Average (Bloomberg)

The theory goes that commodity prices move in “supercycles” or bursts of phenomenal surges, followed by longer, less-exciting periods. As such, a barrel of oil at $50 is, well, normal. Many people think the oil price has crashed, but it has just gone back to its long-term historical trend, according to Ruchir Sharma at Morgan Stanley. That makes a barrel of oil at around $50 just about right based on a 100-year inflation-adjusted average, said Sharma. “The price of oil is returning to normal in its long-term 100-year history,” Sharma said in an interview from New York. “We tend to have a short memory and we tend to forget that the price of oil breached the $50 a barrel level only a decade ago.” Brent crude oil futures, which trade in London and are used as a benchmark to set prices for more than half of the world’s oil, reached a record of $139.83 a barrel on June 30, 2008, according to data compiled by Bloomberg. By Jan. 13, the price had plunged 67% to $46.59.

“At times like these, it’s good to step back and look at the bigger picture, look at what it has done through a long history,” he said. The supercycle surge in oil prices was kicked off by China’s emergence as an industrialized economy and net oil importer in the middle of the 1990s. In 1995 it imported 343,000 barrels a day, according to BP data. In 2013, it bought 5.7 million barrels a day. The nation is now the world’s biggest energy consumer and the second-biggest oil user. “China’s oil imports took off around 2003 and it emerged as a big factor in the market,” Thina Saltvedt at Nordea Bank said in a Jan. 13 phone interview. There’s a long time lag in oil between investments and new supply and it can take 10 years, sometimes 15 years, to balance the market and match it with demand, said Saltvedt. China is structurally changing its economy from big, energy-intensive industry to less so. India or perhaps Africa will start to take over the role China has played, said Saltvedt.

“.. no “concrete proposal” has yet been made. The Governing Council will meet on Jan. 22 in Frankfurt to set monetary policy.”

• ECB Weighing QE Through National Central Banks (Bloomberg)

ECB President Mario Draghi briefed German Chancellor Angela Merkel and Finance Minister Wolfgang Schaeuble on quantitative-easing plans under which national central banks would buy bonds issued by their own country, Spiegel magazine reported. The plan, which tries to avoid a transfer of risk between member states, envisages purchases in line with the ECB’s capital key with a limit of 20% to 25% of each country’s debt, Spiegel said in an article published yesterday, without saying where it got the information. Greece would be excluded from the program because its bonds don’t fulfill the necessary quality criteria, the magazine said. Klaas Knot, governor of the Dutch central bank, told Spiegel that no “concrete proposal” has yet been made. The Governing Council will meet on Jan. 22 in Frankfurt to set monetary policy.

Officials presented various forms of quantitative easing to the council at a Jan. 7 meeting, and Draghi signaled in an interview with Die Zeit that the ECB is ready to take a decision as early as next week. Officials have courted the German public in a flurry of interviews, arguing that more stimulus is needed to fend off deflation in the 19-nation currency region. Knot said in the Spiegel interview that he sees no sign households are postponing spending, which Draghi has pointed to as one indicator of deflation. Knot also signaled a preference for measures that limit risk-sharing. “If each central bank was only buying debt of its own country, the danger of an unwanted redistribution of financial risk would be lower,” he said. “We have to avoid that decisions are taken through the back door of the ECB balance sheet that have to continue to be reserved for elected politicians in euro-area countries.”

Elections January 25.

• Eurozone Ponders Yet Another Greek Bailout (Reuters)

Eurozone officials discussed on Thursday extending Greece’s bailout program by up to six months more to allow time for talks with any new government in Athens on closing the current bailout and on what should replace it. The current bailout, which has already been extended by two months, runs out at the end of February. Athens had hoped to replace it with an Enhanced Conditions Credit Line from the eurozone bailout fund that it would never have to use. “There will have to be an extension beyond February. It will be inevitable,” one eurozone official with knowledge of thetalks said. “It could be six months more.” The extension would have to be requested by the new Greek government that emerges after elections on Jan. 25. But with Greek borrowing costs skyrocketing on uncertainty about policy after the elections, Athens looks set to need further euro zone support and a credit line for insurance purposes only may not be enough, euro zone officials said.

Also, without another program, under which Greece gets cheap euro zone loans or access to a credit line in exchange for reforms, the European Central Bank said it could not provide liquidity to the Greek banking sector. No decisions were taken and the issue is likely to be further discussed at the next meeting of euro zone finance ministers on Jan. 26, a day after the Greek vote. “The ECCL is for a country which has in principle market access, and the ECCL is an insurance policy to calm any remaining doubts in the market,” a second eurozone official said. “With some goodwill you could say that towards the end of last year, this could apply to Greece. Now with the uncertainty, stress on the financial system, Greek long-term yield going beyond 10% – all that makes it much less obvious Greece qualifies for an ECCL,” the official said.

In case this was not clear.

• Forex Leverage: How It Works, Why It’s Dangerous (CNBC)

[..] many retail traders found their trading accounts completely wiped out, being on the wrong side of a trade that couldn’t be liquidated fast enough to preserve their capital. Trading in currency markets at the retail level, with these types of brokerages, centers on the use of one of the biggest double-edged swords in financial markets: leverage. In other words, borrowed funds that are used to amplify potential returns but can also exacerbate the potential losses of trading positions. In the world of retail foreign exchange trading, use of leverage is key. Here’s how it works: Let’s say you want to take a $10,000 position in terms of Swiss francs. Under current regulatory guidelines in the U.S., you are mandated to keep at least $200 in your account in order to support that position. That’s because there’s a mandated minimum margin requirement of 2% for retail forex markets.

In other words, you can only have a position that’s 50 times greater than the equity in your margin account. If the value of your position grows because of market movements, there is no issue. But if your position loses value to a point where you no longer meet minimum margin requirements, your broker will liquidate assets to help assure that you don’t lose more money than you put into the account. The reason why some retail foreign exchange brokerages have gone bankrupt, and others are in severe distress, has to do with how those margin accounts were maintained during the SNB’s shock move. Certain accounts with losing positions weren’t able to be liquidated quickly enough before they went into deficit. That left some brokers responsible for the debit balances in client margin accounts. If those debit balances were high enough, that could cripple the capital position of these retail brokerages. At that point, a handful of things can happen.

For one, the broker can request the client to add enough funds to bring their account back into good standing. Or, the broker is left holding the bag on client losses, perhaps with only legal recourse to try to recover those losses. According to Forex.com, which is a retail foreign exchange broker and is owned by publicly traded Gain Capital, the company does “reserve the right to hold clients responsible for large debit balances and in special circumstances.” Its website also encourages clients to manage use of leverage carefully, since use of more leverage increases risk. Bottom line, the pain of the SNB’s removal of its currency peg hit numerous parts of the market, and will lead to outsized financial losses for the big guys and the little guys. On a relative basis, retail traders may feel more pain than their bigger counterparts. The recent market action serves as a potent reminder of just how dangerous leverage can be when price action moves swiftly, and without warning.

Sounds like an interesting book.

• The End Of Banking, And How To Fix It (Reuters)

“The End of Banking” is an important book about finance. Jonathan McMillan, the nom de plume taken by an investment banker and a macroeconomist, provides a holistic and compelling explanation of the crisis of 2008. The authors predict a repeat, barring a revolution in finance. McMillan, as the co-authors can be called, defines banking as the private sector creation of money from extending credit. Loans create deposits – private money. The monetary liabilities are distinct from the physical or electronic money which comes out of central banks. The book’s central argument is that private money creation is impossible to control in the digital age. Until computers became widespread in the 1970s, banks could keep track of borrowers. But with electronic systems, transactions became more complex as lenders repackaged loans. Financial assets were spread across myriad interlocking chains of balance sheets, both of traditional banks and so-called shadow banks, which have grown into a $35 trillion monster in the United States and European Union.

The illustration of how balance sheets multiply and money grows in “The End of Banking” is illuminating. The focus is on how computing permitted massive regulatory arbitrage. “Over the last 40 years, IT has turned the stick [of capital requirements] into a toothpick.” Financial watchdogs are alert to shadow banking’s risks, but their efforts to bring non-regulated firms into a defined perimeter are akin to using a net to gather water. Thanks to electronic bookkeeping, firms can shift balance sheets out of the authorities’ purview at the tap of a button. Whether to prevent runs on banks or to firm up the financial stability of quasi-banks, weak governments have steadily extended guarantees to bigger portions of the private sector. McMillan has a solution. It starts with an accounting distinction.

Bank assets would be classified either as real, in other words claims on physical or distinct immaterial objects; or as financial, assets which appear as liabilities on the balance sheet of some other institution. Next, regulators would ensure that financial assets were 100%-backed by common equity. And lastly, in a combined regulatory and accounting change, the value of a company’s real assets would have to be greater or equal to the value of the total of its liabilities. This final fix is where the book goes beyond previous proposals to mend finance through concepts such as narrow- or limited-purpose banking. The implication of McMillan’s recommendation is that many derivatives, for which a counterparty’s losses could be infinite, would be banned. What’s more, the intended application to financial and non-financial companies alike would include shadow banking, addressing the so-called “boundary problem” of regulation that other approaches to improve the system fail to solve.

“.. the private sector in Asia-Pacific now owes 1.5 times the region’s combined annual output ..”

• Asia’s Big Demons: Debt, Deflation, Demographics (Reuters)

Asia is battling not one but three demons. The unholy trinity of debt, deflation and demographics threatens to sap the region’s growth potential. Fending off the challenge requires central banks to cut borrowing costs. But they are reluctant to do so when U.S. interest rates are poised to rise. That could turn out to be a huge error. Consider the debt overhang. Taken together, the private sector in Asia-Pacific now owes 1.5 times the region’s combined annual output, according to the Bank for International Settlements. As a big chunk of the borrowing is in the opaque shadow banking system, particularly in China, the debt could be even larger. Either way, servicing the loans requires incomes to increase quickly. Yet, real GDP growth is slowing almost everywhere in the region. The threat of slowly rising consumer prices slipping into outright deflation is making things worse. Producer prices are sliding across Asia-Pacific.

Falling energy costs provide a convenient excuse for margin-starved employers to skimp on pay hikes, just as they did in the late 1980s. That makes the situation harder for borrowers in Malaysia, Korea, Thailand and Singapore, all of which have high household leverage. Persistent lowflation will leave borrowers with higher debt burdens than they expected. Demographics aren’t helping. Japan, China, South Korea, Singapore and Thailand are ageing rapidly. Relatively young countries like Indonesia, Vietnam and the Philippines drag down the average age. Even so, the region will have more middle-aged people than youngsters by 2020. This will present Asian nations with the same problem that has plagued advanced nations: a savings glut. As those looking to invest for retirement outnumber those borrowing to buy new homes and start new businesses, market interest rates could fall.

“It is the first attack by Islamic State itself against Saudi Arabia and is a clear message after Saudi Arabia entered the international coalition against it ..”

• The Great Wall of Saudi Arabia? (Christian Science Monitor)

Saudi Arabia has been constructing a 600-mile East-West barrier on its Northern Border with Iraq since September. The main function of the barrier will be keeping out ISIS militants, who have stated that among their goals is an eventual takeover of the Muslim holy cities of Mecca and Medina, both of which lie deep inside Saudi territory, according to United Press International. This past week, a commander and two guards on the Saudi-Iraq border were killed during an attack by Islamic State militants, the first direct ground assault by the group on the border. “It is the first attack by Islamic State itself against Saudi Arabia and is a clear message after Saudi Arabia entered the international coalition against it,” Mustafa Alani, an Iraqi security analyst with close ties to Saudi Arabia’s interior ministry, told Reuters.

The Saudi “Great Wall” as it’s being dubbed by some media outlets, will be a fence and ditch barrier that features soft sand embankments that is designed to slow down infiltrators on foot and are too step to drive a tired-vehicle up, according to the Telegraph of London. It will have 40 watchtowers and seven command and control centers complete with radar that can detect aircraft and vehicles as far away as 22 miles as well as day and night camera installations. The barrier system will have five layers of fencing, complete with razor wire and underground motion sensors that trigger a silent alarm. The 600-mile structure will be patrolled by border guards and 240 rapid response vehicles. The Saudis sent 30,000 soldiers to patrol the border in July 2014 after ISIS forces swept into western Iraq and Iraqi guards on the Saudi border fled.

“While Poroshenko was pretending his heart bled for French cartoonists, the civilians targeted for extermination by his government were bleeding literally: dozens, including children, have been killed in renewed shelling of Donetsk by Kiev’s military that weekend. ”

• Why Should Charlie Hebdo Deaths Mean More Than Those In East Ukraine? RT)

Though US pundits have been the loudest in calling for another war on terror, American officials were nowhere to be seen on the Sunday march. Only the US Ambassador attended the event, while President Obama, Vice President Biden, or even top diplomat John Kerry was conspicuously absent. The highest-ranking US official in Paris was Attorney General Eric Holder, who had announced his resignation in September 2014. The leaders that did attend weren’t above using the march for their own political purposes. Israeli Prime Minister Benjamin Netanyahu came to the march, even though the French government asked him not to. Turkey’s Prime Minister Ahmet Davutoglu also attended, but as soon as he returned, President Recep Erdogan publicly declared the massacre a French false-flag operation, for which the mayor of the Turkish capital Ankara, Melih Gokcek, blamed the Israeli Mossad.

Perhaps the most hypocritical of all was the Kiev junta, whose leader, Petro Poroshenko, hastened to Paris to claim he too was a victim of terrorism , even as his forces restarted the terror shelling of civilians in dissenting Donetsk. Poroshenko paraded before the cameras, dutifully made accusations of yet another Russian invasion, again accused Russia of being behind the downing of flight MH17, and begged for money from the West to bail out his bankrupt government, and fund another military expedition against the civilians of Donetsk and Lugansk. While Poroshenko was pretending his heart bled for French cartoonists, the civilians targeted for extermination by his government were bleeding literally: dozens, including children, have been killed in renewed shelling of Donetsk by Kiev’s military that weekend.

Among them was a boy of eight named Vanya, who lost his legs, a hand and an eye to Kiev’s humanitarian bombs. When critics of the junta’s campaign of artillery terrorism posted news of this on Twitter with the hashtag #IamVanya, Russophobic trolls quickly responded with displays of hatred. Hypocrisy is the order of the day in the West. Frenchmen and other NATO-sphere subjects are supposed to simultaneously champion free speech and crack down on offensive speech; profess love of Islam and endless tolerance, while their governments sponsor Islamic terrorists in places like Libya, Syria, Iraq or the Balkans; and protest the murder of innocents while backing Kiev’s regime doing precisely that, in the name of – you guessed it – fighting terrorism.

Of course, NATO’s puppets in Kiev have the perfectly rational explanation why it’s different when they kill: their victims are “subhumans”, as US-backed PM Arseny Yatsenyuk once put it. The same man, during his visit to Germany just a day after the Charlie Hebdo massacre, claimed that Russia had invaded Ukraine and Germany in WW2. His German hosts, normally sensitive to pro-Nazi rhetoric, chose to remain silent.

“NATO’s eastward expansion has destroyed the European security architecture as it was defined in the Helsinki Final Act in 1975. ”

• Gorbachev: ‘I Am Truly and Deeply Concerned’ (Spiegel)

SPIEGEL: Michael Sergeyevich, few contributed more to ending the Cold War than you. Now it is returning as a result of the Ukraine crisis. How painful is that?
Gorbachev: It gives one a feeling of déjà-vu. Perhaps that would even make a good headline for this interview: Everything appears to be repeating itself. There was a time for building a Wall and a time for tearing it down. I’m not the only person to thank for the fact that this wall no longer exists. (Former Chancellor) Willy Brandt’s Ostpolitik was important, as were the protests in Eastern Europe. Now, new walls are being built and the situation is threatening to escalate. I do, in fact, see all the signs of a new Cold War. Things could blow up at any time if we don’t act. The loss of trust is disastrous. Moscow no longer believes the West and the West doesn’t believe Moscow. That’s terrible.

SPIEGEL: Do you think it is possible there could be another major war in Europe?
Gorbachev: Such a scenario shouldn’t even be considered. Such a war today would inevitably lead to a nuclear war. But the statements from both sides and the propaganda lead me to fear the worst. If one side loses its nerves in this inflamed atmosphere, then we won’t survive the coming years.

SPIEGEL: Aren’t you overstating things a bit?
Gorbachev: I don’t say such things lightly. I am a man with a conscience. But that’s the way things are. I am truly and deeply concerned.

SPIEGEL: The new Russian military doctrine labels NATO’s eastern expansion and the “reinforcement of NATO’s offensive capabilities” as one of the primary threats facing Russia. Do you agree?
Gorbachev: NATO’s eastward expansion has destroyed the European security architecture as it was defined in the Helsinki Final Act in 1975. The eastern expansion was a 180-degree reversal, a departure from the decision of the Paris Charter in 1990 taken together by all the European states to put the Cold War behind us for good. Russian proposals, like the one by former President Dmitri Medvedev that we should sit down together to work on a new security architecture, were arrogantly ignored by the West. We are now seeing the results.

“The 10 warmest years on record have all occurred since 1997 ..”

• 2014 Was Hottest Year on Record (NY Times)

Last year was the hottest in earth’s recorded history, scientists reported on Friday, underscoring scientific warnings about the risks of runaway emissions and undermining claims by climate-change contrarians that global warming had somehow stopped. Extreme heat blanketed Alaska and much of the western United States last year. Several European countries set temperature records. And the ocean surface was unusually warm virtually everywhere except around Antarctica, the scientists said, providing the energy that fueled damaging Pacific storms. In the annals of climatology, 2014 now surpasses 2010 as the warmest year in a global temperature record that stretches back to 1880.

The 10 warmest years on record have all occurred since 1997, a reflection of the relentless planetary warming that scientists say is a consequence of human emissions and poses profound long-term risks to civilization and to the natural world. Of the large inhabited land areas, only the eastern half of the United States recorded below-average temperatures in 2014, a sort of mirror image of the unusual heat in the West. Some experts think the stuck-in-place weather pattern that produced those extremes in the United States is itself an indirect consequence of the release of greenhouse gases, though that is not proven. Several scientists said the most remarkable thing about the 2014 record was that it occurred in a year that did not feature El Niño, a large-scale weather pattern in which the ocean dumps an enormous amount of heat into the atmosphere.

Longstanding claims by climate-change skeptics that global warming has stopped, seized on by politicians in Washington to justify inaction on emissions, depend on a particular starting year: 1998, when an unusually powerful El Niño produced the hottest year of the 20th century. With the continued heating of the atmosphere and the surface of the ocean, 1998 is now being surpassed every four or five years, with 2014 being the first time that has happened in a year featuring no real El Niño pattern. Gavin A. Schmidt, head of NASA’s Goddard Institute for Space Studies, said the next time a strong El Niño occurs, it is likely to blow away all temperature records.

Debt Rattle January 16 2015

Jan 162015

January 16, 2015 Posted by Raúl Ilargi Meijer at 11:36 am Finance Tagged with: brokers, China, currency, Iran, oil, pope, shadow banking, Swiss franc, TTIP, Ukraine 6 Responses »

Earl Theisen Walt Disney oiling scale model locomotive at home in LA Sep 1951

• Swiss Mess Could Make Oil Plunge Seem Like Minor Hiccup (MarketWatch)

• World Deflationary Forces Have Swept Away Switzerland’s Defences (AEP)

• Switzerland Shows The Era Of Central Bank Omnipotence Is Over (Krasting)

• Swiss Franc Move Cripples, Wipes Out Currency Brokers (WSJ)

• Wall Street Is Bracing For Shock Waves From Swiss Franc Move (MarketWatch)

• Franc’s Surge Ranks Among Largest Ever in Foreign Exchange (Bloomberg)

• Swiss Bankers Are Accelerating the Euro’s Slide (Bloomberg)

• In Praise Of Price Discovery – The Market Is Off Its Lithium (David Stockman)

• Iran Lowers Oil Price for Budget to $40 After Collapse (Bloomberg)

• BP Sees $50 Oil For Three Years (BBC)

• $50 Oil Is The Ceiling For A Much Lower Trading Range (Anatole Kaletsky)

• Big Oil Gets Serious With Cost Cuts on Worst Slump Since 1986 (Bloomberg)

• Schlumberger Cuts 9,000 Jobs as Oil Slump Portends Uncertainty (Bloomberg)

• Aberdeen, The Energy-Rich Town Counting The Cost Of The New Oil Shock (Guardian)

• Greek Systemic Banks Request Emergency Liquidity Assistance (Kathimerini)

• No Risk Of ‘Deflation Spiral’ In Europe: German Minister (CNBC)

• UK Retailers ‘Throttled’ By Black Friday (Daily Mail)

• Warning: China May Trigger Fresh Rout In Commodities (CNBC)

• China Shadow Banking Surge Chills Stimulus Hopes (CNBC)

• New Russian/Chinese Credit Rating Agencies To ‘Balance Big Three’ (RT)

• Ukraine President Poroshenko Signs Decree To Mobilize Up To 100,000 (TASS)

• ‘Corporate Wolves’ Will Exploit TTIP Trade Deal, MPs Warned (Guardian)

• Pope Francis Says Freedom Of Speech Has Limits (BBC)

Anything could blow now.

• Swiss Mess Could Make Oil Plunge Seem Like Minor Hiccup (MarketWatch)

One day, it’s gold. The next, it’s equities. Most days, it’s crude. On Wednesday, it was copper. On Thursday it was the Swiss franc and Swiss stocks. And the move in those two makes those others look like minor-league hiccups. While you were sleeping, all hell broke loose in Switzerland, as the central bank ditched its currency cap against the euro after four years and slashed interest rates to negative 0.75%. The Swiss franc is rallying wildly, while the Swiss stock market is cratering and U.S. stock futures are mostly on the losing side as investors figure out this latest shock to the markets Meanwhile, collapsing oil is claiming its next batch of victims. Apache just became the first, and certainly not the last, big-name oil producer to cut a notable number of jobs. And Calgary is suffering through it’s worst decline in home prices in almost two years. Airlines stocks aren’t even benefiting anymore.

So where’s that cheap oil upside? Perhaps, it’s in the opportunity created in solar stocks. The best thing that can be said about oil at this point is that, hey, at least it’s not bitcoin. Or the ruble. More fallout to come if $50 does, indeed, turn out to be a ceiling and if, as Goldman Sachs says, prices fall below the bank’s $39 target.

Ambrose gets it right: deflation.

• World Deflationary Forces Have Swept Away Switzerland’s Defences (AEP)

The Swiss National Bank has lost control. It is the latest in a list of venerable central banks to be overwhelmed by deflationary forces and global economic disorder. The country is already in deflation. The Swiss franc ended Thursday 13% higher after the SNB abandoned its three-year efforts to defend a currency floor of 1.20 to the euro. “We have a free exchange rate once again,” said the SNB’s president, Thomas Jordan. Indeed, but nobody is fooled by the SNB’s attempt to spin this as benign. “This is a huge hit to their credibility,” said Deutsche Bank. The official statement claimed that the exchange floor is no longer needed and that “overvaluation has decreased as a whole since the introduction of the minimum exchange rate”. This is eyewash. “They have had to throw in the towel. They couldn’t hold the line anymore,” said David Owen, from Jefferies Fixed Income.

“This is going to cause extreme pain for parts of the Swiss economy but SNB are trapped.” The franc has been level over the past year on a trade-weighted basis. Even before Thursday morning’s events, the exchange rate was 25% above its decade-long average. It is now 40% higher. Just one month ago the SNB argued in its quarterly report that currency floor was imperative to stop Switzerland relapsing back into deflation. “In view of heightened deflation risks, the minimum exchange rate remains the key instrument for ensuring appropriate monetary conditions. A further appreciation of the Swiss franc would have a major impact on salary and price structures. Companies in Switzerland would be forced to cut costs drastically again to remain competitive.” The statement was true then. The threat is much greater now, made all too clear by the howls of protest this morning from the Swiss export sector.

Nick Hayek, head of Swatch Group, said the collapse of the floor would cause havoc. “Words fail me. Today’s SNB action is a tsunami; for the export industry and for tourism, and for the entire country,” he said. The Swiss economy has been muddling through over the past year but the output gap is still -1% of GDP, inflation is negative and the KOF index of business sentiment has been slipping lower for two years. On top of this, the country now has to grapple with the likely hangover from its own domestic credit bubble. The SNB’s Mr Jordan said the end of an exchange floor inevitably requires subterfuge. “You can only end a policy like this by surprise. It is not something you can debate for weeks,” he said. That may be true. Less justifiable is the failure to come clean after the event and explain exactly why the SNB now judges the damage of eternal currency intervention to be even more dangerous than the threat of a systemic deflationary shock. We are left guessing.

It was always but an illusion, though.

• Switzerland Shows The Era Of Central Bank Omnipotence Is Over (Krasting)

I wrote about the Swiss National Bank being forced to abandon its currency peg to the Euro on 12/3/14, 12/8/14 and 1/11/15. That said, I’m blown away that this has happened today. Thomas Jordan, the head of the SNB has repeatedly said that the Franc peg would last forever, and that he would be willing to intervene in “Unlimited Amounts” in support of the peg. Jordan has folded on his promise like a cheap suit in the rain. When push came to shove, Jordan failed to deliver. The Swiss economy will rapidly fall into recession as a result of the SNB move. The Swiss stock market has been blasted, the currency is now nearly 20% higher than it was a day before. Someone will have to fall on the sword, the arrows are pointing at Jordan.

The dust has not settled on this development as of this morning. I will stick my neck out and say that the failure to hold the minimum rate will result in a one time loss for the SNB of close to $100B. That’s a huge amount of money. It comes to 20% of the Swiss GDP! If this type of loss were incurred by the US Fed it would result in a loss in excess of $2 Trillion! In the coming days and weeks there will be more fallout from the SNB disaster. There will be reports of big losses and gains from today’s events. But that is a side show to the real story. We have just witnesses the collapse of a promise by a major central bank. The Fed, Bank of Japan, ECB, SNB and other Central Banks have repeatedly made the same promises over the past half decade:

Don’t worry! We are here. We will do anything it takes to achieve the stability we desire. We are stronger than the markets. We can overwhelm all forces. We will never let go – just trust us!

I never believed in these promises, but the vast majority of those who are active in financial markets did. The entire world has signed onto the notion that Central Banks are all powerful. We now have evidence that they are not. Anyone who continues to believes in the All Powerful CB after today is a fool. Those who believed in Jordan’s promises now have red ink on their hands – lots of it! The next central bank that will come into the market’s cross hairs is the ECB. Mario Draghi has made promises that he would “Do anything – in any amount”. Like I said, you would be a fool to continue to believe in that promise as of this morning. We’ve just taken a huge leap into chaos. The linchpin of the capital markets has been the trust in the CBs. The market’s anchors have now been tossed overboard.

“Where a client cannot cover this loss, it is passed on to us. This has forced Alpari (UK) Limited to confirm…that it has entered into insolvency ..”

• Swiss Franc Move Cripples, Wipes Out Currency Brokers (WSJ)

A major U.S. currency broker warned its equity was wiped out, a U.K. retail broker entered insolvency and a global foreign-exchange trading house failed after suffering big losses sparked by the Swiss central bank’s move to free up its currency. On Friday, regulators in Japan, Hong Kong, Singapore and New Zealand sought information from brokers about what happened. In Japan, the Finance Ministry was checking on trading firms after industry sources said the country’s army of mom-and-pop foreign exchange traders suffered big losses. The losses were caused when liquidity dried up and volatility spiked in the debt-driven foreign exchange market, making it impossible for brokers to execute trades as losses spiraled. Many of these brokers offer 100-to-1 leverage, meaning a 1% loss can wipe a client out.

The Swiss franc jumped 30% against the euro in minutes on Thursday, after the Swiss National Bank stopped capping the rise their nation’s currency against the euro. The surprise move sent the Swiss franc soaring and caused big losses for traders who had bet against the currency. FXCM, the biggest retail foreign-exchange broker in the U.S. and Asia, said in a statement that because of unprecedented volatility in the euro against the Swiss franc, its losses left it with a negative equity balance of about $225 million and that it was trying to shore up its capital. FXCM was operating normally in Hong Kong on Friday with employees trying to sort out trading positions and answer questions from clients about their trading losses. “As a result of these debit balances, the company may be in breach of some regulatory capital requirements.

We are actively discussing alternatives to return our capital to levels prior to today’s events and discussing the matter with our regulators,” the company, which has a market capitalization of about $701.3 million, said in a statement. Shares of the company fell 15% in U.S. trading and tumbled another 12% after hours. In the U.K., retail broker Alpari entered insolvency after racking up losses amid the currency turmoil following the SNB’s decision. Alpari said in a statement on its website that a majority of its clients sustained losses exceeding the equity in their accounts. “Where a client cannot cover this loss, it is passed on to us. This has forced Alpari (UK) Limited to confirm…that it has entered into insolvency,” the firm said.

““We expect that few risk-management algorithms in G-20 currencies were prepared for greater than 20% moves in a currency pair ..”

• Wall Street Is Bracing For Shock Waves From Swiss Franc Move (MarketWatch)

Don’t be too quick to look past the turmoil that swept global financial markets after Switzerland’s central bank unexpectedly scrapped a cap on the value of its currency versus the euro. While European and U.S. equities largely regained their footing after a panicky round of selling in the wake of the decision, dangers may still lurk in some corners of the market. Here are the potential shock waves to look out for:

Needless to say, the Swiss franc, which had long been held down by the Swiss National Bank’s controversial cap, exploded to the upside. The euro is down 15% and the U.S. dollar remains down nearly 14% versus the so-called Swissie after having plunged even further in the immediate aftermath of the move. See: Swiss stunner sends euro to 11-year low against buck. Since the Swiss National Bank had given no indication it was set to move — indeed, it had previously said it would defend the euro/Swiss franc currency floor with the “utmost determination” — investors were holding large dollar/Swiss franc and euro/Swiss franc long positions, noted George Saravelos, currency strategist at Deutsche Bank, in a note. As a result, the moves Thursday likely resulted in some big losses on investor portfolios holding those positions, he said.

“This effectively serves as a large VaR [value-at-risk] shock to the market, at a time when investors were already sensitive to poor [profit-and-loss] performance for the year,” Saravelos wrote. The Wall Street Journal reported that Goldman Sachs on Thursday closed what had previously been one of its top trade recommendations for 2015: shorting the Swiss franc versus the Swedish krona after the franc jumped as much as 14% on the day versus its Swedish counterpart. Douglas Borthwick, managing director at Chapdelaine Foreign Exchange, said forex participants are bracing for aftershocks. “We expect that few risk-management algorithms in G-20 currencies were prepared for greater than 20% moves in a currency pair, for this reason the chance of a binary outcome is significant,” he said, in a note. “Either participants gained or lost considerable amounts.”

“It’s normal for ruble to do this kind of thing, but we’re talking about Swiss franc ..”

• Franc’s Surge Ranks Among Largest Ever in Foreign Exchange (Bloomberg)

The Swiss franc’s 41% surge after the central bank unexpectedly lifted its cap against the euro is one of the biggest moves among major currencies since the collapse of the Bretton Woods system in 1971. Unlike previous foreign-exchange upheavals, today’s action occurred to one of the most-traded currencies that is considered a haven in tumultuous times, and few saw the move coming. “It’s normal for ruble to do this kind of thing, but we’re talking about Swiss franc,” Axel Merk, president and founder of Merk Investments, who has 20 years of experience in the currency market. “That’s quite extraordinary and unheard of.” A history of some of the biggest moves in the now $5.3 trillion a day market:

• Mexico Tequila Crisis, December 1994: U.S. interest-rate increases helped spark a peso devaluation and fueled capital flight across Latin America. The peso lost 53% in three months. The recession the following year, when the economy contracted 6.2%, was among the worst since the 1930s.

• Thai baht, July 1997: The currency fell 48% over the second half of the year after the central bank devalued its the baht in an attempt to revive its slumping economy, marking one of the biggest shifts in Asian currency policy since the country last devalued its currency in 1984.

• Japanese yen, October 1998: During the Asian Financial Crisis, the Japanese currency rallied as much as 7.2% in a day as hedge funds rushed to unwind carry trades by repaying the yen that they borrowed to invest in higher-yielding currencies such as the Thai baht and Russia’s ruble. The yen surged 16% that week.

• Turkish lira, 2001: A spat between then-President Ahmet Necdet Sezer and Prime Minister Bulent Ecevit led to an exodus of foreign capital, pushed up government debt and throwing more than 20 banks into bankruptcy. The currency lost 54% in value that year and inflation jumped to 69% by December.

• Argentine peso, June 2002: Argentina started struggling to finance its debt in 1999 as the one-to-one peg to a rising dollar squeezed exporters and Brazil, the country’s largest trading partner, devalued the real. Interim President Adolfo Rodriguez Saa announced to default on $95 billion debts in December 2001. Within weeks, the central bank abandoned the peg, allowing the peso to fall 74% by June 2002.

• Russian Ruble, December 2014: The currency plummeted 34% in three weeks through mid-December as plunging oil prices and international sanctions pushed Russia toward a recession. The central bank has spent $95 billion of foreign reserves over the past year to shore up the ruble and boosted interest rate five times. While the efforts helped quell volatility, the ruble remains within 5% of the record low set on Dec. 16.

Not too crazy so far.

• Swiss Bankers Are Accelerating the Euro’s Slide (Bloomberg)

The euro is shaping up as the biggest casualty of Switzerland’s decision to scrap its currency cap. Soon after the Swiss National Bank unexpectedly decided yesterday to end its three-year policy of keeping the franc from appreciating beyond 1.20 per euro, bearish bets on Europe’s common currency soared. While setting a record low versus the franc, the euro also plunged 3.5% against a basket of 10 developed-nation peers, the most since its 1999 debut. The SNB’s decision removes a key pillar of support for the euro, boosting the odds that its recent slide will accelerate. Companies from Goldman Sachs to Pimco have in recent days talked about the increasing chance the euro falls to parity with the dollar, which would represent a 14% decline from its current level.

“It adds fuel to the fire,” Atul Lele, the chief investment officer of Deltec International Group, who manages $1.9 billion, said by phone from Nassau, Bahamas. “This move out of Switzerland certainly exacerbates the trade-weighted euro weakness that we expect to see.” The difference in the cost of options to sell Europe’s common currency against the dollar, over those allowing for purchases, jumped by the most in almost two years yesterday. The euro dropped 1.3% to $1.1633 yesterday. In defending its cap on the franc, the SNB almost doubled its holdings of the 19-nation currency to 174.3 billion euros ($203 billion) since September 2011.

Speculation the European Central Bank is only days away from announcing a government-bond purchase program, or quantitative easing, at its Jan. 22 meeting had already weakened the euro against its major peers. The euro also sank below parity with the franc yesterday to an all-time low of 85.17 centimes, before recovering to 1.0096 per euro today. Deltec’s Lele said he sees it falling an additional 5% to 10%. “The euro can’t find a friend for love nor money,” said London-based Kit Juckes, a strategist at Societe Generale SA, which predicts a decline to $1.14 by year-end. When one of the biggest buyers of euros “leaves the building,” losses are inevitable, he said.

Stockman addresses the same issue, the return of price discovery, that I did yesterday in The End Of Fed QE Didn’t Start Market Madness, It Ended It.

• In Praise Of Price Discovery – The Market Is Off Its Lithium (David Stockman)

This morning’s market is more erratic than Claire Danes off her lithium. Gold is soaring, the euro’s plunging, US treasury yields are in free fall, junk bonds are faltering, copper is bouncing, oil has rolled over, the Russell 2000 momos are getting mauled, the swissie has shot the moon, the Dow is knee-jerking down, correlations are failing……and the robo traders are flat-out lost. All praise the god of price discovery! For six years financial markets have been drugged into zombiedom by maniacal central bankers who have violated every known rule of sound money and financial market honesty. In expanding their collective balance sheets from $5 trillion to $16 trillion over the past decade, for instance, they have midwifed a planet-wide fiscal fraud.

Politicians have been enabled to spend and borrow like never before because central banks have swapped trillions of public debt for electronic cash confected from nothing. Likewise, never have carry traders and gamblers been so egregiously pleasured by the state. After 73 straight months of ZIRP they are still pinching themselves, wondering if such stupendous largesse is real. They have bought anything with a yield and everything with prospect of gain, financed it for nothing and collected the arb – while being swaddled in the Fed’s guarantee that it would never surprise them or perturb their trades with unannounced money market rate changes. And so they wallowed in their windfalls, proclaiming their own genius.

Does a pompous dandy like Bill Ackman end up purchasing an absurdly priced $90 million Manhattan condo just “for fun” because markets operate on the level? Do his petulant brawls with other grand “activist” speculators like Carl Icahn mark investment genius or the machinery of honest capitalism at work? No they don’t. There is absolutely nothing honest, productive or fair about the central bank dominated casinos which have morphed out of what used to be legitimate money and capital markets. Indeed, all the requisites of stability, efficiency and honest price discovery have been destroyed by the monetary central planners. The short sellers have been eradicated. Downside insurance against a broad market swoon has become dirt cheap. Momo traders have thereby been enabled to earn unconscionable returns because their carry costs have been negligible and their hedging expenses nearly nothing.

“Saudi Arabia, the biggest producer, is probably assuming $80 ..”

• Iran Lowers Oil Price for Budget to $40 After Collapse (Bloomberg)

Iran, its oil exports curbed by sanctions, is lowering the crude price for this year’s budget to $40 a barrel as the energy slump affects governments and industry. The government is revising its draft budget to assume a base price of $40, from $72, the state-run Fars News Agency reported Finance and Economy Minister Ali Tayebnia as saying Jan. 15. The minister said some projects will have to be halted, according to Fars. Iran’s calendar year begins March 21. Prices of Brent, a benchmark for more than half the world’s oil, have dropped about 50% in the past year, forcing governments to reduce subsidies on diesel, natural gas and utilities and companies to cut billions from capital budgets. Qatar Petroleum and Shell called off plans to build a $6.5 billion petrochemical plant.

“Most Gulf countries are pricing $50 oil for 2015,” said Naeem Aslam, chief market analyst at Dublin-based Avatrade Ltd. in a phone interview from Dubai. “Creditors want to be sure they recoup their money so there could be hesitation to starting up new projects.” Iran President Hassan Rouhani presented a budget to lawmakers on Dec. 7 based on $72 oil. Since then, Brent crude has dropped about 30%. It budgeted $100 oil last year. [..] Iraq, the second-biggest member of OPEC, is using $60 in its budget. Saudi Arabia, the biggest producer, is probably assuming $80, according to John Sfakianakis, a former Saudi government economic adviser. Kuwait has propsed basing its 2015-16 budget on oil at $45.

Makes you wonder how BP itself will survive.

• BP Sees $50 Oil For Three Years (BBC)

BP’s job announcement later today, including a few hundred job losses in Aberdeen, is being made because it does not expect the oil price to bounce any time soon. The oil price has dropped around 60% since June, to $48 a barrel, and I understand that BP expects that it will stay in the range of $50 to $60 for two to three years. Although no oil company has a crystal ball, this matters – especially since it has a big impact on its investment and staffing ambitions. So plans that it had already initiated to reduce costs have taken on a new element, namely postponement of investments in new capacity that have not been started, and shelving of plans to extend the life of older fields where residual oil is more expensive to extract.

Aberdeen is an important centre for BP, and it employs around 4000 there. And it is in no sense withdrawing – it is continuing to invest in the Greater Clair and Quad 204 offshore properties. But the reduction of several hundred in the numbers it will henceforth employ in the Aberdeen area is symbolic of a city and industry that faces a severe recession. Hardest hit will be North Sea companies with stakes in older fields, where production costs are on a rising trend – and whose profitable life will be significantly shortened if the oil price does not recover soon. The reason BP expects the oil price to stay in the range of $50 to $60 for some years is for reasons you have read about here – it is persuaded that the Saudis, Emiratis and Kuwaitis are determined to recapture market share from US shale gas.

This means keeping the volume of oil production high enough such that the oil price remains low enough to wipe out the so-called froth from the shale industry – to bankrupt those high-cost frackers who have borrowed colossal sums to finance their investment. This does not simply require some US frackers to be bankrupted and put out of business, but also that enough banks and creditors are burned such that the supply of finance to the shale industry dries up. Only in that way could Saudi could be confident of reinvigorating its market power.

The end of major parts of the industry.

• $50 Oil Is The Ceiling For A Much Lower Trading Range (Anatole Kaletsky)

If one number determines the fate of the world economy, it is the price of a barrel of oil. Every global recession since 1970 has been preceded by at least a doubling of the oil price, and every time the oil price has fallen by half and stayed down for six months or so, a major acceleration of global growth has followed. Having fallen from $100 to $50, the oil price is now hovering at exactly this critical level. So should we expect $50 to be the floor or the ceiling of the new trading range for oil? Most analysts still see $50 as a floor – or even a springboard, because positioning in the futures market suggests expectations of a fairly quick rebound to $70 or $80. But economics and history suggest that today’s price should be viewed as a probable ceiling for a much lower trading range, which may stretch all the way down toward $20.

To see why, first consider the ideological irony at the heart of today’s energy economics. The oil market has always been marked by a struggle between monopoly and competition. But what most western commentators refuse to acknowledge is that the champion of competition nowadays is Saudi Arabia, while the freedom-loving oilmen of Texas are praying for OPEC to reassert its monopoly power. Now let’s turn to history – specifically, the history of inflation-adjusted oil prices since 1974, when OPEC first emerged. That history reveals two distinct pricing regimes. From 1974 to 1985, the US benchmark oil price fluctuated between $50 and $120 in today’s money. From 1986 to 2004, it ranged from $20 to $50 (apart from two brief aberrations after the 1990 invasion of Kuwait and the 1998 Russian devaluation).

Finally, from 2005 until 2014, oil again traded in the 1974-1985 range of roughly $50 to $120, apart from two very brief spikes during the 2008-09 financial crisis. In other words, the trading range of the past 10 years was similar to that of OPEC’s first decade, whereas the 19 years from 1986 to 2004 represented a totally different regime. It seems plausible that the difference between these two regimes can be explained by the breakdown of OPEC power in 1985, owing to North Sea and Alaskan oil development, causing a shift from monopolistic to competitive pricing. This period ended in 2005, when surging Chinese demand temporarily created a global oil shortage, allowing OPEC’s price “discipline” to be restored.

Just the start.

• Big Oil Gets Serious With Cost Cuts on Worst Slump Since 1986 (Bloomberg)

Major oil companies are awaking from their slumber and facing up to the magnitude of the crash in crude prices. From Shell canceling a $6.5 billion project in Qatar to Schlumberger firing about 9,000 people and Statoil giving up exploration in Greenland, the oil industry this week concluded that the slump is no blip. Top producers follow U.S. shale developers such as Continental in unraveling a boom that produced more oil and natural gas than the world is ready to buy. And there’s certainly more unwinding to come. For most of this month, crude oil has traded below $50 a barrel, a level few predicted even two months ago when OPEC signaled it wouldn’t cut production to defend prices.

If the market stays this depressed, global spending on exploration and production could fall more than 30%, the biggest drop since 1986, according to forecasts from Cowen. “Not too many people expected these levels of oil prices, not even the companies themselves,” said Dragan Trajkov, an analyst at Oriel in London. “Now they have to deal with this new situation and the first impact will be on new investments.” Shell, BP, Chevron and other top producers are preparing to present 2014 earnings to investors at the end of this month or early February and will signal plans for this year. Their chief executive officers are faced with the challenge of assuring shareholders they can see through the depression without cutting dividend payments. The direction of the oil market shows companies probably need to prepare for the worst.

Bank of America, noting the speed global oil inventories are building, forecast Thursday that Brent futures are set to fall to as low as $31 a barrel by the end of the first quarter from about $48 now. That’s even lower than the $36.30 seen during the depths of 2008’s financial crisis. Oil traded above $100 a barrel in July and analysts forecast prices would stay there for years to come. The scale and speed of the price drop has forced companies to start making significant decisions. Shell, Europe’s largest oil company, took the axe this week to a $6.5 billion petrochemicals plant it planned to build in Qatar in partnership with the state oil producer. The company, based in The Hague, said the project wasn’t economically feasible in the current price environment.

“Energy companies are expected to cut spending in the U.S. by as much as 35% this year ..”

• Schlumberger Cuts 9,000 Jobs as Oil Slump Portends Uncertainty (Bloomberg)

Schlumberger, the world’s biggest oilfield-services company, tackled the “uncertain environment” of plummeting crude prices head-on by cutting 9,000 jobs and lowering costs at a vessels unit. The 7.1% workforce cutback, along with the reduction and reassessment of its WesternGeco fleet, were among steps leading to a $1.77 billion fourth-quarter charge in anticipation of lower spending by customers in 2015, the Houston- and Paris-based company said in an earnings report Thursday. Energy companies, coping with oil worth less than half its price six months ago, are expected to cut spending in the U.S. by as much as 35% this year, according to Cowen. The number of onshore U.S. rigs could fall by as much as 750 this year, Wells Fargo said. That would be a 43% decline from the 1,744 in operation at the start of the year, according to Baker Hughes. The coming year “is looking like it’s gonna be pretty rough,” Rob Desai, an analyst at Edward Jones in St. Louis, said.

“With the potential for this to last some time, it’s in the best interest of the company to attack it aggressively.” Schlumberger, which had doubled its workforce in the past 10 years, said the one-time charges for the quarter also resulted from the devaluation of Venezuela’s currency and a lower value for production assets it owns in Texas. Net income dropped to $302 million, from $1.66 billion a year earlier. “In this uncertain environment, we continue to focus on what we can control,” Schlumberger Chief Executive Officer Paal Kibsgaard said in the earnings report. “We have already taken a number of actions to restructure and resize our organization.” Shares in oilfield-services companies, which help customers find and produce oil and natural gas, were the first to fall as crude prices declined. Service companies in the Standard & Poor’s Index dropped 20% in the quarter, more than the 18% decline for producers.

Hit hard.

• Aberdeen, The Energy-Rich Town Counting The Cost Of The New Oil Shock (Guardian)

Billy Campbell’s three-year-old is spinning around in a Peppa Pig plastic rocket in the middle of Aberdeen’s Union Square shopping mall. It is not hard to believe that the wider Aberdonian population is in a similar spin given the crisis that has struck the Granite City’s key industry: oil and gas. Ed Davey, the energy secretary, and Nicola Sturgeon, Scotland’s first minister, have both rushed to Britain’s oil capital in the last 48 hours to reassure the city that they are aware of looming problems – problems that, the Bank of England governor warned on Wednesday, will deliver a “negative shock” to Scotland’s economy. Some experts think the oil price fall will wipe £6bn off the country’s GDP and Sturgeon is setting up a task force to try to preserve energy jobs.

[..] This is a very affluent city where unemployment is only a little over 2% and incomes are well above the Scottish average. In Aberdeenshire some 38% of households have an income of more than £30,000, compared to 28% across Scotland and just 19% in Glasgow. The Union Square car park is crammed with upmarket models and four-wheel drives – a survey last year by accountants UHY Hacker Young showed that Aberdeenshire has the highest sales of 4x4s in the UK. The car park is just yards away from the massive offshore support vessels that are waiting to load in the harbour beyond. But, away from the downtown bustle of the city centre, not everyone is quite so laid back.

Certainly not those at the sprawling business park at Dyce, close to the airport, where oil firms and the industry’s service companies are congregated. It was here that BP staff were just told that 300 jobs are to be lost from the North Sea business. These are just the latest staff cuts at major oil employers in the region. Shell has taken similar steps, as has Chevron. Companies such as the Wood Group and Petrofac that provide drilling and other support services to the big oil companies have also been cutting costs. Last year Wood slashed 10% off the rates it pays to its contractors, saying operating costs in the North Sea were unsustainable. And that was before the price of oil crashed over the last six months by 60% to its lowest level in six years.

Preparing for a bank run.

• Greek Systemic Banks Request Emergency Liquidity Assistance (Kathimerini)

Two Greek systemic banks submitted the first requests to the Bank of Greece for cash via the emergency liquidity assistance (ELA) system on Thursday, sources told Kathimerini. It is thought that requests from the remaining Greek banks will follow in the next few days. The move came in response to the pressing liquidity conditions resulting from the growing outflow of deposits as well as the acquisition of treasury bills forced onto them by the state. Banks usually resort to ELA when they face a cash crunch and do not have adequate collateral to draw liquidity from the European Central Bank, their main funding tool. ELA is particularly costly as it carries an interest rate of 1.55%, against just 0.05% for ECB funding.

The requests by the two lenders will be discussed by the ECB next Wednesday. Bank officials commented that lenders are resorting to ELA earlier than expected, which reflects the deteriorating liquidity conditions in the credit sector. Besides the decline in deposits, banks were dealt another blow on Thursday with the scrapping of the euro cap on the Swiss franc. Bank estimates put the impact of the euro’s drop on the local system’s cash flow at between €1.5 and €2 billion. Deposits recorded a decline of €3 billion in December – a month when they traditionally expand – while in the first couple of weeks of January the outflow continued, although banks say it is under control.

A major blow to the system’s liquidity has come from the repeated issue of T-bills: In November the state drew €2.75 billion in this way, in December it secured €3.25 billion, and it has already tapped another €2.7 billion in January. Of the above amounts, a significant share – amounting to €3 billion according to bank estimates – was in the hands of foreign investors who are not renewing their stakes, so Greek banks have to step in to buy them. Local lenders had also resorted to ELA in 2011 to cope with the outflow of deposits and consecutive credit rating downgrades of the state (and the banks) that made Greek paper insufficient for the supply of liquidity by the Eurosystem. In June 2012, due to the uncertainty of the twin elections at the time, the ELA being drawn by local banks to handle the unprecedented outflow of deposits reached a high of €135 billion. By May 2014, Greek banks had reduced their ELA financing to zero.

If politicians – like this guy – don’t understand what deflation is, and most have no clue, that can obviously cause trouble.

• No Risk Of ‘Deflation Spiral’ In Europe: German Minister (CNBC)

Despite data showing that the euro zone has slid into deflation, Germany’s deputy finance minister brushed off concerns that the region could enter a downward spiral of falling prices and lack of demand. “This is not what economists and textbooks describe as a deflation spiral, this is a modest price development,” Steffen Kampeter told CNBC Thursday. Data released last week showed that the 19-country single currency region had entered deflation territory in December. Prices in the euro zone fell 0.2% year-on-year in December, marking the first time since 2009 that prices have dipped into negative territory. The decline in prices has been largely attributed in the cost of oil, which has slipped over 60% since June 2014. However, core inflation, which strips out volatile factors like fuel and unprocessed food prices, was stable at 0.7% in December.

“I see the facts,” Kampeter said. “And the fact is that the core inflation is rising and we have a very moderate and negative price development, especially in energy and raw material.” Deflation concerns analysts because a decline in the price of goods can cause consumers to delay purchases in the hope of further price falls, putting pressure on the broader economy. The figures prompted widespread market speculation that the European Central Bank (ECB) could announce a full-scale quantitative easing program when it meets on January 22. The deputy finance minister wouldn’t comment on any forthcoming ECB action, however. As a German policymaker, Kampeter said he was tasked with looking at structural reforms in Germany and Europe as a whole, and was aiming to ensure that investment in Europe continued in order to keep the region competitive. The Germany economy – which is the largest in the euro zone – has staged something of a turnaround of late, after veering dangerously close to recession in 2014.

Today’s episode of The Dog Ate My Homework.

• UK Retailers ‘Throttled’ By Black Friday (Daily Mail)

It’s the American import that has played havoc with Christmas retail sales. Black Friday, where US shops slash their prices on the day after Thanksgiving, has joined the school prom as a stars-and-stripes tradition that has invaded our islands. For UK retailers, it has proved an unwelcome arrival. Far from boosting net sales it has proved a festive nightmare, denting Christmas trading, causing websites to crash, and sparking delivery chaos. Shoppers spent an estimated £810m on Black Friday on November 28 – making it the biggest ever day for UK online sales. But consumers more than made up for their spree by tightening their belts later on, in the run-up to Christmas.

Retailers suffered their slowest December growth in six years as Black Friday disrupted the timing and rhythm of festive sales. Several chains have lined up to blame the event for their lacklustre performance, with Argos owner Home Retail Group claiming to be the latest victim. The company, which fell short of City forecasts, accused Black Friday of fostering ‘a discount mentality’ in the run-up to Christmas, a time of year when shoppers are usually prepared to pay full price for gifts. Marks & Spencer said that it had caused systems at its Castle Donington warehouse to collapse, and Game Digital blamed it for Monday’s profit warning. Home Retail Group’s new chief executive John Walden said: ‘This year’s adoption of ‘Black Friday’ promotional events generally by the UK market significantly impacted the shape of Argos sales over its peak trading period.’

But China can make the numbers up as it goes along.

• Warning: China May Trigger Fresh Rout In Commodities (CNBC)

Commodities just can’t catch a break – and China’s GDP release on January 20 could throw another punch at the beleaguered asset class should it underperform expectations, warn analysts. “We are days from the release of China’s Q4 GDP and copper is the best barometer of growth. The rout gives me reason to believe China’s growth is not only moderating but is slowing faster than estimated,” Evan Lucas, market strategist at IG wrote in a note. “If China disappoints next Tuesday, brace for a real rout in commodities,” he said. Copper, regarded as an important indicator of economic health, joined the selloff in commodities Wednesday after the World Bank downgraded its growth outlook for the global economy. The global economy is forecast to expand by 3% this year,the Washington-based lender said in its Global Economic Prospects report released on Tuesday, a notch lower than its previous forecast of 3.4% made in June, but up from an estimated 2.6% in 2014.

The red metal suffered its biggest one-day slide in more than three years on Wednesday, with three-month copper on the London Metal Exchange falling more than 8% at one point to $5,353 a tonne before settling around $5,655 on Thursday. The World Bank expects China’s gradual pace of deceleration to continue,forecasting growth in the world’s second largest economy to slow to 7.1% this year from an estimated 7.4% last year. China plays a dominant role in the commodities market because it’s the world’s largest consumer of energy and metals, including copper. “In our view, the significant pressure on copper price lately indicates either a noticeable slow-down in demand [out of China] or troubles in the shadow banking sector, or both,” said David Cui, strategist at Bank of America Merrill Lynch.

“.. shadow bank credit exceeded new yuan-denominated loans for the first time in 2014.”

• China Shadow Banking Surge Chills Stimulus Hopes (CNBC)

Two months ago calls for broad-based stimulus in China were all the rage, but a sudden spike in shadow banking has led analysts to revise their expectations for looser monetary policy. Aggregate social financing, a measure of credit that covers bank lending and shadow banking activity, hit one-year high of 1.69 trillion yuan ($273 billion) in December, up from 1.15 trillion yuan the previous month, official data showed on Thursday. “A surge in shadow bank credit – entrusted loans, trust loans, banker’s acceptances, corporate bonds and non-financial enterprises’ domestic equity – was responsible for December’s considerably larger than expected increase in aggregate financing,” said Tim Condon, head of Asia research at ING in a note on Friday, noting that shadow bank credit exceeded new yuan-denominated loans for the first time in 2014.

China’s central bank surprised markets by cutting interest rates for the first time in two years in November, sparking expectations for further policy easing via interest rate or reserve ratio requirements (RRR) cuts. Tight funding conditions also fuelled hopes for RRR cuts late last year. The seven-day repo rate, a closely-watched measure of interbank lending costs, spiked suddenly to an over one-year high in mid-December, prompting speculation for central bank action to boost liquidity. But Thursday’s data reduce the likelihood that the People’s Bank of China will cut the RRR for lenders, Condon said: “We are reviewing our forecast of 100 basis-points of RRR cuts in the first half of the year for downward revision.” Shadow banking was fairly stable last year after Beijing introduced regulatory measures to clampdown on the sector, such as stricter financing rules for trust companies.

During the July-September period, the shadow banking sector of China’s total social financing contracted for the first time on quarter since the global financial crisis. However, those tightening measures may be the very reason for December’s surge, according to Barclays. “We suspect that borrowers including local government financing vehicles (LGFVs) could have accelerated their financing activities through shadow banking channels, since they might experience difficulties in accessing bond market for new issuance as a result of tightening regulations/declining support from provincial government on new debt,” analysts said in a note on Friday. The sudden spike in shadow banking credit leaves the central bank in a catch-22 situation, Gavin Parry at Parry International Trading said. “Here is the issue for the PBoC; it is facing rampant speculation bubbling in the economy like the stock market, while also facing weaker loan demand, local government funding needs and deflationary forces,” he said.

Logical step.

• New Russian/Chinese Credit Rating Agencies To ‘Balance Big Three’ (RT)

The creation of a joint Russian-Chinese credit rating agency will balance the global outlook and give the world an alternative view on how credit ratings should be done, Chinese international relations expert Victor Gao told RT. “Traditionally credit rating is mostly done by Western credit rating agencies. They sometimes may not fully understand the dynamics of the economics of any particular company or the sovereign borrower,” he said, adding that the agency won’t pursue a goal of replacing traditional Western credit rating agencies like S&P and Moody’s. “It will give the whole world another perspective of how risks are analyzed and how credit rating should be done,” he said. Gao believes Western rating agencies claim to be independent and professional, but in fact they turn out to be biased when it comes to issues of geopolitical importance.

“During the global financial crisis the Western rating agencies did not react as quickly as possible,” he said. “In terms of the rating of the sovereign debt of the US for example, or even for Japan, they’ve actually displayed much more flexibility in rating these countries compared with many other countries.” The announcement of a rating could actually make a situation even worse rather than help stabilize it, he added. Credit rating agencies are very much at the top of the international financial system and they’re not only active domestically in one particular country but in many cases they are active across national boundaries.

Gao said that China has its own credit rating agency Dagong which is actively operating in the country and abroad, increasingly estimating other countries’ and companies’ credit rating. The analyst believes the global economy is changing and going through an important transformation as the emerging markets are growing and their portion in the global economy is increasing despite a significant turmoil in the international financial, economic and energy sectors. Creating a joint credit rating agency of Russia and China is significant but it’s high time the world’s most important developing economies united and came up with their own credit rating agency, as in case of establishing the BRICS Development Bank, he said.

Up to 60 years old, women up to 50.

• Ukraine President Poroshenko Signs Decree To Mobilize Up To 100,000 (TASS)

Ukrainian President Petro Poroshenko has signed a decree on another mobilization. He put his signature to the document at a meeting with the heads of regional authorities. “I have handed it over to parliament, because it requires approval by the national legislature,” Poroshenko said. Under a decision by the National Security and Defense Council of December 20, 2014, a fourth mobilization wave is beginning on January 20, and two more will be held in April and June.

Some categories of reservists will be exempt from mobilization: men with poor health, university and post-graduate students, clerics, parents having three or more children, and those resident in the territories uncontrolled by the Ukrainian authorities. On January 8, Defense Minister Stepan Poltorak said that in 2015 about 104,000 men may be mobilized, if need be. Ukrainian General Staff spokesman Volodymyr Talalai said that women aged 25 through 50 might be drafted into the army, if necessary.

There needs to be far more protest against TTIP, or it’ll be pushed through.

• ‘Corporate Wolves’ Will Exploit TTIP Trade Deal, MPs Warned (Guardian)

The controversial TTIP trade deal between Europe and the US could depress workers’ wages by £3,000 a year and allow “corporate wolves” to sue the government for loss of profit, MPs have heard. The claims were made in a highly-charged House of Commons debate, with many Conservative MPs defending the proposed Transatlantic Trade and Investment Partnership free trade deal and opposition MPs warning that it risks giving too much power to big US corporations. Anti-TTIP campaigners claim one million people have signed a petition against the deal, mainly because of worries that it could open the door to US health companies running parts of the NHS. This has been firmly denied by the UK government and the European commission, who have said public services are explicitly excluded. However, Labour is still worried that the proposals not do enough to protect the public interest.

Many MPs have particular concerns about the investor-state dispute settlement clauses, which would give private companies the right to sue the government in international tribunals for loss of profit arising from policy decisions. Labour MP Geraint Davies, who called the debate, urged negotiators to drop controversial clauses, insisting the judicial system in each country was sufficient protection in mature democracies. His motion called for the UK parliament to play a role in scrutinising any eventual deal, instead of it being passed exclusively by Brussels. “The harsh reality is this deal is being stitched up behind closed doors by negotiators with the influence of big corporations and the dark arts of corporate lawyers – stitching up laws that will be quite outside contract law and common law, outside the shining light of democracy, to in fact give powers to multinationals to sue governments over laws designed to protect their citizens.”

“My view is we should pull the teeth of the corporate wolves scratching at the door of TTIP by scrapping the investor-state dispute settlement rules altogether and so we can get on with the trade agreement without this threat over our shoulder.” Caroline Lucas, the former Green party leader and MP for Brighton Pavilion, said she believed TTIP amounted to a corporate takeover and cited independent research from Tuft University suggesting workers’ wages could suffer by £3,000 a year. “Countries like the Czech Republic, Slovakia and Poland who are in trade agreements which include this kind of investor-state relationship have been sued 127 times and lost the equivalent money that could have employed 300,000 nurses for a year,” she said. “The idea this isn’t a problem is patently wrong; this is about a corporate takeover and that is why it is right to oppose this particular mechanism.”

Good man.

• Pope Francis Says Freedom Of Speech Has Limits (BBC)

Pope Francis has defended freedom of expression following last week’s attack on French satirical magazine Charlie Hebdo – but also stressed its limits. The pontiff said religions had to be treated with respect, so that people’s faiths were not insulted or ridiculed. To illustrate his point, he told journalists that his assistant could expect a punch if he cursed his mother. [..] Speaking to journalists flying with him to the Philippines, Pope Francis said last week’s attacks were an “aberration”, and such horrific violence in God’s name could not be justified. He staunchly defended freedom of expression, but then he said there were limits, especially when people mocked religion. “If my good friend Doctor Gasparri [who organises the Pope’s trips] speaks badly of my mother, he can expect to get punched,” he said, throwing a pretend punch at the doctor, who was standing beside him. “You cannot provoke. You cannot insult the faith of others. You cannot make fun of the faith of others. There is a limit.”

Debt Rattle January 15 2015

Jan 152015

January 15, 2015 Posted by Raúl Ilargi Meijer at 11:30 am Finance Tagged with: deflation, gas, Iraq, madness, North Sea, oil, QE, retail sales, Russia, Swiss franc, Ukraine 3 Responses »

Unknown Marin-Dell dairy truck, San Francisco Mar 1 1945

• US Retail Sales Down Sharply, Likely Cuts to Growth Forecasts Ahead (Bloomberg)

• US Retail Sales Drop Most Since June 2012 – It’s Not Gas Prices (Zero Hedge)

• The December Retail Report: “Disappointing” Isn’t The Half Of It (Stockman)

• Swiss Franc Jumps 30% As Central Bank Abandons Ceiling Versus Euro (Reuters)

• What, Us Worry? Economists Stay Upbeat as Markets See Trouble (Bloomberg)

• Here’s Why Wall Street Is Wrong About Oil Stocks (MarketWatch)

• Increased US Output Bolsters Oil Glut Fears Sending Prices Back Down (Bloomberg)

• US Oil Output Advances To Record Even as Prices Decline (Bloomberg)

• Iraq to Double Exports of Kirkuk Crude Amid Oil Surplus (Bloomberg)

• Big Oil Cuts Back As Analysts Slash Forecasts (CNBC)

• Gravy Train Derails for Oil Patch Workers Laid Off in Downturn (Bloomberg)

• Oil Price Crash Threatens The Future Of The North Sea Oilfields (Guardian)

• Qatar, Shell Scrap $6.5 Billion Project After Oil’s Drop (Bloomberg)

• Europe’s Imperial Court Is A Threat To All Our Democracies (AEP)

• ECB Stimulus Already Priced Into Market (CNBC)

• Deflation Risk Renders Czech Koruna’s Euro Cap Irrelevant (Bloomberg)

• Germany Gets Walloped By Its Own Austerity (Bloomberg)

• Weak Capex Spending Spells Trouble For Japan (CNBC)

• Market Madness Started With End Of Fed’s QE (CNBC)

• Russia to Shift Ukraine Gas Transit to Turkey as EU Cries Foul (Bloomberg)

• Russia to Dip Into Wealth Fund as Ruble Crisis Pressures Economy (Bloomberg)

• China’s Credit Growth Surges; Shadow Banking Stages a Comeback (Bloomberg)

• Asian Central Banks Should Focus On Deflation Not Inflation (Bloomberg)

• Specter Of Fascist Past Haunts European Nationalism (Reuters)

• Rate Of Sea-Level Rise ‘Far Steeper’ (BBC)

What on earth happened to holiday sales?

• US Retail Sales Down Sharply, Likely Cuts to Growth Forecasts Ahead (Bloomberg)

The optimism surrounding the outlook for U.S. consumers was taken down a notch as retail sales slumped in December by the most in almost a year, prompting some economists to lower spending and growth forecasts. The 0.9% decline in purchases followed a 0.4% advance in November that was smaller than previously estimated, Commerce Department figures showed today in Washington. Last month’s decrease extended beyond any single group as receipts fell in nine of 13 major retail categories. While disappointing, the drop followed large-enough gains at the start of the quarter that signaled consumer spending accelerated from the previous three months as the job market strengthened and gasoline prices plunged. Continued improvement in hiring that sparks more wage growth will be needed to ensure customers at retailers such as Family Dollar Stores also thrive.

“Maybe the optimism a month ago got a little too heated,” said Guy Berger, U.S. economist at RBS. “It’s a weak number but it follows some really strong ones and I don’t think it changes my general feeling on how the economy and consumers are doing.” Treasury yields and stocks fell as a deepening commodities rout and the drop in sales spurred concern global growth is slowing. The Standard & Poor’s 500 Index retreated 0.6% to 2,011.27 at the close in New York. The 30-year Treasury bond yielded 2.47% after declining earlier to a record-low 2.39%. Electronics merchants, clothing outlets, department stores and auto dealers were among those posting sales declines in December, today’s report showed. Cheaper fuel helped push receipts at gasoline stations down by the most in six years. T

But but but indeed.

• US Retail Sales Drop Most Since June 2012 – It’s Not Gas Prices (Zero Hedge)

But but but… US retail advanced sales dropped a stunning 0.9% MoM (massively missing expectations of a 0.1% drop). The last time we saw a bigger monthly drop was June 2012. Want to blame lower gas prices – think again… Retail Sales ex Autos and Gas also fell 0.3% (missing an exuberantly hopeful expectation of +0.5% MoM) and the all-important ‘Control Group’ saw sales fall 0.4% (missing expectations of a 0.4% surge). Boom goes the narrative. Advance Retail Sales massively missed For Dec…

“.. no economy can thrive for long – especially one already at “peak debt” – based on consumer “spending” that is 100% dependent upon borrowed funds.”

• The December Retail Report: “Disappointing” Isn’t The Half Of It (Stockman)

Today’s 0.9% decline in December retail sales apparently came as a shock to bubblevision’s talking heads. After all, we have had this giant “oil tax cut”, and, besides, the US economy has “decoupled” from the stormy waters abroad and is finally on its way to “escape velocity”. The Wall Street touts and Keynesian economic doctors have been saying that for months now – while averring that all the Fed’s massive money printing is finally beginning to bear fruit. So today’s retail report is a real stumpe – –even if you embrace Wall Street’s sudden skepticism about government economic reports and ignore the purported “noise” in the seasonally maladjusted numbers for December. All right then. Forget the December monthly numbers. Why not look at the unadjusted numbers in the full year retail spending report for 2014 compared to the prior year.

Recall that the swoon from last winter’s polar vortex overlapped both years, and was supposed to be a temporary effect anyway – a mere shift of consumer spending to a few months down the road when spring arrived on schedule. On an all-in basis, total retail sales in 2014 rose by $210 billion or a respectable 4.0%. But 58% of that gain was attributable to two categories – auto sales and bars&restaurants – which accounted for only 28% of retail sales in 2013. And therein lies a telling tale. New and used motor vehicle sale alone jumped by $86 billion in CY2014 or nearly 9%. Then again, during the most recent 12 months auto loans outstanding soared by $89 billion. Roughly speaking, therefore, consumers borrowed every dime they spent on auto purchases and took home a few billion extra in spare change.

The point here is that no economy can thrive for long – especially one already at “peak debt” – based on consumer “spending” that is 100% dependent upon borrowed funds. Yet that has been the essence of the retail sales rebound since the Great Recession officially ended in June 2009. Auto sales, which have been heavily financed by borrowing, are up by about 70%; the balance of non-auto retail sales, where consumer credit outstanding is still below the pre-crisis peak, has gained only 22%. Stated differently, the only credit channel of monetary policy transmission which is still working is auto credit. Yet as indicated earlier this week, that actually amounts to a proverbial “accident” waiting to happen. On the margin, the boom in auto loans, which are now nearing $1 trillion in outstandings, is on its last leg. The latest surge of growth has been in “subprime” credit based on the foolish assumption that vehicle prices never come down; and that the junk car loan boom led by fly-by-night lenders is nothing to worry about since loans are “collateralized”.

Wow!

• Swiss Franc Jumps 30% As Central Bank Abandons Ceiling Versus Euro (Reuters)

Switzerland’s franc soared by almost 30% in value against the euro on Thursday after the Swiss National Bank abandoned its three-year old cap at 1.20 francs per euro. In a chaotic few minutes on markets after the SNB’s announcement, the franc broke past parity against the euro to trade at 0.8052 francs per euro before trimming those gains to stand at 88.00 francs. It also gained 25% against the dollar to trade at 74 francs per dollar.

Huh? ” ..looking at economic data, “we’re certainly not seeing anything that’s unnerving us.”

• What, Us Worry? Economists Stay Upbeat as Markets See Trouble (Bloomberg)

The U.S. consumer, that dynamo of the global economy, just took a step back. Relax. It’s not that bad, economists say. News Wednesday that U.S. retail sales unexpectedly declined in December reverberated through financial markets, but few economists read the report as a sign of trouble for the nation’s economy. In fact, many economists say the U.S. economy is doing just fine. So why did the markets react the way they did? The answer, in part, is that the report added to a wall of worry confronting investors. Topping the 2015 angst-list are the plunge in oil and other commodities, as well as slowdowns in China and Europe.

“It feels like a global recession when you look at the markets,” said David Hensley, director of global economics for JPMorgan. But looking at economic data, “we’re certainly not seeing anything that’s unnerving us.” For the moment, the 0.9% decline in December retail sales reported by the Commerce Department has pushed back market expectations for when the Federal Reserve will start raising interest rates. It also has bond investors betting that inflation will stay low. Forecasts change all the time. But before anyone panics over one economic number, here are four reasons to stay optimistic about the U.S. economy, which is still in the driver’s seat of global growth.

• December sales figures aside, U.S. consumers aren’t running scared. Yes, last month’s decline was the biggest in a year. But consumer spending probably rose at an annual rate of more than 4% during the fourth quarter as a whole, according to Ted Wieseman at Morgan Stanley. The first quarter of this year is looking just as good, Wieseman wrote in a note today to clients.

• The U.S. jobs market is perking up. Less than a week ago, investors were cheering news of another big rise in U.S. payrolls. In all, the economy added about 3 million jobs last year. “The U.S. is doing great relative to the rest of the developed world,” said Jim O’Sullivan at High Frequency Economics.

• The plunge in oil and other commodities is mostly good news for consumers. Cheaper oil means cheaper fuel. And most economists say that’s good for global growth. The plunge in oil, for example, largely reflects an increase in supply, from shale and the like, rather than a decrease in demand. U.S. production of crude oil rose to 9.19 million barrels a day last week, the highest in Energy Information Administration weekly estimates going back to 1983.

• Bond yields are hitting new lows, but that doesn’t necessarily mean the entire world is about to sink into a deflationary spiral in which prices, wages and output fall in tandem. In fact, many economists predict wages in the U.S. will finally start rising this year. “It’s just a matter of time before wage growth picks up,” said Mohamed El-Erian.

“The Street’s estimates are based on a price of roughly $75 a barrel for oil ..”

• Here’s Why Wall Street Is Wrong About Oil Stocks (MarketWatch)

Most Wall Street analysts are basing their 2015 earnings estimates for oil companies on a questionable number: the price of oil itself. Exxon Mobil, which has, by far, the largest market value of any oil producer, illustrates this point perfectly. The consensus among sell-side analysts polled by FactSet is for the company to earn $5.18 a share this year, down 40% from an estimated $7.27 in 2014. The expected decline in earnings springs from the crash in oil prices amid slowing demand, increased U.S. supply and OPEC’s strategy of defending its market share by refusing to cut production. But Oppenheimer analyst Fadel Gheit, who’s based in New York, has diverged wildly from his peers, predicting a 2015 EPS estimate of only $2.65 for Exxon Mobil.

“The Street’s estimates are based on a price of roughly $75 a barrel for oil,” which is where the analysts think oil will end up after recovering from its drop. Oppenheimer’s estimates are updated every Friday, based on current oil prices, not on where the firm’s analysts think the price may eventually settle. Gheit’s estimates from Friday were based on prices of $51.68 a barrel for West Texas crude and $55.20 for Brent crude. Based on the consensus 2015 estimate and Tuesday’s closing stock price of $90, Exxon Mobil would trade for 17.4 times this year’s earnings. That’s not an outrageously high valuation. However, based on Gheit’s estimate, which in turn is based on what’s actually going on in the oil market, the stock would trade for about twice as much: 34 times earnings.

What do they expect?

• Increased US Output Bolsters Oil Glut Fears Sending Prices Back Down (Bloomberg)

Oil resumed its decline after the biggest gain since June 2012 as U.S. crude production increased, bolstering speculation a global supply glut that spurred last year’s price collapse may persist. Futures dropped as much as 1.3% in New York. U.S. output surged to 9.19 million barrels a day last week, the fastest pace in weekly records dating back to January 1983, the Energy Information Administration reported yesterday. Crude may fall below a six-month forecast of $39 a barrel and rallies could be thwarted by the speed at which lost shale production can recover, according to Goldman Sachs. Oil slumped almost 50% last year, the most since the 2008 financial crisis, as OPEC resisted cutting output even amid the U.S. shale boom, exacerbating a surplus estimated by Kuwait at 1.8 million barrels a day.

Prices rose yesterday as a relative strength index rebounded after more than two weeks below 30, a level that typically signals the market is oversold. “You tend to arrive at points every now and then in major trends like this where you just see a little bit of short covering and profit taking,” Ric Spooner at CMC Markets in Sydney, said. “Supply is still the general theme.” Oil is leading this week’s slide in commodities after a decade-long bull market led companies to boost production and a stronger dollar diminished their allure to investors. The Bloomberg Commodity Index of 22 energy, agriculture and metal products decreased to the lowest level since November 2002 on Jan. 13, extending a 17% loss last year.

“.. output rose in November as the number of new wells coming online fell by 73%.”

• US Oil Output Advances To Record Even as Prices Decline (Bloomberg)

Drillers that unlocked the shale oil boom in the U.S. are finding it hard to shut off the nozzle. U.S. crude production rose even as prices slumped to the lowest in more than five years and the number of rigs targeting oil decreased. In North Dakota’s prolific Bakken shale formation, output rose in November as the number of new wells coming online fell by 73%. The increases illustrate how improvements in horizontal drilling and hydraulic fracturing technology may prop up U.S. crude production even as companies cut spending, idle rigs and lay off thousands of workers with oil prices down more than 50% since June. “We have an oversupply of crude,” Michael Hiley, head of energy OTC at LPS Partners said yesterday.

“Production keeps going up. There is not a great correlation between the rig count and production because drilling has gotten more efficient over the last several years.” Output climbed to 9.19 million barrels a day last week, the most in Energy Information Administration weekly estimates going back to 1983. Strong production helped push crude inventories to a seasonal record, EIA data showed. Crude has slumped 9% in 2015 after declining 46% in 2014 as shale oil lifted U.S. supply and OPEC maintained production. Last week, U.S. oil rigs declined by the most since 1991. Producers including Continental and ConocoPhillips say they will cut spending.

“.. in the coming few weeks,”

• Iraq to Double Exports of Kirkuk Crude Amid Oil Surplus (Bloomberg)

Iraq will double exports within weeks from its northern Kirkuk oil fields and continue boosting output further south amid a global market glut that’s pushed prices to their lowest level in more than five and a half years. Crude shipments will rise to 300,000 barrels a day from the Kirkuk oil hub, where authorities are also upgrading pipelines between fields, Fouad Hussein, at Kirkuk provincial council’s oil and gas committee, said. “There is a need to install a new pipeline network” to increase exports from the area, Hussein said. Kirkuk, which currently exports about 150,000 barrels a day, will boost shipments to 250,000 barrels a day and then to 300,000 “in the coming few weeks,” he said. Iraq, holder of the world’s fifth-largest crude reserves, is rebuilding its energy industry after decades of wars and economic sanctions.

The country exported 2.94 million barrels a day in December, the most since the 1980s, Oil Ministry spokesman Asim Jihad said Jan. 2. The exports, pumped mostly from fields in southern Iraq, included 5.579 million barrels from Kirkuk in that month, he said. [..] State-owned Missan Oil plans to boost its production to 1 million barrels a day in 2017 from an average output of 257,000 barrels a day in 2014, according to Director-General Adnan Sajet. Output exceeded 93 million barrels in 2014, up 10 million barrels from the previous year, he said yesterday. Iraq’s government also awarded a contract to an unspecified international company to more than double the capacity of the southern Basra oil refinery to 300,000 barrels a day, according to an e-mailed statement from the office of Deputy Prime Minister Rowsch Nuri Shaways. The refinery can currently process about 140,000 barrels a day.

“U.K.-based Tullow Oil has painted a bleak outlook for the years ahead. The firm announced earnings Thursday, with write offs of $2.3 billion ..” “Premier Oil also announced an estimated $300-million impairment charge for the second half of this year ..”

• Big Oil Cuts Back As Analysts Slash Forecasts (CNBC)

The ongoing rout in oil markets is putting high-profile industry names on the back foot, with Shell announcing major changes to operations this week – and BP expected to follow suit. BP is expected to announce significant job cuts across the 20 oil fields in owns in the North Sea – just off the coast of the U.K. – on Thursday, according to media reports. It currently employs 4,000 workers in the area. Meanwhile, Anglo–Dutch multinational Royal Dutch Shell announced that it had decided to shelve the construction of a new petrochemicals complex in Qatar, was due to be a tie-up with the country’s state-owned oil firm.

In the exploration sector – the first to be hit by falling oil prices – U.K.-based Tullow Oil has painted a bleak outlook for the years ahead. The firm announced earnings Thursday, with write offs of $2.3 billion, and warned there had been “major steps taken to strengthen the business to adapt to current market conditions.” Rival exploration firm Premier Oil also announced an estimated $300-million impairment charge for the second half of this year on Wednesday, with delays and cost-cutting plans expected in the development of some of its new oil fields. Weak global demand and booming U.S. shale oil production are seen as two key reasons behind the price plunge, as well as OPEC’s reluctance to cut its output. Both WTI and Brent crude prices have crashed by around 60% since mid-June last year and oil stocks have been crushed, underperforming the wider benchmarks.

“As of November, oil and gas companies employed 543,000 people across the U.S., a number that’s more than doubled from a decade ago ..”

• Gravy Train Derails for Oil Patch Workers Laid Off in Downturn (Bloomberg)

The first thing oilfield geophysicist Emmanuel Osakwe noticed when he arrived back at work before 8 a.m. last month after a short vacation was all the darkened offices. By that time of morning, the West Houston building of his oilfield services company was usually bustling with workers. A couple hours later, after a surprise call from Human Resources, Osakwe was adding to the emptiness: one of thousands of energy industry workers getting their pink slips as crude prices have plunged to less than $50 a barrel. “For the oil and gas industry, it’s scary,” Osakwe said in an interview after he was laid off last month from a unit of Halliburton, which he joined in September 2013. “I was blind to the ups and downs associated with the industry.”

It’s hard to blame him. The oil industry has been on a tear for most of the past decade, with just a brief timeout for the financial crisis. As of November, oil and gas companies employed 543,000 people across the U.S., a number that’s more than doubled from a decade ago, according to data kept by Rigzone, an employment company servicing the energy industry. Stunned by the sudden plunge in the price of oil, energy companies have increasingly resorted to layoffs to cut costs since Christmas, shocking a new generation of workers, like Osakwe, unfamiliar with the industry’s historic boom and bust cycles. Workers who entered the holiday season confident they had secure employment in one of the country’s safest havens now find themselves in shrinking workplaces with dimming prospects. [..]

There’s no firm number yet on how many oil industry workers are losing their jobs, or how many more cuts might be coming. Halliburton said last month it was laying off 1,000 staff in the Eastern Hemisphere alone as it adapted to a shrinking business. Suncor, a Canadian oil company, said this week it will cut 1,000 jobs in 2015, a day after Shell said it would cut 300 in the region. Other companies have announced layoffs, but many are making the cuts without public fanfare. The effects are being felt beyond the oil companies as cutbacks trickle down to suppliers and other companies that thrived along with $100 oil. The biggest drilling states – Texas, North Dakota, Louisiana, Oklahoma, Colorado – are expected to feel the most pain. The Dallas Federal Reserve estimates 140,000 jobs directly and indirectly tied to energy will be lost in Texas in 2015 because of low oil prices.

“North Sea oilfields could be shut down if the oil price fell by just a few more dollars ..”

• Oil Price Crash Threatens The Future Of The North Sea Oilfields (Guardian)

The potential impact of the oil price slump on Scotland was underlined as a leading energy expert warned on Wednesday that North Sea oilfields could be shut down if the oil price fell by just a few more dollars. The rising sense of crisis about the plummeting price – which has fallen 60% in the last six months – prompted the Scottish government to promise an emergency taskforce to try to preserve jobs in the offshore energy sector. Meanwhile, Mark Carney, the governor of the Bank of England warned that the Scottish economy was heading for a “negative shock”. The oil industry consultancy Wood Mackenzie said that at the current price for Brent blend, of $46 a barrel, some UK production was already failing to break even, and further falls could endanger output.

Robert Plummer, a research analyst with the firm, said that at $50 a barrel oil production was costing more than its value in 17 countries, including the US and UK. Plummer told Scottish Energy News: “Once the oil price reaches these levels producers have a sometimes complex decision to continue producing, losing money on every barrel produced, or to halt production, which will reduce supply.” Concern about cutbacks was heightened Wednesday when Shell announced it was scrapping a $6.4bn (£4.2bn) energy project in the Middle East because it was no longer commercial, with oil prices falling to six-year lows. Plummer said that if oil prices fell to $40, a small but significant part of global supply would become “cash negative”, although some operators would choose to keep producing oil at a loss rather than stop production.

So many projects will be shelved.

• Qatar, Shell Scrap $6.5 Billion Project After Oil’s Drop (Bloomberg)

Qatar Petroleum and Royal Dutch Shell called off plans to build a $6.5 billion petrochemical plant in the emirate, saying the project is no longer commercially feasible amid the upheaval in global energy markets. The companies formed a partnership for the al-Karaana project in 2011 and planned to operate it as a joint venture, with state-run QP owning 80% and Shell the remaining 20%. They decided not to proceed after evaluating quotations from bidders for engineering and construction work, the companies said yesterday in a joint statement. The expected capital cost of the petrochemical complex planned in Ras Laffan industrial city “has rendered it commercially unfeasible, particularly in the current economic climate prevailing in the energy industry,” they said.

Al-Karaana is the second petrochemical project in Qatar to be canceled in recent months due to unfavorable economics. Industries Qatar, the state-controlled petrochemical and steel producer, halted plans to build a $6 billion plant in September. Qatar, an OPEC member and the world’s biggest exporter of liquefied natural gas, is seeking like other energy producers in the Persian Gulf to diversify its economy away from oil and gas exports and building factories to make petrochemicals, aluminum and steel. “The region is beginning to reduce its capital expenditure for petrochemical and hydrocarbon expansion, and that is expected given that oil prices have plunged,” John Sfakianakis, Middle East director at Ashmore Group Plc, said in a phone interview.

“This would be a fundamental transformation of the EU from a treaty organisation, which depends on the democratic assent of the sovereign states, into a supranational entity.”

• Europe’s Imperial Court Is A Threat To All Our Democracies (AEP)

The European Court of Justice has declared legal supremacy over the sovereign state of Germany, and therefore of Britain, France, Denmark and Poland as well. The ECJ’s advocate-general has not only brushed aside the careful findings of the German constitutional court on a matter of highest importance, he has gone so far as to claim that Germany is obliged to submit to the final decision. “We cannot possibly accept this and they know it,” said one German jurist close to the case. The matter at hand is whether the European Central Bank broke the law with its back-stop plan for Italian and Spanish debt (OMT) in 2012. The teleological ECJ – always eager to further the cause of EU integration – did come up with the politically-correct answer as expected. The ECB is in the clear.

The opinion is a green light for quantitative easing next week, legally never in doubt. The European Court did defer to the Verfassungsgericht in Karlsruhe on a few points. The ECB must not get mixed up with the EU bail-out fund (ESM) or take part in Troika rescue operations. But these details are not the deeper import of the case. The opinion is a vaulting assertion of EU primacy. If the Karlsruhe accepts this, the implication is that Germany will no longer be a fully self-governing sovereign state. The advocate-general knows he is risking a showdown but views this fight as unavoidable. “It seems to me an all but impossible task to preserve this Union, as we know it today, if it is to be made subject to an absolute reservation, ill-defined and virtually at the discretion of each of the Member States,” he said.

In this he is right. “This Union” – meaning the Union to which EU integrationists aspire – is currently blocked by the German court, the last safeguard of our nation states against encroachment. This is why the battle is historic.”His opinion is a direct affront to the German court. It asserts that the EU court has the final say in defining and creating the EU’s own powers, without any national check,” said Gunnar Beck, a German legal theorist at the University of London. “This would be a fundamental transformation of the EU from a treaty organisation, which depends on the democratic assent of the sovereign states, into a supranational entity.” Germany’s judges have never accepted the ECJ’s outlandish claims to primacy.

Their ruling on the Maastricht Treaty in 1993 warned in thunderous terms that the court reserves the right to strike down any EU law that breaches the German Grundgesetz or Basic Law. They went further in their verdict on the Lisbon Treaty in July 2009, shooting down imperial conceits. The EU is merely a treaty club. The historic states are the “masters of the Treaties” and not the other way round. They set limits to EU integration. Whole areas of policy “must forever remain German”. If the drift of EU affairs erodes German democracy – including the Bundestag’s fiscal sovereignty – the country must “refuse further participation in the European Union”.

“In the U.S., 18% of bank assets are stuck at the Fed, dead money. So it’s not really a good move for Europe that’s going to cause stimulus.”

• ECB Stimulus Already Priced Into Market (CNBC)

The markets have already priced in the quantitative easing that the European Central Bank is expected to do next week and he doesn’t think it will be very powerful, David Malpass, president of Encima Global, told CNBC Wednesday. Therefore, he believes the markets are entering a phase of global rebalancing. “People will get tired of just being in the U.S. and will take a look at some of the emerging markets, oil, the euro and so on,” Malpass said in an interview with “Closing Bell.” David Hale, chairman of David Hale Global Economics, agrees the market has been discounting the anticipated QE for several weeks.

“Bond yields in Europe are at record low levels. Leaving aside the last few days, stock markets have been resilient. So I do think the expectation of this happening is now broadly in the market because of both comments by [ECB President Mario] Draghi and other members of the monetary policy council.” The European Central Bank meets next Thursday, and Draghi has said the bank is ready to start full-blown quantitative easing. Hale expects a “decent” amount of QE but said he doesn’t think it will work well enough to be stimulative. “The bond yields are already low, and remember the ECB is going to finance all those bond purchases with bank financing,” he said. “In the U.S., 18% of bank assets are stuck at the Fed, dead money. So it’s not really a good move for Europe that’s going to cause stimulus.”

Sort of like Switzerland. Only, the koruna will plummet, not rise.

• Deflation Risk Renders Czech Koruna’s Euro Cap Irrelevant (Bloomberg)

Currency traders are taking aim at the Czech Republic amid speculation that policy makers will have little choice but to weaken the koruna as it seeks to avert deflation. A measure of volatility jumped this month by the most among 31 major peers as the koruna fell to a six-year low of 28.5 per euro. The exchange rate is so far away from the 27-per-euro cap imposed by the central bank more than a year ago when inflation was the bigger threat that Goldman Sachs says it’s now “odds on” that the ceiling gets adjusted to 30 per euro. “I expect the koruna to tumble much further,” Bernd Berg, director of emerging-market strategy at SocGen, said. “The economy is on the brink of deflation. This has increased the likelihood of a dovish monetary-policy reaction.”

While neighboring Poland and Hungary have room to cut interest rates to curb deflation, the Czech Republic’s options are limited because its borrowing costs are already close to zero at 0.05%. Central-bank Governor Miroslav Singer entered the debate yesterday, seeking to play down the prospect of a lower currency limit by saying it may only become necessary if there were a “long-term increase in deflation pressures.” Singer’s comments in a blog on the Czech National Bank’s website helped the koruna rally late in the trading day, though it’s still 1.5% lower against the euro this year, the biggest loss among 31 major currencies after Russia’s ruble.

“.. their business environment is getting worse, they’re reluctant to invest, and no matter how much cheap money the European Central Bank tries to steer their way, they’re not interested in borrowing to expand.”

• Germany Gets Walloped By Its Own Austerity (Bloomberg)

The euro region is suffering from austerity fatigue, exemplified by polls showing Greece on the verge of dumping its government for one with less enthusiasm for spending cuts. Germany has been the principal architect of fiscal rectitude and the main opponent to any relaxation of deficit rules. What’s happening in the heartland of German industry, however, suggests it’s not just Germany’s neighbors who are threatened by its economic intransigence. The backbone of the German economy is formed by about 3.7 million small- and medium-sized enterprises, defined as those with annual sales no greater than 50 million euros ($60 million) and known as the Mittelstand. It turns out their business environment is getting worse, they’re reluctant to invest, and no matter how much cheap money the European Central Bank tries to steer their way, they’re not interested in borrowing to expand.

That’s the unavoidable conclusion of a report published by the German Savings Banks Association yesterday. The association polled more than 330 of the country’s 416 savings banks in October, and examined more than a quarter of a million SME balance sheets. For German companies that did invest last year, only 19.7% cited “expansion” as their motivation, down from 27.5% in 2013 and the lowest outcome since 2010. More than half of the companies instead were replacing old machinery. Investment itself remains stagnant, stuck at about 340 billion euros or 11.7% of gross domestic product. For small and medium-sized enterprises, this weakness of investment was not due to a lack of external financing or insufficient equity. The continuing economic difficulties experienced by many partner countries in the Monetary Union as well as geopolitical crises have reinforced the wait-and-see attitude of many enterprises.

Only 16% of the business managers at the banks said their customers’ businesses got better in 2014, less than half the number who said a year earlier that they were seeing improvements. Some 18% said things had gotten worse, versus just 4.6% in 2013. Companies in the west of Germany, which are typically the most dependent on exports, were worse hit than those in the eastern federal states, the association said. In response, companies are retrenching. Some 46% of the bank respondents said they provided less investment financing for their customers last year, with just 16% upping their credit allocations. By contrast, more than 64% of companies expanded their equity bases, adding to 59% in both 2012 and 2013.

What goes for Germany goes for Japan: “Many Japanese corporations don’t want to invest because they don’t think they can make any money in Japan ..”

• Weak Capex Spending Spells Trouble For Japan (CNBC)

The majority of Japanese companies appear unwilling to spend, latest government data showed on Wednesday, adding to doubts over the economy’s ability to recover amid slowing growth across the world, particularly in China. Core machinery orders, a leading indicator of capex spending, grew 1.3% on-month in November, a reversal from October’s 6.4% decline, but well below expectations for a 5.0% rise in a Reuters poll. Year-on-year, machinery orders dropped 14.6%, below the Reuters poll estimate of a 5.8% decline. At the same time, the Cabinet Office cut its assessment of machinery orders, citing signs that the economic recovery is stalling, Reuters reported.

“Many Japanese corporations don’t want to invest because they don’t think they can make any money in Japan,” said Taro Saito, director of economic research at NLI Research Institute. “The trend to hoard cash rather than invest is not good for the wider Japanese economy.” Still, he reckons capital spending is on a modest recovery trend now that the second consumption tax hike initially scheduled for October 2015 was shelved until April 2017. The first hike from 5% to 8% in April 2014 was too brutal, he said. Japan’s economy contracted in the two quarters following April’s tax hike, tipping the country into a technical recession.

We are just leaving the madness. “The fuel for the fire over the last several years has been stock repurchases, and that has been fueled for the most part by the zero interest rate environment.”

• Market Madness Started With End Of Fed’s QE (CNBC)

For nearly six years running, the U.S. stock market has withstood a myriad of body blows, from a stuttering economic recovery to a debt crisis in Europe to massive political instability in Washington. Underpinning each move higher was the knowledge that the Federal Reserve would keep the printing presses running, with aggressive quantitative easing programs that sent market confidence high and asset prices soaring. Now, though, comes a shock that has Wall Street reeling: The Black Swan-like collapse in oil prices that has provided a stern test of whether equity markets can survive nearly free of Fed hand-holding. So far, with volatility spiking, traditional correlations breaking down and the bad-news-is-good-news theme no longer in play, the early results are not particularly reassuring. “Stuff happens when QE ends,” said Peter Boockvar, chief market analyst at The Lindsey Group.

“It’s no coincidence that the market started going into a higher volatility mode, it’s no coincidence that the decline in commodity prices accelerated, it’s no coincidence that the yield curve started flattening when QE ended.” Indeed, the increase in volatility and its effect on prices across the capital market spectrum was closely tied to the Fed ending the third round of QE in October. That month marked a momentary collapse in bond yields on Oct. 15, a day that also saw the Dow Jones industrial average plunge some 460 points at one juncture before slicing its losses. The day, and the general tenor of markets as the Fed ended QE amid a global Ebola and economic growth scare, helped make October the most volatile month of 2014.

In second place for monthly volatility was December, according to a Tabb Group analysis, as investors pondered the meaning of “patient” in a Fed statement on when it planned to raise rates and waited for a Santa Claus rally that failed to materialize. January has proven to be an even bumpier month as investors evaluate an oil plunge that sent a gallon of gasoline below $2 in some locations but has raised question about longer-term effects on corporate bottom lines and business investment. Then came Wednesday’s disappointing retail sales numbers, all of which raised concerns about whether Wall Street is capable of negotiating its way through rough times with only zero-bound short-term interest rates as a backstop. “The assumption that low energy prices were unambiguously good was called into question with December retail sales,” said Art Hogan at Wunderlich Securities. “I think it’s all connected, but I’d be hard-pressed to tie it just to monetary policy.”

Threat to the EU.

• Russia to Shift Ukraine Gas Transit to Turkey as EU Cries Foul (Bloomberg)

Russia plans to shift all its natural gas flows crossing Ukraine to a route via Turkey, a surprise move that the European Union’s energy chief said would hurt its reputation as a supplier. The decision makes no economic sense, Maros Sefcovic, the European Commission’s vice president for energy union, told reporters today after talks with Russian government officials and the head of gas exporter, Gazprom, in Moscow. Gazprom, the world’s biggest natural gas supplier, plans to send 63 billion cubic meters through a proposed link under the Black Sea to Turkey, fully replacing shipments via Ukraine, Chief Executive Officer Alexey Miller said during the discussions. About 40% of Russia’s gas exports to Europe and Turkey travel through Ukraine’s Soviet-era network.

Russia, which supplies about 30% of Europe’s gas, dropped a planned link through Bulgaria bypassing Ukraine amid EU opposition last year. Russia’s relations with the EU have reached a post-Cold War low over President Vladimir Putin’s support for separatists in Ukraine. Sefcovic said he was “very surprised” by Miller’s comment, adding that relying on a Turkish route, without Ukraine, won’t fit with the EU’s gas system. Gazprom plans to deliver the fuel to Turkey’s border with Greece and “it’s up to the EU to decide what to do” with it further, according to Sefcovic. “We don’t work like this,” he said. “The trading system and trading habits – how we do it today – are different.”

Sefcovic said he arrived in the Russian capital to discuss supplies to south-eastern EU countries after Putin scrapped the proposed $45 billion South Stream pipeline. The region, even if Turkey is included, doesn’t need the volumes Gazprom is planning for a new link, he said. Ukraine makes sense as a transit country given its location in Europe and the “very clear specified places of deliveries” in Gazprom’s current long-term contracts with EU customers, Sefcovic said. “I believe we can find a better solution,” Sefcovic said.

They’ll be fine.

• Russia to Dip Into Wealth Fund as Ruble Crisis Pressures Economy (Bloomberg)

Russia will unseal its $88 billion Reserve Fund and use it to acquire rubles, the government’s latest effort to stem the country’s worst currency crisis in almost 17 years and limit its effects on the ailing economy. “Together with the central bank, we are selling a part of our foreign-currency reserves,” Finance Minister Anton Siluanov said in Moscow today. “We’ll get rubles and place them in deposits for banks, giving liquidity to the economy.” Russian officials are running out of options to stem the ruble’s plunge as oil prices below $50 a barrel and sanctions imposed over the conflict in Ukraine push the country to the brink of recession. Policy makers have already raised interest rates by the most since 1998 and introduced a 1 trillion-ruble ($15 billion) bank recapitalization plan. The risk for policy makers is that using the reserves to fight the ruble’s slide will worsen its standing with investors.

Economy Minister Alexei Ulyukayev said today there’s a “fairly high” risk that the country’s credit rating will be cut below investment grade for the the first time in a decade. “This should be viewed just as the continuation of the desire to present a united front in dealing with events in the foreign-currency market,” Ivan Tchakarov, chief economist at Citigroup in Moscow, said. Russia may convert the equivalent of as much as 500 billion rubles from one of the government’s two sovereign wealth funds to support the national currency, Siluanov said, calling the ruble “undervalued.” The Finance Ministry last month started selling foreign currency remaining on the Treasury’s accounts. The entire 500 billion rubles or part of the amount will be converted in January-February through the central bank, according to Deputy Finance Minister Alexey Moiseev. The Bank of Russia will determine the timing and method of the operation.

“Some of the jump in shadow-banking credit might have been related to the anticipation of new restrictions on borrowing by local-government financing vehicles”

• China’s Credit Growth Surges; Shadow Banking Stages a Comeback (Bloomberg)

China’s shadow banking industry staged a comeback in December as equity investors and local governments contributed to a surge in credit, underscoring challenges for a central bank trying to revive growth without exacerbating risks. Aggregate financing was 1.69 trillion yuan ($273 billion), the People’s Bank of China said in Beijing today, topping the 1.2 trillion yuan median estimate in a Bloomberg survey. While new yuan loans missed economists’ forecasts, shadow lending rose to the highest in monthly records that began in 2012. With economic growth headed below 7%, the central bank cut interest rates for the first time in two years in November. While manufacturing and factory-gate deflation have worsened, the main stock market index surged about 30% since the rate reduction was announced on Nov. 21.

“This highlights the dilemma for the PBOC: the real economy is still weak, and loan demand is weak, but speculative activity is rampant in the stock market, and local governments need funding,” said Shen Jianguang, Hong Kong-based chief Asia economist at Mizuho Securities Asia Ltd. “I believe the PBOC will further postpone rate and RRR cuts, and instead will resort to targeted measures of injecting liquidity.” New yuan loans, which measure new lending minus loans repaid, were 697.3 billion yuan, missing the median estimate of 880 billion yuan. The M2 gauge of money supply rose 12.2% from a year earlier, compared with the median estimate of 12.5%. December’s entrusted loans increased to about 458 billion yuan, according to PBOC data compiled by Bloomberg — the most on record for the company-to-company credits that are brokered by banks.

Trust loans increased to 210 billion yuan, the most since March 2013. The contrast between new yuan loans and aggregate financing “shows that financial liquidity is not sufficient to support economic activity,” said Lu Ting, Bank of America Corp.’s head of Greater China economics in Hong Kong. “IPOs have been active, and shadow banking is reviving.” The outstanding balance of margin-trading loans on the Shanghai and Shenzhen stock exchanges rose to a then-record 1.02 trillion yuan on Dec. 30, according to data compiled by Bloomberg. That was up from 757 billion yuan on Nov. 21. Some of the jump in shadow-banking credit might have been related to the anticipation of new restrictions on borrowing by local-government financing vehicles.

“.. Raghuram Rajan shocked India today by unexpectedly slashing the benchmark repurchase rate to 7.75% from 8%.”

• Asian Central Banks Should Focus On Deflation Not Inflation (Bloomberg)

After months of preaching monetary discipline to fend off inflation, Raghuram Rajan shocked India today by unexpectedly slashing the benchmark repurchase rate to 7.75% from 8%. Close observers shouldn’t have been surprised. India’s central banker, who famously predicted the 2008 global crisis, warned in an op-ed just yesterday that several of the world’s major economies were “flirting with deflation,” with dire implications for emerging markets like his. The threat of global “secular stagnation” – combined with lower prices in India – no doubt prompted him to act. The question is why Rajan’s peers across the region don’t appear to appreciate the danger. Just today, South Korea’s central bank courted its own deflationary funk by holding benchmark interest rates steady at 2%, even as consumer prices advance at the slowest pace since 1999.

While energy costs in Indonesia are rising due to the lifting of fuel subsidies, economist Daniel Wilson of ANZ warns that prices overall are set to slow or fall: “Disinflation synchronisation is in sight and it will be severe,” he says. From Beijing to Bangkok, Asian central banks seem too blinded by longstanding inflation fears to recognize the trends inexorably pushing prices downward. In a world of plunging commodity prices and weakening global demand, Asian economies that have traditionally depended on exports are going to have to do all they can to gin up growth. Since most of the tools available to governments – increasing spending, lowering trade barriers, loosening labor markets – can’t have an immediate impact, the burden falls on central banks to act. That’s the only sure way to ease strains in credit markets, relieve hard-pressed borrowers and boost investments.

So why aren’t they? An overly doctrinaire fear of inflation explains much of the reluctance. Take the Philippines, where consumer prices are rising just 2.7% and the economy is growing 5.3%. On Dec. 12, central bank Governor Amando Tetangco said cheaper oil gave him “some scope” to leave interest rates unchanged. Since then, Brent crude has fallen to about $48 a barrel, the World Bank has downgraded its 2015 global growth forecast to 3% from 3.4% and Europe has neared a new crisis. Last week, the Philippines government sold $2 billion of 25-year debt at a record-low yield of 3.95%. Markets aren’t always right, but it sure seems time for Tetangco to move the benchmark rate below 4%.

“.. whether Le Pen’s stances – and those of other nationalist leaders in Europe – qualify as fascist is questionable.” Well, better be careful then?!

• Specter Of Fascist Past Haunts European Nationalism (Reuters)

When up to a dozen world leaders and roughly 1.5 million people gathered in Paris on Sunday to mourn the murder of 10 editors and cartoonists of the satirical newspaper Charlie Hebdo and seven other people by three French-born Islamic radicals, they wanted to demonstrate that Europe will always embrace liberal and tolerant values. But the more telling event may turn out to be a counter-rally that took place at a 17th-century town hall in Beaucaire, France, that was led by Marine Le Pen, the leader of the far-right National Front. In Beaucaire, the crowd ended Le Pen’s rally by singing the French national anthem and chanting, “This is our home.” Le Pen is at the forefront of a European-wide nationalist resurgence – one that wants to evict from their homelands people they view as Muslim subversives.

She and other far-right nationalists are seizing on some legitimate worries about Islamic militancy – 10,000 soldiers are now deployed in France as a safety measure – in order to label all Muslims as hostile to traditional European cultural and religious values. Le Pen herself has likened their presence to the Nazi occupation of France. Le Pen herself espouses an authoritarian program that calls for a moratorium on immigration, a restoration of the death penalty and a “French first” policy on welfare benefits and employment. Long after World War Two, fascism is a specter that still haunts the continent. But whether Le Pen’s stances – and those of other nationalist leaders in Europe – qualify as fascist is questionable. The borderline between the kind of populism they espouse and the outright fascism of the 1920s and 1930s, when Adolf Hitler and Benito Mussolini espoused doctrines of racial superiority, is a slippery one.

Scholars continue to debate whether Mussolini was even fascist – or simply an opportunistic nationalist. The real aim of today’s would-be authoritarians – politicians who appeal to the public’s desire for an iron hand – is to present themselves as legitimate leaders who are saying what the public really thinks but is afraid to say. And these far-right leaders are indeed increasingly popular. The card they are playing is populism presented as an aggrieved nationalism. They depict Europeans as victims of rapacious Muslim immigrants. Le Pen, Britain’s Nigel Farage of the U.K. Independence Party and others aim to come across as reasonable and socially acceptable, while sounding dog whistles to their followers about immigrant social parasites who are either stealing jobs from “real” Europeans or living off welfare.

“This new acceleration is about 25% higher than previous estimates ..”

• Rate Of Sea-Level Rise ‘Far Steeper’ (BBC)

The rate at which the global oceans have risen in the past two decades is more significant than previously recognised, say US-based scientists. Their reassessment of tide gauge data from 1900-1990 found that the world’s seas went up more slowly than earlier estimates – by about 1.2mm per year. But this makes the 3mm per year tracked by satellites since 1990 a much bigger trend change as a consequence. It could mean some projections for future rises having to be revisited. “Our estimates from 1993 to 2010 agree with [the prior] estimates from modern tide gauges and satellite altimetry, within the bounds of uncertainty. But that means that the acceleration into the last two decades is far worse than previously thought,” said Dr Carling Hay from Harvard University in Cambridge, Massachusetts.

“This new acceleration is about 25% higher than previous estimates,” she told BBC News. Dr Hay and colleagues report their re-analysis in this week’s edition of the journal Nature. Tide gauges have been in operation in some places for hundreds of years, but pulling their data into a coherent narrative of worldwide sea-level change is fiendishly difficult. Historically, their deployment has been sparse, predominantly at mid-latitudes in the Northern Hemisphere, and only at coastal sites. In other words, the instrument record is extremely patchy. What is more, the data needs careful handling because it hides all kinds of “contamination”. Scientists must account for effects that mask the true signal – such as tectonic movements that might force the local land upwards – and those that exaggerate it – such as groundwater extraction, which will make the land dip.