LAPD to Get Body Cameras. Will They Tamper with Those, Too?

So, now about that whole 'accountability' thing ...The big news coming out of Los
Angeles (besides the rain) is that the city is going to buy 7,000
body cameras to outfit all its police officers. From the
Los Angeles Times

Advocates say the cameras will be a valuable tool for the
department. The ability to record audio and video of police
encounters with the public, they say, could help guard against
officer misconduct and clear cops falsely accused of

Steve Soboroff, president of the Police Commission, has spent
months raising private money to outfit officers with on-body
cameras. He said the mayor’s plan would supplement the contract the
LAPD was already negotiating with the camera vendor, eventually
bringing more cameras to officers on the streets.

More than $1 million raised through private donations will help
pay for the cameras, thus avoiding City Hall budget

I’m a bit fascinated by the idea that they raised money for the
cameras from private donations, but I’m reluctant to try to guess
what it may mean without knowing who the donors were.

LA Weekly notes that one of the police unions is
supporting the cameras, on the condition that officers will be able
to review the video before writing up reports, which has got the
American Civil Liberties Union saying, “Um,

“That would be a ridiculous policy,” argues Peter Bibring, an
ACLU attorney.

Bibring argues that allowing officers to review the videos
beforehand could taint their recollections, or make it easier to

“They’re less likely to lie if they don’t know what the video
caught and what it didn’t,” Bibring says. “This is enormously
important. It’s the difference between this being a tool to promote
accountability and this being a tool to assist in cover-ups.”

Then there’s the matter of whether officers will tamper with the
cameras. Earlier in the year, the Los Angeles Police Department
discovered that officers were tampering with their dash cameras to

keep from being recorded
. Again from the Los Angeles
in April:

An inspection by Los Angeles Police Department investigators
found about half of the estimated 80 cars in one South L.A. patrol
division were missing antennas, which help capture what officers
say in the field. The antennas in at least 10 more cars in nearby
divisions had also been removed.

LAPD Chief Charlie Beck and other top officials learned of the
problem last summer but chose not to investigate which officers
were responsible. Rather, the officials issued warnings against
continued meddling and put checks in place to account for antennas
at the start and end of each patrol shift.

So I’ll end in a reminder that body cameras themselves aren’t a
solution, but rather an
extremely useful tool
to increase transparency and lead to more
accountability. But they won’t work if police find ways to avoid
the transparency, nor if they are shielded from accountability in
situations where they are caught engaging in misconduct.

from Hit & Run

Indiana Cop Responds to Eric Garner Protesters by Selling T-Shirt: 'Breathe Easy—Don't Break the Law'

The South Bend Uniform Co., a cop-owned company that sells
only the finest public
safety apparel
,” has responded to those “I
Can’t Breathe
” T-shirts by producing shirts that look like

Run, rabbit, run.

That’s tasteless and offensive, but I don’t think I would
have blogged it if the story had stopped there. If I want to write
about the backlash against the anti-police-brutality movement,
there are much
bigger fish
than a guy churning out T-shirts in Indiana. But
then the guy in question posted this reply
to his critics on Facebook:

And that’s the sort of insult to everyone’s intelligence that I
just have to share. I mean, I suppose it’s
possible that the company could create these shirts
without recognizing that they also carry a second message—roughly
speaking, “People who break the law deserve to be choked to death.”
Possible, but not very likely.

that the store has “already received more than 100
online orders.” It adds that the owner “says his shirt is an
opportunity to show the other side of the story. He says the other
side is the police prospective.”

from Hit & Run

A. Barton Hinkle: Why Elizabeth Warren Is Right About the Cromnibus

Elizabeth Warren is right. That doesn’t happen
very often, writes A. Barton Hinkle, so it’s worth taking note of
before discussion of the Cromnibus—the $1 trillion spending bill
Congress passed this past weekend—fades in the rearview mirror. As
Hinkle explains, Warren has correctly denounced the Cromnibus
because it gives aid and comfort to the forces of crony

View this article.

from Hit & Run

EUR Tumbles As ECB Coeure (Once Again) Signals Sovereign QE Is Coming

Just two weeks after Germnay reported that Draghi was facing mutiny and Benoit Coeure was firmly against the ECB undertaking Sovereign QE, The WSJ reports today that the very same ECB board member sees a “broad consensus around the table in the governing council that we need to do more to raise inflation and boost the economy.” This of course has been interpreted by the market as meaning sovereign QE though there is no mention of an agreement on what “more” is.



As The WSJ reports,

In an interview with The Wall Street Journal, Mr. Coeuré also provided details of the ECB’s plans to publish minutes of its policy meetings starting next year, saying the accounts should be released four weeks after meetings and will be “substantial” in providing the balance of views among officials.


“I see a broad consensus around the table in the governing council that we need to do more” to raise inflation and boost the economy, Mr. Coeuré said in the interview, conducted late on Tuesday at his office in the ECB’s new skyscraper headquarters in Frankfurt.



“It’s not that much of a question on whether we should do something, but more a discussion on the best way to do it,” he said. “If we want to do more we obviously have to reach out to market segments where there is more liquidity and that is why the government bond market is the baseline option, which doesn’t necessarily mean we would only buy government bonds.”


“What has changed is the confirmation of low growth and low inflation, and the oil shock which is obviously new,” Mr. Coeuré said.

And then there is this utter bullshit smoke and mirrors…

“We were able to design [OMT] the right way because we took concerns on board, and we are now going through exactly the same process,” Mr. Coeuré said. “The more governors standing by this new instrument, the safer you feel that the pros and cons have been weighed in the right way.”

So why not show the world the documentation?

*  *  *
Now ECB QE is even more priced-in-er-er…

via Zero Hedge Tyler Durden

The Russia, Mexico & OPEC Failed Agreement on Production Cuts was Short Sighted

By EconMatters


Vienna Short-Term Greed


Remember several weeks ago when oil was still trading around $75 a barrel, and OPEC was deciding upon a Production cut and Russia and Mexico went to Vienna and a deal was being discussed regarding a combined production cut so that Saudi Arabia wouldn`t have to take the brunt of the cut by themselves? Looking back this has to be one of the most shortsighted business decisions of recent history, and ironically it will end up costing them more money and doing more harm to their countries balance sheets than losing a little market share to the US shale Industry for a couple years until it runs its course. 

Let`s Have A Price War!


I get the simple reasoning, there is a lot of that going on these days. In fact most of Wall Street and Modern Financial theory lacks sophisticated logical reasoning found in other disciplines like Philosophy, Technology & Science. So the simple reasoning by the OPEC decision not to cut production is that “Why should we be the ones to cut production and possibly lose more market share to the US Shale Industry”? Why not talk down price, give the speculators more fuel to work and pressure prices further causing the US Shale players to cut back production, or go out of business entirely, and then they( mainly the Saudi`s who have the lowest production costs) can gain market share after the short term inevitable pain (however long that ends up being).

Sophisticated Cost Benefit Analysis


There are a couple of reasons why this strategy is not the best strategy they could have chosen, first of all the US is a diversified economy, sure the Shale Industry will be hurt with lower oil prices, some of it may even go out of business, or be bought up by larger companies in the US. However, the rest of the United States is going to benefit from lower fuel costs, and the US economy as a whole is going to better off from lower oil and fuel prices and flourish. Whereas the OPEC countries are not diversified, their main source of revenue is oil, so not only do they get lower revenue from lower oil prices; but this just doesn`t hurt their budgets, their balance of trade, or the oil sector of the economies, it hurts their stock market, it hurts their financial sectors, in short every part of their economy is affected from building and real estate stocks to restaurants and the entire supply chain that relies upon healthy oil prices to fuel its economy. Most of these countries subsidize fuel so the consumer in these countries doesn`t really even benefit that much with lower fuel costs as a result of the drop in oil prices like net consumer nations.


Throw Russia and Mexico in this category as well when one evaluates not just the lost revenue due to lower oil prices, but look at how Russia is spending a ton of resources trying to prop up its currency, and the entire system is under considerable distress. So weigh in the lower oil price on the currencies as well in a cost benefit analysis of not agreeing to production cuts and this being a good overall strategy to employ. Did Russia factor in the Inflation costs on its country when making the decision to walk away from production cut talks?



Evil Oil Speculators Can Switch Sides


But there is an even bigger point OPEC didn`t consider because it has been a
long time since the oil market has been weak, and frankly modern energy speculation in electronic markets wasn`t around in the 1980`s like it is today. Remember how OPEC used to always blame really high oil prices on the speculators, well they didn`t think about the magnitude of waiving the white flag, and letting these same speculators go to town on their primary business product. I guarantee you they didn`t see oil prices dropping this fast, and hurting their revenue streams this much. But there is a bigger point, oil is an asset, and you don`t just give it away for free, this isn`t a fall inventory sale at Macy`s, it has long-term value, if you aren`t getting a viable cost, you hold onto the asset, as it is a finite asset, and has greater long-term value in the future. OPEC, Russia, and Mexico are essentially wasting their limited resources, giving these finite resources away to consumer countries at a sharp discount, this is just bad business strategy, it cheapens the asset`s value. De Beers in the Diamond Industry understands this concept, this is what cartels do, they control price, and they never sell or cheapen their assets in a public manner. No business should ever willingly allow shorts to attack their product and make it less valuable, this is just poor business strategy. OPEC had created quite the illusion that their asset was valuable, worth over a $100 a barrel, consumers were willing to pay this high price, the last thing you do as a cartel is alter this perception in the public. It is just a poor branding strategy, Apple would never do this!


Best Option for OPEC in Hindsight


This is what should have happened before the OPEC meeting, Russia, Mexico and OPEC members should have agreed to cut back global production by 2 million barrels per day, when you spread it out it isn`t that much, and they would have all netted more revenue from prices higher in a stabilized market around $100 a barrel (almost twice what it is today). And yes it would make a difference shoot there is probably $25 bucks worth of price regarding shorts in the oil market right now! Think if the shorts covered on a production cut of 2 Million Barrels Per Day at $75 a barrel in WTI, this probably gets WTI back to $100 in two weeks. There is a lot of value in maintaining a sleepy range bound market, the last thing OPEC should have wanted to do was Draw Attention to Sharks that Oil was Ripe for taking down, as they were going to attack their currencies, stock markets and anything else they could find to exploit as well in the feeding frenzy.


Remember oil is a commodity, it has no real value, as we have seen it can be $55 or $105 on no real significant difference in supply, it is all about perception and market sentiment, in other words marketing or branding of the commodity. But look at all the damage to the Cartel member`s stock markets, their currencies, the confidence of their people; and the short-sighted nature of their failure to cut production looks horrific in hindsight despite the public rhetoric of OPEC members. Plus you have more of your primary asset that you can sell in the future when prices are much higher. Let the US Shale producers waste all their asset right now, who cares if they gain 5% more market share on a temporary basis? These people let short-term greed, and a lack of understanding of basic finance and business strategy cost them a whole lot of money when all is calculated with this experiment. “Why should we be the one to cut” because it is in your best interests to cut – the failure here was thinking about their situation in relation to the US Shale Industry. This is completely irrelevant, what is in your best short-term and long-term best interests? It does OPEC no good to hurt the US Shale Industry; or Russia, Mexico and OPEC to avoid production cuts if it hurts them more than the alternative option of production cuts. This should be their sole focus, they got distracted in their cost benefit analysis by thinking about the US Shale Industry and the whole short-term market share issue! Moreover, this is what Cartels do, this is why OPEC formed in the first place to protect its primary asset, control production, and to promote and maintain the brand status of this commodity! Don`t let ego and pride get in the way of a sound business decision! What is the best business decision keeping more of your primary and limited asset, and overall still getting more revenue, helping your economies, stock markets, currencies, and maintaining the illusion that you own a valuable and limited commodity in oil?


Yes Branding Matters in the Oil Market – It`s time for OPEC, Russia & Mexico to start acting like a Cartel – Remember the Oil Market can be Commoditized or Branded – The Answer to “Why Should You Be The Ones To Cut” is because you don`t have Diversified Economies


De Beers even goes so far as buying up black market supply and taking it off the market to control the Diamond Market, the last thing De Beers or Apple is going to do is cut their highly branded product in half to win some market share, you get lower margins for your product. Remember Russia all you had to do was agree to take a small share of the pain of a production cut, sure looks like the best option right now, considering the fact that you had to go to the extreme of a 17% interest rate or bailout Rosneft, it would have been much cheaper just to take a 400,000 barrel per day Oil Production Cut, maybe even less of a Production Cut!


This Problem has some characteristics of a Prisoner`s Dilemma/Nash Equilibrium Scenario for OPEC regardless of what happens with the US Shale Industry,the  OPEC, Russia & Mexico are always going to be Worse Off by Not Agreeing to Production Cuts 


© EconMatters All Rights Reserved | Facebook | Twitter | Email Subscribe | Kindle

via Zero Hedge EconMatters

Russian Stocks Soar 17% – Most Since 2008; Ruble Back Below 62/USD

After falling for 15 of the last 16 days, the RTS (Russian Stocks) are surging 17% today, extending gains post CBR 7 Measures, the most since October 2008.The Ruble is soaring also – back below 62/USD.

RTS biggest gain since Oct 2008…


Juiced by the CBR Measures…


Charts: bloomberg

via Zero Hedge Tyler Durden

Legendary "Closing Dinner" Organizer Sage Kelly Quits Jefferies

Back in October, after reading the complaint of his ex-wife Christina Kelly (since retracted) describing in minute detail the daily life of her estranged ex-husband, we explained ‘Why Every Banker On Wall Street Suddenly Wants To Be Jefferies’ Managing Director Sage Kelly.” And as of moments ago, they have an even greater reason to want to be Sage: he will have all the cash from being a one-man party machine for his clients (allegedly) and none of the workload. Just out from Bloomberg:


What family? Just kidding. That said, well-played Sage and Jefferies (where bankers will no longer need to pee in a cup to prove the lack of narcotic substances in their body), because there is nothing like confirming it was all a bad dream by getting the hell out of dodge.

via Zero Hedge Tyler Durden

Who Are The Three Biggest Data Companies In the World? 1) Google 2) the Fed 3) JP Morgan/ECB

As many already know, I’ve created a startup called Veritaseum that specializes in using the programmable aspects of digital currencies to create “Smart Contracts” to disintermediate legacy businesses that extract rents without adding the requisite value to justify said rents.

Many of my clients, followers and business partners thought me insane to pursue such a path. I considered this a good thing. Why? Because the crowd is very rarely, if every, successful. The true solutions to real problems are seldom percieved by the masses until after the fact. The masses include the management of big industry, and big finance in this particular situation. 

Let’s reference the first sentence that describes my startup to make my assertion evident.

 I’ve created a startup called Veritaseum that specializes in using the programmable aspects of digital currencies...

As per Wikipedia:

Digital currency or digital money is an internet based medium of exchange (i.e., distinct from physical, such as banknotes and coins) that exhibits properties similar to physical currencies, however, allows for instantaneous transactions and borderless transfer-of-ownership. Both virtual currencies and cryptocurrencies are types of digital currencies, but the converse is incorrect. Like traditional money these currencies may be used to buy physical goods and services but could also be restricted to certain communities such as for example for use inside an on-line game or social network.[1] Digital currencies such as bitcoin are known as “decentralized digital currencies,” meaning that there is no central point of control over the money supply.

Let me make this clear. Nearly all currency and currency transactions, and money are in digitial form in the developed world. This is not a “bitcoin” thing! It is not an “UltraCoin” thing. It’s a MONEY thing! Click here to listen to the Fed itself explain how they act as a data company, to the tune of $1.7 trillion. Now, on to the rest of the company description… 

…to create “Smart Contracts“…

As per Wikipedia:

Smart contracts are computer protocols that facilitate, verify, or enforce the negotiation or performance of a contract, or that obviate the need for a contractual clause. Smart contracts usually also have a user interface and often emulate the logic of contractual clauses. Proponents of smart contracts claim that many kinds of contractual clauses may thus be made partially or fully self-executing, self-enforcing, or both. Smart contracts aim to provide security superior to traditional contract law and to reduce other transaction costs associated with contracting.

Digital rights management schemes are smart contracts for copyright licenses, as are financial cryptography schemes for financial contracts. Admission control schemes, token bucketalgorithms, and other quality of service mechanisms help facilitate network service level agreements. Some P2P networks need mechanisms to ensure that remote strangers contribute as well as consume resources, without requiring the overhead of actual legal contracts. Two examples of such protocols are the storage trading protocol in fl?d backup[1] and the Mojo Nation filesharing auction. Cryptographic authentication of one product part by another has been used, in lieu of a contract between manufacturer and consumer, to enforce tying strategies.[2]

The major difference between the digital currency whose blockchain UltraCoin is set against (the Bitcoin blockchain) and the more prominent digital currencies (ex. USD, EUR) is that there is a Blockchain and programmable capabilities. We can program the money and create safeguards that don’t exist in today’s legacy banking system.

If banks truly are data companies, as opposed to those big marble buildings whose employees offer toasters in exchange for grandmothers opening up savings accounts, then they really need to change their modus operandi, not to mention dramatically alter their business models.

banks hacked

Bloomberg reports:

While banks globally have almost reached their long-term average of 10 percent return on equity, most have valuations showing investors aren’t optimistic about their prospects for growth, according to the report. Customers will increasingly use mobile services as more than 12,000 startups are focused on banking businesses, McKinsey said.

Pressure is coming from “FinTech” startups, whose focus has moved beyond processing transactions to areas such as personal investments and lending, the authors wrote. The six largest of these non-bank “attackers” have more combined revenue than the 20th-largest global retail bank, according to the report.

“While the number of FinTechs is large, most provide more of an opportunity than a threat to global banks, which can build on their ideas, set up joint ventures, and sometimes acquire these firms to deepen or broaden their offerings and capabilities,” McKinsey wrote in the report.

Well, I don’t know about that. Until banks realize that they are essentially massive data companies, currently prone to hacking and manipulation without utilizing the advanced aspects of the very technology that they are forced to depend on, I believe the last portion of my company description will be the most pertinent:

…to disintermediate legacy businesses that extract rents without adding the requisite value to justify said rents.


 As per Wikipedia:

In economicseconomic rent is any payment to a factor of production in excess of the cost needed to bring that factor into production. In classical economics, economic rent is any payment made (including imputed value) or benefit received for non-produced inputs such as location (land) and for assets formed by creating official privilege over natural opportunities (e.g., patents). In neoclassical economics, economic rent also includes income gained by beneficiaries of other contrived exclusivity, such as labor guilds and unofficial corruption.

Economic rent should not be confused with producer surplus, or normal profit, both of which involve productive human action. Economic rent is also independent of opportunity cost, unlike economic profit, where opportunity cost is an essential component. Economic rent should be viewed as unearned revenue, whereas economic profit is a narrower term describing surplus income greater than the next best risk-adjusted alternative. Unlike economic profit, economic rent cannot be eliminated by competition, since all value from natural resources and locations yield economic rent.

Visit and download the most advanced implementation of smart contracts and digital currencies available to the public.

via Zero Hedge Reggie Middleton

Russell Napier: Oil May Drop To $25 On Chinese Demand Plunge, Supply Glut, Ageing Boomers

From Russell Napier’s ERIC

We have forecast since mid-August that Brent oil prices would fall to “$70/bbl and probably lower”, and the US$ would see a strong rise. As Chart 1 shows, Brent has now reached our target, falling 40%, whilst the US$ has risen 10%. We believe this represents the first stage of the Great Unwinding of policymaker stimulus that has dominated markets since 2009. This Note now takes our oil price forecast forward into H1 2015.

Astonishingly, most commentators remain in a state of denial about the enormity of the price fall underway. Some, failing to understand the powerful forces now unleashed, even believe prices may quickly recover. Our view is that oil prices are likely to continue falling to $50/bbl and probably lower in H1 2015, in the absence of OPEC cutbacks or other supply disruption. Critically, China’s slowdown under President Xi’s New Normal economic policy means its demand growth will be a fraction of that seen in the past.

This will create a demand shock equivalent to the supply shock seen in 1973 during the Arab oil boycott. Then the strength of BabyBoomer demand, at a time of weak supply growth, led to a dramatic increase in inflation. By contrast, today’s ageing Boomers mean that demand is weakening at a time when the world faces an energy supply glut. This will effectively reverse the 1973 position and lead to the arrival of a deflationary mindset.


1. Oil prices continue bouncing down the stairs to lower levels. Page 2
2. Financial players have destroyed price discovery in oil markets.  Page 4
3. OPEC’s high prices have accelerated move away from oil to gas. Page 5
4. Gulf countries risk losing US defence shield if oil prices stay high. Page 7

1. Oil prices continue bouncing down the stairs to lower levels

Chart 2: Brent prices are now in a steep downtrend

Brent oil prices have reached the “$70/bbl and probably lower” level that we forecast in August. So we now need to think about where they go next. Luckily, Chart 2 above can still guide us, as it has done since September 2010. We first forecast the collapse on 18 August, and then followed this on 27 August with a detailed analysis and specific price forecast:

“How low will prices go? We can have no idea, as prices have never been this high for so long. Nor can we rule out a further massive stimulus effort by the central banks at some point. But “technical trading” logic would suggest they will fall to at least the 200-day exponential moving average, currently around $70/bbl, and probably lower (red line)”.

Unfortunately, conventional wisdom completely missed this move, believing that prices would always stay at $100/bbl. Many companies and investors have lost large amounts of money as a result of wearing these rose-tinted glasses.


There are 2 parts to the question of ’What Happens Next?’:

  • Why is this happening?
  • will tell us when the price move is ending?

The “Why” question is easy to answer:

  • China’s stimulus policy has ended. Instead, President Xi is moving to his New Normal concept. He intends to improve income levels for ordinary people, not to create wealth effects for a minority via a property bubble
  • The US Federal Reserve’s Quantitative Easing (QE) policy has paused. Many investors are preparing to ‘dash for the exits’ just before interest rates rise, as they know prices for financial assets are well out of line with fundamentals

This means that the stimulus policies that pumped air into China’ s demand bubble and the US financial asset bubble have stopped pumping. And a child knows what happens to bubbles when you stop pumping more air – they deflate very quickly. The initial catalyst for this was the unwinding of China’s ‘collateral trade’. As we warned in June, this is now opening the fault lines in the debt-fuelled ‘ring of fire’ created by central bank stimulus.

The “What” question relies on the chart for an answer. We are still in the Great Unwinding phase of these stimulus policies, so we cannot yet rely on supply/demand fundamentals to guide us. Instead, as the chart shows:

  • The ‘triangle shape’ extended for 5 years before prices finally fell (red, green lines)
  • Prices then collapsed rapidly through support at $90/bbl and $70/bbl (purple)
  • $70/bbl was also the 200-day exponential moving average price (red)
  • Our August forecast has thus been realised, and prices have indeed carried on falling

We are now in a classic falling formation, bounded by the blue line. We think of this as a rubber ball bouncing down stairs. The ball falls off one stair, bounces to the next, and never quite manages to bounce back to the higher stair. Then it bounces down to the next stair, before eventually reaching the bottom.

Market traders instead call this a “Lower highs, Lower lows” pattern, where sellers continue to dominate. Buyers appear at the lows, but then give up as more sellers appear and sell into the rally. So we will only know when the selling is finished when the price finally makes a ”Higher high” again, and bounces back onto the stair above.

In terms of supply/demand fundamentals, however, little has so far changed. There have been no major production cutbacks or demand increases. As expected, Saudi Oil Minister Ali al-Naimi, wants the market to decide, saying Wednesday, ”Why should we cut production? Why?”. Equally, many developing countries have been busy removing subsidies that supported demand.

It is therefore hard to see what will stop prices continuing to fall towards $50/bbl in H1.


What happens then will be the key question. Geopolitical disruption cannot be ruled out. Russia, for example, might cut gas supplies to try and boost energy prices. But otherwise, the key to the future will continue to be China.

Asian producers and traders now have large inventories of almost every oil-related product. Buyers have simply stopped buying in recent weeks as prices have collapsed. So the question is whether China’s demand will now increase in January, before markets close for Lunar New Year in mid-February. A lot of money is now riding on this issue.

If these hopes prove false, and the West enjoys a mild winter, there would seem little to stop prices heading back towards historical levels of $30/bbl – $40/bbl. This would be good news long-term, as $30/bbl is an ‘affordable’ price for the global economy, at 2.5% of GDP. But it would be very bad news for investments based on the two myths that (a) oil will remain at $100/bbl forever and (b) China’s demand will increase exponentially as it becomes middle-class. Equally important is that a sustained price fall will mean deflation becomes inevitable in the Eurozone and Japan, irrespective of any further QE initiatives.

Financial markets will also be impacted as a new ‘Minsky moment’ develops, and investors suddenly realise, as in 2008, that they have overpaid for their assets and rush for the exits.
The International Energy Agency’s December Report suggests OECD stocks “may bump against storage capacity limits” in H1, and confirms our own fears that we risk “social instability or financial difficulties” in H1. This highlights why we have long feared the Great Unwinding will be a very bumpy road, as we described back in June.

2. Financial players have destroyed price discovery in oil market

Chart 3: Volumes in financial futures markets is now many times physical production.

Oil prices should be set by the balance of supply and demand. But as Chart 3 shows, oil markets have instead become dominated by financial players, as pension and hedge funds decided to buy oil as a “store of value“.

Before 2000, financial market volume (red line) had equalled annual oil production (green). This worked well, providing physical players with sufficient liquidity to enable price hedging to take place. But in 2000, after the dot-com crash, central banks stopped focusing on the need to defend the value of the currency – previously their main role. Instead, they refocused on trying to maintain economic growth. And they began to use their new weapon created in the dot-com revolution, the power to print ‘electronic money’.


Chart 3 shows how this has played out. Unfortunately for all of us, central banks couldn’t resist the temptation to play with their new toy. They came to believe it had near-magical powers, and could control the economic cycle. After the Crisis began in 2008, they even gave it a new name “Quantitative Easing” (QE). And central banks around the world began to use it to print trillions of dollars. Unsurprisingly, of course, this had side-effects.

One was that US pension and hedge funds quickly realised that QE would also devalue the US$. They therefore rushed to invest in oil markets as a supposed ’store of value‘.
What they didn’t realise was that this created a massive imbalance of financial versus physical market demand. Producers couldn’t suddenly double their production at the touch of an electronic button. Financial sector demand simply overwhelmed physical supply:

  • Hurricane Katrina in 2005 had already shown the potential for this type of speculation to occur.
  • By the time US refineries were operating again after it, financial trading was 4x physical production.
  • By 2011, with the support from QE, financial players were trading the equivalent of 6x physical production.

Thus financial market demand came to dominate physical demand, and prices leapt skywards (blue line). The physical market’s key role, that of price discovery, was destroyed [ZH: same as the gold market, incidentally]

Many analysts failed to make the linkages, and instead claimed these high prices were justified by reduced supply or increasing demand. But as we know today, there has never been any physical shortage of oil since the Crisis began. Instead, what is now becoming obvious is that the collapse of the price discovery process led producers to over-invest and create an energy glut.

There are two key issues that will now determine future prices:

  • One is that gas has been increasing its market share at oil’s expense.
  • The second is Saudi Arabia’s need to ensure the 1945 US/Saudi ‘oil-for-defence agreement’ continues.

We are in for a very bumpy ride, as oil prices return to being based on their own supply/demand fundamentals.

3. OPEC’s high prices have accelerated move away from oil to gas

Does OPEC have a future? Or has it already disappeared as an effective force in oil markets? We are not alone in asking this question. Saudi Oil Minister Ali al-Naimi asked the same question in the summer, suggesting OPEC Ministers should instead meet once a year, and have occasional videoconferences, adding:

“We don’t need a meeting. People come and make nice when at the end of the day, Saudi Arabia carries the burden of balancing the oil market.”

Recent events have shown Naimi meant what he said. He understands that major oil producers need to monetise their product quickly, as it is likely much of today’s vast reserves will end up being left in the ground. This has already happened with coal, after all.

Nobody today worries about the potential for coal shortages set out in the Club of Rome’s famous 1972 Report, ‘The Limits of Growth’ . And the chart above, based on BP data, suggests oil will likely share coal’s fate:

  • Consumption of oil (red line) and gas (blue) grew at similar rates from 1965-75
  • Both gained market share versus coal in relation to total energy demand (green)
  • But OPEC’s high oil prices from 1973-1985 gave a sustained boost to gas demand
  • Record oil prices since 2005 have further boosted gas and reduced oil consumption
  • They have also reduced OPEC’s oil market share to 42% today versus 51% in 1974

Chart 5: Energy markets are now transitioning from oil to gas.

 Chart 5 from ExxonMobil’s 2013 ‘Outlook for Energy to 2040? places these trends in a longer-term context.

– Wood (brown) was the major fuel 200 years ago, but was replaced by coal (orange)
– Oil (green) has since replaced coal, but it is now being replaced by gas (red)
– In 50 years, gas may be replaced by renewables, hydro-electric or nuclear as a fuel

So OPEC faces a future where its product, oil, is now inevitably losing market share to gas. It made a terrible mistake by allowing prices to rise to unaffordable levels in 1974-1985. And since 2005, it has repeated the same mistake.

Energy users have choices, after all. Many have chosen to abandon oil for gas or other fuels. Those tied to oil have reduced consumption by improving energy efficiency.
Even the US has finally moved to adopt European fuel efficiency standards for its auto fleet. Since 1980, US passenger car fuel economy has risen 27%, from 26 mpg to 33 mpg. And this trend is accelerating as today’s more efficient cars replace older models. The standard for new vehicles will be 35.5 mpg (15.09 km/l) in 2016.

Equally important is that most OPEC countries have undermined the oil quota system:

– They have built large numbers of oil-based refineries, as well as oil/gas-based petrochemical complexes
– Those using oil effectively increase the country’s oil exports beyond its official quota
– Those using gas increase its total energy exports, effectively cannibalising oil’s share of the energy market

Naimi has another reason for abandoning OPEC today, namely the growing geopolitical threat to Saudi and the other Gulf Co-Operation Council (GCC) countries. The GCC are surrounded by potential enemies, all of whom would like a share of its current oil wealth.
In these circumstances, they cannot possibly continue to allow high prices to destroy the rationale for the US defence shield on which they have depended since 1945.

4. Gulf countries risk losing US defence shield if oil prices stay high

Chart 6: Canada now exports more to the US than OPEC

A version of Chart 6 must have been keeping ministers awake at nights in Riyadh and other Gulf Co-Operation Countries (GCC) in recent months. “How did we allow Canada to supply more oil than OPEC to the US?” they worry. ”What did we think we were doing?”

This might not be quite so critical if the GCC was able to defend itself militarily against its enemies. But Saudi Arabia, the main GCC country, has a population of just 27 million. The total population of the other GCC countries is just 23m. And they all remember very well what happened in 1990, when OPEC-member Iraq decided to invade GCC-member, Kuwait.

It wasn’t Nigeria, or Venezuela or Libya or another OPEC member that cam
e to their rescue then. It was the USA, under the long-standing 1945 oil-for-defence deal agreed by President Roosevelt and King Saud. Roosevelt had needed Saudi oil to rebuild the US after World War II, and Saud needed someone to fight off his enemies.

Now, fast forward to today. Can one imagine President Obama and Congress putting US armies into a modern-day Operation Desert Shield/Desert Storm? Or UK Prime Minister Cameron rushing to persuade the President to do this? Of course not. But Margaret Thatcher did in August 1990, telling President Bush “This is no time to go wobbly”. And Congress agreed, as we all knew we needed friendly regimes in Riyadh and the GCC.

Chart 7: GCC exports to the US are falling as Canada’s increase

The second chart highlights the key message. Of course, it wasn’t OPEC’s fault that oil prices went back to record levels over the past decade, as discussed in section 2. But they allowed it to continue, instead of increasing supply post-2008, and collapsing the whole charade. Sadly, they preferred to believe the story that the world could now live with $100/bbl oil – though it had never done so before, and they forgot that high prices encourage new supply:

  • GCC oil exports to the US had historically been on a rising trend (purple line)
  • But their volume peaked at 2.5mbd after 2004, and now risks falling below 1.5mbd
  • Canadian imports have instead been rising from 1mbd in 1993 to 3.5mbd today (red)
  • And Canadian volumes are continuing to rise, whilst GCC volumes fall

So what would happen today if the Caliphate or someone else decided to attack? After all, the GCC countries are immensely wealthy after a decade of high prices. Would the US, UK and other countries come to their rescue again?

The GCC countries have clearly woken up to this critical issue, that their position is extremely vulnerable without US support. This have suddenly begun to plan their own oil price strategy, independently of OPEC. Instead of agreeing to production cuts, Saudi Oil Minister Naimi has said that in future, “the market sets the price”.

* * *

Prices have so far fallen $40/bbl from $105/bbl since we first argued in mid-August that a Great Unwinding was now underway. And there have been no production cutbacks around the world in response, or sudden jumps in demand. So prices may well need to fall the same amount again, before GCC leaders can once again sleep easily in their beds at night.

via Zero Hedge Tyler Durden

The Fed Is Sitting On a $191 TRILLION Time Bomb

Stocks are bouncing today because the Fed will wrap up its monthly FOMC meeting and make a public statement this afternoon. Stocks have been rallying into FOMC meetings for the last three years, so traders are now conditioned to buy stocks in anticipation of this.


The prime focus for the markets is whether the Fed continues to state that it will raise rates after “a considerable time.” The reality is that the Fed cannot and will not raise rates anywhere near normal levels at any point because doing so would blow up the financial system.


Let’s walk through this together.


Currently, the US has over $17 trillion in debt. The US can never pay this off. That is not some idle statement… we issued over $1 trillion in NEW debt in the last eight weeks simply because we don’t have the money to pay off the debt that is coming due from the past.


Since we don’t have that kind of money, the US is now simply issuing NEW debt to raise the money to pay back the OLD debt.


This is why the Fed NEEDS interest rates to be as low as possible… any slight jump in rates means that the US will rapidly spiral towards bankruptcy. Indeed, every 1% increase in interest rates means between $150-$175 billion more in interest payments on US debt per year.


So the Fed wants interest rates low because it makes the US’s debt load much more serviceable. This is why the Fed keeps screwing around with language like “after a considerable time” despite the fact that rates should already be markedly higher based on the Taylor Rule as well as the state of the US economy: it’s all a ruse to pretend the Fed has a real choice in the matter.


However, there’s an even bigger story here.


Currently US banks are sitting on over $236 trillion in derivatives trades.


Of this, 81% ($191 TRILLION) are based on interest rates.


Put another way, currently US banks have bet an amount equal to over 1,100% of the US GDP on interest rates.


Guess which banks did this?


The BIG FIVE: JP Morgan, CitiGroup, Goldman Sachs, and Bank of America.


In other words… the Too Big To Fails… the very banks that the Fed has bailed out, and done everything it can to prop up.


What are the odds that the Fed is going to raise rates significantly and risk blowing up these firms? Next to ZERO.


Forget about the Fed’s language and its FOMC meeting. The real story is the $100 trillion bond bubble (more like the $200 trillion interest rate bubble based on bonds). When it breaks, it doesn’t matter what the Fed says or does.


If you’ve yet to take action to prepare for the second round of the financial crisis, we offer a FREE investment report Financial Crisis "Round Two" Survival Guide that outlines easy, simple to follow strategies you can use to not only protect your portfolio from a market downturn, but actually produce profits.


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Best Regards

Phoenix Capital Research





via Zero Hedge Phoenix Capital Research