Category: zerohedge

Overheard everywhere this week…

 

But it seems something changed…

*  *  *

Across global assets…

Half-way through the year and judging by the last 3 days, everything is awesome… Gold and Silver are massive outperformers, stocks just broke even, and bonds are surging…

 

This is gold's best H1 since 1980…

 

Stocks bounced hard off their End-QE3 levels…

 

But Nasdaq -4% and Trannies remain the laggards year-to-date…

 

*  *  *

In Q2, Silver and Crude were best performers, stocks and HY debt worst with bonds and gold doing well…

 

This was the worst quarter for the Chinese Yuan since 1994's Q1 49% devaluation…

 

Trannies ended the quarter down 6% and Nasdaq -1.6% while Small Caps short-squeezed themselves to a 4% gain…

 

*  *  *

And finally, for June…stocks managed to scramble back into the green barely this week but Silver soared with bonds and bullion big winners…

 

A 3rd 200-point plus gain in The Dow was the first since the face-ripping rally off mid-Feb lows…

 

If ever there was a presence of The PPT to be found, we note that the last 3 days are the first time since the August crash rebound that The Dow has ripped over 200 points from the open to the high…same as in Oct 2014 when Bullard saved the world…

Makes sense – if The PPT is going to step in then they will want cash investors to take the momentum… not overnight futures traders.

Here is June – The S&P scrambled all the way back to unchanged (ending June +2pts)…

Manipulation instrument of choice – VIX – collapsed almost 40% (yes we know we don't like using %ages with VIX) – the most since the Bullard bounce in Oct 2014…notice VIX is stuck right at its 50DMA

 

*  *  *

Since Brexit, gold remains the winner but stocks are catching back up to unch…

 

While Trannies and Small Caps are laggards, Dow & S&P surge desperately for the pre-Brexit levels…

 

VIX broke down to 15.29 intrday today, but was unable to hold below its 50DMA at 16.05…

 

Treasury yields were crazy today – spiking higher early at the EU open, then plunging on BoE, spiking again on ECB, then tanking into the close…

 

Notably on the day (this is bond futures) – Gilts gained (BoE easing), TSYs unch to lower (safety/yield), and Bunds tumbled (ECB buying elsewhere)

 

FX Markets were nosiy…Cable dumped on Carney but rallied back, JPY dumped (to support stocks) and EUR dumped and pumped…

 

Commodities were mixed as the USD swung around. Crude was weakest as Silver soared…

 

Crude ramped into the NYMEX close yet again… and then crashed…

 

Finally, Precious Metals are soaring. Silver is at its highest since Sept 2014…

 

Charts: Bloomberg

via http://ift.tt/2988Dnc Tyler Durden

Olympic atheletes heading to Rio are dropping like flies…

 

Source: Townhall.com

 

And to be honest, who can blame them?

 

via http://ift.tt/298vanJ Tyler Durden

Submitted by via TheAntiMedia.org,

Got a bullshit parking ticket? Now you can appeal it in less than a minute. The new chatbot tool, DoNotPay, uses previously successful appeal letters to draw up a customized template, allowing users to avoid courts, legal fees, stress, and having to use a lawyer.

So far, the free app has overturned 160,000 parking tickets in London and New York. With a success rate of 64%, DoNotPay has appealed $4 million in parking fines in just two cities in only nine months of operation. In 2014, New York City collected $546 million in revenue from parking tickets.

Stanford freshman Joshua Bowder created the app after spending an exorbitant amount of time crafting his own appeals for parking tickets. He read thousands of pages of documents related to parking tickets released under the Freedom of Information Act and consulted a traffic lawyer. Then, using PHP and Javascript, he created a conversation algorithm that aggregates keywords, pronouns, and word order. Like many chatbots, Browder’s app becomes more intelligent each time it is used.

DoNotPay is not commercial and Josh plans to keep it that way. In an interview with Anti-Media, Josh said he was driven by a sense of social justice and a desire to help vulnerable people who are exploited by policing-for-profit schemes. Josh also wants to use technology like artificial intelligence for humanitarian purposes.

He finds it “irritating and disappointing” that bots are usually created for vapid commercial uses. In reality, he says, algorithmic intelligence and chatbots are a “humanitarian goldmine.”

 

Value in bots is not to order pizzas. Great story about my bot in context of human rights https://t.co/kq2ueUp5ei http://pic.twitter.com/TAocQdxknD

— Joshua Browder (@jbrowder1) May 21, 2016

 

DoNotPay also assists with delayed or canceled flights, payment-protection insurance (PPI) claims, and even legally disclosing an HIV-positive health status.

Josh describes his creation as “the first robot lawyer.” People are describing him as the “Robin Hood of the Internet.”

“If it is one day possible for any citizen to get the same standard of legal representation as a billionaire,” Browder says, “how can that not be a good thing?”

Josh says government agencies have actually been supportive, even using it to test for glitches. He also received support from his friends, one of whom he says has created an app for scanning blood to test for the likelihood of malaria.

Josh wants to continue developing artificial intelligence applications for the public good. He’s spoken with entrepreneurs about how to use apps like this in conjunction with driverless cars.

What’s on the horizon? Josh’s summer project is an app to help Syrian refugees seek legal asylum. The chatbot he is planning would translate Arabic to English and then draw up legal paperwork.

Josh also plans to expand DoNotPay to Seattle.

via http://ift.tt/299uHNO Tyler Durden

As we noted today, the rumors of an Italian bank bailout, which started on Monday morning, and were promptly shot down by Merkel the next day, got louder today after a Reuters report that the government is considering more creative ways to inject liquidity into Italy’s banks. However that was just an appetizer to a main course, which came later today when as the WSJ reported citing a spokeswoman for the European Union’s executive arm that the “European Commission has authorized Italy to use government guarantees to create a precautionary liquidity support program for their banks.”  

How did this happen so quietly under the table and without Merkel’s blessing? WSJ says that the program was approved under the bloc’s “extraordinary crisis rules for state aid.”

And here we thought that Italy’s banks are actually doing so very well.  Oh wait, no we didn’t.

As the WSJ notes, the proposed “crisis” plan is the “other leg of an intervention plan considered by the government” namely, the direct capital injection into Italian banks that would add up to €40 billion in capital to the banking sector”, the one we profiled previously. It is also the plan that Merkel supposedly shut down before it got off the ground. However, Europe had a Plan B up its sleeve.

What are the details of this latest “crisis” program?

According to an EU official, the liquidity support program includes up to €150 billion ($166 billion) in government guarantees. The WSJ adds that the commission spokeswoman declined to comment on the amount of guarantees that were authorized, but said that the budget requested by the Italian government had been found to be proportionate. The Italian economy ministry declined to comment.

An amusing sidebar: “only solvent banks would qualify for the liquidity support program, which has been authorized until the end of the year.” The problem is that with €360 billion in NPLs, every bank in Italy is insolvent, which implicitly means that they will all be found to be solvent or otherwise nobody will benefit.

Confirming the severity of the Italian fiasco, is that the decision which was taken on Sunday, had not been previously disclosed until the WSJ reported on it and “appears to be a first indication of governments moving to shore up banks in the wake of market turbulence following the Brexit referendum in the U.K.”

In other words, just as we said before, Brexit was nothing more than a Europe-blessed “crisis” ploy designed to achieve two things: unleash more QE, which the BOE admitted will happen (most likely with the involvement of the ECB), and ii) to facilitate the bailout of insolvent Italian banks. To wit:

Brexit will be just the scapegoat used by Renzi and Italy to circumvent any specific eurozone prohibitions. And if it fails, all Renzi has to do is hint at a referendum of his own. Then watch as Merkel scrambles to allow Italy to do whatever it wants, just to avoid the humiliation of a potential “Italeave.”

And while Angela Merkel apparently shut down the original proposal pitched by Italy, Europe – surely under the guidance of Mario Draghi – has found a way to circumvent her veto power.

“As this decision and other precedents demonstrate there are a number of solutions that can be put in place in full compliance with EU rules to address market turbulence,” the spokeswoman said.

To be sure, Italy’s market has indeed been turbulent: Italian banks have lost more than half of their market capitalization since the beginning of the year, as investors fret about the lenders’ huge exposure to bad loans. That compares to an average decline of less than one third for European lenders. Some Italian banks have seen their shares drop by some 75%.

But what is most stunning is the WSJ’s conclusion of what the plan is supposed to prevent – it is not to halt the stock price collapse, it is to prevent a bank run:

A person familiar with the Italian government plans said the cabinet of Prime Minister Matteo Renzi hoped to use a liquidity backstop to contain investor panic, which could result in a run on deposits and affect banks’ liquidity.

Needless to say, for Italy’s Prime Minister to be contemplating how to avoid “investor panic” and prevent a “run on deposits“, then Italian banks must truly be on the verge of collapse.

Finally, for those curious about timing and how soon until it all unravels, we quote the European Commission spokesman who said that “there is no expectation that the need to use this scheme should arise.”

What this statement really means, and whether a preemptive plan to bailout Italy’s insolvent banks will “boost confidence”, we leave up to readers decide.

via http://ift.tt/299qSs2 Tyler Durden

Submitted by Eugen von Bohm-Bawerk via Bawerk.net,

Money, generally accepted medium of exchange, acts as a veil that confuse and blurs economic relations. This is especially true when it comes to intertemporal considerations. Whilst probably the most important institution in a free market, money can be highly destructive when politicized. Why? Because politics is about power and distribution of real wealth. And since money affect almost every single transaction, politics can span throughout society with ease when in control of money. Amchel Rothschild was spot on when he allegedly said “[g]ive me control of a nation’s money supply, and I care not who makes its laws.” Power over money is power over people and power over people is, well, pure power. Money is thus the most sacred tool in a statist’s toolbox and has become instrumental in their quest to control society and allocate resources as they see fit.

It is within this context the monstrosity called the euro need to be analyzed. By pooling Western European countries within the realm of one central bank, power over people increases immensely. There is a catch though; as power increases, greed and corruption increases with it and the temptation to go too far is obvious for all to see.

Money coordinates production with consumption, saving with investment and properly done, money will create the means for a smooth flow of resources among the millions or even billions of people transacting with each other. Politicize money and economic imbalances, between economic agents and even over time, will grow and destabilize the system. It is no exaggeration to say that the welfare and prosperity of the populace depends on a well-functioning monetary system.

The most important function money has, in our view, is its ability to create recessions, or as we like to call it, disruptions of unsustainable resource flows. In a sound system, money will make sure recession occur before the imbalance will even be felt by the broader public. Sound money will remove tensions in fault lines before they turn into a massive earthquake with devastating consequences. However, it is true that economic imbalances can be fed for years if sound money is replaced with a politicized fiduciary medium. And herein lies the crux of the problem, no power hungry politician will voluntarily end the economic prosperity a boom apparently foster. Therefore, they feed it with money created ex nihilo instead; chipping away trust and letting the bubble grow larger and larger. As imbalances becomes ever more entrenched in the economic system, the mere thought of terminating it becomes terrifying. Abruptly ending today’s imbalances will be a truly cataclysmic event, so the once greedy money masters feel they have no choice but to keep the boom going; petrified of the pitchforks that may come their way if they do not.

This is where we are today. Central bankers are painting themselves further and further into the proverbial corner with no chance of getting out unscathed.

When the euro was first created it looked like a boon to all members. In the chart below we depict Irish and Greek contribution to euro area M3. Prior to the crisis these metrics grew at an astounding pace; between 2006 and mid-2007 the Irish M3 grew by an average of 30 per cent annual rate, and by 20 per cent in the two years prior. How was this even possible? In the pre-euro era the Irish punt would surely depreciate dramatically in value if they created new currency units at what would have then been considered a reckless rate. In a sound commodity based monetary regime recipients of new money would before soon exchange them for gold and the monetary inflation would come to a screeching halt before it could do too much damage.

Not within the euro system though. Irish banks created new loans so its customers could buy houses, which helped bring the price of real estate to new highs and naturally so did the value of the collateral posted to banks for new credit. Higher collateral valuations were obviously used to back even more loans ad infinitum. Inevitably, large sums leaked out of Ireland as every European, or even global citizen, would accept the Irish euros as a safe payment – whether the euro was manufactured in Ireland or Germany did not matter as they were both an equal claim on euro area production and assets.

Unsurprisingly, the current account deficit quickly got out of control. Other peripheral countries fared even worse. There were absolutely no correcting mechanisms to halt these grossly unsustainable capital flows. As long as banks kept within easily manipulated capital standards, and they did because collateral values rose alongside the monetary inflation, they could produce euros as there were no tomorrow. The whole edifice actually turned into a tragic of the commons where the manufacturing base in Europe should be exploited to the fullest through money printing, before someone else did the same thing.  Also note that the European Central Bank (ECB) was, as every central bank is, fixing the price of its money. Increased demand for monetary reserves would normally put pressure on its price, but with zero cost supply, the ECB met increased demand by creating more money. It is the only “market” that actually works according to Keynesian principles where demand creates its own supply. There were essentially no checks on the amount of euros that could be created.

Naturally there is a limit to this madness; when Germans finally started to question the prudence of sending all the euros they received from peripheral countries back to the same countries to fund their current account deficits the vendor funded flow stopped and the boom came to an abrupt end. In enter the ECB with all sorts of backstops and promises to do “whatever it takes” to maintain the imbalances.

Somehow, the periphery still manages to fund current account deficits for years, even in the midst of crisis. Who on earth would be willing to fund this perversion?  

TARGET2 – or Trans-European Automated Real-time Gross settlement Express Transfer system – facilitates payments between euro area countries and quickly became an unintended, but highly convenient, way to continue funding deficits by forcibly allocate German surpluses to the task. Where the Germans once said enough is enough, the euro system of central banks kept going.

TARGET2 creates a liability for, say, the Bank of Spain, when a Spaniard sends money to a German bank through the Bundesbank, which in turn receives an asset on their balance sheet. These balance sheet items are cancelled when the final German recipient deposits his money at the bank if the bank then uses the proceeds to “invest” in Spanish banks, bonds, stocks or whatever it might be. However, if there are no reverse capital flows, if say the German bank or depositors are not willing to fund Spanish deficits anymore, balance sheet items at the national central banks accumulate. Instead of a much-needed restructuring of unsustainable resource flows, the TARGET2 allows the old ways to continue. In other words, even after taking away the correcting mechanism a sound commodity based money would have or the effect from a deprecating fiat money, the euro system allow trade to continue when people refuse to fund these imbalances.

We have followed TARGET2 for a long time as it essentially morphed into one of the largest bail-out facilities in Europe and give us a good indication on the stresses building in Europe. TARGET2 assets and liabilities peaked in August 2012, incidentally at the time Draghi gave his infamous speech. Since Draghi promised to bail-out everyone in need, Germans, half-heartedly believed him and started to send euros back to the periphery. TARGET2 imbalances shrank until the end of 2014, but then started to climb again and are now close to record levels.

What the TARGET2 chart shows us is a breakdown of the central bank narrative. Despite the alphabet soup of bail-out facilities provided by the ECB, people still do not trust the system. In our view, the TARGET2 chart is the best way to assess trust in central banks and as it clearly shows, the narrative is failing.

Linking this back to our introduction the TARGET2 chart actually confirms and substantiates what we see in politics. The recent Brexit vote, with all its subsequent noise about following the Brits out of the EU witnessed in continental Europe and the general Pasokification of the political center is clear testimony off waning power by the elite. People are gradually rebelling against the failed status quo.

It seems impossible for Draghi to reestablish monetary confidence. While it looked promising back in 2012, the crisis of confidence keeps lingering on and the big reset seems to come closer by the day. Expect even more destructive creativity, from all central banks around the world, in the coming months. You know the global central bank narrative have failed completely when the Fed cut rates and the dollar rallies. Then it is too late to buy your gold coins.

via http://ift.tt/293zdLN Tyler Durden

CLSA’s Chris Wood, author of the popular Greed and Fear newsletter, chimes in on the consequences for Brexit with a note titled “Disintegration Dynamic” in which he focuses not so much on Britain as Italy and specifically the proposed Italian bailout which was first reported here and which circumvents European bailout rules, however which Renzi hopes will pass as a result of scapegoating Brexit (even if Angela Merkel was quick to shut down).

This is what he says, excerpted: 

GREED & fear continues to believe that the real flash point in the EU is likely to be Italy. GREED & fear was reminded of this reading this week that Italian Prime Minister Matteo Renzi is now seeking Europe’s agreement for a €40bn state-funded recapitalisation of the country’s banking system. This would seem in conflict with the EU’s new rules that taxpayer money cannot be used for bank bailouts before bank shareholders and, critically, bank bondholders are first bailed in. The tricky point here is that 29% of Italian bank bonds were still owned by retail depositors as at the end of 2015 (see Figure 1).

This Italian issue was discussed in more detail here a few months ago (see GREED & fear – The Eurozone and newborn economics, 3 March 2016). Renzi is doubtless hoping that the market turmoil created by Brexit, or at least the sense of political crisis, creates the pressure for Berlin and Brussels to agree to a breaking of the new rules. But if Berlin does agree to such a concession it will strengthen the electoral appeal of eurosceptics within Germany, just as further debt relief for Greece would – and the eurosceptics, primarily in the form of the AfD in Germany, have enjoyed a surge of support ever since last summer’s refugee crisis. Indeed Renzi’s plan has reportedly already been rebuffed by Frau Merkel and ECB board member Benoit Coeure.

The conclusion from all of the above is that it will take a political genius to hold the EU together in the next few years. And geniuses are in short supply. In this sense Brexit will only have accelerated something that was going to happen anyway.

Meanwhile, from a market standpoint, to repeat the point made here already, Brexit will serve as an excuse by G7 policymakers to accelerate the next wave of easing which in GREED & fear’s view is likely to be some form of monetisation of fiscal stimulus. Logically, this should only happen after the November US presidential election. But if markets are bad enough it can happen before.

 

 

via http://ift.tt/29iMZx4 Tyler Durden

Submitted by John Mauldin via MauldinEconomics.com,

It is one of the great ironies of life that each generation believes its experiences are unique. The reality is that we have seen this movie before—with different actors, plot twists, and technological advancements.

The basic plot seems to push along a hauntingly familiar path.

In 1997, Neil Howe and William Strauss introduced the concept of Fourth Turning. They divided the population into four generational archetypes: Hero, Artist, Prophet, and Nomad. (read more about the archetypes and their characteristics here)

Each generation consists of people who were born and came of age at the same period in history. They had similar experiences and thus gravitated toward similar attitudes.

The change of control from one generation to the next is called a “turning” in the Strauss/Howe scheme. On a Fourth Turning, the cycle repeats, sparking a generational crisis.

When Howe uses that word, he doesn’t mean a short period of difficulty. He means an existential crisis—one in which society’s strongest institutions collapse (or are severely challenged and stressed) and national survival is in serious doubt.

By Neil Howe’s timeline, we are today about halfway through the Fourth Turning’s Crisis phase. If this Fourth Turning is like previous ones, here is what we should see.

See how the following Fourth Turning characteristics match today’s landscape…

Rising community

Notice in the Orlando shooting coverage how often people use the word community to designate the different groups with which people identify.

Following the tragic nightclub events, Orlando’s communities drew together to support their members and each other. We see the same behavior in other stressful events. “Je suis Charlie,” the motto that emerged from the January 2015 Paris shootings, comes to mind.

Think of all the other disasters we have seen in recent times, and the public response to them. I am not suggesting that community comes to the fore only during a Fourth Turning—far from it. But it does gain strength during such periods.

Strengthening government

Small-government conservatives like me, and possibly you, are on the defensive. We live in a time when most voters would rather enlarge government than shrink it. We can expect to see stronger government action regardless of who wins this year’s presidential election.

Party realignment

Donald Trump is obviously changing the Republican Party into something quite different than it was just four years ago. Bernie Sanders may have done the same to the Democrats. I don’t think this is over yet. We will see a lot of shifting and movement between the two parties as they redefine themselves.

I am really quite taken with an interview that Trump did a few weeks ago where he talked about his vision that the Republican Party would be a “workers’ party” within four to eight years.

You spring that on me four years ago, and I smile indulgently. Now, within the framework of the Protected versus the Unprotected, I wonder…

Introverted foreign policy

Fifteen years on, the US is increasingly tired of the War on Terror. Donald Trump and Bernie Sanders both gained traction in the primaries with a less aggressive approach to foreign engagement.

Technology to scale

The Internet has outgrown its adolescence and entered adulthood. The technology industry now views the Internet as a platform on which to build new capabilities: virtual reality, home automation, and more.

Rising income Equality

The years of ZIRP and QE served mainly to drive up asset prices, enriching those who are already wealthy and doing little for everyone else. Now a backlash is building against wealth concentration.

We may see attempts to raise taxes on the wealthy, higher working-class wages, and other measures intended to “level the playing field.”

Wage disruption

We’ve seen major retailers hike hourly pay in the last year; $15/hour minimum wages passed in California and elsewhere; and there are growing calls for labor to get a bigger piece of the pie.

Fertility bust

Birth rates are now near or even significantly below replacement rate throughout the developed world. Much of the Millennial Generation feels financially or otherwise unprepared for parenthood.

Falling immigration

Both the US and Europe are trying to control immigrant flows. Refugees from the Middle East are the exception in an otherwise less migratory world.

Falling crime

Criminal activity varies tremendously depending on where you are, but overall rates are down considerably from the 1980s and 1990s.

Strengthening family

This one may seem counterintuitive with birth rates down and young people reluctant to marry. My observations are that people delay marriage today precisely because they respect it so much.

They want to do it right or not at all. And once they do have kids, they take parenting very seriously. My Millennial Generation children and their friends, Howe’s Hero archetype, are amazingly protective of their children.

They seemingly script every moment of their children’s lives. My three-year-old granddaughter just started school, for God’s sake. My generation just didn’t approach child rearing like that.

Practical culture

The financial crisis has set a new standard of frugality, which has evolved into the “sharing” economy… think Uber and Airbnb. We even see the trend in fashion: Millennials have little interest in prestige labels and much prefer the low-priced “fast fashion” they can buy at Zara or H&M.

Rediscovered norms

The Fourth Turning is a time when people rediscover values and norms. That process can take many shapes, of course, but we may again see the “all-together” ethos that brought the US through the Depression and World War II.

Overprotective parenting

My Baby Boomer peers and I love to recall the unsupervised play and relative independence of our childhood years. Growing up as a country boy on the edge of a small West Texas city, I roamed the woods and ranches of our neighbors.

The barbed wire fences were built to keep the cattle in, but they didn’t keep the kids out. We knew which fields had the bulls we wanted to steer clear of. We explored quarries and lakes and rivers, clambered down into caves, and in general did things that would scare the pants off of today’s younger parents.

Today’s cautious parents won’t let children out of their sight—and often with good reason. As the crisis unfolds, we should see growing concern for protecting children from harm.

The worst is yet to come

So after Neil Howe explained all this at the conference, it was time for questions. Naturally, I voiced the question that we all want to know the answer to: “Will the crisis be over soon?”

Neil’s answer was succinct and not encouraging. He thinks we are only halfway through; and if the next few years play out like past Fourth Turnings, the worst is yet to come.

The message is, make sure you’re ready. The good news is that we still have some time (even if we don’t know how much time). We can prepare our portfolios and lives to deal with the coming changes.

via http://ift.tt/29gtWGl Tyler Durden

A day after the most awkward three-way handshake in history between Obama, Trudeau, and Nieto, the latter’s central bank just pushed rates higher by a bigger than expected 50bps to 4.25% (exp +25bps). The Peso is surging back (extending its bounce off January lows) retracing all the post-Brexit losses… on what seems like fears of a surge in food inflation.

• *WORSENED GLOBAL CONDITIONS COULD IMPACT CPI: BANXICO
• *BANXICO LOOKS TO KEEP MXN FROM HITTING INFLATION EXPECTATIONS
• *BANXICO SAW STEEP RISE IN FOOD MERCHANDISE PRICES
• *BANXICO: EXTERNAL CONDITIONS DETERIORATED IN SIGNIFICANT WAY
• *BANXICO TO ALSO WATCH CURRENT ACCOUNT DEFICIT
• *BANXICO TO ALSO WATCH MONETARY POSITION RELATIVE TO U.S.
• *BANXICO SAYS MORE PUBLIC FINANCE TIGHTENING WOULD BE DESIRABLE

Sparking a rapid bid for pesos…

 

But well off the mid-April recent highs..

via http://ift.tt/298clks Tyler Durden

Throughout oil’s torrid rally from the February lows, one major driver of demand – namely China – had been broadly ignored by the punditry which instead focused on supply, whether excess OPEC oversupply or lack thereof, due to production disruptions in Canada or Nigeria. And yet, China and specifically its demand, may have been the elephant in the room all along.

Two months ago we reported that “China Is Hoarding Crude At The Fastest Pace On Record“, a move which among other things was attributed to China’s aggressively filling up its Strategic Petroleum Reserve.  However, just a few weeks ago, we followed up with “China Oil Imports Drop To Four Month Low As Demand Is Expected To “Moderate Significantly” In 2016.”

We now may have an answer what has caused this drop.

As Bloomberg says, citing a JPM report, “one of the pillars of oil’s recovery from the lowest price in 12 years may be on the verge of crumbling.”

The reason: as many speculated, a big source of China’s demand in the past 5 months was Beijing’s decision to stockpile oil for its SPR. However, that is now over as China is likely close to filling its strategic petroleum reserves after doubling purchases for it this year as prices plunged. JPM estimates that China’s SPR demand was equivalent to approximately 1mm bpd. More importantly, stopping shipments for the reserve would wipe out about 15 percent of the country’s imports, according to the bank.

A guard stands before the oil SPR tanks at Zhoushan

Here are the details from JPM:

China has taken the opportunity of lower oil prices since early-2015 to accelerate the strategic petroleum reserve (SPR) builds at c.1mbd, pushing the total oil in stock under SPR to an estimated 400mmbbl, or 53 days of net crude oil import equivalent, based on JPM calculation of multiple data points announced publicly. This volume might be close to the capacity limit, in our view, and together with potential teapot utilization pullback and slower-than-expected demand from China could increase near-term risks to global oil prices (c.1.2mbd impact). We stay cautious on upstream plays and continue with our relative bias on the downstream.

 

 

JPM SPR methodology. China regularly publishes four data points for  crude oil: domestic production, net imports, commercial inventories and refinery throughput. Given the exclusive consumption of crude oil at refineries in China, we derive the SPR monthly changes to account for the balance implied by the four data sets. Furthermore, based on China government’s official release of SPR level in 2014/15, we arrive at the current SPR volume, which compared with China’s previously announced SPR plans seems to be close to the max . 

 

Implication to China’s oil imports. Partially confirmed with our discussion with oil traders, our base case assumes China continuing high volumes of (1mbd) SPR builds through August, while factoring in 7% domestic crude production decline and 2% refinery throughput increase. This means 15% mom decline in China’s crude imports in September, or 1.2mbd loss from the China inventory demand. China’s net oil imports ytd has expanded 16% yoy, versus a flat consumption growth.

Below is JPM’s estimate of the stunning rate of increase in Chinese SPR build, which rose from 491Kbpd average in 2015 to a record 1.191MMbpd in 2016 through May.

Bloomberg reminds us that Chinese crude imports have risen 16 percent this year, and the country is rivaling the U.S. as the world’s biggest oil purchaser. That demand, along with supply disruptions from Canada to Nigeria, has helped boost oil prices about 80 percent since January. Chinese imports surged to a record 8.04 million barrels a day in February. The nation may surpass the U.S. as the world’s largest crude importer this year with average inbound shipments of 7.5 million barrels a day, according to Zhong Fuliang, vice president with China International United Petroleum & Chemicals Co., the trading arm of the nation’s biggest refiner.

However, if JPM is right, China’s imports are about to hit a brick wall.

So how does JPM calculate the capacity of China’s SPR and how much capacity is left? Here is the answer:

There are very limited data points regarding China’s SPR levels and hence questions arise about the reliability of our derived volume because the data base on which our calculations are made come from various sources: crude oil production and refinery throughput from the China National Bureau of Statistics (NBS), net imports from China Customs, and commercial inventory changes from the official newswire Xinhua News Agency. There might be a data consistency issue.

 

We attempt to test the quality of our data by comparing the only publicly available SPR volumes that the NBS formally reported for November 2014 and mid-2015. According to the authorities, China had 91mmbbl (12.43mt) of SPR stored in tanks as of November 2014 (versus SPR capacity of 103mmbbl) and the volume increased to 191mmbbl (versus SPR capacity of 180mmbbl) as of mid-2015. China government rented some commercial tanks for SPR filling for the mid-2015 volume, according to NBS.

 

Adding our calculated monthly SPR changes to the 91mmbbl base as of November 2014 gives us 201mmbbl at end-2015, versus NBS-reported 180mmbbl, or a 12% difference.

 

Although the difference is not desirably narrow, we think it is acceptable, or at least it gives us a sense of how to adjust for the potential actual volume. Based on this finding, we further interpolate the current SPR volume by applying the monthly volume changes to the 180mmbbl base reported by the NBS for Dec 2015. And our calculated SPR level as of May 2016 is 444mmbbl. Applying a 10% discount as indicated by the end 2015 data discrepancy, we get 400mmbbl, or 53 days of net import equivalent. That compares with 25 days at Dec 2015 and 15 days at Nov 2014.

 

Based on the previous government plans cited by state media, the total capacity of China’s SPR under all three phases would be 511mmbbl. The current SPR volume calculated above implies 22% distance from the previously announced capacity target, meaning the cap will be hit after continuous builds at the current speed (1mbd) for another three months.

 

The implication if JPM is accurate is simple: China will import far less oil starting in September, 1.2mbd to be specific.

Based on our base case of assuming another high SPR builds through August and the following three assumptions listed below, our model suggests a 15% mom decline in China’s crude oil net imports in September, or a loss of 1.2mmbbl versus August and 0.8mmbbl less from the 12-month average. Although it’s difficult to have an accurate forecast of the specific timing of the drop, we think it’s worth noting this risk and previous accumulation looks high based on our assessment. We do not believe the 16% growth in oil imports ytd is sustainable despite a domestic oil production decline, as demand is weak (2% expansion in oil processing with gasoline an increased risk), if inventory capacity reaches the limit.

 

 

As for the future SPR capacity additions, we think there has been lower urgency from the Chinese government to push for new construction because they are also seeing lower for longer oil prices with government funding possibly another issue. This also explains their intention to include company contributions under the new regulations and delay the Phase III to after 2020.

 

What does the market think of JPM’s assessment? As of this moment WTI is down, 2.4%, below $49, on a day when it would otherwise be soaring and keeping up with the rest of the risk complex. Because between a 1 million drop in demand, and the increase in supply which Goldman warned about last night as Canadian and Nigerian disruptions fade away, suddenly the market will find itself oversupplied by 2 million more barrels. This excess oil will either have to be stored somewhere, most likely offshore with Cushing also close to operational capacity and ARA stocks at multi-year highs, or it will have to be sold. If it is the latter, a rerun of last year’s second half swoon is now on the table.

via http://ift.tt/29iDDS0 Tyler Durden

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

Any clique in the E.U. that thinks the U.S. will sit idly by while they "punish" the U.K. had better recalibrate their core interests and the potential for blowback.

One constant in a fast-shifting global chess board is the special relationship between the United Kingdom and the United States. The term special relationship defines a close collaboration diplomatically, militarily and financially.

Some might go so far as to speak of an Anglo-American Empire in terms of finance.

Needless to say, this special relationship impacts the European Union and the longer term impacts of Brexit.

Alliances are as complex as marriages. Just as marriages unite families as well as individuals, so alliances and treaties bind various sectors and agencies of nations in different ways and with different degrees of bonding.

Ties between France and Britain, for example, go back to the Norman invasion of England in 1066. The two have been rivals, adversaries and allies.

Nations that share borders almost always have special relationships due to the histories that go with borders–trade, war, occupation, alliances, etc.

The U.S. also has special relationships with a variety of other nations, relationships that are not like the U.K./U.S. ties but unique and powerful nonetheless.

The U.S. and Russia go way back, to the era of Pacific imperial rivalries in the 19th century, U.S. backing of anti-Communist forces in Russia's civil war, an alliance in World War II, the rivalries of the Cold War and a number of critical cooperative advances such as the SALT limitations on nuclear weapons and the International Space Station (Russia has done the heavy lifting of resupply and provided cosmonauts since the beginning).

China and the U.S. also have a special relationship due to the size and interconnectedness of their economies and their mutual need for cooperation despite the jostling for Great Power influence.

Japan and the U.S. also have a special relationship, from mortal enemies in World War II to the occupation of Japan and the strong economic and diplomatic ties of the postwar era.

France and the Etats-Unis (United States) have long, deep and often fractious ties, stretching back to the French fleet's critical role in sealing the defeat of the British Army in the Revolutionary War (1781). Thousands of American soldiers killed defending France in World War I ("Lafayette, we are here!") and World War II are buried in French soil.

Germany and the U.S. also have a unique relationship due to the long presence of American troops on German soil to make good the U.S. pledge to defend West Germany against Soviet invasion. United Germany and the U.S. remain allies with core interests in maintaining peace and prosperity throughout Europe.

Special relationships are not necessarily harmonious or trouble-free; what they provide is a history of communication and an overlay of self-interest that drives a search for common ground or a level of disagreement that doesn't threaten the core interests of both nations.

Some observers have seen the U.K. as a broker between the E.U. and the U.S. Perhaps this was true in some cases, but I don't think the complexities of the special relationship and the even greater complexities of the E.U. can be distilled down to such a simplistic dynamic.

I think the reality is nobody's in a mood to take orders from anyone. The core interests of all players in the Brexit drama are being recalculated, and areas of common ground and regions of profound disagreement are being mapped out.

There's been some talk that the major E.U. powers will need to punish the U.K. to discourage any other escapes. I have no idea if this is mere talk or not, but I am confident that the U.S. will help its British cousins through any spot of bother.

Whatever problems that can be solved by creating a trillion dollars will be solved. It's worth recalling which central bank issued trillions in credit and swap lines to the major European banks in the 2008 global financial meltdown: yes, the Federal Reserve, which remains the central bank to the world, not just the U.S.

While some countries are selling pieces of national oil companies to raise desperately needed cash (Russia) and others are taking their oil to the global pawn shop to borrow desperately needed cash (Saudi Arabia), the U.S., for better or for worse, can borrow or print almost unlimited sums, and there will be ready buyers of the bonds and ready customers for the USD swap lines.

That's the benefit of owning a true reserve currency, something I've discussed many times in terms of Triffin's Paradox, the dual role of the USD in the domestic and global economies, and the value of USD hegemony:

Understanding the "Exorbitant Privilege" of the U.S. Dollar (November 19, 2012)

Why the Rising U.S. Dollar Could Destabilize the Global Financial System (November 13, 2014)

Could the U.S. Dollar Rise 50%? (January 12, 2011)

The Dollar and the Deep State (February 24, 2014)

The U.S. has a core interest in preserving British autonomy, but it also has a core interest in helping the European Union solve its many problems. The U.S. is not choosing between the U.K. and the E.U., except if it is forced to on specific issues by extremists in the E.U.

Any clique in the E.U. that thinks the U.S. will sit idly by while they "punish" the U.K. had better recalibrate their core interests and the potential for blowback. Choose your frenemies and allies wisely.

via http://ift.tt/296rQ7v Tyler Durden