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Authored by Haley Zaremba via Oilprice.com,

Canadian oil producers are in an increasingly tough predicament. With high and increasing oil demand around the globe over the last year, Canadian oil production has increased accordingly. All of this is simple and predictable economics, but now Canadian oil has hit a massive roadblock. Producers have the supply, and they have more than enough demand, but they don’t have the means to make the connection. Canadian export pipelines simply don’t have the capacity to keep up with either the supply or the demand.

Canadian oil producers have now maxed out their storage capacity, and the Canadian glut continues to grow while they wait for a solution to the pipeline problem to materialize. As pipeline space is at a premium and storage has hit maximum capacity, oil prices have fallen dramatically, and the differentials that had previously been hitting heavy oil hard in Canada (now at below $18 a barrel for the first time since 2016) have now spread to light oil and upgraded synthetic oil sands crude as well, leaving overall Canadian oil prices at record lows.

(Click to enlarge)

Now, adding to the problem, growth in oil demand has begun to slow in the wake of skyrocketing United States production and the weakening of U.S.-imposed sanctions on Iranian oil. First, the U.S. granted waivers to eight nations to continue buying Iranian oil despite strong rhetoric, and now the European Union has undermined the sanctions even further.

In an effort to correct the pricing drop, some Canadian drillers have been cutting production levels, turning to more expensive forms of transportation like railways to ship their oil, and in some cases even using trucks to move their product. One of Canada’s major producers, Cenovus Energy, has gone so far as to implore the government to impose production caps until the oil glut and inversely corresponding, free falling prices are under control. Some oil sands producers, including Canadian Natural Resource, Devon Energy, Athabasca Oil, and the aforementioned Cenovus Energy, have taken the issue of over-production into their own hands by announcing curtailments that could total 140,000 barrels a day or more.

The massive Keystone XL pipeline project from TransCanada Corp. was going to be a major move in the right direction for the Canadian oil industry, adding much-needed capacity to the network. Keystone XL would add 830,000 barrels of daily shipping capacity — approximately 4.2 percent of total U.S. oil demand — by 2021. Now, in yet another bit of bad news, it looks like Canada won’t be able to count on Keystone XL as a saving grace after all, as a Montana federal judge recently ruled to further delay the pipeline at what is easily the worst possible time for the industry.

Last Thursday’s ruling for an additional environmental review is just the latest setback in a decade-long legacy full of roadblocks for the controversial Keystone XL pipeline. The huge project would construct a 1,179-mile long pipeline for the purpose of delivering Canadian crude from Alberta’s oil sands to a Nebraska junction, from where it would continue its transnational journey all the way to refineries near the Gulf of Mexico. The pipeline was plagued with lawsuits since its inception and has recently seen new waves of litigation since President Donald Trump announced his approval for Keystone XL to cross the U.S.-Canada border in early 2017. At that time, two separate lawsuits challenging the project were filed by the Indigenous Environmental Network, River Alliance and Northern Plains Resource Council, which resulted in last week’s ruling that prohibits both TransCanada and the U.S. government from “from engaging in any activity in furtherance of the construction or operation of Keystone and associated facilities” until the U.S. State Department carries out a supplemental review.

As the options for Canadian oil become more limited, the industry is growing more and more dependent on even fewer projects, including Enbridge Inc.’s Line 3 expansion and the federal government’s Trans Mountain expansion project, leaving dangerously little margin for error.Could Brazil’s Oil Sector Trigger An Economic Miracle

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The algos have their sensitivity cranked up to ’11’ today…

President Trump said the following…

• *TRUMP: CHINA WOULD LIKE TO MAKE A DEAL

• *TRUMP: CHINA SENT LIST OF THINGS WILLING TO DO ON TRADE

• *TRUMP: THINK WE WILL HAVE GREAT RELATIONSHIP WITH CHINA

• *TRUMP: DON’T WANT TO PUT CHINA IN BAD POSITION

• *TRUMP: CHINA LIST PRETTY COMPLETE, FOUR OR FIVE THINGS LEFT OFF

And the machines panic bid stocks…

It appears Trump has discovered the OPEC jawbone strategy: repeat the exact same thing every day, betting idiot algos will buy.

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Total household debt hit a new record high, rising by $219 billion (1.6%) to $13.512 trillion in Q3 of 2018, according to the NY Fed’s latest household debt report, the biggest jump since 2016. It was also the 17th consecutive quarter with an increase in household debt, and the total is now $837 billion higher than the previous peak of $12.68 trillion, from the third quarter of 2008. Overall household debt is now 21.2% above the post-financial-crisis trough reached during the second quarter of 2013.

Mortgage balances—the largest component of household debt—rose by $141 billion during the third quarter, to $9.14 trillion. Credit card debt rose by $15 billion to $844 billion; auto loan debt increased by $27 billion in the quarter to $1.265 trillion and student loan debt hit a record high of $1.442 trillion, an increase of $37 billion in Q3.

Balances on home equity lines of credit (HELOC) continued their downward trend, declining by $4 billion, to $432 billion. The median credit score of newly originating mortgage borrowers was roughly unchanged, at 760.

Mortgage originations edged up to $445 billion in the second quarter, from $437 billion in the second quarter. Meanwhile, mortgage delinquencies were unchanged improve, with 1.1% of mortgage balances 90 or more days delinquent in the third quarter, same as the second quarter.

Most newly originated mortgages continued went to borrowers with the highest credit scores, with 58% of new mortgages borrowed by consumers with a 760 credit score or higher.

The median credit score of newly originating borrowers was mostly unchanged; the median credit score among newly originating mortgage borrowers was 758, suggesting that with half of all mortgages going to individuals with high credit scores, mortgages remain tight by historical standards. For auto loan originators, the distribution was flat, and individuals with subprime scores received a substantial share of newly originated auto loans.

In what will come as a surprise to nobody, outstanding student loans rose $37BN to a new all time high of $1.44 trillion as of Sept 30. It should also come as no surprise – or maybe it will to the Fed – that student loan delinquencies remain stubbornly above 10%, a level they hit 6 years ago and have failed to move in either direction since…

… while flows of student debt into serious delinquency – of 90 or more days – spiked in Q3, rising to 9.1% in the third quarter from 8.6% in the previous quarter, according to data from the Federal Reserve Bank of New York.

The third quarter marked an unexpected reversal after a period of improvement for student debt, which totaled $1.4 trillion. Such delinquency flows have been rising on auto debt since 2012 and on credit card debt since last year, which has raised a red flag for economists.

Auto loan balances also hit an all time high, as they continued their six-year upward trend, increasing by $9 billion in the quarter, to $1.24 trillion. Meanwhile, credit card balances rose by $14 billion, or 1.7%, after a seasonal decline in the first quarter, to $829 billion.

Despite rising interest rates, credit card delinquency rates eased slightly, with 7.9% of balances 90 or more days delinquent as of June 30, versus 8.0% at March 31. The share of consumers with an account in collections fell 23.4% between the third quarter of 2017 and the second quarter of 2018, from 12.3% to 9.4%, due to changes in reporting requirements of collections agencies.

Auto loan balances also hit an all time high, as they continued their six-year upward trend, increasing by $27 billion in the quarter, to $1.265 trillion. Meanwhile, credit card balances rose by $15 billion to $844 billion. In line with rising interest rates, credit card delinquency rates rose modestly, with 4.9% of balances 90 or more days delinquent as of Sept 30, versus 4.8% in Q2.

Overall, as of September 30, 4.7% of outstanding debt was in some stage of delinquency, an uptick from 4.5% in the second quarter and the largest in 7 years. Of the $638 billion of debt that is delinquent, $415 billion is seriously delinquent (at least 90 days late or “severely derogatory”). This increase was primarily due to the abovementioned increase in the flow into delinquency for student loan balances during the third quarter of 2018. The flow into 90+ day delinquency for credit card balances has been rising for the last year and remained elevated since then compared to its recent history, while the flow into 90+ day delinquency for auto loan balances has been slowly trending upward since 2012. About 215,000 consumers had a bankruptcy notation added to their credit reports in 2018Q3, slightly higher than in the same quarter of last year. New bankruptcy notations have been at historically low levels since 2016.

This quarter, for the first time, the Fed also broke down consumer debt by age group, and found that debt balances remain more concentrated among older borrowers. The shift over the past decade is due to at least three major forces. First, demographics have changed with large cohorts of baby boomers entering into retirement. Second, demand for credit has shifted, along with changing preferences and borrowing needs following the Great Recession. Finally, the supply of credit has changed: mortgage lending has been tight, while auto loans and credit cards have been more widely available.

In addition to an overall increase in the share of debt held by older borrowers, there has been a noticeable shift in the composition of debt held by different age groups. Student and auto loan debt represent the majority of debt for borrowers under thirty, while housing-related debt makes up the vast majority of debt owned by borrowers over sixty.

Confirming what many know, namely that Millennial borrowers are screwed, the Ny Fed writes that older borrowers have longer credit histories with more borrowing experience, as well as higher and typically steadier incomes; “thus, they often have higher credit scores and are safer bets for lenders.” Tighter mortgage underwriting during the years following the Great Recession has limited mortgage borrowing by younger and less creditworthy borrowers; meanwhile, student loan balances – and as most know “student” loans are usually used for anything but tuition – and participation rose dramatically and credit standards loosened for auto loans and credit cards. Consequently, there has been a relative shift toward non-housing balances among younger borrowers, while housing balances moved to the older and more creditworthy borrowers with lower delinquency rates and better performance overall.

And since this is a circular Catch 22, absent an overhaul of how credit is apportioned by age group, Millennials and other young borrowers will keep getting squeezed out of the credit market resulting in a decline in loan demand – and supply – which is slow at first and then very fast.

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Authored by Jesse Colombo via RealInvestmentAdvice.com,

TechCrunch recently posted a fascinating chart of the monthly count of global VC deals that raised $100 million or more since 2007. According to this chart, a new “unicorn” startup was born every four days in 2018. Unfortunately, this is even more evidence of the tech startup bubble that I have been warning about.

Here’s the list of “unicorn” companies worth more than $1 billion as of the third quarter of 2018:

The world has gone completely startup crazy over the last several years. Spurred by soaring tech stock prices (a byproduct of the U.S. stock market bubble) and the frothy Fed-driven economic environment, countless entrepreneurs and VCs are looking to launch the next Facebook or Google. Following in the footsteps of the dot-com companies in the late-1990s, startups that actually turn a profit are the rare exceptions. Unfortunately, today’s tech startup bubble is going to end just like the dot-com bubble did: scores of startups are going to fold and founders, VCs, and investors are going to lose their shirts.

The chart below shows the Nasdaq Composite Index and the two bubbles that formed in it in the past two decades. Lofty tech stock prices and valuations encourage the tech startup bubble because publicly traded tech companies have more buying power with which to acquire tech startups and because they allow startups to IPO at very high valuations.

In the chart below, I compared TechCrunch’s monthly global VC deals chart to the Nasdaq Composite Index and they line up perfectly. Surges in the Nasdaq lead to surges in VC deals, while lulls or declines in the Nasdaq lead to lulls or declines in VC deals (yes, I’m aware that correlation is not necessarily causation, but there is a causal relationship in this case).

Please watch my recent presentation about the U.S. stock market bubble to learn more:

I believe that a very high percentage of today’s startups are actually malinvestments that only exist due to the false signal created when the Fed and other central banks distorted the financial markets and economy with their aggressive monetary stimulus programs after the global financial crisis. See this definition of malinvestment from the Mises Wiki:

Malinvestment is a mistaken investment in wrong lines of production, which inevitably lead to wasted capital and economic losses, subsequently requiring the reallocation of resources to more productive uses. “Wrong” in this sense means incorrect or mistaken from the point of view of the real long-term needs and demands of the economy, if those needs and demands were expressed with the correct price signals in the free market. Random, isolated entrepreneurial miscalculations and mistaken investments occur in any market (resulting in standard bankruptcies and business failures) but systematic, simultaneous and widespread investment mistakes can only occur through systematically distorted price signals, and these result in depressions or recessions. Austrians believe systemic malinvestments occur because of unnecessary and counterproductive intervention in the free market, distorting price signals and misleading investors and entrepreneurs. For Austrians, prices are an essential information channel through which market participants communicate their demands and cause resources to be allocated to satisfy those demands appropriately. If the government or banks distort, confuse or mislead investors and market participants by not permitting the price mechanism to work appropriately, unsustainable malinvestment will be the inevitable result.

Rising interest rates and the overall tightening monetary environment will lead to the popping of today’s stock market bubble, which will then spill over into the tech startup bubble.

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With UK stocks and the pound recovering from the Brexit-related chaos of the past week, it appears traders are still unwilling to accept the fact that, in trying to ram her extremely unpopular draft agreement down the throats of intransigent Tory Brexiteers (not to mention the still-furious DUP), Theresa May is facing an impossible task.

Even analysts at now-bearish Goldman Sachs were willing to base their ‘base case’ on the likelihood that a modified version of the draft agreement would eventually pass at the eleventh hour as “it is characteristic of European negotiations to come down to the wire.”

But in a note published two days after May secured her cabinet’s reluctant backing of the draft deal (setting off a furious confrontation with Brexiteers and other slightly more moderate pro-Leave Tories wary of becoming a “vassal state” of the EU), analysts at Deutsche Bank took what appears to be a more sober look at the steep odds facing a Brexit deal. Unlike Goldman, DB dares to assign odds to the possible outcomes: and it sees the probability that Theresa May will survive a leadership challenge and successfully pass the deal in hand at a paltry 35%.

Th only reasonable scenario in which May’s deal could pass would if “significant market pressure” is brought to bear againsst the Tories. It’s more likely that one of two alternatives will follow: Either May calls for a second referendum (the dreaded “People’s vote”, which she has repeatedly insisted won’t happen.

But before any of this can happen, May will almost certainly be faced with a leadership challenge as MPs continue to file ‘no confidence’ letters with the 1922 Committee. The stakes here for the UK couldn’t be higher: While it’s very possible that May survives the vote, her margin of support is narrower than many believe. And if May loses the support of more than 130 MPs, DB believes she will resign rather than facing a defeat, setting off a chaotic leadership conference. Out of the chaos, DB expects that a Brexiteer leader would likely take power after running on an explicit ‘no deal’ platform.

Should a confidence vote be triggered, the threshold for Prime Minister May surviving is a simple majority, after which no confidence vote can be triggered for twelve months. In political terms, if she loses more than 130-140 MP votes (around 40%) survival will be more difficult and there is a strong chance the Prime Minister resigns.

Should a confidence vote be triggered today, it will happen within twenty four hours. Should this outcome materialise, we view the implications for markets as very negative. Unlike 2016, we see a strong probability that a full Conservative leadership contest results, with an ultimate vote taken to the Conservative Party membership, likely including a hard Brexiteer. The winner of the contest is likely to run on a no deal platform. We anticipate that the EU27 will make a no deal outcome their base case and both sides step up no deal planning.

Even if she survives the vote, the prime minister would still be in a serious bind. The past two days have demonstrate that there’s little political will to pass the draft agreement in its current form. And senior EU officials, including Michel Barnier, have made it clear that no more changes will be accepted.

So the only other options available to Prime Minister May would be a policy pivot towards a much softer form of Brexit (eg EEA membership plus a permanent customs union), which would be likely to gain Labour Party support in the Commons. However, it’s unclear whether the EU would be willing to allow this. The only other alternative would be a second referendum, which May has said she’s resolutely opposed to doing.

There is also considerable doubt over what question would be put forward in a referendum, should one be called ( would it be another vote on remain/leave? Or deal/no deal?). If all else fails and May is deposed, the next logical step would be for another general election (though these political gambits haven’t worked out all that well for the Tories in the past)

To be sure, DB’s base case, like Goldman’s, is that May survives a leadership challenge and that a deal is forced through at the last minute. In the meantime, DB believes the focus for their clients should be on a) whether a motion of confidence is called and what the result will be b) whether market pressure will be sufficient to change the political calculus.

But without further delay, here are DB’s odds (notably, the combined odds that May either calls for a second referendum or resigns are 50%).:

• May survives and continues with current deal, ultimately voted through due to lack of alternatives: 35% (“national interest”)
• May calls second referendum: 30% (“we will fulfill the Democratic decision of the British people”)
• May loses confidence vote/resigns, with risk of early election: 20% (“this is the best possible deal”)
• May pivots to soft Brexit position: 15% (“Brexit means Brexit”)

And if you’re still confused about the many possible scenarios that could play out from here, check out the schematic below:

Nomura has also mapped out the likelihood that the customs union backstop could be removed from the deal during the following four scenarios.

And if DB’s worst case scenario (for markets) comes to pass, May is toppled, and a “no deal” Brexit becomes imminent, here’s what that might mean for the pound.

This would take the £ to parity.
With the Turkish Lira. https://t.co/t5dLcsHt9t

— Paul McNamara (@M_PaulMcNamara) November 16, 2018

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With Bridgewater’s Ray Dalio yesterday and Fed vice chair Richard Clarida this morning the latest voices to join the chorus of warnings about the slowing US economy as Trump’s fiscal stimulus fades and turns into a tailwind, it is only a matter of time before the historic growth decoupling between the US and the rest of the world finally converges.

Meanwhile, Wall Street consensus now unanimously expects the global economy to slow next year (in Goldman’s case from 3.8% in 2018 to 3.5% in 2019) led by deceleration in the US and further softening in China.

Growth to slow in 2019E: Real GDP growth forecast, %

Beyond 2019 it gets worse: as Goldman writes in its 2019 Macro Outlook, “the risk of a global recession is likely to rise as more and more DM economies move beyond full employment.”

But while a recession in 2020 is increasingly priced in, with the market now expecting a rate cut in 2020 – if not Q4 – the question is what happens in 2019. As the following chart from Merk Investments shows, the global growth backdrop based on various PMI indexes may be even worse than consensus holds. The good news: most major PMIs remain above 50, i.e. in expansion. The bad news: at the current pace, contraction is inevitable for most developed economies.

One doesn’t need PMIs however: in many cases GDP tells the full story, and in just the past week we saw what BofA called “flash recessions” in three key economies: Japan GDP -0.3%, German GDP -0.2%, and Italy GDP 0.0%. Meanwhile China is also cracking, as its auto sales plunge -12% YoY.

To Bank of America’s Michael Hartnett, who has been bearish for much of the past several years, this means that the resilience of US data, and US credit spreads will soon to be tested.

Which brings us back to the always engaging debate about what is the level of the “Fed Put”?

The answer, according to BofA, is threefold: SPY <$250, HYG <$80, ISM new orders < 50 would trigger the Fed.

And it’s not just the Fed: China export growth would panic PBoC, while US payroll <50K would panic Trump on trade, according to BofA. Why is this important? Because as Hartnett’s Axiom 1 about markets is thatr “markets stop panicking the moment central banks start panicking.“

For now markets are still panicking, perhaps as a result of being massively wrong-footed by their capital allocation YTD: in 2018, there have been $122BN flows equities, $35BN into money market fund, and $24BN into bonds, when in reality investors should have just put it all in 3M Bills as cash outperforms stocks & bonds for 1st time since 1992.

What – to BofA – is the ultimate tell for the Fed to start panicking? The answer: rhe fall of the last bull standing. Following oil collapse, final bear dominoes to drop…HY corporate bonds…

…and after a Q4/Q1 overshoot, the US dollar.

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With traders’ expectations for sterling volatility remaining anxiety-inducingly high…

And cable unable to rebound from yesterday’s drop, amid a new onslaught of establishment fearmongery…

Bloomberg’s Macro Strategist Mark Cudmore has an answer (or a process) to the multi-billion pound question everyone is asking: what’s priced in for sterling and where’s the next big move?

Don’t try to answer. Instead, think of a framework for assessing the situation.

1. Make things as simple as possible

There are multiple scenarios but they can essentially be divided into a binary decision of either

• Chaos: a hard Brexit or no-deal Brexit starting next March (or at least that result looking likely until near the March deadline); or…

• Relief: no major change of economic status quo, either because the current Brexit deal passes, Brexit is cancelled via a second referendum, or the negotiation period is extended

2. Set a baseline

Estimate where we were at Wednesday’s close — when an agreement was in place and the Cabinet had signed off, and before any ministers had resigned. Let’s say we were pricing 50% chaos / 50% relief then.

Next, estimate how those probabilities had shifted by Thursday’s close. It looks more fraught, but not blind panic. Say 65% chaos / 35% relief.

The Bloomberg British Pound Index fell by ~2% in that period. So, based on the input probabilities, that indicates that a 15% shift toward the chaos scenario caused a 2% reaction in sterling.

But bear in mind the gyrations may be bigger, the closer we get toward 100% likelihood of one outcome or the other.

3a. Identify the next major event risks.

PM Theresa May has given no indication that she will resign, so the next major catalyst could be a confidence vote on her leadership.

Until a confidence vote is declared, sterling should slowly grind higher as the gap between the probabilities narrows.

If a confidence vote is declared, it may shift the probabilities again — to, say, a 75% chance of our chaos outcome — within just a couple of hours. A 10% probability move (rather than the earlier 15% probability shift), but at a higher-beta part of the curve, may lead traders to expect something like another ~2% drop in the Pound Index.

3b. Break those risks into a decision tree

If May loses the confidence vote, we get closer to a chaos outcome (maybe 85%), which could trigger another negative reaction in the Pound Index, again larger relative to the change in probabilities as we’re still further along the curve. Sterling could be another 2.5% weaker and still falling, though with the risk of occasional rallies on any headlines that change the narrative

If May wins the confidence vote, the relief scenario gains a bit of ground (back to, say, 40%), so the pound should strengthen. And by the time of the parliamentary vote, there’s a chance the equation could be more like 55% chaos / 45% relief as May works with a tailwind to campaign for the deal. That’s 10% better than we are now, so the pound could probably be ~1.5% higher than we currently trade

4. Weigh everything up and wait for the opportunity

Having assigned a probability that there’ll be a confidence vote, and then also whether May survives such a vote, then it’s possible to probability-weight the likelihood of where sterling will trade under the various outcomes. When it looks misaligned versus expectations of how the drama plays out — that’s the moment to pounce.

This process can obviously be extended to the parliamentary vote and all the other major steps on the way.

 

 

 

 

 

 

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