Month: May 2016

It appears Russia is close to taking the next big step towards de-dollarization and killing the petro-dollar as Vladimir Putin's "dream" of ruble-based pricing of its domestically-produced oil is on the verge of realization. SPIMEX (The St. Petersburg International Mercantile Exchange) is actively courting international oil traders to join its emerging futures market, which as Bloomberg reports, is designed "to create a system where Russian oil is priced and traded in a fair and straightforward way."

Step-by-step Russia, China and other emerging economies are taking measures to reduce their dependence on the US dollar, and as SputnikNews detailed, F. William Engdahl warns – referring to Russia's crude oil benchmark initiative – this move could deal a dramatic blow to the "petrodollar's" dominance.

Russia has taken a significant step which will undermine the current Wall Street oil price monopoly: Russia's own crude oil benchmark futures contract will price oil in rubles and no longer in US dollars, American-German researcher, historian and strategic risk consultant F. William Engdahl remarks.

 

"The move is part of a longer-term strategy of decoupling Russia's economy and especially its very significant export of oil, from the US dollar, today the Achilles Heel of the Russian economy… It is part of a de-dollarization move that Russia, China and a growing number of other countries have quietly begun," the American researcher writes in his recent article for New Eastern Outlook.

 

He explains that the setting of an oil benchmark price is a cornerstone of the method used by omnipotent Wall Street bankers to control world oil prices. "Oil is the world's largest commodity in dollar terms," the historian stresses.

 

Engdahl focuses attention on the fact that the sale of oil denominated in US dollars is essential for the support of the American currency's leading role. Indeed, the US dollar's status as world's major reserve currency is one of two pillars of Washington's hegemony since the end of the Second World War (the other one is the US military supremacy), the historian emphasizes.

 

"Today, prices for Russian oil exports are set according to the Brent price in as traded London and New York. With the launch of Russia's benchmark trading, that is due to change, likely very dramatically. The new contract for Russian crude in rubles, not dollars, will trade on the St. Petersburg International Mercantile Exchange (SPIMEX)."

And, as Bloomberg reports, it appears that day is getting close…

The nation’s largest commodity exchange, whose chairman is Putin ally Igor Sechin, is courting international oil traders to join its emerging futures market. The goal is to increase revenue from Urals crude by disconnecting the price-setting mechanism from the world’s most-used Brent oil benchmark. Another aim is to move away from quoting petroleum in U.S. dollars.

 

If Russia is going to attract international participation in Russian-based pricing, the Kremlin will need to persuade traders it’s not simply trying to push prices up, some energy analysts said. The government is dependent on oil revenue to fund its budgets.

 

“The goal is to create a system where Russian oil is priced and traded in a fair and straightforward way,” said Alexei Rybnikov, president of the St. Petersburg International Mercantile Exchange, or Spimex, in a phone interview.

 

Russia, which exports about half its crude, has long complained about the size of the discounts for lower quality Urals oil compared to North Sea Brent prices, which are assessed by the Platts agency. With world oil prices down by half in the past two years and Russia facing the prospect of its worst budget deficit as a percentage of its economic output since 2010, it needs every dollar of petroleum revenue it can get. Having its own futures market would improve Russian oil price discovery as well as help domestic companies generate extra revenue from trading, said Rybnikov.

Not everyone is excited about the prospect of a Russia-controlled oil benchmark, as one can well imagine…

“The reality is that the Kremlin is always likely to be heavily involved in the Russian oil industry,” said Richard Mallinson, an analyst at Energy Aspects Ltd. “That creates the concern that the proposals might be structured to try to achieve higher prices, which is not consistent with efficient price discovery.”

Moscow is not alone in its push to change global oil pricing. China, which vies with the U.S. as the world’s biggest crude importer, has spent two decades trying to introduce its own oil futures contact, now expected this year. Iran and Venezuela, members of the Organization of Petroleum Exporting Countries, have called for trading oil in other currencies than U.S. dollars.

The Kremlin plan echoes the New York Mercantile Exchange’s efforts to offer Russian export oil futures in late 2006. Nymex, now part of CME Group Inc., discontinued the contract six years later because it wasn’t popular among traders, JBC Energy GmbH said.

“Some market participants might be wary of embracing the new futures contracts as a benchmark due to concerns about the Russian government’s high degree of involvement in the oil sector,” said Eugene Lindell an analyst at Vienna-based JBC. “It remains questionable as to what extent Spimex can provide a better overall trading framework.”
 

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Submitted by Mike Krieger via Liberty Blitzkrieg blog,

The Clinton Foundation’s finances are so messy that the nation’s most influential charity watchdog put it on its “watch list” of problematic nonprofits last month.

 

The Clinton family’s mega-charity took in more than $140 million in grants and pledges in 2013 but spent just $9 million on direct aid.

 

The group spent the bulk of its windfall on administration, travel, and salaries and bonuses, with the fattest payouts going to family friends.

 

“It seems like the Clinton Foundation operates as a slush fund for the Clintons,” said Bill Allison, a senior fellow at the Sunlight Foundation, a government watchdog group where progressive Democrat and Fordham Law professor Zephyr Teachout was once an organizing director.

 

– From last year’s post: Senior Fellow at Sunlight Foundation Calls the Clinton Foundation “A Slush Fund”

Thanks to Charles Ortel, it’s time to prepare ourselves for some more Clinton Foundation revelations.

The Washington Free Beacon reports:

The Wall Street analyst who uncovered financial discrepancies at General Electric before its stock crashed in 2008 claims the Bill, Hillary, and Chelsea Clinton Foundation has a number of irregularities in its tax records and could be violating state laws.

 

Charles Ortel, a longtime financial adviser, said he has spent the past 15 months digging into the Clinton Foundation’s public records, federal and state-level tax filings, and donor disclosures. That includes records from the foundation’s many offshoots—including the Clinton Health Access Initiative and the Clinton Global Initiative—as well as its foreign subsidiaries.

 

This week, Ortel is starting to release his findings in the first of a series of up to 40 planned reports on his website. His allegation: “this is a charity fraud.”

 

The Sunday Times of London described Ortel as “one of the finest analysts of financial statements on the planet” in a 2009 story detailing the troubles at AIG.

 

“Where you or I see pages of numbers, [Ortel] sees a narrative,” wrote Sunday Times reporter Tim Rayment. “Sometimes the theme is a company’s potential for growth. Sometimes it is the prospect of self-destruction. And at times the story does not make sense, because the figures are hiding a fraud.”

 

Ortel turned his attention to the Clinton Foundation in February 2015. To learn more about the charity, he decided to take it apart and see how it worked.

 

“I decided, as I did with GE, let’s pick one that’s complicated,” said Ortel. “The Clinton Foundation is complicated, but it’s really very small compared to GE.”

 

When Ortel tried to match up the Clinton Foundation’s tax filings with the disclosure reports from its major donors, he said he started to find problems.

 

“I decided it would be fun to cross-check what their donors thought they did when they donated to the Clinton Foundation, and that’s when I got really irritated,” he said. “There are massive discrepancies between what some of the major donors say they gave to the Clinton Foundation to do, and what the Clinton Foundation said what they got from the donors and what they did with it.”

 

Last year, the Clinton Foundation was forced to issue corrected tax filings for several years to correct donation errors. But Ortel said many of the discrepancies remain.

 

“I’m against charity fraud. I think people in both parties are against charity fraud, and this is a charity fraud,” he said.

A spokesperson for the Clinton Foundation did not comment on the claims.

I covered the Clinton Foundation and all its shadiness repeatedly last year. Here are a few highlights:

Exposed – The Clinton Foundation is Running a $20 Million Private Equity Firm in Colombia

How the Clinton Foundation Paid Sidney Blumenthal $10K per Month as He Gave Horrible Libya Advice to the State Dept.

How Donations to the Clinton Foundation Led to Tens of Billions in Weapons Sales to Autocratic Regimes

What Difference Does it Make? 1,100 Foreign Donors to Clinton Foundation Never Disclosed and Remain Secret

Senior Fellow at Sunlight Foundation Calls the Clinton Foundation “A Slush Fund”

More Clinton Foundation Cronyism – The Deal to Sell Uranium Interests to Russia While Hillary was Secretary of State

More Hillary Cronyism Revealed – How Cisco Used Clinton Foundation Donations to Cover-up Human Rights Abuse in China

This is How Hillary Does Business – An Oil Company, Human Rights Abuses in Colombia and the Clinton Foundation

Clinton Foundation’s Deep Financial Ties to Ukrainian Oligarch Who Pushed for Closer Ties to EU Revealed

Hillary Clinton Exposed Part 2 – Clinton Foundation Took Millions From Countries That Also Fund ISIS

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Pro-refugee protestors are rallying at the Brenner Pass on the Austrian-Italian border. As RT reports, the activits oppose the Austrian Governments decision to increase controls at its border with Italy, and are demanding that refugees are allowed to enter the country.

Police at the Brenner Pass. They say 400 anarchists & extreme left plan to protest Austrian plans to close border http://pic.twitter.com/PVRjYK3oMA

— Bethany Bell (@BethanyBellBB) May 7, 2016

Tear gas, riot police and anarchists at Brenner #borders #migrantcrisis http://pic.twitter.com/WhXjh6Jlk7

— Bethany Bell (@BethanyBellBB) May 7, 2016

Tear gas, riot police and anarchists at Brenner #borders #migrantcrisis http://pic.twitter.com/aLAgB2FBSb

— Bethany Bell (@BethanyBellBB) May 7, 2016

Live Feed:

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For years, Ali al Naimi was the most important person in the world of oil: the former CEO of Saudi Aramco ascended to the post of Saudi oil minister in 1995, and over the past 21 years had the power to send the price of oil soaring or plunging with one word. To be sure, over the past two years it was mostly plunging because as is well-known, Saudi Arabia’s policy ever since the 2014 Thanksgiving OPEC meeting in which Saudi Arabia broke off from the rest of the petroleum cartel to pursue its intention of putting US shale and high cost OPEC production out of business.

Then things unexpected, and dramatically, changed in April when Bloomberg published a detailed interview on the present and future of Saudi oil policy, which however took place not with al Naimi but with a young man few had heard of: Deputy Crown Prince Mohammed bin Salman, barely 30 years old, who just happens to be the favored son of Saudi Arabia’s new King Salman who took control just one year ago.

Suddenly not all was well in the top power echelons of oil, and less than three weeks later the FT wrote an extended profile of prince Mohammed bin Salman whom it dubbed “the unpredictable new voice of Saudi oil.” This is what it said:

As the fallout from collapsed oil talks in Doha reverberates, Saudi Arabia’s Mohammed bin Salman has emerged as the unpredictable new voice of the kingdom’s energy policy.

 

The 30-year-old deputy crown prince and favoured son of King Salman was not even in the Qatari capital, where many of the world’s biggest oil producers had gathered in hopes of brokering the first global output deal in 15 years in an effort to arrest a prolonged price slide.

 

Still, his message echoed through the marble halls of the Sheraton: there would be no production freeze without Iran.

 

Around 3am on Sunday morning — just hours before the talks were due to begin — Prince Mohammed called the Saudi delegation, according to people briefed on the matter, and ordered them to come home. The Saudis ultimately remained, but the talks were effectively dead.

For oil watchers Doha was not so much about OPEC oil production, but about a huge power move that had just taken place in Saudi Arabia, as a result of which al Naimi had become irrelevant overnight.

The FT confirmed as much:

“the episode has left Ali al Naimi, the kingdom’s technocratic oil minister for the past 21 years, looking increasingly sidelined. While the Saudi royal family has always had the final say on oil policy, rarely has a member spoken so publicly — or freely — on its direction. Delegates from other countries had been assured Mr Naimi was there to deliver a deal. “Saudi Arabia’s oil policy is now firmly in the hands of Deputy Crown Prince Mohammed bin Salman,” said Sean Evers, managing partner of Gulf Intelligence in Doha.”

This is all came to a stunning culmination moments ago, when Al Arabiya reported the shocking, if inevitable news, that Saudi Arabia has fired long-serving oil minister Ali al-Naimi, on Saturday. According to the WSJ, Naimi would be replaced with Khalid al-Falih, chairman of state oil company Aramco.

The royal decree, announced via state media, is part of a wider government reshuffle that includes a restructuring of the oil ministry, which has been renamed the Ministry of Energy, Industry and Mineral Resources, but the ultimate target is al Naimi who after 21 years at the helm of Saudi oil policy is gone, replaced effectively by bin Salman himself.

So the question everyone now wants answered is “what does this mean for oil?“

While nobody knows the answer, what is clear is that over the past 2 months, Prince Mohammed has had a far more hawkish outlook on oil prices. As noted above, it was Mohammed who effectively scuttled the Doha oil deal which was “this close” to reaching a conclusion before a last minute collapse as the crown prince intervened, overriding al Naimi’s proposal.

Furthermore, as the FT reported at the time, “there were other signs that Saudi Arabia’s oil ministry was preparing for a deal. Between January and March the country held its oil output at around 10.2m barrels per day — a level consistent with the proposed freeze.” Then a few weeks ago, Prince Mohammed once again poured cold water over any expectations that Saudi Arabia would permit higher oil prices when he said last week said “the country’s production could immediately rise to 11.5m b/d — if there was demand.“

In other words, on the margin al Naimi’s termination and Prince Mohammed’s official ascent to the top of the Saudi oil chain of command is likely bearish in the short term, as Saudi Arabia reverts to its 2014 strategy of pushing oil prices low enough to put marginal producers out of business, a process that due to relentless hedging and generous banks, has taken way too long.

In summary, it is likely the slow fruition of Saudi plans to put high cost producers out of business, coupled with Saudi Arabia’s own economic deterioration that forced the king to take this drastic measure.

As for the real impact on the price of oil, we will have to wait until Monday, although we can’t wait to see what happens if Saudi Arabia’s intentions are to push oil far lower once more, while algos and central banks continue to do everything in their power to push it higher.

Now that will be a showdown worth the price of admission.

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Submitted by Eric Zuesse courtesy of Strategic Culture

Why Obama Prioritizes Ousting Assad Over Defeating Syria’s Jihadists: Part I

Dr Christina Lin, a leading young scholar on jihadist groups, opens her April 8^th commentary at Asia Times: «In a blunder reeking of the fallout caused by supplying Stinger anti-aircraft missiles to 1980s mujahideen in Afghanistan, civilian airline passengers are now under threat from Syrian jihadists armed with portable surface-to-air missiles (MANPADS).

Reports say some American-backed jihadi groups are being equipped with US-made MANPADS. Indications are they’re obtaining these advanced weapons either directly or indirectly from the US or its Mideast allies in connection with a recent escalation in the fighting in Syria.

On April 2, fighting broke out between western-backed al-Qaeda affiliates and the Syrian army, ending the Syrian ceasefire. The groups that broke the ceasefire included al-Qaeda in Syria (al-Nusra), the Chinese Uyghur Turkistan Islamic Party (TIP), The Levant Brigade, the Freemen of Syria (Ahrar ash-Sham), Division 13, and other jihadi groups. According to AP, the US-trained and armed Division 13 is now fighting alongside al-Nusra and Ahrar al-Sham. The latter two are part of the Turkey/Saudi/Qatar-backed Army of Conquest».

That report goes on to document, essentially, that US President Barack Obama is continuing his efforts to replace the the only secular, non-sectarian government in the Middle East, that of the Ba’athist Party, which has always been the only non-religious political party in the Arab world – everything else in Arabia has been fundamentalist-Sunni, to at least some extent. (Think of it: after 9/11, the US government aiding al-Qaeda! The US government is more against Russia than it’s against jihadists – though Russia never invaded the US, and communism is gone!)

Dr Lin quotes a Saudi official as saying (in Germany’s Spiegel), «We believe that introducing surface-to-air missiles in Syria is going to change the balance of power on the ground… just like surface-to-air missiles in Afghanistan were able to change the balance of power there». He was referring there to this in 1979, where Obama’s friend Zbigniew Brzezinski explained why the Americans and the Saudis were supplying SAMs to the mujahideen who became al-Qaeda, and he was also referring to this in 1998, where Brzezinski, when asked whether he thought that arming those fundamentalist Sunnis had been a mistake, said that it certainly was not. Obama is continuing in that vein. Brzezinski still was talking there as if Russia equals the USSR, equals «the enemy». Obama acts from that same viewpoint – the viewpoint that will end either in WW III, or in Russia’s capitulation to the US aristocracy.

In their view, the end of communism, and the end of the Soviet Union, and the end of the Soviets’ Warsaw Pact (which was their counterpart to America’s NATO alliance), made and make no difference, and Syria should be ruled by jihadist groups, because its current government is allied with Russia, and Russia always tries to kill jihadists, never allies with them (as the US does).

Obama overthrew the Russia-friendly government of Ukraine and replaced it with an anti-Russian government; he also led the NATO bombing campaign that overthrew the Russia-friendly leader of Libya, Muammar Gaddafi; and he has since been trying to do the same thing in Syria, to Assad.

Dr Lin continues:

«Now, if it turns out that al-Qaeda affiliates in Syria are indeed armed with MANPADS, it would amount to what former CIA director David Petraeus called ‘our worst nightmare’. The missile would do far more than improve terrorist groups’ military capabilities to conduct future attacks.

A 2005 RAND study also concluded that Jihadists shooting down a civilian airliner would put a temporary freeze on worldwide air travel, causing a $15 billion loss to the world economy. More than a decade after this study, the present-day economic loss would be substantially higher than $15 billion».

Dr Lin’s calling this a «blunder» from Obama is based upon an assumption that Obama isn’t aware of the harms that he’s causing by what he’s doing; but, on the same day, a report, including shocking documentation from Jane’s (the specialist site about military matters), makes clear that Obama is determined to overthrow Assad no matter what the consequences.

The anonymous «Moon of Alabama» blogger posted at Global Research on April 8^th, «US Delivers 3,000 Tons Of Weapons And Ammo To Al-Qaeda and Co. in Syria». Shown there is the «Simplified packing list for December 2015 arms» that were sent. The anonymous blogger explained:

«One ship with nearly one thousand tons of weapons and ammo left Constanta in Romania on December 5. The weapons are from Bulgaria, Croatia and Romania. It sailed to Agalar in Turkey which has a military pier and then to Aqaba in Jordan. Another ship with more than two-thousand tons of weapons and ammo left in late March, followed the same route and was last recorded on its way to Aqaba on April 4.

We already knew that the ‘rebels’ in Syria received plenty of weapons during the official ceasefire. We also know that these ‘rebels’ regularly deliver half of their weapon hauls from Turkey and Jordan to al-Qaeda in Syria (aka Jabhat al-Nusra):

Hard-core Islamists in the Nusra Front have long outgunned the more secular, nationalist, Western-supported rebels. According to FSA officers, Nusra routinely harvests up to half the weapons supplied by the Friends of Syria, a collection of countries opposed to Assad…

US and Turkey supported ‘rebels’ took part in the recent attack on Tal al-Eis against Syrian government forces which was launched with three suicide bombs by al-Qaeda in Syria. This was an indisputable breaking of the ceasefire agreement between Russia and the US. It is very likely that some of the weapons and ammunition the US delivered in December were used in this attack».

Consequently, Obama is clearly determined to supply weapons to the jihadists until they win. This is no «blunder». It’s a determination to beat Putin, no matter what. It has consequences not only for the US and for Russia, but for the countries that America invades or whose governments America overthrows. Here are those consequences.

The «2016 Global Emotions Report» by Gallup, surveying over a thousand people in each one of 140 different nations, found that, by far, the people in Syria had «the lowest positive experiences worldwide», the people there were far more miserable than in any other nation. The score was 36 (on a scale to 100). Second and third worst were tied at 51: Turkey because of the tightening dictatorship there as Turkey has become one of Obama’s key allies in toppling Assad; Nepal, on account of the earthquake. Then tied at 54, were three countries, the fourth, fifth, and sixth, most-miserable places to live: Georgia, which still hasn’t recovered from the US-backed wars against Abkhazia and South Ossetia, where the majority want to be part of Russia; Serbia, where the majority are opposed to the government’s move to enter NATO; and Iraq, which still hasn’t recovered from Bush’s 2003 invasion. Then tied at 55, are five countries, the seventh-through-eleventh-most-miserable nations: Yemen, where America’s ally the Sauds are dropping American bombs onto Shiite neighborhoods; Bosnia and Herzegovina, which still hasn’t recovered from the civil war and the US bombing; Lithuania, which became impoverished by IMF-imposition of economic austerity, which has prevented economic recovery; Belarus, which will probably be the last country in the world to break away from Marxism; and, finally, the 11th-worst, Ukraine, which prior to the US coup, was less miserable than 29 countries and had a score of 60, which was 5 points higher than today’s – Obama’s coup there has definitely immiserated the Ukrainian people (not to mention displaced millions and slaughtered thousands by the ethnic-cleansing campaign against residents of the former Donbass region of Ukraine).

To what extent would it be sincere, or even honest, then, for the US President to say this?:

«America’s willingness to apply force around the world is the ultimate safeguard against chaos, and America’s failure to act in the face of Syrian brutality or Russian provocations not only violates our conscience, but invites escalating aggression in the future… In Ukraine, Russia’s recent actions recall the days when Soviet tanks rolled into Eastern Europe. But this isn’t the Cold War. Our ability to shape world opinion helped isolate Russia right away. Because of American leadership, the world immediately condemned Russian actions; Europe and the G7 joined us to impose sanctions; NATO reinforced our commitment to Eastern European allies; the IMF is helping to stabilize Ukraine’s economy; OSCE monitors brought the eyes of the world to unstable parts of Ukraine. And this mobilization of world opinion and international institutions served as a counterweight to Russian propaganda and Russian troops on the border and armed militias in ski masks».

Those «armed militias in ski masks», incidentally, were US-CIA-hired mercenaries. He had to know that; he simply lied.

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Several days ago, hedge fund legend Stan Druckenmiller spoke at the Sohn Conference, delivering what may have been his most bearish fire and brimstone sermon yet, and in fact according to some buysiders who were present, its somber mood and lack of faux optimism was downright apocalyptic. And how can it not be when Druckenmiller said that while the Fed and policymakers have no endgame, markets do – hinting that one is rapidly approaching – and suggested that everyone should liquidate their equity holdings and buy a certain 5000 year old shiny asset, which as we reported earlier this week, is Druckenmiller’s “largest currency allocation.”

And just so everyone can appreciate what is keeping up at night one of the most illustrious investing minds of any generation (with a 30% average return from 1986 through 2010) below we repost his entire presentation delivered at the May 4 Sohn Conference, titled appropriately enough…

* * *

The Endgame

When I started Duquesne in February of 1981, the risk free rate of return, 5 year treasuries, was 15%. Real rates were close to 5%. We were setting up for one of the greatest bull markets in financial history as assets were priced incredibly cheaply to compete with risk free rates and Volcker’s brutal monetary squeeze forced much needed restructuring at the macro and micro level. It is not a coincidence that strange bedfellows Tip O’Neill and Ronald Reagan produced the last major reforms in social security and taxes shortly thereafter. Moreover, the 15% hurdle rate forced corporations to invest their capital wisely and engage in their own structural reform. If this led to one of the greatest investment environments ever, how can the mirror of it, which is where we are today, also be a great investment environment? Not a week goes by without someone extolling the virtues of the equity market because “there is no alternative” with rates at zero. The view has become so widely held it has its own acronym, “TINA”.

 

Not only valuations were low back in 1981 but financial leverage was less than half of what it is today. The capacity of credit inspired growth was still ahead of us. The policy response to the global crisis was, and more importantly, remains so forceful that it has prevented any real deleveraging from happening. Leverage has actually increased globally. Ironically from where I stand, that has been the intended goal of most policymakers today.

 

Let me focus on two of the main policies that have not only prevented a clean-up of past excesses in developed markets but also led to an explosion in leverage in Emerging markets. The first of these policies has been spearheaded by the Federal Reserve Bank in the US. By most objective measures, we are deep into the longest period ever of excessively easy monetary policies. During the great recession, rates were set at zero and they expanded their balance sheet by $1.4T. More to the point, after the great recession ended, the Fed continued to expand their balance sheet another $2.2T. Today, with unemployment below 5% and inflation close to 2%, the Fed’s radical dovishness continues. If the Fed was using an average of Volcker and Greenspan’s response to data as implied by standard Taylor rules, Fed Funds would be close to 3% today. In other words, and quite ironically, this is the least “data dependent” Fed we have had in history. Simply put, this is the biggest and longest dovish deviation from historical norms I have seen in my career. The Fed has borrowed more from future consumption than ever before. And despite the US global outperformance, we currently have the most negative real rates in the G-7. At the 2005 Ira Sohn Conference, looking at a more muted but similar deviation, I argued that the Greenspan Fed was sowing the seeds of an historical housing bubble fed by reckless sub-prime borrowing that would end very badly. Those policy excesses pale in comparison to the duration and extent of today’s monetary experiment

The obsession with short-term stimuli contrasts with the structural reform mindset back in the early 80s. Volcker was willing to sacrifice near term pain to rid the economy of inflation and drive reform. The turbulence he engineered led to a productivity boom, a surge in real growth, and a 25 year bull market. The myopia of today’s central bankers is leading to the opposite, reckless behavior at the government and corporate level. Five years ago, one could have argued it was in search of “escape velocity.” But the sub-par economic growth we are experiencing in the 8th year of a radical monetary experiment and in Japan after more than 20 years has blown that theory out of the water. And smoothing growth over a cycle should not be confused with consistently attempting to borrow consumption from the future. The Fed has no end game. The Fed’s objective seems to be getting by another 6 months without a 20% decline in the S&P and avoiding a recession over the near term. In doing so, they are enabling the opposite of needed reform and increasing, not lowering, the odds of the economic tail risk they are trying to avoid. At the government level, the impeding of market signals has allowed politicians to continue to ignore badly needed entitlement and tax reform.

Look at the slide behind me. The doves keep asking where is the evidence of mal-investment? As you can see, the growth in operating cash flow peaked 5 years ago and turned negative year over year recently even as net debt continues to grow at an incredibly high pace. Never in the post-World War II period has this happened. Until the cycle preceding the great recession, the peaks had been pretty much coincident. Even during that cycle, they only diverged for 2 years, and by the time EBITDA turned negative year over year, as it has today, growth in net debt had been declining for over 2 years. Again, the current 5-year divergence is unprecedented in financial history!

And if this wasn’t disturbing enough, take a look at the use of that debt in this cycle. While the debt in the 1990’s financed the construction of the internet, most of the debt today has been used for financial engineering, not productive investments. This is very clear in this slide. The purple in the graph represents buybacks and M/A vs. the green which represents capital expenditure. Notice how the green dominates in the 1990’s and is totally dominated by the purple in the current cycle. Think about this. Last year, buybacks and M&A were $2T. All R&D and office equipment spending was $1.8T. And the reckless behavior has grown in a non-linear fashion after 8 years of free money. In 2012, buybacks and M&A were $1.25T while all R&D and office equipment spending was $1.55T. As valuations rose since then, R&D and office equipment grew by only $250b, but financial engineering grew $750b, or 3x this! You can only live on your seed corn so long. Despite no increase in their interest costs while growing their net borrowing by $1.7T, the profit share of the corporate sector peaked in 2012. The corporate sector today is stuck in a vicious cycle of earnings management, questionable allocation of capital, low productivity, declining margins, and growing indebtedness. And we are paying 18X for the asset class.

A second source of myopic policies is now coming from China. In response to the global financial crisis, China embarked on a $4 trillion stimulus program. However, because they had engaged in massive infrastructure investment the previous 10 years, and that was the primary stimulus pipe they chose; this only aggravated the overcapacity in the investment side of their economy. Not surprisingly, this only provided a short term pop in nominal growth. While we were worried about bank assets to GDP in 2012, incredibly, credit has increased by 70% of GDP in the 4 years since then. Just to put this in perspective, this means that since 2012 the Chinese banking sector has allowed credit to grow by the amount of the entire Brazilian GDP per year! Picture the entire Brazilian production in new houses and infrastructure. Incredibly, all this credit growth has been accompanied by a fall in nominal GDP growth from 15% to 5%. This is an extremely toxic cocktail for companies that have borrowed at 10% expecting 15% sales growth. Our strong suspicion therefore is that a large part of this growth is just credit flowing to otherwise insolvent borrowers. How else to explain the lack of NPL problem in heavy industries hit by lower prices and sales growth?

As a result, unlike the pre-stimulus period, when it took $1.50 to generate a $1.00 of GDP, it now takes $7. This is extremely rare and dangerous. The most recent historical analogue was the U.S. in the mid- 2000’s when the debt needed to generate a $ of GDP increased from  $1.50 to $6 during the subprime mania. Two years ago, we had hope the Chinese were ready to accept a slowdown in exchange for reform. Unfortunately, with the encouragement of the G-7, they have opted for another investment focused fiscal stimulus which may buy them some time but will exacerbate their problem. They do not need more debt and more houses.

As the chart shows, this will remove a major cylinder from the engine of world growth.

I have argued that myopic policy makers have no end game, they stumble from one short term fiscal or monetary stimulus to the next, despite overwhelming evidence that they only produce an ephemeral sugar high and grow unproductive debt that impedes long term growth. Moreover, the continued decline of global growth despite unprecedented stimulus the past decade suggests we have borrowed so much from our future for so long the chickens are coming home to roost. Three years ago on this stage I criticized the rationale of fed policy but drew a bullish intermediate conclusion as the weight of the evidence suggested the tidal wave of central bank money worldwide would still propel financial assets higher. I now feel the weight of the evidence has shifted the other way; higher valuations, three more years of unproductive corporate behavior, limits to further easing and excessive borrowing from the future suggest that the bull market is exhausting itself.

If we have borrowed more from our future than any time in history and markets value the future, we should be selling at a discount, not a premium to historic valuations. It is hard to avoid the comparison with 1982 when the market sold for 7x depressed earnings with dozens of rate cuts and productivity rising going forward vs. 18x inflated earnings, productivity declining and no further ammo on interest rates.

The lack of progress and volatility in global equity markets the past year, which often precedes a major trend change, suggests that their risk/reward is negative without substantially lower prices and/or structural reform. Don’t hold your breath for the latter. While policymakers have no end game, markets do.

On a final note, what was the one asset you did not want to own when I started Duquesne in 1981? Hint…it has traded for 5000 years and for the first time has a positive carry in many parts of the globe as bankers are now experimenting with the absurd notion of negative interest rates. Some regard it as a metal, we regard it as a currency and it remains our largest currency allocation.

 

via http://ift.tt/1ZqfESb Tyler Durden

By EconMatters

Paradigm Shifts happen throughout human evolution, are we experiencing just such a case in the automobile marketplace and Energy space? Additional Technological Breakthroughs necessary for knock out punch against the Oil Market.

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