Month: September 2016

In the most dramatic diplomatic escalation involving the Syrian conflict in the past years, yesterday John Kerry issued an ultimatum to Russia, in which he warned his colleague Lavrov to stop bombing Aleppo or else the US would suspend all cooperation and diplomacy with Russia.

24 hours later, this appears to be precisely what is about to take place, leading to an even greater geopolitical shock in Syria. According to Retuers, the United States is expected to tell Russia on Thursday it is suspending their diplomatic engagement on Syria following the Russian-backed Syrian government’s intense attacks on Aleppo, U.S. officials said on condition of anonymity.

Why now and what happens next? According to US officials, the Obama administration is now considering tougher responses to the Russian-backed Syrian government assault on Aleppo, including military options. According to Reuters, the new discussions were being held at “staff level,” and have yet to produce any recommendations to President Barack Obama, who has resisted ordering military action against Syrian President Bashar al-Assad in the country’s multi-sided civil war.

However, now that diplomacy with Russia is set to end, this will give the greenlight for Obama to send in US troops in Syria, with Putin certain to respond appropriately, in what will be the biggest military escalation in the Syrian proxy war in its five and a half year history.

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By John Buttler, originally published in the The Guardian. John is vice president and head of wealth services for Goldmoney and a consultant to Cobden Partners, an economic consultancy.

It is time to start calling QE what it is: a hidden tax on the wealth of middle-class savers and pensioners

The prolonged unconventional, quantitative easing (QE) monetary policy of the Bank of England has effectively hijacked fiscal policy from the government, with disastrous effects on savers and pensioners and in a way that makes wealth inequality worse more generally.

The reasons for this are subtle, which is why they are also insidious.

As quoted by Steve Baker MP in a recent House of Commons debate on QE, John Maynard Keynes once explained how, via inflation, “governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens,” and, “while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth”.

As arguably the single most influential economist of the 20th century, we should give Keynes’ thoughts on this matter due consideration.

It may be true that consumer price inflation remains relatively low due to what economists call slack in the labour market, which tends to reduce or prevent wage growth. But because of the artificially low asset yields associated with QE, savers and pensioners now find they must outright liquidate assets in order to maintain a middle-class lifestyle or to enjoy a comfortable retirement. While that can work for a time, in the end it erodes the middle-class capital base and leaves households with less to pass down to their children and grandchildren.

QE enriches those who have already accumulated enough assets such that they generate sufficient income without the need to liquidate their accumulated capital base. As the Bank itself determined in a 2012 paper analysing, among other things, the distributional effects of QE, “the top 5% of households own 40% of the assets,” and hence they have been the primary beneficiaries of the rampant asset price inflation following the financial crisis of 2008 and large devaluation in sterling.

QE can also be an effective tool to weaken the currency, which makes imports and basic goods more expensive, squeezing the middle class further. While some argue that it is possible to “devalue your way to prosperity”, history has not been kind to the countries and empires that have followed this path. Countries that have pursued stable or outright strong currency policies have generally fared much better. Germany and Switzerland come to mind, as does the pre-1970s United States.

Claudio Borio, the head of the monetary and economic department at the Bank for International Settlements, claimed in a recent speech that radical unconventional monetary policy “is just fiscal policy dressed up”.

Indeed, it is time to start calling QE what it is: a hidden tax on the wealth of middle-class savers and pensioners which, on the one hand, the government can use to finance the deficits associated with a large, modern welfare state and, on the other, redistribute wealth to the top 5% of households. That is not only monetary policy. It is fiscal policy, which the Bank has de facto taken over.

It remains to be seen whether it was a wise decision, but UK citizens recently exercised their democratic right by voting to leave the comparatively less democratic EU. The government has already set about considering what changes its newfound independence might enable it to make to fiscal policy, such as lowering the corporate tax rate to attract much-needed private investment.

It would be even more refreshing to see it reassert its right to determine fiscal policy more generally by telling the Bank to end QE and with it the associated insidious, pernicious distributional effects in favour of the wealthy. The economic policy focus can then turn to where it truly belongs, on how best to generate increasing rates of savings, investment and productivity growth, and in a way that does not disproportionately benefit any one group – whether rich or poor – over another.

The British public was recently allowed to vote on whether they wished to leave the EU. Shouldn’t they also be allowed to vote on whether they would like their accumulated private savings to be devalued?

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By John Buttler, originally published in the The Guardian. John is vice president and head of wealth services for Goldmoney and a consultant to Cobden Partners, an economic consultancy.

It is time to start calling QE what it is: a hidden tax on the wealth of middle-class savers and pensioners

The prolonged unconventional, quantitative easing (QE) monetary policy of the Bank of England has effectively hijacked fiscal policy from the government, with disastrous effects on savers and pensioners and in a way that makes wealth inequality worse more generally.

The reasons for this are subtle, which is why they are also insidious.

As quoted by Steve Baker MP in a recent House of Commons debate on QE, John Maynard Keynes once explained how, via inflation, “governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens,” and, “while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth”.

As arguably the single most influential economist of the 20th century, we should give Keynes’ thoughts on this matter due consideration.

It may be true that consumer price inflation remains relatively low due to what economists call slack in the labour market, which tends to reduce or prevent wage growth. But because of the artificially low asset yields associated with QE, savers and pensioners now find they must outright liquidate assets in order to maintain a middle-class lifestyle or to enjoy a comfortable retirement. While that can work for a time, in the end it erodes the middle-class capital base and leaves households with less to pass down to their children and grandchildren.

QE enriches those who have already accumulated enough assets such that they generate sufficient income without the need to liquidate their accumulated capital base. As the Bank itself determined in a 2012 paper analysing, among other things, the distributional effects of QE, “the top 5% of households own 40% of the assets,” and hence they have been the primary beneficiaries of the rampant asset price inflation following the financial crisis of 2008 and large devaluation in sterling.

QE can also be an effective tool to weaken the currency, which makes imports and basic goods more expensive, squeezing the middle class further. While some argue that it is possible to “devalue your way to prosperity”, history has not been kind to the countries and empires that have followed this path. Countries that have pursued stable or outright strong currency policies have generally fared much better. Germany and Switzerland come to mind, as does the pre-1970s United States.

Claudio Borio, the head of the monetary and economic department at the Bank for International Settlements, claimed in a recent speech that radical unconventional monetary policy “is just fiscal policy dressed up”.

Indeed, it is time to start calling QE what it is: a hidden tax on the wealth of middle-class savers and pensioners which, on the one hand, the government can use to finance the deficits associated with a large, modern welfare state and, on the other, redistribute wealth to the top 5% of households. That is not only monetary policy. It is fiscal policy, which the Bank has de facto taken over.

It remains to be seen whether it was a wise decision, but UK citizens recently exercised their democratic right by voting to leave the comparatively less democratic EU. The government has already set about considering what changes its newfound independence might enable it to make to fiscal policy, such as lowering the corporate tax rate to attract much-needed private investment.

It would be even more refreshing to see it reassert its right to determine fiscal policy more generally by telling the Bank to end QE and with it the associated insidious, pernicious distributional effects in favour of the wealthy. The economic policy focus can then turn to where it truly belongs, on how best to generate increasing rates of savings, investment and productivity growth, and in a way that does not disproportionately benefit any one group – whether rich or poor – over another.

The British public was recently allowed to vote on whether they wished to leave the EU. Shouldn’t they also be allowed to vote on whether they would like their accumulated private savings to be devalued?

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While historically the major conflict within OPEC in recent years had been between Iran, whose oil production had been mothballed since 2013 as a result of the US embargo and which is now eager to regain its roughly 4mmbpd in production, and Saudi Arabia, which successfully picked up market share from Iran, a new source of contention within OPEC emerged last night when Iraq disagreed with OPEC’s method of production estimates as reported last night.

And now it appears that Iraq – which in August produced between 4.4mmbpd and 4.6mmbpd depending on whose estimates are used, will not be easily placated. As Reuters details, Iraq, which overtook Iran as the group’s second-largest producer several years ago but kept its OPEC agenda fairly low-profile, on Wednesday finally made its presence felt. “What it did, however, pleased neither Saudi Arabia nor Iran.”

Iraq’s new oil minister Jabar Ali al-Luaibi told his Saudi and Iranian counterparts, Khalid al-Falih and Bijan Zanganeh, in a closed-door gathering in Algiers that “it was an OPEC meeting for all ministers”, a source briefed on the talks said. Luaibi, it turns out, is also the key OPEC member who “didn’t like the idea of re-establishing OPEC’s output ceiling at 32.5 million barrels per day (bpd), according to OPEC sources.”

Continuing the point made first yesterday, Luaibi told the meeting that the new 32.5 mmbpd ceiling was no good for Baghdad as OPEC had underestimated Iraq’s production, which has soared in recent years.

Confusion followed, according to Reuters sources, and after a debate OPEC chose to impose a ceiling in the range of 32.5-33.0 million bpd – a decision dismissed by many analysts as weak and non-binding. OPEC’s current output stands at 33.24 million bpd.

As ministers including Falih and Zanganeh emerged smiling from the room and praised OPEC’s first output-limiting deal since 2008, Luaibi called a separate briefing to complain about OPEC’s estimates of Iraqi output.

“These figures do not represent our actual production,” he told reporters. If by November estimates do not change, “then we say we cannot accept this, and we will ask for alternatives”. Luaibi went even further and asked a reporter from Argus Media – whose data OPEC uses among other sources to compile estimates of countries’ production – to disclose from where Argus’ estimates were coming.

“Your sources are not acceptable. And if there is deviation from the government, then Argus will not work in Iraq,” Luaibi told the Argus reporter.

What Luabi’s was outraged by was the delta shown in the table below, which reveals a nearly 300 barrel difference between Iraq’s self-reported oil production of 4.638mmbpd and that estiamted by OPEC which amounts to just 4.354mmbpd. As we said last night, just this one difference alone is enough to eliminate the lower end of the proposed OPEC production cut of 250kbpd. If one adds other member states such as Kuwait, UAE and Venezuela, the difference between the two sets of numbers rises to nearly 1 million barrels, or well above the proposed upper bound of the production “cut” agreed upon in Algiers.

In other words, unless Iraq (and thus, Kuwait, UAE and Venezuela all relent) to using OPEC production estimates, there will be no production cut unless Saudi Arabia is willing to eat the difference.

As Reuters puts it, “Luaibi’s revolt shows the fragility of the OPEC deal.”

And while the market appears unbothered by the details, between now and November, when OPEC meets formally in Vienna, the group will have to overcome huge obstacles to agree a binding deal.

Key among them will be to establish at least some semblance of country quotas to make sure members limit global oversupply, which has helped halve prices since 2014 to below $50 a barrel. Iran, which has been exempt from the production cut (explaining why it complied with the terms of the deal) insists it wants to raise output to around 4 million bpd as it emerges from European sanctions. The Saudis have proposed that Iran freeze production at 3.7 million bpd.

Riyadh is offering to cut its own production to 10.2 million bpd from 10.7 million but most analysts argue it will fall to such a level anyway as the summer heat eases, reducing the need for cooling. It would have to cut much more if the “outlier” nations demand that their own production estimates are used.

While for some yesterday’s deal is confirmation that the Saudi strategy implemented in November 2014 has been a failure, such as Michael Wittner, head of oil research at Societe Generale, who said that the decision shows Saudi Arabia is turning its back on letting the market manage supply, it remains to be seen what if any actual production cut will actually be reached. For now, OPEC has achieved what it wanted: a spike in oil for the next two months. When the time comes to dealing with the consequences of another disappointed market reaction once OPEC reveals no final deal in Vienna in November, well at least OPEC will have sold a few billion barrels at far higher prices in the interim.

To summarize, as Reuters quoted one OPEC source, “The deal is a bit of a farce.”

via http://ift.tt/2ddQAxz Tyler Durden

While historically the major conflict within OPEC in recent years had been between Iran, whose oil production had been mothballed since 2013 as a result of the US embargo and which is now eager to regain its roughly 4mmbpd in production, and Saudi Arabia, which successfully picked up market share from Iran, a new source of contention within OPEC emerged last night when Iraq disagreed with OPEC’s method of production estimates as reported last night.

And now it appears that Iraq – which in August produced between 4.4mmbpd and 4.6mmbpd depending on whose estimates are used, will not be easily placated. As Reuters details, Iraq, which overtook Iran as the group’s second-largest producer several years ago but kept its OPEC agenda fairly low-profile, on Wednesday finally made its presence felt. “What it did, however, pleased neither Saudi Arabia nor Iran.”

Iraq’s new oil minister Jabar Ali al-Luaibi told his Saudi and Iranian counterparts, Khalid al-Falih and Bijan Zanganeh, in a closed-door gathering in Algiers that “it was an OPEC meeting for all ministers”, a source briefed on the talks said. Luaibi, it turns out, is also the key OPEC member who “didn’t like the idea of re-establishing OPEC’s output ceiling at 32.5 million barrels per day (bpd), according to OPEC sources.”

Continuing the point made first yesterday, Luaibi told the meeting that the new 32.5 mmbpd ceiling was no good for Baghdad as OPEC had underestimated Iraq’s production, which has soared in recent years.

Confusion followed, according to Reuters sources, and after a debate OPEC chose to impose a ceiling in the range of 32.5-33.0 million bpd – a decision dismissed by many analysts as weak and non-binding. OPEC’s current output stands at 33.24 million bpd.

As ministers including Falih and Zanganeh emerged smiling from the room and praised OPEC’s first output-limiting deal since 2008, Luaibi called a separate briefing to complain about OPEC’s estimates of Iraqi output.

“These figures do not represent our actual production,” he told reporters. If by November estimates do not change, “then we say we cannot accept this, and we will ask for alternatives”. Luaibi went even further and asked a reporter from Argus Media – whose data OPEC uses among other sources to compile estimates of countries’ production – to disclose from where Argus’ estimates were coming.

“Your sources are not acceptable. And if there is deviation from the government, then Argus will not work in Iraq,” Luaibi told the Argus reporter.

What Luabi’s was outraged by was the delta shown in the table below, which reveals a nearly 300 barrel difference between Iraq’s self-reported oil production of 4.638mmbpd and that estiamted by OPEC which amounts to just 4.354mmbpd. As we said last night, just this one difference alone is enough to eliminate the lower end of the proposed OPEC production cut of 250kbpd. If one adds other member states such as Kuwait, UAE and Venezuela, the difference between the two sets of numbers rises to nearly 1 million barrels, or well above the proposed upper bound of the production “cut” agreed upon in Algiers.

In other words, unless Iraq (and thus, Kuwait, UAE and Venezuela all relent) to using OPEC production estimates, there will be no production cut unless Saudi Arabia is willing to eat the difference.

As Reuters puts it, “Luaibi’s revolt shows the fragility of the OPEC deal.”

And while the market appears unbothered by the details, between now and November, when OPEC meets formally in Vienna, the group will have to overcome huge obstacles to agree a binding deal.

Key among them will be to establish at least some semblance of country quotas to make sure members limit global oversupply, which has helped halve prices since 2014 to below $50 a barrel. Iran, which has been exempt from the production cut (explaining why it complied with the terms of the deal) insists it wants to raise output to around 4 million bpd as it emerges from European sanctions. The Saudis have proposed that Iran freeze production at 3.7 million bpd.

Riyadh is offering to cut its own production to 10.2 million bpd from 10.7 million but most analysts argue it will fall to such a level anyway as the summer heat eases, reducing the need for cooling. It would have to cut much more if the “outlier” nations demand that their own production estimates are used.

While for some yesterday’s deal is confirmation that the Saudi strategy implemented in November 2014 has been a failure, such as Michael Wittner, head of oil research at Societe Generale, who said that the decision shows Saudi Arabia is turning its back on letting the market manage supply, it remains to be seen what if any actual production cut will actually be reached. For now, OPEC has achieved what it wanted: a spike in oil for the next two months. When the time comes to dealing with the consequences of another disappointed market reaction once OPEC reveals no final deal in Vienna in November, well at least OPEC will have sold a few billion barrels at far higher prices in the interim.

To summarize, as Reuters quoted one OPEC source, “The deal is a bit of a farce.”

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Following Obama's 9/11 bill veto defeat yesterday, and despite a surge in oil prices after a 'deal' was struck by OPEC, Saudi Arabia's markets are signaling panic in The Kingdom. Currency forwards are collapsing, default risk is jumping, and bank stocks are hitting record lows…

Mint's Bill Blain, in his Morning Porridge noted that last nights “surprise” OPEC agreement to agree to agree about talks on cutting oil production is fascinating. Not from the likelihood it may not ever happen, (the earliest we will know is the Vienna meeting in November), but what it tells us about how the sands are shifting around Saudi Arabia. Deliberate Saudi over-production caused the oil glut and was a policy designed to take out expensive US producers. Voodoo economics didn’t work – US producers cut and adapted, and the rest of the world hasn’t played along.

Last night’s agreement represents a fundamental shift in Saudi – a wake up and smell the camel-waste moment. The result is the kingdom is suffering rising twin deficits amounting to over 20% of GDP. As global oil revenues have tumbled on the back of crashing prices, Saudi faces a cash and spending crisis for which it’s largely unprepared. Social issues are mounting. The elites “salaries” have been slashed. It’s being forced towards the international debt markets – a massive deal is on the new issue stocks. My colleague Martin Malone expects to see Debt/GDP rise from 15% to 50%.

 

This is a picture we’ve seen before.

 

While Saudi won’t become Venezuela overnight.. are there parallels? Perhaps. Meanwhile, last night’s overturn of Obama’s veto on US citizens suing Saudi over 9/11 is very interesting – and potentially further trouble.

 

However, it does sound like Iran and Saudi are going to try to coordinate on oil supply. Despite the fact these two very different nations will disagree on absolutely everything, it’s in their mutual interest to do so. Oil analysts expecting a $10 rise in prices are pinning their hopes on Sunni/Shia rapprochement.

 

I’ve been looking at some research suggesting a seismic shift in Middle East investment into the US as a safe-haven on regional fears it won’t happen – meaning Saudi can’t just assume the global investor base will blithely fund its coming debt binge. That adds pressures for them to play nice with other pariah states, including Russia and China. And even the Iranians..

 

Or, other commentators suggest the big Middle East funds – the SWFs – could be obliged to channel funds to Saudi to preserve regional stability – therefore liquidating current US holdings..

The Saudi riyal fell against the U.S. dollar in the forward foreign exchange market on Thursday after the U.S. Congress voted to allow relatives of victims of the Sept. 11 attacks to sue Saudi Arabia.

And as Reuters reports, any legal action could take years to wind through the U.S. court system, and analysts said there might be little if any impact on the Saudi economy or state finances. But the decision by Congress was an unwelcome reminder of political and financial pressures on Riyadh as low oil prices strain its budget.

Saudi Arabia has been preparing to make its first international issue of sovereign bonds next month to raise $10 billion or more, but some Gulf bankers said the issue might now be delayed to give investors time to digest the news.

 

Similarly, the legal threat could make Riyadh less likely to choose New York for a listing of shares in national oil giant Saudi Aramco. An offer of Aramco shares is expected as soon as 2017, possibly raising tens of billions of dollars, and Saudi officials have said they are considering several foreign bourses.

 

The Senate and House of Representatives voted overwhelmingly on Wednesday to override President Barack Obama's veto of legislation granting an exception to the legal principle of sovereign immunity in cases of terrorism on U.S. soil.

 

This clears the way for attempts to seek damages from the Saudi government. Riyadh has denied longstanding suspicions that it backed the hijackers who attacked the United States in 2001. Fifteen of the 19 hijackers were Saudi nationals.

One-year dollar/riyal forwards – bets on Saudi devaluation – have soared to near 2016 highs…

And long-term forward points (a proxy for borrowing costs and The Kingdom's stability) have exploded…

Some analysts speculated that trade and investment ties between Saudi Arabia and the United States could be hurt. The kingdom owns $96.5 billion of U.S. Treasury bonds, according to the latest official U.S. data, and is believed to hold at least that sum in other U.S. assets and bank accounts.

"From a Saudi foreign ministry perspective, there will be a review of investment policy and that could move the kingdom down a different path, which could include diversification away from U.S. Treasuries," the Gulf banker said.

 

In May, Saudi foreign minister Adel al-Jubeir said the proposed U.S. law "would cause an erosion of investor confidence" in the United States, though he added that Riyadh was not threatening to pull its money out of the country.

Certainly, the fact that the largest bank in Saudi Arabia is crashing to record lows (with brokers citing loss of faith in the 2030 reform plans, rising defaults, and on top of the 9/11 bill blowabck, concerns over a possible new income tax)

h/t @Pierpont_Morgan
 

Probably nothing!!

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