Month: June 2017

After allegedly pressuring the Chinese government to act first and adopt sanctions against nearly 10 local entities who the US claims provided North Korea with materials used in its nuclear program, the US has decided to act.  In an unprecedented step, the Treasury Department slapped financial sanctions on two Chinese nationals and a Chinese shipping company over their ties to North Korea stemming from its nuclear program, according to Reuters.

The Trump administration also proposed sanctions against a Chinese bank of helping North Korea launder money and cut the institution off from the US financial system, in a major step that at least on the surface, is aimed at convincing China to put more pressure on Pyongyang to abandon its missile and nuclear programs, according to the Financial Times. The US Treasury designated the bank in question, the Bank of Dandong, as a “foreign bank of primary money laundering concern” and also imposed sanctions on two Chinese individuals and one Chinese company.

The Treasury Department said in a statement it was sanctioning Wei Sun for links to the Foreign Trade Bank of the Democratic People's Republic of Korea, Hong Ri Li for his links to North Korean banking executive Song-hyok Ri, as well as the Dalian Global Unity Shipping Co Ltd of Dalian, China.

The moves come one week after top US and Chinese officials met for strategic talks in Washington in which the US side tried to persuade China to take more action on North Korea. Steven Mnuchin, Treasury secretary, said the US was “sending an emphatic message across the globe that we will not hesitate to take action against persons, companies, and financial institutions who enable this [North Korean] regime”.

Dennis Wilder, the former top White House adviser to George W Bush, said the moves were a “major decision” that had been under consideration for some time, but had been held off because of sensitivities in China, which is opposed to what the US terms secondary sanctions.

“It should not come as a surprise to Beijing as the Trump administration has repeatedly signaled that if China did not do more to shut down entities violating the UN Security Council resolutions, Washington would have to act unilaterally,” said Mr Wilder. “The question going forward is whether it will spur Beijing to do more to enforce the sanctions or cause Beijing to reduce cooperation on North Korea.”

Evan Medeiros, a former top Asia official in the Obama administration now at the Eurasia Group, said the Trump administration was “crossing an important threshold and signalling to Beijing how serious they are about the North Korea threat”.

The news comes after the Trump administration scored a minor victory when the Chinese government said it agreed on the need for complete dismantling of the North Korean nuclear program, though Trump Trump has repeatedly complained about the ongoing efforts to coax China into doing more to curb the country's nuclear ambitions.

And now we await China's response to what the local media will promptly brand a belligerent act by the US. Making things especially awkward, Trump will meet with China's president XI in just a few days, during next week's G-20 summit in Germany.

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The Institute of International Finance is perhaps best known for its periodic – and concerning – reports summarizing global leverage statistics, and its latest Q1 report was the most troubling yet, because what it found was that in a period of so-called “coordinated growth”, global debt hit a new all time high of $217 trillion, or over 327% of global GDP, up $50 trillion over the past decade. So much for Ray Dalio’s beautiful deleveraging, oh and for those economists who are still confused why r-star remains near 0%, the chart  below has all the answers.

Not surprisingly, China continues to be the biggest source of global debt growth, with the country’s total debt load now surpassing 300%.

While much of the debt issuance at the financial sector level has moderated in recent years, supplanted by outside money created by central banks, debt in the non-financial sector has continued to grow, and as of Q1 2017, hit an all time high of 242% of GDP.

An interesting observation by the IIF: despite the recent dollar strength (if not so much in the past quarter), dollar bond issuance in Emerging Markets has been on a tear over the past year.

Another notable observation: while the EM bond universe has increased by $2.5 trillion to $18.4 trillion since 2016, only 25% of this debt is tradeable via benchmark bond indices.

What is more troubling, however, is the IIF’s observation that despite the relentless foreign portfolio inflows into EM, the credit quality of many emerging markets has deteriored rapidly in the past year.

This is an especially acute problem because there is over $1.9 trillion in EM bonds and loans coming due by the end of 2018. Should the EM sector fall out of favor with investors, and if the debt can not be rolled over, it could result in substantial liquidity events across the EM space.

Finally, here is perhaps the most troubling chart of all: for all those wondering how oil-exporters in the Gulf region have funded their budgets, and maintained their economies from sliding into recession or social disorder, the answer is shown below: a dramatic increase in new debt issuance.

So what is the policymakers’ response as global debt hits new all time highs? To raise interest rates.

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Back in May, Trump raised some eyebrows when he offered his candid opinion to Time Magazine on the advantages of steam catapult systems as compared to the Navy’s new Electro-Magnetic Aircraft Launch System (EMALS) currently being installed on a new generation of aircraft carriers…apparently he’s a fan of the “goddamned steam” systems if you must know.

You know the catapult is quite important. So I said what is this? Sir, this is our digital catapult system. He said well, we’re going to this because we wanted to keep up with modern [technology]. I said you don’t use steam anymore for catapult? No sir. I said, “Ah, how is it working?” “Sir, not good. Not good. Doesn’t have the power. You know the steam is just brutal. You see that sucker going and steam’s going all over the place, there’s planes thrown in the air.”

 

It sounded bad to me. Digital. They have digital. What is digital? And it’s very complicated, you have to be Albert Einstein to figure it out. And I said–and now they want to buy more aircraft carriers. I said what system are you going to be–”Sir, we’re staying with digital.” I said no you’re not. You going to goddamned steam, the digital costs hundreds of millions of dollars more money and it’s no good.

 

Unfortunately, given that the EMALS had already been installed on the Navy’s latest $13 billion carrier, the USS Gerald R. Ford, that wasn’t a fight Trump ever really had a shot at winning, irrespective of his ‘technical expertise’ on the topic.

But, with U.S. taxpayers set to spend over $40 billion on just three new carriers over the next several years, the real question isn’t whether the new class of super ships should have steam or ‘digital’ catapults for launching aircraft, but whether the ships should be built at all.  Per Bloomberg:

At roughly $13 billion, the USS Gerald Ford is the Navy’s priciest ship and arrives with critical performance kinks that contractors are working to remedy by 2019. Two innovations that have thus far induced Navy headaches: an electric catapult launch system that replaces steam—a decision Trump derided in a magazine interview—and a landing system to arrest planes that saw its cost triple to $961 million, Bloomberg News reported. The catapult cannot yet launch an F/A-18 Super Hornet fully loaded with fuel, which limits the range and performance of the Navy’s workhorse fighter aircraft.

 

The Navy is spending $24.3 billion for the Ford and Kennedy, with another $17 billion expected for the third Ford-class carrier, the USS Enterprise. A General Accountability Office report this month blasted the service over costs on the Kennedy, which is about half finished. The report concluded that the cost estimate doesn’t address lessons learned from the performance of the lead ship.

Meanwhile, more sophisticated missile technology being developed in China and Russia make these ~$15 billion floating fortresses more vulnerable to attack.

When it comes to carrier deployments, the most immediate concern is the security of the more than 7,000 crew members who travel with a carrier strike group, an armada formulated to protect the ship and its aircraft as well as to serve as “a principal element of U.S. power projection capability,” as the Navy terms it.

 

But this formation is likely to face greater risks due to new missile technology in the coming years. China and Russia are both perfecting more sophisticated missile designs, and both are believed to be developing hypersonic glide vehicles (HGVs), weapons that travel faster than Mach 5, according to a Pentagon report obtained by Bloomberg News.

 

China already fields a ballistic missile, the Dong Feng-21D, which has been dubbed a “carrier killer” due to its 900-mile range and lethality. Over time, these types of weapons are likely to keep U.S. carriers farther from shore, which will require greater refueling capabilities for their aircraft complements.

Which is why some military strategists have proposed ditching future carriers altogether to focus on unmanned platforms and revamping the Navy’s submarine fleet.

For several years, the Pentagon has “admired the problem” of how long-range enemy missiles affect its carrier fleet but has avoided tough decisions about how to increase the fleets’ aircraft range and provide for more unmanned aircraft, said Paul Scharre, senior fellow and director of the technology and national security program at the Center for a New American Security (CNAS), a nonprofit think tank. Meanwhile, the Navy’s strike range from its carrier wings has actually dipped by 50 percent, below 500 miles, according to Jerry Hendrix, another CNAS analyst.

 

Last year, the they recommended scrapping the Ford-class carriers after the Kennedy’s completion and boosting the Navy’s offensive range with a greater reliance on unmanned aircraft, including a long-range attack platform. The Navy’s submarine fleet would also grow to 74, from 58, under the author’s recommendations, which reflected a 2 percent annual increase in Pentagon funding.

 

More spending for unmanned platforms, from electronics jamming to surveillance and reconnaissance, would give pilots in F/A-18s as well as the newer F-35Cs more range and effectiveness. But because the Pentagon hasn’t developed unmanned platforms, “naval aviators … are accepting a world where the carrier has less relevance in higher-end fights, against high-end adversaries,” Scharre said.

But, despite these strategic shortcomings, as Bloomberg notes, there’s still a political reality to wrestle with: The carrier retains a mystique throughout the military and Congress; it’s an 1,100-foot giant that’s become a uniquely American symbol of dominating military power…in other words, John McCain thinks they’re really cool and he’s going to keep building them no matter what you think.

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Authored by Lance Roberts via RealInvestmentAdvice.com,

Janet Yellen, Federal Reserve Chair, recently stated;

“Will I say there will never, ever be another financial crisis? No, probably that would be going too far. But I do think we’re much safer and I hope that it will not be in our lifetimes and I don’t believe it will.” 

That is a pretty bold statement to make considering that every one of her predecessors failed to predict the negative consequences of their actions.

Will there will be another “Financial Crisis” in our lifetimes?  

Yes, it is virtually guaranteed.

The previous “crisis” wasn’t about just “an asset gone bad,” but rather the systemic shock caused by a “freeze” in the credit markets when Lehman Brothers filed for bankruptcy. Counterparties evaporated, banks froze lending and the credit market ceased to function.

Credit, not the stock market, is the “lifeblood” of the economy.

Of course, it is all good now because the Federal Reserve says so with Ms. Yellen placing a great amount of faith in the Federal Reserve’s own carefully constructing, and recently released results, of “bank stress tests.” Interestingly, EVERY bank passed with flying colors. In other words, the Millennial generation has now passed the baton of “Everybody Gets A Trophy” to the banking sector.

“Test results released by the Federal Reserve show that the 34 institutions under scrutiny have enough capital to make it through the two scenarios regulators posed — one akin to the financial crisis and another entailing a shallower downturn.

 

Under the scenarios, the banks tested ‘would experience substantial losses.’ However, in total, the institutions ‘could continue lending to businesses and households, thanks to the capital built up by the sector following the financial crisis.’

 

In the most severe scenario, bank losses are projected to be $493 billion. In the less severe, the losses were put at $322 billion.”

This passage of the “test” by every bank, of course, is based on several faulty assumptions including:

• FASB Rule 157 is still repealed allowing banks to mythically mark bad assets to “face value” which makes balance sheets stronger than they appear. So, how do you know what “toxic assets” still exist?
• There is roughly $2 Trillion of excess reserves supporting banks which will evaporate IF the Fed actually commences with shrinking their bloated balance sheet. 
• The worst case scenario only accounted for a “doubling” of the unemployment rate, or 8.6% from current levels, despite the fact we have an exceptionally low labor force participation rate and a surge to more than 10% is quite likely in the next recession. 
• With more leverage in the system than at any point any previous history, and banks inextricably linked to the financial markets, just how sensitive are the tests to another “worst case scenario?”

What was NOT included in the test was another “Financial Crisis” scenario which SHOULD be the baseline of the stress tests to begin with. Unemployment rates of 15% or more, asset price declines of 50% and default rates of 20% or greater on outstanding debt should be the baseline by which you stress test financial systems against another systemic shock.

The Federal Reserve is once again engaging in very faulty thinking by believing the system will operate normally during a more severe economic scenario. It isn’t just the losses projected on the banking sector in terms of defaulting loans that are the problem, but also the collapse in the asset markets when defaults ramp sharply as recessionary pressures build. Most assuredly, lenders will immediately shut off access to capital leading to another “freeze” in the credit system. (Not to mention the sharp losses in market capitalization due to share price declines.)

Here is why Janet Yellen is wrong in believing another “Financial Crisis” can’t occur.

Catalyst 1: Delinquency & Defaults

We are already seeing the early warning signs with delinquency rates rising and commercial lending on the decline in both consumer and commercial and industrial loans.

Of course, as I noted above, once delinquency and default rates begin to rise, the first thing banks tend to do is to stop lending. Naturally, as banks shut off capital to businesses, private investment begins to slow which reduces employment and leads to slower economic growth.

Of course, this also includes the credit problems of the collapse in Commercial Real Estate which is grossly leveraged at a time when prices have begun to stagnate with an oversupply of inventory sitting on the ground.

Catalyst 2: Leverage & Robots

It isn’t just bank loans which will catalyze the coming financial crisis. It is also, be the massive surge in debt and leverage over the last eight years including student loans, credit cards, corporate debt and margin loans. As I discussed recently in the “Illusion Of Liquidity:”

“The illusion of liquidity has a dangerous side effect. The process of the previous two debt-deleveraging cycles led to rather sharp market reversions as margin calls, and the subsequent unwinding of margin debt fueled a liquidation cycle in financial assets. The resultant loss of the ‘wealth effect’ weighed on consumption pushing the economy into recession which then impacted corporate and household debt leading to defaults, write-offs, and bankruptcies.”

“With the push lower in interest rates, the assumed ‘riskiness’ of piling on leverage was removed. However, while the cost of sustaining higher debt levels is lower, the consequences of excess leverage in the system remains the same.”

You will notice in the chart above, that even relatively small deleveraging processes had significant negative impacts on the economy and the financial markets. With total system leverage spiking to levels never before witnessed in history, it is quite likely the next event that leads to a reversion in debt will be just as damaging to the financial and economic systems.

Of course, when you combine leverage into investor crowding into “passive indexing,” the risk of a “disorderly unwinding of portfolios” due to the lack of market liquidity becomes an issue. As Mark Carney, head of the BOE, recently opined:

“Market adjustments to date have occurred without significant stress. However, the risk of a sharp and disorderly reversal remains given the compressed credit and liquidity risk premia. As a result, market participants need to be mindful of the risks of diminished market liquidity, asset price discontinuities and contagion across asset markets.’”

At some point, that reversion process will take hold. It is then investor “psychology” will collide with “margin debt” and ETF liquidity. As I noted in my podcast with Peak Prosperity:

“It will be the equivalent of striking a match, lighting a stick of dynamite and throwing it into a tanker full of gasoline.”

When the “robot trading algorithms”  begin to reverse, it will NOT BE a slow and methodical process but rather a stampede with little regard to price, valuation or fundamental measures as the exit will become very narrow.

Importantly, as prices decline it will trigger margin calls which will induce more indiscriminate selling. The forced redemption cycle will cause catastrophic spreads between the current bid and ask pricing for ETF’s. As investors are forced to dump positions to meet margin calls, the lack of buyers will form a vacuum causing rapid price declines which leave investors helpless on the sidelines watching years of capital appreciation vanish in moments.

Catalyst 3: Pensions

Lastly, and a point clearly missed by Ms. Yellen in her quest to dismiss financial crisis risks, is the $3 Trillion “Pension Crisis” that is just one sharp downturn away from imploding. The cresting of the “baby boom” generation now puts these massively underfunded pensions at risk of a “run on assets” during the next downturn which could send the entire system into chaos. Of course, this problem can be directly traced to the malfeasance of pension fund managers, and pension boards, which used excessively high return rates to lower costs of contributions.

“Pension computations are performed by actuaries using assumptions regarding current and future demographics, life expectancy, investment returns, levels of contributions or taxation, and payouts to beneficiaries, among other variables. The biggest problem, following two major bear markets and sub-par annualized returns since the turn of the century, is the expected investment return rate.

 

Using faulty assumptions is the lynch-pin to the inability to meet future obligations. By over-estimating returns, it has artificially inflated future pension values and reduced the required contribution amounts by individuals and governments paying into the pension system.

 

It is the same problem for the average American who plans on getting 6-8% return a year on their 401k plan, so why save money. Which explains why 8-out-of-10 American’s are woefully underfunded for retirement.”

The chart below demonstrates the problem pensions face today. The chart shows a $1000 investment into the S&P 500 TOTAL return from 1995 to present. There is a substantial difference between a dollar-weighted outcome in markets versus just looking at a market-capitalization weighted index return. I have then projected for using variable rates of market returns with cycling bull and bear markets, out to 2060 along with projections of 8%, 7%, 6%, 5% and 4% average rates of return from 1995 out to 2060. 

See the problem here. The average rate of return growth is far above what markets are expected to return over a long period of time. But this has not deterred pension funds from clinging on to exceptionally high return rates. According to a recent report from the Hoover Institution:

“Despite the introduction of new accounting standards, the vast majority of state and local governments continue to understate their pension costs and liabilities by relying on investment return assumptions of 7-8 percent per year. This report applies market valuation to pension liabilities for 649 state and local pension funds. Considering only already-earned benefits and treating those liabilities as the guaranteed government debt that they are, I find that as of FY 2015 accrued unfunded liabilities of U.S. state and local pension systems are at least $3.846 trillion, or 2.8 times more than the value reflected in government disclosures. Furthermore, while total government employer contributions to pension systems were $111 billion in 2015, or 4.9 percent of state and local government own revenue, the true annual cost of keeping pension liabilities from rising would be approximately $289 billion or 12.7 percent of revenue. Applying the principles of financial economics reveals that states have large hidden unfunded liabilities and continue to run substantial hidden deficits by means of their pension systems.””

If the numbers above are right, the unfunded obligations of approximately $4-$5 trillion, depending on the estimates, would have to be set aside today such that the principal and interest would cover the program’s shortfall between tax revenues and payouts over the next 75 years.

That ain’t gonna happen.

As Axel Merk recently penned:

“So while the banks may not need a bailout, I’m not so sure about pension funds or individual investors. Yet, ‘needing a bailout’ and actually getting one are different stories.”

Axel is right. When the next major bear market comes growling, the “financial crisis” won’t be secluded to just sub-prime auto loans, student loans, and commercial real estate. The real crisis comes when there is a “run on pensions” when the “fear” prevails that benefits will be lost entirely.

As George Will recently wrote:

“The problems of state and local pensions are cumulatively huge. The problems of Social Security and Medicare are each huge, but in 2016 neither candidate addressed them, and today’s White House chief of staff vows that the administration will not ‘meddle’ with either program. Demography, however, is destiny for entitlements, so arithmetic will do the meddling.”

Ms. Yellen is wrong about the next financial crisis. The only question is the timing and magnitude of its occurrence?

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Across the country, opioids killed more than 33,000 people in 2015, more than any year on record, according to the Centers for Disease Control and Prevention.

As we have noted numerous times, the epidemic is ravaging populations across racial and socioeconomic lines, according to The Post's Joel Achenbach and Dan Keating. Spurred by overdoses, the death rate for Americans rose 8 percent between 2010 and 2015.

And Ohio and other Rust Belt states are at the center of the epidemic. Opioid-related deaths in Ohio jumped from 296 in 2003 to 2,590 in 2015 — a 775 percent jump, according to the Ohio Department of Health.

There's also an economic toll: One study estimated that the cost of the prescription drug opioid epidemic costs American society $78.5 billion.

And one Ohio city council member has a solution…

As The Washington Post reports, under a new plan, people who dial 911 seeking help for someone who's overdosing on opioids may start hearing something new from dispatchers: “No.”

In response to the opioid epidemic that swept the nation — including the small city of Middletown, population 50,000 — council member Dan Picard has floated an idea that has been called more of “a cry of frustration” than a legitimate solution.

 

At a council meeting last week, Picard proposed a three-strikes-style policy for people who repeatedly overdose: Too many overdoses and authorities wouldn't send an ambulance to resuscitate them.

 

Picard told The Washington Post that he sympathizes with anyone who has lost someone to drug abuse, but said that responding to an ever-increasing number of overdose calls threatens to bleed his city dry.

 

“It’s not a proposal to solve the drug problem,” Picard said this week. “My proposal is in regard to the financial survivability of our city. If we’re spending $2 million this year and $4 million next year and $6 million after that, we’re in trouble. We’re going to have to start laying off. We're going to have to raise taxes.”

The proposal also calls for the city to create a database of overdose victims who paramedics have responded to.

“We'll have that list and when we get a call, the dispatcher will ask who is the person who has overdosed,” Picard said.

 

“And if it's someone who has already been provided services twice, we'll advise them that we're not going to provide further services — and we will not send out an ambulance.”

Solutions, Picard told The Post, require out-of-the-box thinking.

Still, he said he has received dozens of angry emails, phone calls and Facebook messages as news of his proposal spread.

But he said his worst critics don't understand how bad the heroin problem has gotten in his community — with no sign of abating.

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With Trump tax reform far on the backburner, as the administration is focused on at least getting Obamacare repeal past the Senate, the CBO reminded that in just 4 months a more material threat is facing the US: according to the latest CBO calculations, the Treasury will “most likely” run out of cash in early to mid-October, unless the most polarized Congress in history raises the debt ceiling.

This is what the CBO just said in its latest report on the “Federal Debt and the Statutory Limit”, released moments ago.

If the debt limit is not increased above the amount that was established on March 16, 2017, the Treasury will not be authorized to issue additional debt that increases the amount outstanding. (It will be able to issue additional debt only in the amount of maturing debt or the amounts cleared by taking extraordinary measures.) That restriction would ultimately lead to delays of payments for government programs and activities, a default on the government’s debt obligations, or both. CBO estimates that without an increase in the debt limit, the Treasury, by using all available extraordinary measures, would most likely be able to continue borrowing and have sufficient cash to make its usual payments  until early to mid-October of this year.

In recent weeks, Treasury Secretary Mnuchin has urged Congress to lift the debt limit before its August recess (with others calling to abolish it altogether) although he also conceded that the nation can likely pay its bills if action waited until September, which is all lawmakers needed to know they don’t have to rush until the very last minute.

He has also warned that the closer the U.S. gets to breaching the debt ceiling in mid-October, the more likely financial markets are to react unfavorably, although that warning appears to have been negated by his first one. On Thursday following the release of the CBO report, he again urged Congress to take action.

“For the benefit of everybody, the sooner that they do this the better,” he said at a White House briefing, although he once again diluted his case by adding that “we have contingency plans” if Congress doesn’t raise debt ceiling by a certain date, so the market “shouldn’t be concerned.” Which is all the market needed to know to keep rising until some time in early October, when it freaks out again.

Of course, the Treasury breached its debt limit on March 16, when the debt ceiling was reset to $19.8 trillion, however, so far there has been no new borrowing authority to surpass it. Since then the Treasury has been using so-called “extraordinary measures,” to pay bills without technically adding to the debt amount, while draining various Treasury emergency funds. As shown in the Citi chat below, those measures are expected to be exhausted in October, although Citi acknowledged the risk of an earlier date (in September) if monthly deficits worsen, and/or if the Treasury refuses to draw down its cash balance to compliment use of “extraordinary measures.”

As the next chart shows, the Treasury traditionally accumulates larger cash balances ahead of debt ceiling showdowns.It is when the cash balance hits zero and the the Treasury taps all extraordinary measures without the authority to borrow more, that things can spiral out of control.

“That would ultimately lead to delays of payments for government programs and activities, a default on the government’s debt obligations, or both,” the CBO report noted.

The last time the US infamously shut down due to passing its debt ceiling was in August 2011, when S&P downgraded the US, formerly at a AAA rating, for the first time ever prompting a furious response from then-Treasury secretary Tim Geithner. 

As The Hill notes, Republicans are wary of increasing the debt limit without tying it to some set of spending or regulatory reforms, a tactic they pursued under President Barack Obama. Furthermore, Republicans will need Democratic support in the Senate to increase the debt ceiling, but Democrats have demanded that Republicans keep the measure free of “poison pill” riders or other policies.

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Authored by Jeffrey Snider via Alhambra Investment Partners,

Despite Mario Draghi’s supposedly misinterpreted comments earlier this week, there are global indications that the best of this round has already been reached. Policymakers are always going to claim things are improving, that much is given. But there is tremendous difference between that and what has occurred, especially if it is indeed rolling over worldwide.

The earliest indicators for China’s economy in June signal that the manufacturing sector may be poised to decelerate, while other challenges loom in the second half of this year.

 

Small- and medium-sized enterprises showed the lowest level of confidence in 16 months, a gauge of manufacturing drawn from satellite imagery slumped, and conditions in the steel business remained lackluster.

At the center of the story is as always crude oil. There are, of course, direct effects of the ups and downs (more down than up) in the energy market. As the price of it rises there will be more exploration, drilling, production, and transportation required. Some of that has already happened, and accounts for some part of this economic recuperation.

The larger effects are in sentiment, or at least the kind they might measure in PMI’s or surveys. It bears repeating that when the global downturn arrived in early 2015, economists worldwide assured everyone not to worry. They had several plausible reasons for taking that position, flawed as they were. Overall, however, especially from a US perspective the big contrary indicator was WTI.

Dismissing it as a mere “supply glut”, actual economic agents especially in industry would have known better. Even if these important marginal changes weren’t completely understood, it didn’t take any special knowledge or complex series of regressions to link the crash in oil to reduced demand for goods globally. In that way, oil became the best real-time indicator for economic demand and its overall direction no matter what Janet Yellen would say.

The same has likely held true on the upswing. Oil prices bottomed in February 2016, rose steadily for several months and then for the rest of last year held on to those gains -with a slightly higher price bias to top it off. Translating that roughly into global economic demand, it seemed as if there was a positive economic trend developing.

If we add several of the other elements of “reflation”, it’s not difficult to surmise the basis for economic improvement late last year and early in 2017 – as well as why it may have reached its near-term end just a few months into it. Oil has simply failed to follow-through on the promise, remaining well-below the prior peak from three years ago this week. Worse, it has since February 2017 turned lower again.

There is once more no hiding from the problem. The fundamentals of oil are all negative, therefore businesses that might have in some part based their decisions on interpretations of its rebound would no doubt return to a far more cautious state without that rebound continuing. Mario Draghi intimates the global economy is moving again, but oil demonstrates otherwise. Credibility remains all on the side of the commodity.

The feedback effects would certainly be enough, given the visibility and recent history of oil, for a possible end to the small upturn.

The latest estimates from the US EIA with regard to oil inventories, now the central focus of oil markets, are not optimistic. Crude inventory levels which had been drawing down in somewhat assuring fashion have stopped doing so. As of the latest estimates for last week, crude stocks remain higher this year than at the same time last year. The relative comparison, if demand was truly rising in reflation, would have reversed by now and further indicated that it would surely continue.

The same unfavorable comp has persisted in gasoline, as well. The physical commodities are simply not being used near fast enough. The promise of the initial oil rebound hasn’t come to fruition, as in many respects nothing has changed. That’s the overall commentary that seems to be more and more applied globally in a real economic sense.

Now the futures curve sits in steady contango all over again, having gained the positive slope in the last selloff (of what looks like a third liquidation episode in just the last four months). That’s another negative sign for oil fundamentals, and therefore the guidance of oil prices in economic terms.

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