Month: June 2017

Every year, the world’s richest and most powerful business executives, bankers, media heads and politicians sit down in some luxurious and heavily guarded venue, and discuss how to shape the world in a way that maximizes profits for all involved, while perpetuating a status quo that has been highly beneficial for a select few, even if it means the ongoing destruction of the middle class. We are talking, of course, about the annual, and always secretive, Bilderberg meeting.

And just like last year’s meeting in Dresden, the primary topic on the agenda of this year’s 65th Bilderberg Meeting which starts today and ends on Sunday, is one: Donald Trump.

Ironically, this year “the storm around Donald Trump” as the SCMP puts it, is not half way around the world, but just a few miles west of the White House, in a conference centre in Chantilly, Virginia, where the embattled president will be getting his end-of-term grades from the people whose opinion actually matters: some 130 participating “Bilderbergs”.

The secretive three-day summit of the political and economic elite kicks off Thursday in heavily guarded seclusion at the Westfields Marriot, a luxury hotel a short distance from the Oval Office.

As of Wednesday, the hotel was already on lockdown and an army of landscapers have been busy planting fir trees around the perimeter, to try protect “coy billionaires and bashful bank bosses” from prying lenses and/or projectiles.  Perched ominously at the top of the conference agenda this year are these words: “The Trump Administration: A progress report”.

So is the president going to be put in detention for tweeting in class? Held back a year? Or told to empty his locker and leave? If ever there’s a place where a president could hear the words “you’re fired!”, it’s Bilderberg.

Sarcasm aside, the White House was taking no chances, sending along some big hitters from Team Trump to defend their boss: national security adviser, HR McMaster; the commerce secretary, Wilbur Ross; and Trump’s new strategist, Chris Liddell (curiously, neither Gary Cohn nor Steven Mnuchin will be there although the controversial new Chairman of Goldman Sachs International, Jose Barroso will be present). Could Trump himself show up to receive his report card in person: we are confident he will tweet all about it… which is probably why he will never be invited.

Stil, none other than Henry Kissinger, the gravel-throated kingpin of Bilderberg, visited the White House a few weeks ago to discuss “Russia and other things”, and certainly, the Bilderberg conference would be the perfect opportunity for the most powerful man in the world to discuss important global issues with Trump.

Sarcasm aside, what are among the “Trump agenda” items to be discussed?  The publicly list is as follows:

• The Trump Administration: A progress report
• Trans-Atlantic relations: options and scenarios
• The Trans-Atlantic defence alliance: bullets, bytes and bucks
• The direction of the EU
• Can globalisation be slowed down?
• Jobs, income and unrealised expectations
• The war on information
• Why is populism growing?
• Russia in the international order
• The Near East
• Nuclear proliferation
• China
• Current events

The US president’s extraordinary chiding of NATO leaders in Brussels is sure to be first and foremost on the Bilderberg discussing panel. The Bilderbergers have summoned the head of Nato, Jens Stoltenberg, to give feedback. Stoltenberg will be leading the snappily titled session on “The Transatlantic defence alliance: bullets, bytes and bucks”. He’ll be joined by the Dutch minister of defence and a clutch of senior European politicians and party leaders, all hoping to reset the traumatised transatlantic relationship after Trump’s galumphing visit.

As the Guardian puts it, the guest list for this year’s conference is a veritable “covfefe” of big-hitters from geopolitics, from the head of the IMF, Christine Lagarde, to the king of Holland, but perhaps the most significant name on the list is Cui Tiankai, China’s ambassador to the US.

According to the meeting’s agenda, “China” will also be discussed at a summit attended by Cui, the US commerce secretary, the US national security adviser, two US senators, the governor of Virginia, two former CIA chiefs and any number of giant US investors in China, including the heads of the financial services firms the Carlyle Group and KKR. And for good reason: as last night’s PMI numbers showed, the Chinese economy – the global growth dynamo – is finally contracting. If China goes, the rest of the world will follow. 

Additionally, the boss of Google Eric Schmidt, who warned in January that Trump’s administration will do “evil things”, is expected to attend, too. The executive chairman of Alphabet, Google’s holding company, has just come back from a trip to Beijing, where he was overseeing Google AI’s latest game of Go against humans. He declared it “a pleasure to be back in China, a country that I admire a great deal”. It’s possible three days spent chatting to the Chinese ambassador could even be good for business.

Several journalists are participating in this year’s forum, including London Evening Standard editor George Osborne and Cansu Camlibel, the Washington bureau chief for Turkey’s Hurriyet newspaper. But per convention, news outlets are not invited to cover the event.

“There is no desired outcome, no minutes are taken and no report is written,” the group stated. “Furthermore, no resolutions are proposed, no votes are taken, and no policy statements are issued.”

Ex-deputy secretary of state William Burns and former deputy assistant secretary of defence Elaine Bunn, both Obama-era officials, will also attend. Burns, the current president of the Carnegie Endowment for International Peace, has warned that Trump “risks hollowing out the ideas, initiative and institutions on which US leadership and international order rest.”

Anti-globalisation protesters reportedly have descended on the location of the meeting.

* * *

Below is a full list of this year’s participants:

CHAIRMAN

• Castries, Henri de (FRA), Former Chairman and CEO, AXA; President of Institut Montaigne

 
PARTICIPANTS

• Achleitner, Paul M. (DEU), Chairman of the Supervisory Board, Deutsche Bank AG
• Adonis, Andrew (GBR), Chair, National Infrastructure Commission
• Agius, Marcus (GBR), Chairman, PA Consulting Group
• Akyol, Mustafa (TUR), Senior Visiting Fellow, Freedom Project at Wellesley College
• Alstadheim, Kjetil B. (NOR), Political Editor, Dagens Næringsliv
• Altman, Roger C. (USA), Founder and Senior Chairman, Evercore
• Arnaut, José Luis (PRT), Managing Partner, CMS Rui Pena & Arnaut
• Barroso, José M. Durão (PRT), Chairman, Goldman Sachs International
• Bäte, Oliver (DEU), CEO, Allianz SE
• Baumann, Werner (DEU), Chairman, Bayer AG
• Baverez, Nicolas (FRA), Partner, Gibson, Dunn & Crutcher
• Benko, René (AUT), Founder and Chairman of the Advisory Board, SIGNA Holding GmbH
• Berner, Anne-Catherine (FIN), Minister of Transport and Communications
• Botín, Ana P. (ESP), Executive Chairman, Banco Santander
• Brandtzæg, Svein Richard (NOR), President and CEO, Norsk Hydro ASA
• Brennan, John O. (USA), Senior Advisor, Kissinger Associates Inc.
• Bsirske, Frank (DEU), Chairman, United Services Union
• Buberl, Thomas (FRA), CEO, AXA
• Bunn, M. Elaine (USA), Former Deputy Assistant Secretary of Defense
• Burns, William J. (USA), President, Carnegie Endowment for International Peace
• Çakiroglu, Levent (TUR), CEO, Koç Holding A.S.
• Çamlibel, Cansu (TUR), Washington DC Bureau Chief, Hürriyet Newspaper
• Cebrián, Juan Luis (ESP), Executive Chairman, PRISA and El País
• Clemet, Kristin (NOR), CEO, Civita
• Cohen, David S. (USA), Former Deputy Director, CIA
• Collison, Patrick (USA), CEO, Stripe
• Cotton, Tom (USA), Senator
• Cui, Tiankai (CHN), Ambassador to the United States
• Döpfner, Mathias (DEU), CEO, Axel Springer SE
• Elkann, John (ITA), Chairman, Fiat Chrysler Automobiles
• Enders, Thomas (DEU), CEO, Airbus SE
• Federspiel, Ulrik (DNK), Group Executive, Haldor Topsøe Holding A/S
• Ferguson, Jr., Roger W. (USA), President and CEO, TIAA
• Ferguson, Niall (USA), Senior Fellow, Hoover Institution, Stanford University
• Gianotti, Fabiola (ITA), Director General, CERN
• Gozi, Sandro (ITA), State Secretary for European Affairs
• Graham, Lindsey (USA), Senator
• Greenberg, Evan G. (USA), Chairman and CEO, Chubb Group
• Griffin, Kenneth (USA), Founder and CEO, Citadel Investment Group, LLC
• Gruber, Lilli (ITA), Editor-in-Chief and Anchor “Otto e mezzo”, La7 TV
• Guindos, Luis de (ESP), Minister of Economy, Industry and Competiveness
• Haines, Avril D. (USA), Former Deputy National Security Advisor
• Halberstadt, Victor (NLD), Professor of Economics, Leiden University
• Hamers, Ralph (NLD), Chairman, ING Group
• Hedegaard, Connie (DNK), Chair, KR Foundation
• Hennis-Plasschaert, Jeanine (NLD), Minister of Defence, The Netherlands
• Hobson, Mellody (USA), President, Ariel Investments LLC
• Hoffman, Reid (USA), Co-Founder, LinkedIn and Partner, Greylock
• Houghton, Nicholas (GBR), Former Chief of Defence
• Ischinger, Wolfgang (INT), Chairman, Munich Security Conference
• Jacobs, Kenneth M. (USA), Chairman and CEO, Lazard
• Johnson, James A. (USA), Chairman, Johnson Capital Partners
• Jordan, Jr., Vernon E. (USA), Senior Managing Director, Lazard Frères & Co. LLC
• Karp, Alex (USA), CEO, Palantir Technologies
• Kengeter, Carsten (DEU), CEO, Deutsche Börse AG
• Kissinger, Henry A. (USA), Chairman, Kissinger Associates Inc.
• Klatten, Susanne (DEU), Managing Director, SKion GmbH
• Kleinfeld, Klaus (USA), Former Chairman and CEO, Arconic
• Knot, Klaas H.W. (NLD), President, De Nederlandsche Bank
• Koç, Ömer M. (TUR), Chairman, Koç Holding A.S.
• Kotkin, Stephen (USA), Professor in History and International Affairs, Princeton University
• Kravis, Henry R. (USA), Co-Chairman and Co-CEO, KKR
• Kravis, Marie-Josée (USA), Senior Fellow, Hudson Institute
• Kudelski, André (CHE), Chairman and CEO, Kudelski Group
• Lagarde, Christine (INT), Managing Director, International Monetary Fund
• Lenglet, François (FRA), Chief Economics Commentator, France 2
• Leysen, Thomas (BEL), Chairman, KBC Group
• Liddell, Christopher (USA), Assistant to the President and Director of Strategic Initiatives
• Lööf, Annie (SWE), Party Leader, Centre Party
• Mathews, Jessica T. (USA), Distinguished Fellow, Carnegie Endowment for International Peace
• McAuliffe, Terence (USA), Governor of Virginia
• McKay, David I. (CAN), President and CEO, Royal Bank of Canada
• McMaster, H.R. (USA), National Security Advisor
• Micklethwait, John (INT), Editor-in-Chief, Bloomberg LP
• Minton Beddoes, Zanny (INT), Editor-in-Chief, The Economist
• Molinari, Maurizio (ITA), Editor-in-Chief, La Stampa
• Monaco, Lisa (USA), Former Homeland Security Officer
• Morneau, Bill (CAN), Minister of Finance
• Mundie, Craig J. (USA), President, Mundie & Associates
• Murtagh, Gene M. (IRL), CEO, Kingspan Group plc
• Netherlands, H.M. the King of the (NLD)
• Noonan, Peggy (USA), Author and Columnist, The Wall Street Journal
• O’Leary, Michael (IRL), CEO, Ryanair D.A.C.
• Osborne, George (GBR), Editor, London Evening Standard
• Papahelas, Alexis (GRC), Executive Editor, Kathimerini Newspaper
• Papalexopoulos, Dimitri (GRC), CEO, Titan Cement Co.
• Petraeus, David H. (USA), Chairman, KKR Global Institute
• Pind, Søren (DNK), Minister for Higher Education and Science
• Puga, Benoît (FRA), Grand Chancellor of the Legion of Honor and Chancellor of the National Order of Merit
• Rachman, Gideon (GBR), Chief Foreign Affairs Commentator, The Financial Times
• Reisman, Heather M. (CAN), Chair and CEO, Indigo Books & Music Inc.
• Rivera Díaz, Albert (ESP), President, Ciudadanos Party
• Rosén, Johanna (SWE), Professor in Materials Physics, Linköping University
• Ross, Wilbur L. (USA), Secretary of Commerce
• Rubenstein, David M. (USA), Co-Founder and Co-CEO, The Carlyle Group
• Rubin, Robert E. (USA), Co-Chair, Council on Foreign Relations and Former Treasury Secretary
• Ruoff, Susanne (CHE), CEO, Swiss Post
• Rutten, Gwendolyn (BEL), Chair, Open VLD
• Sabia, Michael (CAN), CEO, Caisse de dépôt et placement du Québec
• Sawers, John (GBR), Chairman and Partner, Macro Advisory Partners
• Schadlow, Nadia (USA), Deputy Assistant to the President, National Security Council
• Schmidt, Eric E. (USA), Executive Chairman, Alphabet Inc.
• Schneider-Ammann, Johann N. (CHE), Federal Councillor, Swiss Confederation
• Scholten, Rudolf (AUT), President, Bruno Kreisky Forum for International Dialogue
• Severgnini, Beppe (ITA), Editor-in-Chief, 7-Corriere della Sera
• Sikorski, Radoslaw (POL), Senior Fellow, Harvard University
• Slat, Boyan (NLD), CEO and Founder, The Ocean Cleanup
• Spahn, Jens (DEU), Parliamentary State Secretary and Federal Ministry of Finance
• Stephenson, Randall L. (USA), Chairman and CEO, AT&T
• Stern, Andrew (USA), President Emeritus, SEIU and Senior Fellow, Economic Security Project
• Stoltenberg, Jens (INT), Secretary General, NATO
• Summers, Lawrence H. (USA), Charles W. Eliot University Professor, Harvard University
• Tertrais, Bruno (FRA), Deputy Director, Fondation pour la recherche stratégique
• Thiel, Peter (USA), President, Thiel Capital
• Topsøe, Jakob Haldor (DNK), Chairman, Haldor Topsøe Holding A/S
• Ülgen, Sinan (TUR), Founding and Partner, Istanbul Economics
• Vance, J.D. (USA), Author and Partner, Mithril
• Wahlroos, Björn (FIN), Chairman, Sampo Group, Nordea Bank, UPM-Kymmene Corporation
• Wallenberg, Marcus (SWE), Chairman, Skandinaviska Enskilda Banken AB
• Walter, Amy (USA), Editor, The Cook Political Report
• Weston, Galen G. (CAN), CEO and Executive Chairman, Loblaw Companies Ltd and George Weston Companies
• White, Sharon (GBR), Chief Executive, Ofcom
• Wieseltier, Leon (USA), Isaiah Berlin Senior Fellow in Culture and Policy, The Brookings Institution
• Wolf, Martin H. (INT), Chief Economics Commentator, Financial Times
• Wolfensohn, James D. (USA), Chairman and CEO, Wolfensohn & Company
• Wunsch, Pierre (BEL), Vice-Governor, National Bank of Belgium
• Zeiler, Gerhard (AUT), President, Turner International
• Zients, Jeffrey D. (USA), Former Director, National Economic Council
• Zoellick, Robert B. (USA), Non-Executive Chairman, AllianceBernstein L.P.

Natrually, the secretive nature of the group has given birth to conspiracy theories. Some have claimed that the Bilderberg is a group of rich and powerful kingmakers seeking to impose a one world government. Whether that is true remains in the eye of the beholder, however one thing is clear: as the graph below shows, the members are connected to virtually every important and relevant organization, media outlet, company and political entity in the world.

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We already know the topic, and now we know the time and place: according to just released statement by the Senate Intel Committee, former FBI Director James Comey will testify in an open session next Thursday, June 8, starting at 10:00 am, which will be followed by a closed session testimony at 1pm.

Recall, that as CNN reported yesterday, the former FBI director plans to testify publicly that President Donald Trump “did push Comey to end his investigation into a top Trump aide’s ties to Russia.”

When he testifies, Comey is unlikely to be willing to discuss in any detail the FBI’s investigation into the charges of possible collusion between Russia and the Trump campaign — the centerpiece of the probe, this source said. But he appears eager to discuss his tense interactions with Trump before his firing, which have now spurred allegations that the president may have tried to obstruct the investigation. If it happens, Comey’s public testimony promises to be a dramatic chapter in the months-long controversy, and it will likely bring even more intense scrutiny to an investigation that Trump has repeatedly denounced as a “witch hunt.”

As the CNN sources concluded, “the bottom line is he’s going to testify. He’s happy to testify, and he’s happy to cooperate.” We doubt Donald Trump will share Comey’s sentiment.

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Authored by Ryan McMaken via The Mises Institute,

Socialists have attempted many times to put their ideology into action. Socialism has been applied in the Soviet Union, Cuba, China (before Deng), North Korea, and by many other less-famous regimes.

In each case, the result has been economic impoverishment and political authoritarianism.

But the die-hard socialists refuse to give up. "Don't judge communism based on these results, " we're told. "Socialism has simply never really been tried."

Socialism Doesn't Work Unless It's Pure Socialism

Indeed, in a recent back-and-forth between John Stossel and Noam Chomsky, Chomsky denied that the Venezuelan regime is socialist at all: 

I never described Chavez's state capitalist government as 'socialist' or even hinted at such an absurdity. It was quite remote from socialism. Private capitalism remained … Capitalists were free to undermine the economy in all sorts of ways, like massive export of capital.

The thinking goes that socialism cannot work unless it progresses all the way to "full socialism." No partial effort will suffice, we are told, and socialism keeps failing because the some elements of "private capitalism" remained. 

So long as any aspect of a state is not full-on socialism, the thinking goes, then the regime is not really socialist. Moreover, the failure of the regime's socialist policies — such as expropriation of private companies and expansion of government-owned industries — are to be blamed on capitalism, not socialism. 

Naturally, were socialism able to achieve it's final state — and all elements of capitalism expunged —  we'd know it by its ushering in of a society marked by unparalleled prosperity and total equality.

Nevermind that for all intents and purposes, Lenin did achieve nearly complete and total nationalization of the economy during the Russian Civil War in 1922. The people began to starve soon after, and Lenin retreated to the partial socialism under his so-called "New Economic Policy." 

The Lenin example is steadfastly ignored, of course, and we're repeatedly told by the likes of Chomsky that mere half measures don't work for socialism, and only total socialism works. Anything short of total socialism, it seems, will fail miserably, as it has in Venezuela. Yes, the government can seize many factories, shops, and even whole industries, as has happened in Venezuela. But, unless the state seizes every single shop, then it's not real socialism. Thus, don't blame socialism when the whole thing crashes down. 

The Same Logic Need Not Be Applied to Laissez-Faire Liberalism 

Note, however, that this isn't a problem in the opposite direction. If we take a middle-of-the road interventionist economy and start introducing partial, half-way free-market liberal reforms, does this cause the economy to collapse? 

Certainly not. Indeed, everywhere we look and find a relatively less socialistic economy, the less poverty and more prosperity we find. 

Historically, this is obvious. The countries that embraced free trade, industrialization, and the trappings of market economies early on are the wealthiest economies today. We also find this to be the case in post-war Europe where the relatively pro-market economies such as those in Germany and the UK are wealthier and have higher standards of living than the more socialistic economies of southern Europe — such as Greece and Spain. This is even true of the Scandinavian countries like Sweden, which, as Per Bylund has noted,  historically built its wealth with a relatively laissez-faire regime.1

This is all the more true when we compare Western Europe with Eastern Europe.

In none of these cases is any economy totally free-market (or even nearly so) or totally socialistic. What we do find, however, is that in countries where the economy leans more in the direction of markets — the standard of living is higher, there is less inequality, and poverty is less awful in general.  

This is also true in Asia. South Korea and Japan are by no means free-market economies. Both countries' economies are characterized by a wide variety of trade restrictions, crony capitalist deals, and a massive regulatory state. 

But North Korea and Vietnam, which are much poorer, are characterized by far more government ownership of industry, and much smaller private sectors than is the case in Japan and South Korea.

And yet, by the logic of the socialists, the problem with North Korea and Vietnam is that they don't have enough socialism. If those countries could only rid themselves of the capitalists who are "free to undermine the economy" then North Korea will finally be prosperous and Vietnam will rival Japan in its productivity and wealth. 

This is nonsense, of course. If North Korea wants fewer famines it need only move in the direction of less socialism as South Korea has. 

Even Halfway Reforms Work with Markets

Unlike socialism, market reforms need not be total, complete, or utopian in order for their benefits to be recognized. 

This is why market advocates never need to say "market reforms didn't work in Country X because that country never achieved full and true capitalism! If only all the socialists been liquidated, then true capitalism would have been realized!" 

This is never said said because even half-measures in the direction of laissez faire improve economic growth and standards of living. 

We saw this in West Germany after World War II with the reforms of Ludwig Erhard, who helped usher in a period of immense economic growth with only half-way reforms. By abolishing price controls and other government-imposed restraints on the economy, the Germany economy took off while more socialistic economies — like that found in the UK at the time — were more stagnant. "If only East Germany had had more socialism!" we can only conclude. Then East Germans wouldn't have risked death trying to escape to West Germany.   

Obviously, in this case, the West German state did not adopt "pure" capitalism. They merely adopted relatively more laissez-faire. And the economy expanded. In fact, according to Hans Sennholz, the West German state rather accidentally stumbled upon its free market reforms. And yet, we call the results "the German economic miracle." 

Another modern example is Latin America. When we look across the region as a whole, we find repeatedly that the regimes that have embraced even half-hearted pro-market reforms — such as Chile, Peru, and Colombia — are the countries that have seen some of the greatest economic growth in recent decades.

Meanwhile, those countries that have most enthusiastically embraced the so-called pro-socialist "Pink Tide" have seen some of the worst growth rates: 

But what is the excuse for the lack of economic growth in Argentina, Brazil, and Venezuela? All those countries have in recent decades embraced economic populism — namely, more government ownership, more government regulation, and more government control of the economy. 

So why haven't those countries outpaced the more market-oriented Latin American states? According to the logic of the socialists, the problem is that none of these states has embraced total socialism. 

What a blessing for the socialists, then, that every time some socialist reforms are tried – and fail – the ideology has a built-in excuse: socialism never works unless it's fully implemented. 

Just imagine if the same were true of markets, though. Since no ideology is ever likely to be fully realized in its entirety, this would mean that humanity would be doomed to abject and grinding poverty forever. 

Fortunately for us, market reforms need only be partial and haphazard to make us all better off. Unfortunately, governments are often committed to moving in the wrong direction with central banks, wage controls, price controls, more regulation and more taxation. The assaults on markets are continuous and widespread. Fortunately, all it takes is movement back in the direction of freer markets to improve matters again. We'd do well to learn from Eastern Europe, West Germany, Latin America, and all the other regimes that have, reluctantly or not, gotten out of the way and allowed markets to work. 

The socialists can keep dreaming about their paradise to be realized some day when total unadulterated socialism is achieved. Meanwhile, markets will continue to improve matters for billions of people in real life.

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Over the past year, as OPEC developed the unpleasant habit of jawboning the price of oil higher on nothing but flashing red headlines, targeting headline scanning algos, many compared the oil-producing cartel to another familiar institution whose core mandate is higher asset prices: the Federal Reserve. However, the similarities are not enough, and according to Goldman’s chief energy analyst Jeffrey Currie, OPEC should learn from the U.S. Federal Reserve and do more to explain its long-term oil-output policies instead of just focusing on short-term goals.

The phrase Goldman is referring to is “forward guidance”, something the Fed has tried (and failed at) for years, in hopes of managing market expectations. The need for such forward guidance, which has long been a staple of comments from central bankers, should be evident to the oil producers’ group after prices slumped last week following its ministerial meeting in Vienna, said Currie, the bank’s head of commodities research, according to Bloomberg.

As he explained last week after the disappointing OPEC meeting, Currie once again lamented that “OPEC didn’t provide the market with an exit strategy,” and added that  “while they discussed the near-term strategy of reducing and normalizing inventories, they failed to be very aggressive in explaining their exit strategy.”

As a reminder, after last week’s deal announcement which saw oil production cuts extended into Q1 2017, Brent fell 4.6% amid concerns about whether the curbs would prove effective and how they would be phased out after March 2018. A main reason for the skepticism about OPEC’s effectiveness has been the resurgence of shale oil in the U.S., which threatens to blunt the impact of the group’s cuts. A clearer signal that the group intends to expand its market share once the inventory surplus is eliminated could also address this problem, said Currie.

As Currie wrote in a long report last week referencing the “shale productivity paradox”, Goldman expects a dramatic surge in shale oil production over the next two decades, peaking around 2030 at a level that is about three times greater than current levels.

“Time is not on their side as shale production will respond,” he said. “A stated market-share target would help reduce forward prices and discourage future investment as it would be viewed as a credible threat.”

US oil production has already risen by 550,000 barrels a day this year and drillers are still increasing the number of active rigs, signaling further output gains may be coming. According to the EIA, US oil production is expected to hit an all time high sometime in the next year. That wipes out almost a third of the supply reduction from OPEC and its allies and the output surge could double by year-end, according to energy market consultant IHS Markit.

As a result, Currie warned that OPEC will probably need to discuss its exit strategy soon and could look at the recent history of the Fed for ways to improve its messaging.

“At the beginning of quantitative easing, central banks also struggled with how to communicate forward guidance on the exit strategy,” he said. “Over time they got much better at such communications.”

Because one confused Fed bombarding the momentum-igniting algos with non-stop headlines about “forward guidance” was not enough, we now may be getting a second one.

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A recurring theme on this website has been to periodically highlight the tremendous build up in US corporate debt, most recently in April when we showed that “Corporate Debt To EBITDA Hits All Time High.” The relentless debt build up is something which even the IMF recently noted, when in April it released a special report on financial stability, according to which 20% of US corporations were at risk of default should rates rise. It is also the topic of the latest piece by SocGen’s strategist Andrew Lapthorne who uses even more colorful adjectives to describe what has happened since the financial crisis, noting that “the debt build-up during this cycle has been incredible, particularly when compared to the stagnant progression of EBITDA.”

Lapthorne calculates that S&P1500 ex financial net debt has risen by almost $2 trillion in five years, a 150% increase, but this mild in comparison to the tripling of the debt pile in the Russell 2000 in six years. He also notes, as shown he previously, that as a result of this debt surge, interest payments cost the smallest 50% of stocks in the US fully 30% of their EBIT compared with just 10% of profits for the largest 10% and states that “clearly the sensitivity to higher interest rates is then going to be with this smallest 50%, while the dominance and financial strength of the largest 10% disguises this problem in the aggregate index measures.”

Another key point that Lapthorne makes, as also highlighted here back in November 2015, is that the reason for this increase in debt is largely down to financial engineering – aka share buybacks (see charts below). However the most recent data points to a significant change in this trend – with not only debt issuance in decline, but also the quantity of share buybacks.

Clearly over the long-term, this is obviously good news; borrowing money to buy back your elevated shares is clearly nonsense. However that has been the case for a number of years now. Are US corporates really waking up to the foolishness of their actions or are they constrained by their balance sheets? Or they may simply be anticipating greater clarity on Trump’s policies? Who knows! But in the short term, this does significantly reduce the impact of the biggest net purchaser of US equities, according to the SocGen strategist.

In other words, Lapthorne has found something surprising: after years of constant growth “having boomed out of control”, net debt growth is rapidly heading toward zero, and perhaps even a contraction, for the first time since the financial crisis!

Needless to say, for an economy in which debt growth – either public or private – has been a primary driver of overall economic expansion, this is a stunning development. So what is driving it.

Here, Lapthorne makes several nuanced observations which have significant implications not only on future debt levels but overall equity prices and broader risk-assets:

Firstly, while the headline S&P 500 continues to move ever higher, the dynamics within the US equity market are not so encouraging. The chart below breaks down the FT US non-financial universe into top and bottom quintiles based on balance sheet strength (as measured by Merton’s Distance to Default). What is abundantly clear is that while the strongest continue to do very well, ever since the Fed surprised the markets back in February with a US rate move, stocks with the weakest balance sheets have struggled.

This goes to an observation we made last month, namely that virtually half of the S&P return has been due to a handful of high growth tech, (i.e., no debt) companies. At the same time, the average stock as measured by the equal-weighted performance, has also gone nowhere.

And here is where SocGen may have found something few have considered so far: “many are associating the surge in FAANG performance as a ‘go-for-growth’ play, but in a reality it looks like investors are running scared into cash rich companies.”

Lapthorne’s conclusion: “This is not a Trump policy play, this is balance sheet risk.“

Lapthorne next highlights an odd discrepancy between equity and debt: the aversion to debt “may seem a little odd given that high yield bond yields are down at historical lows and the appetite for new issuance remains strong. What drives credit is typically a mixture of leverage levels, interest rates, asset prices and asset volatility. Corporate leverage ratios are currently high, despite near record asset prices, and while interest rates are gradually rising, credit spreads on high yield bonds have plummeted. Why? Well asset volatility is very low compared to historical levels, or to put it another way, asset price confidence is high. This, coupled with the continuous clamor for yield, is helping to compress corporate bond spreads. This overconfidence may be misplaced. If equity volatility were to move higher, lower quality bonds could struggle, as firms with poor balance sheets are already in the US equity market.“

The chart below plots the relationship between long/short portfolios formed on balance sheet strength (again using Merton) and high yield bond yields. That they have a strong historical relationship is not surprising as both are measures of credit risk, but as such it is interesting when they diverge. For example there are only two instances in which we saw major divergences in the chart below. The first was the original Fed tapering bond sell-off in 2013. The second is today, with equity markets clearly balance sheet risk averse and credit markets seemingly incredibly complacent.

Going back to the core point made by the SocGen strategist, namely that investors are increasingly reluctant to lend to companies that already have a sizable debt load, Lapthorne points out, as one would expect, that where he has seen the greatest aversion to debt is within the smaller cap Russell 2000 index. A long/short balance sheet strength strategy is up 20% this year – the long leg is up 7% and the short leg is off 13%. To confirm this is not all about beta or cyclicality – a long portfolio formed on just price volatility is flat this year while the short leg is off 7%.

To summarise SocGen’s unexpected finding which started by looking at debt incurrence among various “quality” strata of companies and ended up with implications for risk appetite for stocks: the strength of tech stocks (lowest amount of debt) and the Russell 2000 weakness (most debt) this year has nothing to do with Trump and everything to do with interest rate rises and balance sheet concerns.

And one final point from SocGen: “the problem with highly leveraged companies experiencing falling market caps is that it makes things worse, i.e. implied leverage and price volatility both go up!”

We wonder if Janet Yellen and her central bank peers are aware of these findings which have dramatic consequences for the Fed’s treasured “wealth effect”, as they set off to not only raise rates but also unwind record balance sheets, in the process exacerbating the divergence between a handful of no/low debt companies and the rest of the public market facing increasingly higher interest rates…

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In a blow to the anti-Russia narrative being spewed by any and everyone in the western establishment (most recently Hillary again), the head of the French National Agency of Information Systems Security (ANSSI) told AP that France has found no traces of Russian hackers in a cyberattack on President Emmanuel Macron’s campaign (we wonder if the result would have been the same if he, like Hillary, had lost).

French Intelligence Head: there is absolutely no evidence of Russian involvement in French Elex hacking. Hack was crude; could be anyone http://pic.twitter.com/MCpyX87PH8

— Murad Gazdiev (@MuradGazdiev) June 1, 2017

Right after the event, it was claimed (by officials and the media lapdogs) that Russian hacking group called APT28 was responsible for the cyberattack on Macron’s presidential campaign.

However, according to ANSSI (the French cybersecurity agency has been investigating the attack) chief Guillaume Poupard,

the hacker attack on Macron’s campaign “was so generic and simple that it could have been practically anyone.”

 

He told AP that it “means that we can imagine that it was a person who did this alone. They could be in any country.”

Of course, given Putin’s meeting with Macron this week, we are sure the narrative remains alive and well and Putin must have strong-armed Macron to deny this.

As a reminder, the leak of Macron campaign data contained 9 gigabytes of emails, images and attachments dating back several months. At the time, the French authorities called on the national media not to report the contents of the leak, saying that doing so would violate election rules to stop campaigning a day ahead of an election. The candidate also barred RT and the Russian news agency Sputnik from his campaign HQ, accusing them of spreading false information about him. His team failed to provide any examples of such misreporting.

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Oil prices have roller-coastered since last night's API report of the biggest crude draw since September (hurricane-impacted), but kneejerked higher after DOE confirmed a big crude draw (though less than API), the largest since Dec 2016 and 8th weekly draw in a row. Distillates saw a surprise build, crude exports hit a record high, and production rose again to its highest since Aug 2015.

API

• Crude -8.67mm (-3mm exp) – biggest since Sept 2016
• Cushing -753k
• Gasoline -1.726mm (-1.5mm exp)
• Distillates +124k

DOE

• Crude -6.43mm (-3mm exp)
• Cushing -747k (-500k exp)
• Gasoline -2.86mm (-1.5mm exp)
• Distillates +394k (-700k exp)

8th weekly crude draw in a row and biggest since Dec 2016… surprise build in distillates

U.S. COMMERCIAL CRUDE STOCKS are drawing down much earlier and harder than normal for time of year http://pic.twitter.com/WRWVPPrYsU

— John Kemp (@JKempEnergy) June 1, 2017

Bloomberg's Laura Blewitt notes that Today is June 1st — an important day for Bakken crude. As of today, Energy Transfer's controversial Dakota Access Pipeline is now in service, providing a key outlet for oil to the U.S. Gulf Coast.

Lower 48 production continues to rise… from 8.815mm to 8.835mm – highest in 21 months…

Rystad Energy says U.S. crude production will exceed 10 million barrels a day before year-end, echoing sentiment from other analysts.  

Crude exports hit a new record high…

Gasoline demand at its highest since the peak last summer – seasonally ahead…

It's been a week since the OPEC extension deal and prices continue to hold lower… GLENCORE CEO SAYS OPEC HAS LOST MARKET CONTROL DUE TO SHALE – but prices were holding above API lows heading into the DOE print (ticking up into the data)= and bounced higher (though only marginally) on the data…

Close up…

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Over the past three years, gold has found itself in an odd place: while it still remains the ultimate “safety” trade and store of value should everything go to hell following social and monetary collapse, when it comes to “coolness” it has been displaced by various cryptocurrencies, all of which have vastly outperformed the yellow metal in recent months. Meanwhile, central banks continue to pressure the prise of gold to avoid a repeat of 2011 when gold nearly broke out above $2,000, putting the fate world’s “reserve currency” increasingly under question. As a result, gold has traded in a rather somnolent fashion, range bound between $1,100 and $1,300 over the last few years, failing to break out on either side.

But is that a fair price for gold?

That is the question Deutsche Bank’s Grant Sporre set out to answer in a special report released overnight, which among other things finds that gold is a “metal” full of paradoxes.

Here is what Deutsche Bank found: as Sporre contends, in order to determine whether gold is cheap or expensive, one must first define what gold actually is.

At its simplest form and yes we are stating the obvious, gold is a shiny yellow metal, relatively scarce and mined from the earth’s crust. Valuing the metal should then be just as easy? Gold is a simple commodity, governed by supply and demand, and valuing it should bear some relationship to the cost of digging it out of the earth? But it turns out; gold’s nature is far more mercurial. Gold can be many things to many different people – a store of value, a financial asset, a medium of exchange, a currency, an insurance policy against disruptive events or global uncertainty and even a “barbarous relic*” according to John Maynard Keynes. (*As with any famous quote, there are suggestions that the term was not originally coined by Keynes himself, nor that he was actually referring to gold, but rather to the constraints of the gold standard at the time).

 

All of this means that finding an absolute valuation method which will be accepted by all is rather optimistic; and that the value of gold is more likely to be determined on a relative basis depending on the individual’s perception of gold.

 

Whilst we contend that there is something of an art to valuing gold, we have used a more scientific framework to come up with that true fair value. There are flaws in any one of the individual approaches, and even averaging out the different approaches still seems like a bit of a cop out. However, in our table below the average of all the selected metrics would suggest that gold should trade around USD1,015/oz, with relative G7 per capita income valuing gold at USD735/oz, whilst the bloated size of the big four central bank balance sheets suggesting that gold should travel at USD1,648/oz.

Here is a summary of DB’s findings:

And DB’s take: the reason why gold is trading with a roughly 20% premium to “fair value” is because “there is a heightened perception of risk or uncertainty in the broader markets.“

Although gold screens as expensive, there is a short term scenario (3 month) which would justify gold trading higher, in our view. In the near term, our US rates economist Dominic Konstam sees scope for the US 10-year bond yield to fall to 2% (before rising to 2.75% by year-end), as falling excess liquidity points to softer US growth momentum ahead. If we apply a US 10 year bond yield of 2%, a USD 2% weaker from current levels (not our FX strategist view) and the S&P500 down 5% from current levels, our fair value model points to a gold price of USD1,320/oz.

 

Our own simple four factor model points to a value of USD1,185/oz. Our conclusion is that gold is still trading at a premium versus a wide variety of metrics; 20% versus the average or 6% versus our fair value model. This suggests to us that the certainly through the lens of gold, there is a heightened perception of risk or uncertainty in the broader markets.

And some additional thoughts from DB on how it scores gold’s value across its various roles in society:

* * *

Gold as a commodity – scarce but always in surplus?

Many investors are uncomfortable with treating gold as a commodity in that gold is not “consumed” like other commodities – it is not eaten, or burned or forged as food, energy or industrial metals would be. At first glance the price of gold relative to the marginal producer on the cost curve would provide a perfect yardstick to determining the fair value of gold. There are however two fundamental problems with this method. The first is that the conventional supply demand analysis does not work very well for gold. Partly due to its value and enduring nature (and high incentive to recycle), very little gold is actually consumed or lost every year. Thus every year, we add to the stocks of gold, with the industrial surplus being “consumed” by financial investors. We would argue that even the jewellery market is not “pure” consumption and the motivation is linked to a store of wealth.

Gold’s price trajectory relative to the marginal producer on the cost curve should be reasonable determinant of value. However, the mined supply of gold is relatively stable and only responds to pricing signals with a four to five year lag. Gold has been falling since 2012, the bump in 2016 notwithstanding and we only forecast mined supply to finally decline in 2017. It turns out, the gold miners are very good at adjusting their cost bases to the prevailing gold price, not least by targeting the richer parts of their ore bodies. The practice of “high grading” is much frowned upon in the industry, as certain less economic  parts of the ore body may be sterilized thereby reducing the NPV of the mine. However, when faced with significant cash burn, many miners have little choice.

If indeed gold is a commodity, gold’s perceived value relative to copper and oil should revert to a long run equilibrium level, based on the relative abundance of various commodities in the earth’s crust. There is no doubt that gold is scarce relative to copper for instance (10,000x less abundant). However the perception of utility will vary according to global growth. In a high global growth environment, copper should be seen as more valuable relative to gold.

* * *

Gold as Money – a medium of exchange with little intrinsic value?

Gold is often seen as a medium of exchange and one that is officially recognized (if not publically used as such) in our view. Simply, gold is widely held by most of the world’s larger central banks as a  component of reserves. The ideal medium of exchange must balance the paradox of representing value while having little intrinsic value itself. Fiat currencies physically have no use other than that which is ascribed to them by government and accepted by the public. Arguably, gold is a purer form of money because it actually costs something to produce, compared to fiat currencies which cost very little. However, the concept of relative scarcity or abundance comes into play. If the rate at which fiat currencies have been printed exceeds that rate at which gold has been mined, then ceteris paribus, gold should become scarcer and rerate versus fiat currencies. Since 2005, central bank balance sheets have expanded nearly fourfold. In contrast the global above ground stocks of gold have expanded a mere 20%. The gold price has rerated accordingly, but not enough to keep the value of gold at parity with the global (big four central banks to be precise) money stock. The average ratio since 2005 between global money stocks and the value of global gold stocks is c.1.8x. In order for gold to get back to this level, the price should appreciate to USD1,648/oz, nearly USD300/oz above the current spot price.

If we assume that gold reverts to the long run ratio of these two commodities, then at an oil price of USD50/bbl, gold should be trading at USD840/oz, and at a copper price of USD5,600/t, gold should be trading at USD960/oz. Gold remains expensive versus other commodities

* * *
Gold as a store of value – capital appreciation but no yield

We all need ways to store the fruits of our physical or intellectual labour for use at a later stage. We all have our preferences, be it bricks and mortar, the equity markets or gold. It depends on your confidence in how well you believe your asset of choice will preserve and in many instances grow your wealth or capital. We have examined the level of the gold price in real terms i.e. versus US CPI, relative to the per capita income and versus an alternative financial asset, the US equity market.

In terms of the relationship between gold and the S&P500, we have adjusted both for inflation and applied a further equity time value adjustment. Both should rise with inflation, but the S&P 500 should rise more and its retained and reinvested earnings should generate real EPS growth. We find that the adjusted gold to S&P500 ratio at 0.65x is still above its historical average of 0.54x. To bring this ratio back to its long run average would require the gold price to fall to USD990/oz. The average G7 per capita income since 1971 could buy just over 62 ounces of gold. Currently the average per capita income can purchase 47 ounces which implies that gold should trade at USD740/oz.

The real gold price average since 1971 when the gold standard was relinquished in the US is USD735/oz in PPI adjusted terms and USD810/oz in CPI adjusted terms.

Gold as a measure of market uncertainty

In order to adjust for the current gap between the actual gold price and our model forecast, we have adjusted our model (yes all models have dummy variables to account for the periods when they don’t quite work) for global risk perceptions. The adjustment we apply is simply a risk perceptions adjustment factor derived by plotting the model residual against the VIX index. We note that any significant period above 20 on the VIX index causes gold to trade above its “fair value”. The scale we apply ranges from -20 to 20, with each point accounting for USD10/oz. This is the minimum and maximum range of the deviation. The current gap of USD80/oz or 8 on our scale would suggest an above average sense of risk or uncertainty in the market. If we apply the DB house view forecasts at year end for the US 10 year bond yield of 2.75%, a US 10 year break even of 2.15%, an S&P year-end target of 2600, IMF gold purchases of 5 tonnes and a USD up 7.6% versus the broad trade weighted basket, then gold should trade all the way down to USD1,031/oz. Even if we increase our risk perception index from 8 to 12, this brings us back to USD1,150/oz by year end. In the near term however, our US rates economist Dominic Konstam sees scope for the US 10-year bond yield to fall to 2% (before rising to 2.75% by year-end), as falling excess liquidity points to softer US growth momentum ahead. If we apply a US 10 year bond yield of 2%, a USD down 2% from current levels and the S&P500 down 5% from current levels, our fair value model points to a gold price of USD1,320/oz.

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