Month: July 2017

Authored by James Rickards via The Daily Reckoning,

After nine years of unconventional quantitative easing (QE) policy the Federal Reserve is now setting out on a new path for quantitative tightening (QT).

QE was a policy of money printing. The Fed did this by buying bonds from the big banks. The banks would then deliver bonds to the Fed, and the Fed would in turn pay them with money from thin air. QT takes a different approach.

Instead, the Fed will set out policy that allows the old bonds to mature, while not buy new ones from the banks. That way the money will shrink the balance sheets ahead of any potential crisis.

For years leaders at the Federal Reserve have been rolling over the balance sheet to keep it at $4.5 trillion.

Here’s what the Fed wants you to believe.

The Fed wants you to think that QT will not have any impact. Fed leadership speaks in code and has a word for this which you’ll hear called “background.” The Fed wants this to run on background. Think of running on background like someone using a computer to access email while downloading something on background.

This is complete nonsense. They’ve spent eight years saying that quantitative easing was stimulative. Now they want the public to believe that a change to quantitative tightening is not going to slow the economy.

They continue to push that conditions are sustainable when printing money, but when they make money disappear, it will not have any impact. This approach falls down on its face – and it will have a big impact.

Markets continue to not be fully discounted because they don’t have enough information. Contradictions coming from the Fed’s happy talk wants us to believe that QT is not a contractionary policy, but it is.

My estimate is that every $500 billion of quantitative tightening could be equivalent to one .25 basis point rate hike. The Fed is about to embark on a policy to let the balance sheet run down. While I don’t know the figure, let’s give a rough estimate that they lower balance sheets at a rate of $10 billion a month, or $120 billion a year. I would expect for the long-term they’ll look to increase the tempo, which could even reach $20 billion a month or higher.

Under that estimate, it would be the equivalent of half a .25 basis point rate hike just in the first year alone, with expectations of Fed increases from there.

The Fed has pushed that hiking rates will have the same effect as QT. While they might attempt to say that this method is just going to “run on background,” don’t believe it.

The problem continues to be that the stock market is overpriced.

Go back to the days following the November 8th presidential election of Donald Trump. What happened the next day? Stocks went up and then immediately they went down.

The Dow Jones went down 800 points following the election.  Until Carl Icahn, who was with Trump in Trump Tower on election night, went out and bought $2 billion worth of stocks in the middle of the night.

By the end of the next day, November 9th, the market was up, and then it went up from there. The Dow Jones went up a thousand points in November, December and January based on the expectation of Trump tax cuts. He’s only cutting taxes once, he’s not cutting them three times.

When I saw that, it immediately indicated that this is a bubble. This is bubble behavior, and it has even gone up a little bit from there. The market seems to have nearly peaked as of March 1st.

Now that it’s apparent that the Trump agenda’s not going to be enacted, the market’s ready for a fall on its own.

Quantitative Tightening, Wall Street and Gold

Where are estimates headed for 2018? Many in the Wall Street crowd have extrapolated that analysis from the S&P projected earnings charts shows numbers going vertical. That’s not going to happen if the Fed’s doing quantitative tightening and raising rates, which they are headed toward. The stock market’s set up for a fall.

The one thing to know about bubbles is they last longer than you think and they pop when you least expect it. Under such conditions, it’s usually when the last guy throws in the towel that the bubble pops. We’re not there yet.

While the current environment might not show that stocks are going to go down in the next few weeks, the question still remains on whether this is a bubble? Is this thing ready to pop? Absolutely, and QT could be just the thing to do it.

I would say the market is fundamentally set up for a fall. When you throw in the fact that the Fed continues to have no idea what they’re doing, and has taken a dangerous course anyways. I would expect a very severe stock market correction coming sooner than later.

This is where taking multi-step analysis comes into play. In the very short run, you say see that the Fed’s raising rates, they’re going to do QT, and the economy’s slowing and tends to make the dollar stronger by giving deflationary actions.

All those things historically are bad for gold.

Yet while everything described is bad for gold, you will notice that gold’s going up anyway. While it may go up and down some weeks, if you look at charts going back to December 15th, 2016, gold is up significantly. It is in a zigzag pattern where it will go up then back down repeatedly. Every high is higher than the one before, and every low is higher than the one before.

In other words, this is a step pattern. That pattern of higher highs and higher lows is very bullish for gold. I’m actually surprised that gold is as strong as it is – given all the headwinds described. That’s part of the bull case for gold.

The stock market seems to be correcting and the Fed will eventually have to reverse course. The Fed believes they’re going to be able to continue on a rate raising path, but this won’t be the case for long because the economy’s going to hit stall speed. They’re going to have to go into the vast toolkit yet again and likely apply forward guidance.

That’s when the Fed is going to find out the hard way that raising rates in September will be difficult because they’re slowing the economy. When the market sees that the Fed has decided to flip from tightening to an easing policy and the Federal Reserve decides it must apply forward guidance yet again – look for severe corrections.

Expect the price of gold to go to the moon because that kind of easing will be extremely bullish for gold.

What’s surprising about gold currently is that it has performed well in an adverse environment. When you flip to a positive or a favorable environment, it’s going to do even better.

Instead of watching the tape or short-term, my advice is to stay focused on the long-term trends.

That’s how you’ll make the most money and preserve wealth in adversity.

I would expect gold doing very well in the second half of the year.

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Heading into today’s car delivery estimate, Tesla had previewed that for the first half of 2017 it expects a substantial jump in vehicle deliveries. Recall that management guided for a 61% to 71% increase in Model S and Model X deliveries during H1 of 2017 compared with the first half of 2016. To achieve this goal, Tesla would need to deliver 47,000 to 50,000 vehicles in Q1 and Q2 combined. Moments ago Tesla announced its first half vehicle deliveries, and it made the low end of this guidance: just barely, with 47,100 autos delivered.

Tesla delivered just over 22,000 vehicles in Q2, of which just over 12,000 were Model S and just over 10,000 were Model X. This represents a 53% increase over Q2 2016. Total vehicle deliveries in the first half of 2017 were approximately 47,100.

However, where Tesla clearly failed to deliver was relative to sellside consensus which expected the electric car maker to sell 22,912 cars in Q2. Instead, the official number was 22,000. Which explains the very next sentence, in which Elon Musk delivered the latest the mea culpa why the company once again failed to hit expected deliveries.

The major factor affecting Tesla’s Q2 deliveries was a severe production shortfall of 100 kWh battery packs, which are made using new technologies on new production lines. The technology challenge grows exponentially with energy density. Until early June, production averaged about 40% below demand. Once this was resolved, June orders and deliveries were strong, ranking as one of the best in Tesla history.

Odd how this production bottleneck was never made clear to any of the analysts covering the company so they could adjust their forecasts accordingly.

Tesla also issued a conditional guidance for second half, in which Tesla said that “provided global economic conditions do not worsen considerably, we are confident that combined deliveries of Model S and Model X in the second half of 2017 will likely exceed deliveries in the first half of 2017.”

And since Tesla will likely miss, or once again just barely make its guidance, we look forward to seeing just what economic conditions will “worsen considerably” preventing Musk from hitting yet another projection.

Some other details from the press release:

Q2 production totaled 25,708 vehicles, bringing first half 2017 production to 51,126.

 

We always want our customers to experience the newest versions of Model S and X while their cars are in service, so we added fully loaded, newly built cars to our service loaner fleet. We always want the service loaner Tesla to be *better* than the customer car being serviced. The customer should never suffer for something that is our fault.

 

We also finally added a sufficient number of Model X cars to our test drive and display fleet because our stores had been operating with far short of what was needed and, in some cases, none at all. There appears to be substantial untapped sales potential for Model X. It should also be noted that production quality and field reliability of the Model X, for which Tesla has been fairly criticized, have improved dramatically. It is now rare for a newly produced Model X to have initial quality problems.

 

The first certified production Model 3 that meets all regulatory requirements will be completed this week, with a handover of ~30 customer cars at our Fremont factory on July 28. More details to follow soon.

And another caveat: “Our delivery count should be viewed as slightly conservative, as we only count a car as delivered if it is transferred to the customer and all paperwork is correct. Final numbers could vary by up to 0.5%. Tesla vehicle deliveries represent only one measure of the company’s financial performance and should not be relied on as an indicator of quarterly financial results, which depend on a variety of factors, including the cost of sales, foreign exchange movements and mix of directly leased vehicles.”

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A powerful Senator – a member of the Armed Services and Judiciary Committees, the Subcommittee on Defense of the Appropriations Committee, and Formerly on the Select Committee On Intelligence (Lindsey Graham) – asked the general counsel for the Office of the Director of National Intelligence:

• If the government was spying on him

• Whether his identity had been “unmasked”

• And whether this information could be used for blackmail by politicians who didn’t like him

The counsel for the intelligence agency refused to respond:

What should we make of that?

Washington’s Blog asked the highest-level NSA whistleblower of all time … the guy who created the NSA’s global intelligence gathering system, Bill Binney^* what he thought.

Binney responded:

They won’t tell him because his communications with foreigners and domestically are being collected and probably targeted. That’s why they don’t ever want to tell senators or representatives or the president or federal judges etc. their communications are collected and scanned.

 

Further, they won’t tell them how many US citizens are in their databases … again because it’s about 280 million by my estimates.

 

All of these acts are crimes against the constitution and laws of the US which should put them in jail. (see attached)

 

These letters are a direct violation of the intelligence acts of 1947 and 1978. But, who cares, the intelligence community runs the US government anyway.

The two letters Binney sent to us are attached at the end of this post. The first letter – to NSA whistleblower Russel Tice – says that he can’t talk to anyone in Congress about what’s really going on.

The second letter – to Senators Wyden and Udall, both on the Senate Select Committee on Intelligence – says that the NSA can’t reveal how many Americans it has spied on because that would “likely impede NSA’s mission” and “would itself violate the privacy of US persons.”   Here are the letters:

• NSA letter to Tice
• NSA can’t say cause would violate us citizen privacy

Binney continued:

[The NSA’s letter to Russ Tice] shows the arrogance of the intelligence community that they can, in writing, say that the congress is not cleared to know about intelligence programs.

 

By law, they are required to keep the Congress informed of all their programs – for Covert programs that requirement is to the Gang of 8.

The Washington Times explained in 2006:

Renee Seymour, director of NSA special access programs stated in a Jan. 9 letter to Russ Tice that he should not testify about secret electronic intelligence programs because members and staff of the House and Senate intelligence committees do not have the proper security clearances for the secret intelligence.

(And see this.)

Binney previously pointed out how absurd this is:

Russ Tice … was prepared to testify to Congress to this, too, and so NSA sent him a letter saying, we agree that you have a right to go to Congress to testify, but we have to advise you that the intelligence committees that you want to testify to are not cleared for the programs you want to speak about. Now, that fundamentally is an open admission … by NSA that they are violating the intelligence acts of 1947 and 1978, which require NSA and all other intelligence agencies to notify Congress of all the programs that they’re running so they can have effective oversight, which they’ve never had anyway.

In case you think this is a one-off, remember that the Chairman of the Senate Intelligence Committee said in 2007:

Do you think that because I’m Chairman of the Intelligence Committee that I just say I want it, and they [the intelligence agencies] give it to me? They control it. All of it. ALL of it. ALL THE TIME. I only get – and my committee only gets – what they WANT to give me.

Remember that the NSA was created in secret … and Congress wasn’t even notified.

During the Vietnam war, the NSA spied on two prominent politicians: Senators Frank Church and Howard Baker.  Church was the chairman of the committee investigating wrongdoing by the NSA and other intelligence agencies.

To this day, Congress members get more information about NSA spying from reading the newspaper than they get in classified NSA briefings.

Congressman Justin Amash said that the NSA would only divulge information in classified briefings if Congress guessed at the right questions:

Amash said that intelligence officials are often evasive during classified briefings and reveal little new information unless directly pressed.

 

“You don’t have any idea what kind of things are going on,” Amash said. “So you have to start just spitting off random questions. Does the government have a moon base? Does the government have a talking bear? Does the government have a cyborg army? If you don’t know what kind of things the government might have, you just have to guess and it becomes a totally ridiculous game of twenty questions.“

A senior staffer for the Chair of the Senate Intelligence Committee – one of the biggest apologists for NSA spying- confirms Amash’s statement:

Sen. Dianne Feinstein (D-Calif.), chairman of the Senate Intelligence Committee, said in August that the committee has less information about, and conducts less oversight of, intelligence-gathering that relies solely on presidential authority. She said she planned to ask for more briefings on those programs.

 

“In general, the committee is far less aware of operations conducted under 12333,” said a senior committee staff member, referring to Executive Order 12333, which defines the basic powers and responsibilities of the intelligence agencies. “I believe the NSA would answer questions if we asked them, and if we knew to ask them, but it would not routinely report these things, and in general they would not fall within the focus of the committee.”

And the courts don’t have any oversight over the intelligence agencies either:

• A Federal judge who was on the secret spying court for 3 years says that it’s a kangaroo court

• Even the current judges on the secret spying court now admit that they’re out of the loop and powerless to exercise real oversight.

• When these judges raised concerns about NSA spying, the Justice Department completely ignored them

• The secret spying court recently noted that there is an institutional “lack of candor” at the NSA, and that the agency’s illegal spying constitutes a “very serious” constitutional issue

In other words, the intelligence agencies are rogue.

Blackmail

But what about Senator Graham’s question about whether someone who didn’t like him could blackmail him with information gained through spying?

Intelligence agency insiders says that blackmail is a huge part of why the intelligence agencies are really spying on us. And see this.

*Binney is the NSA executive who created the agency’s mass surveillance program for digital information, who served as the senior technical director within the agency, who managed six thousand NSA employees, the 36-year NSA veteran widely regarded as a “legend” within the agency and the NSA’s best-ever analyst and code-breaker, who mapped out the Soviet command-and-control structure before anyone else knew how, and so predicted Soviet invasions before they happened (“in the 1970s, he decrypted the Soviet Union’s command system, which provided the US and its allies with real-time surveillance of all Soviet troop movements and Russian atomic weapons”).

Binney is the real McCoy. As we noted in 2013, Binney has been interviewed by virtually all of the mainstream media, including CBS, ABC, CNN, New York Times, USA Today, Fox News, PBS and many others.

via http://ift.tt/2sjmKxT George Washington

Authored by Tsvetana Paraskova via OilPrice.com,

Every now and then, an oil supermajor comes up with what they tout as a breakthrough in scientific research of renewable energy sources.

 

This month, it was ExxonMobil’s turn to report a breakthrough in advanced biofuels. Exxon said that it had found a way to make algae ‘fatter’, and those algae could become part of the (distant) future energy mix, could cut carbon dioxide emissions, and would not compete with food crops like other biofuel sources.

Exxon and Synthetic Genomics have been partners since 2009 in researching and developing oil from algae to be used as a renewable, lower-emission alternative to traditional transportation fuels.

By using advanced cell engineering technologies at Synthetic Genomics, the joint research team has just modified an algae strain to enhance the algae’s oil content from 20 percent to more than 40 percent, Exxon said.

But the U.S. oil supermajor was quick to note that, referring to the fatter-algae strain, “technology is still many years from potentially reaching the commercial market.”

If at some point in the future Exxon was able to produce commercial-scale biofuel from algae at competitive prices, it could potentially offer an alternative to electric vehicles, creating a renewable-source fuel and freeing the U.S. from the geopolitical issues like crude oil imports or lithium reserves in countries outside America, David Butler at Seeking Alpha argues.

That is, if cars in America still run on gas when Exxon hits the market with a biofuel from a source that is grown and made fatter in labs.

Back in 2013, Exxon said—after having spent US$600 million on developing biofuels for motor vehicles from algae—that success was still a quarter of a century away.

“We’ve come to understand some limits of that technology, or limits as we understand it today, which doesn’t mean it’s limited forever,” the then CEO of Exxon, Rex Tillerson, said. 

Now a breakthrough in research has been achieved, but still, limits exist in taking the fatter algae out of the lab and into the car engines.

Oliver Fetzer, chief executive officer of Synthetic Genomics, said:

“One of the chief obstacles facing the adoption of algae as a scalable energy source has been the biofuels industry’s difficulty in producing sufficient volumes. It’s not enough to be able to produce amounts equivalent to a lake’s-worth of oil from algae when global oil consumption is a veritable ocean – 96 million barrels – every day, according to the International Energy Agency.”

 

According to Exxon, apart from transportation-related energy, the algae could also “potentially be processed in conventional refineries, producing fuels no different from convenient, energy-dense diesel. Oil produced from algae also holds promise as a potential feedstock for chemical manufacturing.”

Exxon is not the only oil supermajor that has been conducting biofuel research. Ten years ago, in 2007—three years before the disastrous oil spill in the Gulf of Mexico, UK’s BP selected UC Berkeley to lead a US$500 million energy research consortium in partnership with Lawrence Berkeley National Laboratory (LBNL) and the University of Illinois at Urbana-Champaign. The funding created the Energy Biosciences Institute (EBI), to which BP had pledged to contribute US$350 million. But at the beginning of 2015, BP exercised its contract option to pull nearly a third of its funding for 2015, pulling even more in the remaining two years, according to the Cal Alumni association at UC Berkeley.

In November last year, BP said that it was investing US$30 million in bio jet fuel producer Fulcrum. 

The UK supermajor has been producing ethanol from sugarcane in Brazil since 2008, and has three ethanol production plants there. But sugarcane crop growing and harvesting impacts the environment and needs arable land, unlike Exxon’s fat-lab-algae.

Exxon’s research may be promising and hailed as a ‘breakthrough’ by the company, but in its own words, actual feasible deliverable commercial production is many years away.

Until then, the ‘transportation’ using algae could only be this surfboard made of algae processed into a different kind—and sustainable—“polyols” that replace the conventional petrochemicals used in making surfboards.

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Nearly two years after Janet Yellen’s “dehydration” event during a speech in Boston, when in September 2015 the Fed Chair slurred her speech for several minutes before getting medial attention, moments ago the Fed disclosed that the Fed Chair had been hospitalized in London over the weekend for a urinary tract infection, although she has since recovered and is expected to “resume her schedule as planned this week”.

Fed press release below:

Federal Reserve Chair Janet L. Yellen was treated at King Edward VII hospital in London over the weekend

 

Federal Reserve Chair Janet L. Yellen was treated at King Edward VII hospital in London over the weekend for a urinary tract infection. She was admitted Friday and released Monday. She is returning to Washington, D.C., and expects to resume her schedule as planned this week.

 

Chair Yellen was in London for an event Tuesday, June 27, at the British Academy and stayed in London for a brief vacation with her family.

As a reminder, Yellen’s next semi-annual Humphrey Hawkins speech is scheduled to take place on July 12.

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After an optimistic overnight buying panic, markets nose-dived into the early close today led by Big Tech stocks…

With FANG at 2-month lows.

Bonds were also dumped as the dollar rallied.

However, the biggest mover on the day was Nasdaq 'VIX'…

Which is now trading at its most fearful relative to S&P 'VIX' since 2002.

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At least nine people have been injured – several seriously – after a car crashed into a crowd of people in East Boston, with the Boston Globe reporting that according to State Police a car has driven into a group of pedestrians in East Boston. 

DEVELOPING – Units on scene, vehicle into a group of pedestrians, Porter St at Tomahawk Driver, East Boston, near Logan taxi pool. Injuries.

— Mass State Police (@MassStatePolice) July 3, 2017

The incident is unfolding at Porter Street and Tomahawk Drive, near the Logan taxi pool. State Police are on the scene, the agency said in a tweet.

BOSTON: PHOTOS: Taxi drives into group of people at Taxi stand outside Logan Airport, reports of 9 people injured. Cause not yet known. http://pic.twitter.com/WspagwOQkQ

— KolHaolam (@KolHaolam) July 3, 2017

A police spokesman told WBTS that there were serious injuries, though it was not immediately clear how many or if any were life-threatening. The injured are being evaluated and transferred to several hospitals. Boston police, Boston firefighters, and Boston EMS workers are also at the scene, State Police said.

The driver remained at the scene and was being interviewed by police immediately afterwards, according to the Boston Globe.

A law enforcement official briefed on the incident said it did not appear to be terrorism. Another said investigators are looking at possible operator error in the incident.

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Last Thursday, when the VIX briefly soared from 10 to 15, crossing the level which Marko Kolanovic previously said could lead to “catastrophic losses” for systematic funds and vol sellers, we asked two questions: “i) Will today’s selloff lead to a broad deleveraging among vol-sellers who are forced to cover into a sharply rising VIX, and ii) will the risk parity funds finally be forced to unwind?”

While the VIX surge was short-lived (thus answering question i) with the VIX tumbling back to 11 by EOD, it allowed us to trot out our favorite risk-parity chart, a matrix showing implied deleveraging thresholds for a large cross-section of the risk-parity industry, based on intraday moves in equities vs bonds.

While Thursday’s fireworks weren’t as acute as the 2015 Taper Tantrum, for a few minutes it did seem that a broad wave of risk parity deleveraging was about to kick in, potentially resulting in a few worse outcome for capital markets. 

And even though it is probably just a coincidence, moments ago Goldman’s Ian Wright boldly went where BofA…

… and JPM…

… have both gone before on several occasions in the very recent past, namely warning that in the current environment, there is a growing risk “of a negative rate shock, especially for balanced and risk parity investors.” Here is why Goldman is growing concerned that a spike in vol (coupled with a coordinated move either higher or lower in both stocks and bonds) could result in pain for the market.

Last week the worst returns across assets we track were in European equities and German 10-year Bunds. US equities and bonds were also down on the week. Ultimately, we think higher real rates weighed on equities and bonds, creating a particularly bad combination for balanced investors. For example, a simple risk parity portfolio strategy we track experienced a material drawdown last week, especially in Europe.

 

 

And if that warning was too implicit, here is the explicit one.

While we think this low vol period will continue, supported by still strong global growth (as a result in our asset allocation we remain OW equity over 12m), we think as we move more late cycle that rates – in particular real rates – will continue to increase, also weighing on equity. In addition, higher rates from these low levels imply both poor income and negative capital returns to bonds (we remain UW bonds over 12m as a result).

 

We also think it is likely that bonds will be worse hedges for equity as rates are currently part of the risk to equity, rather than the support. For risk parity investors this is particularly problematic as low equity volatility has likely driven higher equity allocations, and so shocks driven by real rate increases will be amplified in their portfolios.

What is Goldman’s suggestion? Go to cash: “As an alternative to bonds and given little potential for diversification across assets, we remain OW cash over both 3 and 12m.” That, or bitcoin of course.

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