Month: July 2017

It's a triple-whammy – Americans are overworked, Americans are underpaid, and, now, potentially as a result of these, Statista's Isabel von Kessler writs that Americans are overweight – over 2 in 5 American workers have put on pounds at their present job.

A survey by Harris Poll on behalf of CareerBuilder, asked workers what they thought contributed most to weight gain at their current workplace.

At least 51 percent thought sitting at a desk most of the day was the main reason.

You will find more statistics at Statista

While sports could counterbalance the desk jobs, 45 percent stated they were too tired to exercise after returning home. 38 percent blamed stress-related eating for increasing pounds.

Accordingly, 25 percent of all workers say they've gained more than 10 pounds at their present job, while 1 in 10 gained more than 20 pounds.

Houston is the city with the highest share of weight gaining workers (57 percent), Washington D.C. follows suit (50 percent) and Dallas comes third (47 percent).

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Authored by Whitney Webb via TheAntiMedia.org,

While his health and even sanity have been in doubt for years, fresh rumors are spreading that King Salman of Saudi Arabia’s physical condition has further deteriorated. According to Saudi sources cited by Oil Price, Salman’s health will likely forced him to abdicate the throne in the next few months.

Though it was long believed that Mohammed bin Nayef, the king’s nephew and the country’s Minister of the Interior, would assume the throne, bin Nayef’s sudden ouster as Saudi Crown Prince during Ramadan definitively changed that, with King Salman’s son and the current Crown Prince, Mohammed bin Salman, now positioned to take control.

Bin Nayef’s ouster was initially reported by international media as having gone “smoothly.” However, it soon emerged that bin Salman had planned the entire affair and that the former Crown Prince, following his acquiescence of the title, was essentially under house arrest. Since then, rumblings have emerged that many in the Saudi royal family, which has long been guided by deference to elders and group consensus, are none too happy with the sudden turn of events in the normally stable kingdom.

Now, with King Salman on vacation in Morocco for an entire month, the ambitious Crown Prince has been left in charge, promising a taste of things to come for the oil-rich kingdom. Already, speculators are stating that the kingdom’s balance of power is “on a knife-edge.”

One such indication that there is trouble brewing within the royal family is the King’s recent string of drastic policy changes that stripped the Interior Ministry, formerly headed by bin Nayef, of many of its key mandates, including counter-terrorism.

These functions have now been transferred to a new entity called the Presidency of State Security, which is under the direct command of the King, who also serves as Prime Minister. A royal decree further stated that “whatever concerns the security of the state, including civil and military personnel, budgets, documents, and information will also be transferred to the new authority.” According to experts, the overhaul of security services indicated there still exists opposition to bin Salman’s position as Crown Prince.

It is highly probable that this mass concentration of authority under the king and the essential gutting of the Interior Ministry was orchestrated by bin Salman himself, much like bin Nayef’s ouster. Given that King Salman’s suspected dementia has led the Crown Prince to “practically” administer the entire kingdom, bin Salman’s now-elevated position makes it highly likely that such efforts were intended to reduce opposition to his forthcoming rule and consolidate his power.

A warhawk ascends to the throne

While speculation is rife over how bin Salman is set to manage domestic affairs, there seems to be little disagreement over bin Salman’s likely handling of key foreign policy issues, considering his tenure as Defense Minister has shown his penchant for war, as well as his hotheadedness.

It was bin Salman, after all, who began the Saudi’s atrocious war in Yemen and oversaw its military’s use of force against civilian infrastructure and gatherings. Since it began in 2015, the war has claimed the lives of over 10,000 civilians and has brought Yemen to the brink of collapse. In addition, the Saudi’s repeated bombings of hospitals and its blockade of aid and medicine have caused the worst cholera outbreak in recorded history to spread through Yemen.

Despite the increasingly dire situation in Yemen, bin Salman stated in May that he was in no hurry to end the conflict, saying “time is in our favor,” later adding that Saudi troops were planning to wait for the rebels “to tire out.”

In addition, bin Salman has caused great discomfort with the Saudis’ foreign allies by orchestrating a diplomatic crisis with Qatar. The diplomatic row put the United States, a major foreign ally of the Saudis, in an uncomfortable situation as it sought to repair the rift between the two influential Gulf state monarchies. The United States has been tepid in its embrace of bin Salman, largely due to the fact that his predecessor as Crown Prince, bin Nayef, was highly regarded by U.S. counterterrorism officials and was seen as a close ally of the U.S. in the region.

The move was likely orchestrated to pressure Qatar to end support for the Muslim Brotherhood, which bin Salman despises, as well as its support of Hezbollah, a consolation from bin Salman to Israel. Indeed, bin Salman has been hailed as a “dream come true” for Israel and has pushed to normalize relations between the Saudi kingdom and the apartheid state in recent months.

In addition, the Saudis have also demanded that Qatar end all contact with Iran, speaking to bin Salman’s aggressive brinkmanship with the Islamic Republic. Prior to becoming Crown Prince, bin Salman had said that dialogue with Iran, i.e. a diplomatic solution to disagreements, was “impossible” and has hinted at a Saudi pre-emptive strike against Iran, stating that “We won’t wait for the battle to be in Saudi Arabia. Instead, we’ll work so that the battle is for them in Iran.”

While bin Salman has publicly stated that he will not push for war with Iran since he became Crown Prince, Iran doesn’t seem so sure. After bin Salman’s hawkish comments on Iran, the Iranian Defense Minister Hossein Dehghan stated that “If the Saudis do anything ignorant, we will leave no area untouched except Mecca and Medina.” Then, after terror attacks targeted the heart of Tehran a month later in early June, Iran’s intelligence community accused Saudi Arabia of involvement, vowing revenge. The Islamic State, a terrorist organization known to be directly funded by the Saudi kingdom, took credit for the attack in Tehran.

Some experts agree with Iran’s concern that bin Salman’s growing power will lead to more war, not less. For instance, Shirleen Hunter, professor of political science at Georgetown University, believes that bin Salman’s appointment and forthcoming ascension to the throne “means that Saudi Arabia’s hardline approach towards the war in Yemen as well towards Iran will continue.” In an interview with the Tehran Times, she added that “relations with Iran, in particular, could seriously deteriorate as Bin Salman might increase destabilizing efforts inside Iran.”

Coupled with rising domestic dissent and economic damage resulting from the artificial manipulation of oil prices and the high cost of the war in Yemen, bin Salman – though eager to gain power – will likely find himself in a perfect storm. Though many young Saudis see bin Salman as a potential reformer, his history of warmongering and making rash decisions suggests that he is set to unravel the power balance that has allowed the Saudi kingdom to maintain its influence in the Middle East for so long.

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As Amazon flirts with a $500 billion market cap, letting Jeff Bezos try on the title of world’s richest man on for size if only for a few hours, for Amazon’s competitors it’s “everything must go” day everyday, as the bad news in the retail sector continue to pile up with the latest Fitch report that the default rate for distressed retailers spiked again in July.

According to the rating agency, the trailing 12-month high-yield default rate among U.S. retailers rose to 2.9% in mid-July from 1.8% at the end of June, after J. Crew completed a $566 million distressed-debt exchange. Meanwhile, with the shale sector flooded with Wall Street’s easy money, the overall high-yield default rate tumbled to 1.9% in the same period from 2.2% at the end of June as $4.7 billion of defaulted debt – mostly in the energy sector – rolled out of the default universe.

In a note, Fitch levfin sr. director Eric Rosenthal, said that “even with energy prices languishing in the mid $40s, a likely iHeart bankruptcy and retail remaining the sector of concern, the broader default environment remains benign.”

He’s right: after the energy sector dominated bankruptcies in the first half of 2016, accounting for 21% of Chapter 11 cases, in H1 2017 the worst two sectors for bankruptcies are financials and consumer discretionary.

And if recent trends are an indication, the latter will only get worse as Fitch expects Claire’s, Sears Holdings and Nine West all to default by the end of the year, pushing the default rate to 9%. “The timing on Sears and Claire’s is more uncertain, and our retail forecast would end the year at 5% absent these filings,” Rosenthal wrote.

Putting the retail sector woes in context, Reorg First Day has calculated that retail bankruptcies soared 110% in the first half from the year-earlier period, accounting for $6 billion in debt.

The list includes name brands such as Gymboree, Payless, rue 21 and the Limited, all of which cited the Amazon affect as a contributor to their downfall.

“Many retailers have echoed the familiar cries of those that filed before them—the proliferation of online shopping, rapidly deteriorating brick-and-mortar retail, the rise of fast fashion, hefty lease obligations and shifting consumer preferences,” Reorg First Day said in a midyear review.

While it is far from empirically, and certainly scientifically established, every incremental retail bankruptcy should add approximately $5-10 billion to AMZN’s market cap, further cementing Jeff Bezos as the world’s richest monopolist man.

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Authored by James Rickards via The Daily Reckoning,

With the U.S. preparing to confront China and go to war with North Korea, Russia is an indispensable ally for the U.S.

There are huge implications on capital markets as these hegemonic powers continue to edge toward war.

Here’s an overview of some of the financial implications of improved relations with Russia…

1: The End of OPEC and the Rise of the Tripartite Alliance

On energy, a new producer alliance is being created to replace the old OPEC model. This new alliance will be far more powerful than OPEC ever was because it involves the three largest energy producers in the world — the U.S., Russia, and Saudi Arabia. This Tripartite Alliance is being engineered by former CEO of Exxon and Secretary of State Rex Tillerson, with support from Trump, Putin and the new Crown Prince of Saudi Arabia, Mohammad bin Salman.

This alliance is perfectly positioned to enforce both a price cap ($60 per barrel to discourage fracking) and a price floor ($40 per barrel to mitigate the revenue impact on producers). Supply cheating by outsiders, including Iran and Nigeria, can be discouraged by directing order flow to the alliance members, which denies the cheaters of any revenue.

As a result, energy will trade in the range described. Traders can profit by buying energy plays when prices are in the low 40s and selling when prices hit the mid-to-high 50s.

2: Improved U.S. Relations with Russia and Sanctions Relief

Following Russia’s annexation of Crimea and intervention in eastern Ukraine, President Obama imposed stringent economic sanctions on Russia, its major banks and corporations, and certain political figures and oligarchs. The EU joined these sanctions at the behest of the U.S. Russia responded by imposing its own sanctions on Europe and the U.S. in the form of banning certain imports.

The sanctions have been a failure. They have had no impact on Russian behavior at all. Russia still acts freely in Crimea, eastern Ukraine, and in other spheres of influence such as Syria.

This failure was predictable. Russian culture thrives on adversity. Russians understand that their culture is distinctly non-western and has its roots in Slavic ethnicity and the Eastern Orthodox religion.

The benefits to Europe from sanctions relief would amplify what is already solid growth and monetary policy normalization there. This paints a bullish picture for the euro and the ruble as trade and financial ties expand beginning in 2018.

A review of Russia’s place in the world and its prospects would not be complete without an analysis of its monetary policies and positions.

Russia’s hard currency and gold foreign exchange reserves have been on a roller coaster ride since mid-2008, just before the panic of 2008 hit full force. Reserves were $600 billion in mid-2008 before falling to $380 billion by early 2009 at the bottom of the global contraction.

Reserves then expanded to over $500 billion by mid-2011, and remained in a range between $500 billion and $545 billion until early 2014.

Russia’s reserves nosedived beginning in mid-2014 due to the global collapse of oil prices, which fell from $100 per barrel to $24 per barrel by 2016. The Russian reserve position fell to a low of $350 billion by mid-2015, about where they were at the depths of the 2008 crisis.

Reserves then began a second recovery in late 2015 and today stand at around $420 billion. This recovery is a tribute to the skill of the head of the Central Bank of Russia, Elvira Nabiuillina, who has twice been honored as the “Central Banker of the Year.”

When U.S.-led sanctions prohibited Russian multinationals, such as Gazprom and Rosneft, from refinancing dollar- and euro-denominated debt in western capital markets in 2015, those giant companies turned to Nabiullina. They requested access to Russia’s remaining hard currency reserves to pay off maturing corporate debt.

Nabiullina mostly refused their requests and insisted that the reserves were for the benefit of the Russian people and the Russian economy and were not a slush fund for corporations partially controlled by Russian oligarchs.

Nabiullina’s hard line forced the Russian energy companies to make alternative arrangements including equity sales, joint ventures, and yuan loans from China (which could be swapped for hard currency) to pay their bills. As a result, Russia’s credit was not impaired and its reserve position gradually recovered.

3: Watch Russia’s “Gold-to-GDP” Ratio

Another critical aspect of Russia’s reserve management under Nabiullina is that, even at the height of the oil-related drawdown in mid-2015, the Central Bank of Russia never sold its gold. In fact, it continued expanding its gold reserves. This meant that gold reserves as a percentage of total reserves continued to grow.

The Russian reserve position today consists of approximately 17% gold compared to only about 2.5% for China. (The U.S. has about 70% of its foreign exchange reserves in gold; a surprisingly high percentage to most observers who never hear any positive remarks about gold from U.S. Treasury or Federal Reserve officials).

More important as a measure of Russia’s gold power are gold reserves as a percentage of GDP. If we take GDP as a metric for the economy, and gold as a metric for real money, then the gold-to-GDP ratio tells us how much real money is supporting the real economy. It is the inverse of leverage through government debt.

For the United States, that ratio is 1.8%. For China the ratio is estimated at 1.5% (China’s ratio is an estimate because China is non-transparent about the amount of gold in its reserves. The actual ratio is likely in a range of 1% to 3%).

For Russia, the gold-to-GDP ratio is a whopping 5.6%, or three times the U.S. ratio. The only other economic power that comes close to Russia is the Eurozone. It consists of the 19 nations that use the euro and they collectively have just over 10,000 metric tonnes of gold.

The gold-to-GDP ratio for the Eurozone is 3.6%; not as high as Russia, but double the U.S. ratio. On the whole, Russia is the strongest gold power in the world.

Russia is one of the five largest gold producers in the world. Currently Russian gold mining output is sold on the open market and the Russia central bank buys gold for its reserves on the open market. This stands in contrast to the situation in China, the world’s largest gold producer, where gold exports are banned, and are partly diverted to government reserves at below market prices.

However, Russia could easily flip to the China model in a financial crisis. This would rapidly increase Russian gold reserves at low cost, while drastically reducing global physical supply.

Russia and China are well-positioned to execute the greatest gold short squeeze in history. Of course, they have no interest is doing so right now because both are still buyers who favor low prices. At some point, they will flip to hoarders who favor high prices, but not yet.

Russia’s strong gold position combined with a very low amount of external debt leaves Russia in the best position to withstand economic distress without default or a funding crisis in the future. This is one reason U.S. economic sanctions have been relatively ineffective at hurting the Russian economy despite a slowdown and recent recession.

This trend in gold as a percentage of total reserves is highly revealing. It is part of a long-term effort by Russia and China (among others) to abandon the dollar-based international monetary system. They’d prefer a system less congenial to the United States and more accommodating to rising gold powers such as Russia, and rising geopolitical powers such as China.

Gold is not the only factor in the Russian plan to abandon the dollar-based system. Russia has actively promoted the ruble (RUB) as a regional reserve currency. The ruble has no prospect of becoming an international reserve currency for decades, if ever. Yet it is in wider use in bilateral trading payments in eastern Europe and central Asia where Russia is trying to reestablish local economic hegemony along the lines of the former Soviet empire.

4: Russian Relations and Blockchain Technology Will Challenge U.S. Dollar Dominance

Russia is also exploring the use of blockchain technology and crypto-currencies as a medium of exchange and as a payments platform. Recently, Putin met with Vitalik Buterin, the inventor of crypto-currency ethereum.

Buterin was born in Kolomna, Russia and was able to converse casually with Putin in their native Russian language. Here’s how Bloomberg reported the meeting on June 6, 2017:

Ethereum, the world’s largest cryptocurrency after bitcoin, has caught the attention of Vladimir Putin as a potential tool to help Russia diversity its economy beyond oil and gas…

 

‘The digital economy isn’t a separate industry, it’s essentially the foundation for creating brand new business models,’ Putin said at the event, discussing means to boost growth long-term after Russia ended its worst recession in two decades…

 

Russia’s central bank has already deployed an Ethereum-based blockchain as a pilot project to process online payments and verify customer data with lenders including Sberbank PJSC, Deputy Governor Olga Skorobogatova said at the St. Petersburg event. She didn’t rule out using Ethereum technologies for the development of a national virtual currency for Russia down the road.

 

Last week, Russia’s state development bank VEB agreed to start using Ethereum for some administrative functions. Steelmaker Severstal PJSC tested Ethereum’s blockchain for secure transfer of international credit letters. (Emphasis added).

Left unsaid in this report is the fact that the blockchain technology on which ethereum is based has unbreakable encryption. Its message traffic is routed through an infinite number of internet pathways that the U.S. cannot interdict. Any blockchain-based payment system offers a way to run a global payments system independent of existing systems controlled by the U.S. such as FedWire and SWIFT.

Bitcoin and ether boosters were quick to shout about the Putin-Buterin meeting as evidence of Russian support for bitcoin or ether. That’s not exactly right.

Putin’s interest is in the blockchain technology, not any particular crypto-currency. With the right technology platform, Russia could launch its own crypto-currency. This could be a digital-RUB or a jointly issued currency with China and other members of the Shanghai Cooperation Organization.

Whichever platform or direction Russia chooses, they all point in the same direction — the displacement of the dollar as a dominant transaction and reserve currency, and the creation of payments systems that the U.S. cannot sanction.

This project will continue on a gradual basis in the years ahead and then suddenly be unleashed in the equivalent a gold and digital Pearl Harbor sneak attack on the dollar.

What Does This All Add Up To?

Absent the phony scandals that have impeded the Russian–U.S. relationship for the past eight months, a substantial improvement in that relationship would have occurred already. As it is, the relationship will improve either because the scandals abate or because Trump pushes the relationship forward despite the scandals.

This is a simple matter of balance-of-power politics. With the U.S. preparing to confront China and go to war with North Korea, Russia is an indispensable ally-of-convenience for the U.S. This emerging U.S.–Russia condominium has implications far beyond China, including common interests in Syria, energy markets, and toward sanctions relief.

Notwithstanding the prospect of improved relations, Putin remains the geopolitical chess master he has always been. His long game involves the accumulation of gold, development of alternative payments systems, and ultimate demise of the dollar as the dominant global reserve currency.

It is up to the United States to defend that monetary ground. However, the likelihood of that is low because the U.S. does not even perceive the problem it’s facing, let alone the solution.

This evolving state of affairs creates enormous opportunities in the months and years ahead.

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Now that Obamacare repeal is dead for the foreseeable future thanks to John McCain, the full court press to expand on the existing system has begun with Bernie Sanders saying Sunday that he will “absolutely” introduce legislation on single-payer healthcare.

“Of course we are, we’re tweaking the final points of the bill and we’re figuring out how we can mount a national campaign to bring people together,” Sanders said on CNN’s State of the Union.

Sanders. who if it weren’t for the DNC’s collusion with Hillary Clinton would likely have been the Democratic party’s presidential candidate and perhaps current president of the US – a truth which the public must urgently forget and thus the daily barrage of “Russian collusion” headlines – promised to introduce a “Medicare for All” proposal once the debate over repealing ObamaCare ended. He is one of several progressive lawmakers who back the healthcare model that has divided Democratic lawmakers.

On #CNNSOTU @SenSanders says that he will “absolutely” introduce a single payer bill after Obamacare repeal fails https://t.co/zvTfMlyCkW

— State of the Union (@CNNSotu) July 30, 2017

It’s unclear exactly when he will introduce the legislation, or who will support it. The Senate has two weeks remaining in sessions.

According to The Hill, Sen. Steve Daines, a Montana Republican, attached an amendment to one version of the ObamaCare repeal bill Wednesday that would have created a single-payer healthcare system. Daines, unlike Sanders, does not support a single-payer system but used the model as a political maneuver. Sanders’s spokesman slammed the amendment as a “sham” at the time and said Sanders and other Democrats would refuse to vote on the measure.

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After both Brent and WTI rose above their respective 50DMAs on Friday, capping 2017’s best weekly rally for oil, the rising tide is accelerating as the latest CFTC COT data confirmed, when net specs boosted bullish Nymex WTI crude oil bets by 27K net-long positions to 423K, the highest in two months, as producers continued to cover short hedges, sending their net position to the most bullish since the summer of 2015.

Meanwhile, oil started the Sunday session jumping out of the gate, with WTI rising above $50 for the first time since May in early Asian trading, following the usual non-material weekend chatter and “noise” out of OPEC (which to exactly nobody’s surprise “can’t stop pumping“), however what has attracted traders’ attention, is a WSJ report that following last week’s latest round of sanctions, and after today’s vote to overhaul Venezuela’s constitution further entrenching Maduro’s unpopular regime, US government officials are considering announcing sanctions against Venezuela’s oil industry as early as Monday, although as the WSJ notes, a full-blown “embargo against Venezuelan crude oil imports into the U.S. is off the table for now.”

In its latest escalation, last Wednesday the U.S. government levied additional sanctions on 13 high-ranking Venezuelan officials for alleged corruption, human-rights violations and undermining democracy in the South American country. On Friday Mike Pence vowed “strong and swift economic actions” if the vote goes ahead.

While Maduro’s government has responded defiantly, “dismissing sanctions and warnings from Washington”, with Maduro insisting the government would notch a triumph in Sunday’s vote, the potential collapse in oil trade between Venezuela could crippled the country even more, while sending the price of oil sharply higher.

In fact, in a note from last week posted here, Barclays Warren Russell explains just what will happen should Trump expand Venezuela’s sanctions to impact its oil sector: “a sharper and longer disruption (eg, exceeding three months) could raise oil prices at least $5-7/b and flatten the curve structure despite an assumed return of some OPEC supply, a more robust US shale response, and weaker demand. It may be just the opportunity OPEC needs to exit its current strategy. US producer hedging activity would pick up if WTI moves to $50-55, limiting price upside potential.”

Furthermore, among the downstream consequences, is that refining margins should deteriorate if Venezuelan crude oil supply is curtailed. US refiners will be negatively affected by any sanctions related to trade constraints. On the other hand, China and India could benefit if Venezuelan oil is offered at a discount to comparable grades, Barclays suggests.

Finally, looking at Venezuela from a longer-term perspective, this is how Barclays estimates the local investment climate:

It is too early to assess the investment appetite in Venezuela in a post-Maduro environment. Though Venezuela’s assets are large, they are not short-cycle. Companies with deep connections to the country are likely to maintain a presence, but wait for the political landscape to stabilize before making incremental investments. Either way, it looks like Venezuela’s production trend is down over the near term.

Of course, the higher the price of oil goes, the more profitable shale will be, the more oil it will produce and so on, in the diabolic feedback loop that will assure oil does not go too far above $50 for the foreseeable future, as Goldman explained efficiently in just three bullet points last Thursday:

• Oil prices have rebounded over the past month on large inventory draws, a declining US rig count and strong demand data, suggesting that the rebalancing is accelerating.
• We remain, however, cautiously optimistic on prices from the current level with the recent improvements in fundamentals needing to be sustained for oil prices to rally meaningfully further.
• In fact, too large a price recovery now would only increase the downside risks to our year-end $55/bbl WTI price forecast given the fast velocity of shale’s supply response.

At which point it’s back to square one. For now, however, the bulls get to enjoy the next few days until the momentum reverses once again.

* * *

For those who are eager for more reasons to buy oil, there are more details in the full Barclays excerpt below and posted here first last week:

Looming risk of sanctions against Venezuela

The Trump administration is considering a wide variety of sanctions against the Venezuelan regime, which could range from sanctions on several senior government officials to targeting PDVSA’s ability to transact in US dollars, according to Reuters. This would not be the first time the Trump administration has taken action against Venezuela. The US already imposed sanctions on Venezuela’s vice president (February 2017), eight members of the Supreme Court (May 2017), and other military and government officials. The most recent Supreme Court sanctions were in response to the court’s decision to disband the democratically elected congress. The administration’s recent discussion of potential new sanctions would aim to keep elections “free and fair” and prevent President Maduro from being able to establish a dictatorship, which could occur as early as July 30.

The Trump administration is likely to proceed cautiously and incrementally with any sanctions. In contrast to the energy-related sanctions imposed on Russia and Iran, the more entrenched connections between US companies and consumers and the Venezuelan oil industry lead us to believe that the US administration will take a cautious approach.

Venezuela produces around 2.2 mb/d of oil and NGLs, which represents roughly 2% of the global petroleum market. Its Orinoco heavy oil plays a critical role as a feedstock for complex refineries around the world, particularly along the US Gulf Coast. Close to half of its 1.8 mb/d of oil exports go to OECD countries, with Asia consuming most of the remainder. Venezuela is the third largest exporter of oil to the US (?750 kb/d), behind Canada (3.2 mb/d) and Saudi Arabia (1.1 mb/d).

As a guide to potential outcomes, we examine US sanctions on Iran and Russia and their impact on the oil market. We find that the sanctions on Russia have not had a noticeable effect on its production or the oil market, while sanctions against Iran lowered its production and exports and supported oil prices. For more on sanctions on Russia and Iran, see the Appendix of this report.

We see several important differences between the situation in Venezuela and those in Iran and Russia.

1. Unlike Russia and Iran, Venezuela is at significant risk of political and economic collapse. Low oil prices have greatly reduced the government’s ability to pay its outstanding debts while funding imports of basic goods. As a result, President Maduro has taken decisions that have resulted in a deteriorating quality of life for Venezuelans in recent years. Amid the current instability, even limited sanctions are likely to have an outsized effect on the oil market.
2. A collapse in Venezuela could turn it into a regional crisis. More than 1.5mn Venezuelans have already fled the country because of the current crisis, this number could increase exponentially, affecting neighboring countries, particularly Colombia. The international community will need to support the region in a refugee crisis. In the case of Colombia, the situation could have additional implications because there are nearly 2mn Colombian and Colombian descendants living in Venezuela. Those people would likely be the first to cross the border and the Colombian government cannot deny them their rights as Colombian citizens. This could become significant fiscal burden for the Colombian government.
   Venezuela needs to import oil and refined products to produce oil. Roughly 50% of Venezuelan production is heavy oil, which is typically blended with diluent for transportation purposes. Without access to diluent imports from the US and elsewhere, certain Orinoco projects may be at risk of being shut-in. A trade embargo, sanctions that affect PDVSA, or a sovereign default could be catalysts for heavy oil shut-ins in the Orinoco. We estimated earlier this year that a default could take around 300 kb/d of heavy oil production offline (Commodities special report: The black swans of 2017, January 2017).
3. The current state of Venezuela’s refinery sector necessitates fuel imports, which have been met in part by imports from the US. Plagued by underinvestment, Venezuela’s refineries have been running well below nameplate capacity, with Bloomberg recently reporting that the Puerto La Cruz refinery is running at 15% utilization. Restricting fuel shipments to Venezuela would result in increased dependency on the PDVSA’s dilapidated plants and imports from other origins to prevent the country coming to a standstill.
4. Venezuela’s oil sector is much more intricately connected to the North American energy system, due to CITGO’s presence in the US and the dependence of other US refineries on Venezuelan feedstock. This interdependency with the US and the lesser connection with other OECD countries, mean Venezuela’s position in the international energy system is quite different to that of Russia or Iran.

If the US does impose further sanctions on Venezuela, it would likely take into account these differences. The use and timing of various sanctions will likely depend on how much the conflict escalates in the coming days and whether other factors (such as the potential for default on sovereign debt payments due in October and November), might be a catalyst for political change in the near future. In our view, if the Trump administration decides to issue sanctions, it would proceed conservatively and become increasingly restrictive only if its goals are not being achieved. One of the stated goals of the Trump administration is for Venezuela to hold “free and fair elections,” according to the White House press statement on July 17, 2017. Before implementing more aggressive sanctions, the administration is likely to seek multilateral support from other nations.

The EU recently expressed a willingness to impose sanctions on Venezuela as well. We believe sanctions could turn out to be a double-edged sword. Multilateral sanctions implemented after having exhausted negotiations are most likely to be successful. Nonetheless, history shows that sanctions alone are not enough to trigger political change, eg, Cuba, North Korea, and Syria. This finally depends on the level of internal pressure, which in Venezuela seems high.

Sanctions against individuals

Additional US-imposed sanctions against government officials may be the next step. Such sanctions are likely to cause some inconvenience but probably would have only a limited impact on Venezuela’s oil industry, in our view.

Sanctions on Venezuela’s energy sector

Sanctions could take several forms, ranging from sanctions similar to those imposed on Russia to more disruptive ones that could completely halt existing operations.

• Sanctions that prohibit or limit investment in new exploration and production activity would not likely have an immediate direct impact on Venezuelan production. Many of the companies with equity stakes in Venezuela’s new greenfield developments are headquartered in non-OECD countries. Furthermore, due to the current upstream investment environment and the increasing political risk within Venezuela, we believe upstream spending on greenfield projects is limited, with many projects shelved for future reconsideration.
• Sanctions prohibiting businesses from operating in Venezuela would be much more disruptive to Venezuela’s current contribution to the oil market. A policy that would limit US producer and service company operations and further investment in Venezuela, would require PDVSA and other international companies to step in to maintain operations. This scenario is likely to exacerbate Venezuela’s declining production profile.

Sanctions against PDVSA

The US could take an even more drastic approach by issuing direct sanctions against PDVSA. In an extreme scenario, if the NOC is banned from banking activity in the US and from trading with US entities, the impact would likely be swift and very damaging to Venezuelan oil production. Directly targeting PDVSA will also likely lead to a sovereign debt default in 2017. This action would affect Venezuela’s petroleum imports and exports.

• PDVSA would have to find new destinations for nearly half of its oil exports, assuming production does not collapse. Currently, Venezuela ships more than 700 kb/d of oil to the US and nearly 100 kb/d to the EU. China and India would likely be alternative destinations for some of this crude.
• PDVSA would also need to find a new source for some of its diluent needs. Algerian and Nigerian crude and condensates were previously used for diluent purposes and could substitute for shipments of US crude and products used in the transport of heavy oil. PDVSA could ask it JV partners to import diluent, but the capacity to do this would depend on the extent of sanctions and other countries’ participation. Even if possible, this could also increase the production cost of these fields to levels that are not financially viable, which could ultimately result in shut-ins.

We believe the US would implement such measures only as a last resort. In addition, the US would likely seek multilateral support from other nations before taking this route. Such an action is likely to be severely disruptive to Venezuela as well as the oil market and its participants.

Sanctions against PDVSA would likely also mean that US producers and service companies conducting business in Venezuela would have to cease operations, which would have an outsized effect on oil production compared to the effect of the US-imposed sanctions on Russia. Compared with Russia, Venezuela is much more reliant on foreign oilfield service companies for oil extraction.

Discussions of broader sanctions likely limits Venezuela’s access to capital

Regardless of whether new sanctions are imposed, discussion of broader sanctions could limit the Venezuelan government’s ability to raise financing and to make debt payments coming due in October and November. Moreover, it could change the government’s willingness to pay. If the current government wants to remain in control and not negotiate, it may be unwilling to use the few assets left to service its debt. As mentioned above, default alone would have a significant impact on oil production and the domestic economy.

The US could sell oil from the SPR to steady the market

We believe the US would consider the sale of oil from the strategic petroleum reserve (SPR) in order to smooth any price volatility that may result from a disruption to supply from Venezuela. The previous US administration was willing to tap the SPR to steady markets after the Libyan supply disruption, and we believe the current administration would consider this option as well. The US did not sell oil from the SPR during the 2002-03 Venezuelan supply disruption and prices rose by more than 40% during that period, although other factors also contributed. We doubt a disruption will result in a 40% price increase in the event of a supply disruption, but we think prices will rise nonetheless. For this reason, we think the US government would consider using the SPR as a backstop.

At present, we believe the price response to a disruption would be more muted than previous disruptions due to the apparent increased willingness of the US to use its SPR, the fact that OPEC could raise quotas, and US producers would begin to respond to sustained higher prices.

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By Ed Rogers via The Washington Post,

While everyone is fixated on President Trump’s unbecoming and inexplicable assault on Attorney General Jeff Sessions, the media has been trying to sneak away from the “Russian collusion” story. That’s right. For all the breathless hype, the on-air furrowed brows and the not-so-veiled hopes that this could be Watergate, Jared Kushner’s statement and testimony before Congress have made Democrats and many in the media come to the realization that the collusion they were counting on just isn’t there.

As the date of the Kushner testimony approached, the media thought it was going to advance and refresh the story. But Kushner’s clear, precise and convincing account of what really occurred during the campaign and after the election has left many of President Trump’s loudest enemies trying to quietly back out of the room unnoticed.

Cable news airtime and in-print word count dedicated to the nonexistent collusion story appear to be dwindling. Democrats and their allies in the media seem less eager to talk about it, and when they do, they say something to the effect of “but, but, but … Kushner didn’t answer every question … He wasn’t under oath … There are still more witnesses … What about this or that new gadfly?” They are stammering. And it hasn’t taken long for news producers and editors to realize that the story is fading.

At last, the story that never was is not happening.

There are a few showstoppers from Kushner’s testimony that make it obvious to any fair-minded, thinking person that there was no collusion with Russia. In his own words, Kushner makes it clear that his actions were innocent but, at times, misguided and ill-conceived. He plainly states he had “hardly any” contacts with Russians during the campaign and found his June 2016 meeting with Donald Trump Jr. and the infamous Russian lawyer to be an absolute “waste of time.”

Democrats and their allies in the media have exhausted themselves building a scandalous narrative surrounding the Russian lawyer meeting, but according to Kushner, the meeting was so useless that he “actually emailed an assistant from the meeting after [he] had been there for ten or so minutes and wrote ‘Can u pls call me on my cell? Need excuse to get out of meeting.”’ Maybe the collusion didn’t take very long, or maybe he realized what the lawyer had to say was a useless farce and he wanted to get on with his day.

Much to the dismay of Trump’s haters, Kushner’s account of events even further proves just how far the media has stretched the collusion story. When the campaign received an official note of congratulations from Russian President Vladimir Putin the day after the election, Kushner had to send Dimitri Simes of the Center for the National Interest an email asking for the name of the Russian ambassador so that he could reach out and confirm the message’s authenticity.

So, that’s that. If you can’t remember your handler’s name, you can’t be guilty of nefariously colluding with that person. How much collusion could Kushner have possibly done with someone whom he had so little communication with that he could not remember his name and did not know how to contact him?

Sure, there are others still in the crosshairs of the collusion-hunters, but Kushner has been the biggest target if for no other reason than he is the only one serving in the White House. Paul Manafort is a private citizen, and he departed the campaign before the general election campaign really started. Donald Trump Jr. is implicated only in the one ill-advised and now-shown-to-be-pointless encounter with a few gadflies. The media can knock itself out trying to find some left-behind paperwork or some other scrap to hang onto, but the dead end is in sight.

The quest for collusion is crumbling.

With the Democrats and their allies in the media beginning to walk away from the collusion story, the single biggest thing keeping this story alive is the president’s obsession with it. No doubt the issue will continue to be irresistible to some of Trump’s haters. Some will never believe the truth, no matter what else is revealed. But if Democrats and the president’s worst enemies can begin to silently acknowledge the obvious and move on, perhaps Trump can, too. Maybe now he will see the futility of continuing to whine, tweet, moan and seethe about the whole non-affair. Maybe the president will now see that he should leave Sessions alone so that he can get on with his work. Maybe he will let special counsel Robert S. Mueller III quietly do his job and the whole “Russian collusion” affair won’t even be a footnote in the retelling of the story of the Trump campaign.

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Authored by Kimberley Strassel via The Wall Street Journal,

Democrats don’t want you to find out – and that ought to be a scandal of its own…

It has been 10 days since Democrats received the glorious news that Senate Judiciary Chairman Chuck Grassley would require Donald Trump Jr. and Paul Manafort to explain their meeting with Russian operators at Trump Tower last year. The left was salivating at the prospect of watching two Trump insiders being grilled about Russian “collusion” under the klieg lights.

Yet Democrats now have meekly and noiselessly retreated, agreeing to let both men speak to the committee in private. Why would they so suddenly be willing to let go of this moment of political opportunity?

Fusion GPS. That’s the oppo-research outfit behind the infamous and discredited “Trump dossier,” ginned up by a former British spook. Fusion co-founder Glenn Simpson also was supposed to testify at the Grassley hearing, where he might have been asked in public to reveal who hired him to put together the hit job on Mr. Trump, which was based largely on anonymous Russian sources. Turns out Democrats are willing to give up just about anything—including their Manafort moment—to protect Mr. Simpson from having to answer that question.

What if, all this time, Washington and the media have had the Russia collusion story backward? What if it wasn’t the Trump campaign playing footsie with the Vladimir Putin regime, but Democrats? The more we learn about Fusion, the more this seems a possibility.

We know Fusion is a for-hire political outfit, paid to dig up dirt on targets. This column first outed Fusion in 2012, detailing its efforts to tar a Mitt Romney donor. At the time Fusion insisted that the donor was “a legitimate subject of public records research.”

Mr. Grassley’s call for testimony has uncovered more such stories. Thor Halvorssen, a prominent human-rights activist, has submitted sworn testimony outlining a Fusion attempt to undercut his investigation of Venezuelan corruption. Mr. Halvorssen claims Fusion “devised smear campaigns, prepared dossiers containing false information,” and “carefully placed slanderous news items” to malign him and his activity.

William Browder, a banker who has worked to expose Mr. Putin’s crimes, testified to the Grassley committee on Thursday that he was the target of a similar campaign, saying that Fusion “spread false information” about him and his efforts. Fusion has admitted it was hired by a law firm representing a Russian company called Prevezon.

Prevezon employed one of the Russian operators who were at Trump Tower last year. The other Russian who attended that meeting, Rinat Akhmetshin, is a former Soviet counterintelligence officer. He has acknowledged in court documents that he makes his career out of opposition research, the same work Fusion does. And that he’s often hired by Kremlin-connected Russians to smear opponents.

We know that at the exact time Fusion was working with the Russians, the firm had also hired a former British spy, Christopher Steele, to dig up dirt on Mr. Trump. Mr. Steele compiled his material, according to his memos, based on allegations from unnamed Kremlin insiders and other Russians. Many of the claims sound eerily similar to the sort of “oppo” Mr. Akhmetshin peddled.

We know that Mr. Simpson is tight with Democrats. His current attorney, Joshua Levy, used to work in Congress as counsel to no less than Chuck Schumer. We know from a Grassley letter that Fusion has in the past sheltered its clients’ true identities by filtering money through law firms or shell companies (Bean LLC and Kernel LLC).

Word is Mr. Simpson has made clear he will appear for a voluntary committee interview only if he is not specifically asked who hired him to dig dirt on Mr. Trump. Democrats are going to the mat for him over that demand. Those on the Judiciary Committee pointedly did not sign letters in which Mr. Grassley demanded that Fusion reveal who hired it.

Here’s a thought: What if it was the Democratic National Committee or Hillary Clinton’s campaign? What if that money flowed from a political entity on the left, to a private law firm, to Fusion, to a British spook, and then to Russian sources? Moreover, what if those Kremlin-tied sources already knew about this dirt-digging, tipped off by Mr. Akhmetshin? What if they specifically made up claims to dupe Mr. Steele, to trick him into writing this dossier?

Fusion GPS, in an email, said that it “did not spread false information about William Browder.” The firm said it is cooperating with Congress and that “the president and his allies are desperately trying to smear Fusion GPS because it investigated Donald Trump’s ties to Russia.”

If the Russian intention was to sow chaos in the American political system, few things could have been more effective than that dossier, which ramped up an FBI investigation and sparked congressional probes and a special counsel, deeply wounding the president. This is all to Mr. Putin’s benefit, and the question is whether Russia engineered it.

If Special Counsel Robert Mueller, Democrats and the media really want answers about Russian meddling, this is a far deeper well than the so-far scant case against Mr. Trump.

If they refuse to dive into the story, we’ll know that the truth about Russia and the election was never what they were after.

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It’s probably not a coincidence that in the same week in which one of the most level-headed investors of all, Oaktree’s Howard Marks issued an alarm on the current state of the market, that JPM has come out with not one (as discussed previously, Marko Kolanovic’s latest “tipping point” note last Thursday was blamed for the small and sharp selloff at the end of last week), but two reports in which JPMorgan makes it clear that not only is the market on the edge, but increasingly more traders, both institutional and equity, are getting ready for what comes next.

First, as another reminder, these are the 4 bullet points with which Marks summarized the current investing environment:

• The uncertainties are unusual in terms of number, scale and insolubility in areas including secular economic growth; the impact of central banks; interest rates and inflation; political dysfunction; geopolitical trouble spots; and the long-term impact of technology.
• In the vast majority of asset classes, prospective returns are just about the lowest they’ve ever been.
• Asset prices are high across the board.  Almost nothing can be bought below its intrinsic value, and there are few bargains. In general the best we can do is look for things that are less over-priced than others.
• Pro-risk behavior is commonplace, as the majority of investors embrace increased risk as the route to the returns they want or need.

One day later, Kolanovic added fuel to the fire, warning that with volatility at record lows, the upcoming mean-reversion will leave many in ruin, and that while there is still time to get out of the market, “we may be very close to the turning point”:

“In what is akin to the law of ‘communicating vessels,’ once inflows in bonds stop, funds are likely to start leaving other risky assets as well, including equities. The FOMC statement yesterday alleviated immediate fears – normalization of balance sheet will start ‘relatively soon,’ but only if ‘the economy evolves broadly as anticipated.’ This reasonably dovish stance pushes this market risk out for a few weeks (the next ECB meeting is Sep 7th, Fed Sep 20th, BoJ Sep 21st). This gives volatility sellers and other levered investors a limited window to position for a seasonal pickup in volatility and central bank catalysts in September.”

Not one to mince his words, the JPM head quant then compared the current period to the period just before 1987’s Black Monday, warning that “strategies that boost leverage when volatility declines, such as option hedging, CTAs and risk-parity, share similar features with the dynamic ‘portfolio insurance’ of 1987,” which “creates a ‘stop-loss order’ that gets larger in size and closer to the current market price as volatility gets lower.” Finally, from a timing standpoint, he said that as growth in short-vol strategies suppresses both implied and realized volatility, and with volatility at all-time lows “we may be very close to the turning point.”

* * *

Over the weekend, in yet another note from JPM, this time from the bank’s “flow” expert, Nikolaos Panigirtzoglou, he writes that none of the above should come as a surprise and that as a result, investors – both institutional  and retail – have started putting hedges against an equity crash.

Among the market feature he highlights is that the current put to call open interest ratio for S&P500 index options has been rising for most of this year, and that while this ratio had peaked in June and its current level is not extremely high, it nevertheless stands above its post 2014 average. What is more extreme, is the call to put open interest ratio for VIX options, which at almost 4.0, is close to historical highs.

To Nikolaos, the combination of these two observations implies that “there is greater demand for hedging against equity tail risk or a volatility spike relative to hedging against a typical equity market correction.”

In other words, there is just the right amount of hedging for a crash.  And it’s not only institutional investors who are hedging. Retail investors have been also hedging.

Here are the details from Panagirtzoglou’s latest letter:

Our client conversations over the past few weeks have been dominated by the impending reduction of quantitative stimulus by the ECB and the Fed as the main risk markets are facing into the autumn. Our sense from these client conversations is that, as we approach September, the perceived likely timing of balance sheet shrinkage by the Fed and/or ECB tapering, investors have already started reducing their net exposure to risky markets via hedges in order to protect themselves against a repeat of the August 2015 correction. How consistent is this anecdotal evidence with our flow and position indicators?

 

One way of gauging institutional investors’ demand for hedges is by looking at the put to call open interest ratio for S&P500 index options, the biggest and most liquid listed index option market in the world. This put to call open interest ratio is shown in Figure 1. The ratio has been rising for most of this year. Although the ratio peaked in June and has declined somewhat since then, its current level remains above historical averages pointing to decent demand for hedging equity exposure. In fact, Figure 1 shows that since the oil price shock of 2014 the ratio has averaged at a higher level relative to previous years, i.e. there has been  structurally higher demand for hedging equity exposure since 2014 relative to previous years. The current put to call open interest ratio for S&P500 index options is not extremely high, but it stands still above the post 2014 historical average.

 

 

Another way of gauging institutional investors’ demand for hedges is by looking at the call to put open interest ratio of VIX options. The use of VIX options has risen exponentially since the Lehman crisis by investors seeking to hedge equity tail risk, credit exposure or volatility exposure. Several investor types such as vol targeting (equity or multi asset) funds or risk parity funds are structurally short volatility and we note VIX calls provide the most direct and liquid way to hedge their short volatility exposure.

 

This call to put open interest ratio for VIX options is shown in Figure 2. This ratio has been also rising for most of this year, especially over the past three months, as the collapse in equity index volatility to record low levels naturally induces demand for protection against a volatility spike. Typically, the open interest for VIX calls increases in low volatility periods as investors enter hedges, and declines after VIX spikes as investors unwind hedges. Similarly, the open interest for VIX puts increases in periods of high equity volatility as investors buy puts to sell equity volatility.

 

 

The main difference between Figure 2 and Figure 1 is that the call to put open interest ratio for VIX options stands at close to record high levels currently, while the put to call open interest ratio for S&P500 index options stands at just above its average since 2014. In other words, there is more extremity in the former implying greater demand for hedging against equity tail risk or a volatility spike relative to hedging against a typical equity market correction.

 

What about retail investors? Are they also boosting their hedges? We argued last week that the heavy buying of bond funds this year reflects, at least partly, the desire by retail investors to offset or hedge the rising AUM of their equity fund holdings. If this interpretation is correct then this year’s very strong bond fund buying is a reflection of strong demand for hedging by retail investors.

 

But retail investors are not only confined to buying bond funds for hedging. They also buy VIX ETFs, a universe which has also grown exponentially since the Lehman crisis along with VIX options. Retail investors continued to buy VIX ETFs this year albeit at a slower pace than last year. But their vol buying accelerated over the past month as the VIX index declined to record low levels. This is shown in Figure 3 which shows the cumulative flow into VIX ETFs vs. the flow into Inverse VIX ETFs.

 

 

And in Figure 4 which is provided by our Equity Derivatives Strategy team and which uses a more sophisticated calculation to estimate the net vega, i.e. sensitivity to each percentage point change in vol,

for the total universe of VIX related ETFs adjusted by their short interest. This vega stands at historical high levels currently.

 

Rising VIX ETF exposures are likely reflective of skepticism by retail investors, who are the main users of VIX ETFs, and who see the current combination of record low equity market volatility and record high equity  prices as rather unsustainable. Effectively, the collapse in both realized and implied volatility over the past months and the current record low level of the spot VIX index is inducing retail investors to buy VIX products on the expectation that volatility will increase. After all, uncertainty is high and the risk from central bank policy normalization seems significant. So establishing a long VIX exposure via ETFs at current levels appears on surface attractive as it implies a large potential upside, in the case that a negative shock, such as tapering or central bank balance sheet reduction, pushes the VIX up to much higher levels.

 

But this protection comes at a cost: as more money flows into long VIX ETFs, the VIX futures curve steepens making the negative roll more onerous and the cost of holding a VIX ETF for long rather prohibitive. As a result of the steepness in the VIX futures curve, popular VIX ETFs are currently losing close to 10% per month due to negative roll. If no negative shocks materialize over the coming months, it is likely that  negative-carry long-VIX positions are taken off, exerting downward pressure on the steepness of the VIX curve, from currently elevated levels.

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Authored by John Mauldin via MauldinEconomics.com,

Exactly 10 years ago, we were months way from a world-shaking financial crisis.

By late 2006, we had an inverted yield curve steep to be a high-probability indicator of recession. I estimated at that time that the losses would be $400 billion at a minimum. Yet, most of my readers and fellow analysts told me I was way too bearish.

Turned out the losses topped well over $2 trillion and triggered the financial crisis and Great Recession.

Conditions in the financial markets needed only a spark from the subprime crisis to start a firestorm all over the world. Plenty of things were waiting to go wrong, and it seemed like they all did at the same time.

We don’t have an inverted yield curve now. But when the central bank artificially holds down short-term rates, it is difficult if not almost impossible for the yield curve to invert.

We have effectively suppressed the biggest warning signal.

But there is another recession in our future (there is always another recession), which I think will ensue by the end of 2018. And it’s going to be at least as bad as the last one was in terms of the global pain it causes.

Below are three scenarios that may turn out be fateful black swans. But remember this: A harmless white swan can look black in the right lighting conditions. Sometimes, that’s all it takes to start a panic.

Black Swan #1: Yellen Overshoots

It is clear that the US economy is not taking off like the rocket some predicted after the election:

• President Trump and the Republicans haven’t been able to pass any of the fiscal stimulus measures we hoped to see.

• Banks and energy companies are getting some regulatory relief, and that helps; but it’s a far cry from the sweeping healthcare reform, tax cuts, and infrastructure spending we were promised.

• Consumer spending is still weak, so people may be less confident than the sentiment surveys suggest. Inflation has perked up in certain segments like healthcare and housing, but otherwise it’s still low to nonexistent.

Is this, by any stretch of the imagination, the kind of economy in which the Federal Reserve should be tightening monetary policy? No—yet the Fed is doing so.

It’s in part because they waited too long to end QE and to begin reducing their balance sheet. FOMC members know they are behind the curve, and they want to pay lip service to doing something before their terms end. 

Plus, Janet Yellen, Stanley Fischer, and the other FOMC members are religiously devoted to the Phillips curve. 

The black-swan risk here is that the Fed will tighten too much, too soon. 

We know from recent FOMC minutes that some members have turned hawkish in part because they wanted to offset expected fiscal stimulus from the incoming administration. That stimulus has not been coming, but the FOMC is still acting as if it will be.

What happens when the Fed raises interest rates in the early, uncertain stages of a recession instead of lowering them? Logic suggests the Fed will curb any inflation pressure that exists and push the economy into outright deflation.

Deflation in an economy as debt-burdened as ours is could be catastrophic. 

Let me make an uncomfortable prediction: I think the Trump Fed—and since Trump will appoint at least six members of the FOMC in the coming year, it will be his Fed—will take us back down the path of massive quantitative easing and perhaps even to negative rates if we enter a recession.

The urge to “do something,” or at least be seen as trying to do something, is just going to be too strong.

Black Swan #2: ECB Runs Out of Bullets

Relative to the size of the Eurozone economy, Draghi’s stimulus has been far more aggressive then the Fed’s QE. It has pushed both deeper, with negative interest rates, and wider, by including corporate bonds.

Such interventions rarely end well, but this one is faring better than most.

Europe’s economy is recovering, at least on the surface, as the various populist movements and bank crises fade from view. But are these threats gone or just glossed over? The Brexit negotiations could also throw a wrench in the works.

Anatole Kaletsky at Gavekal thinks Draghi is still far from reversing course. He expects that the first tightening steps won’t happen until 2018 and anticipates continued bond buying (at a slower pace) and near-zero rates for a long time after.

But he also sees risk and makes an important point.

The US’s tapering and now tightening coincided with the ECB’s and BOJ’s both opening their spigots. That meant worldwide liquidity was still ample. I don’t see the Fed returning that favor. Draghi and later Kuroda will have to normalize without a Fed backstop—and that may not work so well.

Black Swan #3: Chinese Debt Meltdown

China is by all appearances unstoppable.

GDP growth has slowed down to 6.9%, according to official numbers. The numbers are likely inflated, but the boom is still underway.

Ambrose Evans-Pritchard reported some shocking numbers in his July 17 Telegraph column.

A report from the People’s Bank of China showed off-balance-sheet lending far higher than previously thought and accelerating quickly. (Interestingly, the Chinese have made all of this quite public. And President Xi has taken control of publicizing it.)

The huge increase last year probably reflects efforts to jump-start growth following the 2015 downturn. Banks poured fuel on the fire, because letting it go out would have been even worse. But they can’t stoke that blaze indefinitely.

President Xi Jinping has been trying to dial back credit growth in the state-owned banks for some time; but in the shadow banks that Xi doesn’t control, credit is growing at an astoundingly high rate, far offsetting any minor cutbacks that Xi has made.

A market in which “they all think the government will save everything” is generally not one you want to own—but China has been an exception. It won’t remain one forever. The collapse, when it comes, could be earthshaking.

It is very possible that any of these black swans could trigger a recession in the US. And let’s be clear: The next US recession will be part of a major global recession and will result in massive new government debt build-up.

It will not end well.

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