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via Zero Hedge http://ift.tt/1wpLUZN williambanzai7

Not a day passes without pundits on either side of the debate, eager to make their case that the acute, nearly 50% plunge in the price of crude, swear up and down their preferred economic ideology of choice that said plunge is [bullish|bearish] for the economy. The reality is that the true impact of the great oil crash of 2014 will not be revealed for at least several months, however for those who can’t afford to wait, or simply lack the patience, here is perhaps the most comprehensive view of the pros and cons of what has now been dubbed a “textbook macroeconomic shock” by Deutsche Bank.

From Deutsche Bank’s 2015 Credit Outlook titled “Plate Spinning”

The Great 2014 Oil Shock – Aftermath

The fall in the price of oil – down more than 40% since June – is a textbook macroeconomic “shock”. Stripping it down to its most fundamental level, a fall in the price of oil predistributes real income from oil producers to oil consumers. Money oil consumers would have exchanged with oil producers for the stuff, can instead be put towards other purchases or savings. At the global level it means less spent on oil imports for oil importing nations and less income from oil exports for oil exporting nations. To put some rough numbers around this, US average net imports of oil and the like has averaged 5.2m barrels per day in 2014, thus the fall in the oil price by $43 since late June is saving the US economy about $224m a day on its net oil transactions and costing its oil trade partners the same amount. This is after accounting for the dramatic fall in US net oil imports driven in part by the country’s shale boom.

Therefore if oil prices stay where they currently are this appears to be a meaningful headwind for the big oil consuming nations. The biggest net oil importers in 2013 were (1) the US, (2) China, (3) Japan and (4) India. Major exporters will suffer. Probably the most prominent current example of an economy that will struggle to cope with the fall in the oil price is Russia, which in 2013 was the world’s second largest net exporter of oil. As we’ve already discussed, estimates suggest that at oil prices below $90 the Russian economy will go into recession and DB estimates the government will fail to balance its budget at $100 (Figure 133). At current levels none of the major oil exporters will be able to balance their budgets next year.

Overall, most estimates suggest that a fall in the oil price is a net positive for the total world economy. According to the IMF’s Tom Helbling, “a 10% change in the oil price is associated with around a 0.2% change in global GDP” (The Economist) as oil consumers are greater spend-thrifts than oil producers. Given those estimates the current fall of more than 40% should add about +0.8% to global GDP growth.

With so much of the global growth story resting on US shoulders next year the fall in the price of oil should help, although not as much as it used to given the USA’s shale boom. The EU should also gain given its $500bn of energy imports in 2013. However the drop in the price of oil might prove a mixed blessing given that sharp drops in the oil price will weigh on inflation (Figure 134) and another negative headwind to inflation (in any form) is not something the euro area really needs or wants currently with CPI running at just +0.4% YoY. On the other hand the drop in inflation pressures should be a boon for a number of EM economies whose central banks may otherwise have had to hike rates in the face of rising inflation even as their growth rates remained tepid.

It’s also important to remember that whilst oil is an important global commodity it is rare for it alone to drive global economic outcomes. The halving of global oil prices in 2008 didn’t prevent many of the world’s oil importing economies from suffering severe recessions and as Figure 135 shows there is no easy nor automatic relationship between falling oil prices and rising US growth. The environment within which the oil price change occurs is important. Indeed if the current drop in the price of oil is being driven by expectations of falling demand driven by expectations of a slowdown in global growth it’s possible that the drop in the oil price is at best going to partially cushion the global economy from a slowdown rather then drive it to higher growth rates.

Also importantly for investors, falling oil prices will not affect all areas of economies equally, even in those economies that should benefit at an aggregate level. As our US credit strategy team wrote recently, energy companies make up the largest single sector component of the US HY market at 16% (US HY DM Index) and so the falling oil price may prove a negative for the US HY credit market. Our US team added that if the WTI price fell to $60/bbl this would push the whole US HY energy sector into distress, with around 1/3rd of US energy Bs/CCCs forced to restructure, implying a 15% default rate for overall US HY energy which would contribute 2.5% to the broad US HY default rate. This could be a sizeable enough shock to cause concern throughout the rest of the US HY market.

There is no doubt that the fall in the price of oil in 2014 has been a significant economic shock. Most estimates suggest that this should add to global growth, weigh on global inflation and most likely have varied but oil-specific asset price implications (EM oil producing nations and US HY weakness stand out); however it is likely that growth tailwinds from this year’s fall in oil prices will not be the main story for investors in 2015.

via Zero Hedge http://ift.tt/1yM7Jjy Tyler Durden

While the market, and America’s media, was focusing over the passage of the Cromnibus, and whether Wall Street would dump a few hundred trillion in derivatives on the laps of US taxpayers once again (it did), quietly and unanimously both houses passed The Ukraine Freedom Support Act of 2014, which authorizes “providing lethal assistance to Ukraine’s military” as well as sweeping sanctions on Russia’s energy sector.

The measure mandates sanctions against Rosoboronexport, the state agency that promotes Russia’s defense exports and arms trade. It also would require sanctions on OAO Gazprom (GAZP), the world’s largest extractor of natural gas, if the state-controlled company withholds supplies to other European nations (yes, the US is now in the pre-emptive punishment business, and is enforcing sanctions on a “what if” basis).

But while one may debate if additional sanctions will do much to impact a Russian economy which is already impaired due to the plunging ruble, the clear escalation is that unlike previously, when the US limited itself – at least on paper – to non-lethal assistance to the Ukraine, now the US is finally preparing to send in weapons, and potentially “military advisors” as well. We say “on paper”, because in late November hacked US documents revealed the extent of secret US “Lethal Aid” for the Ukraine army. And since America’s under-the-table support for Ukraine’s insolvent armed forces has been revealed, there is little point in pretending to keep a moral upper hand (especially in light of recent “other” revelations involving the US, most notably its intelligence services).

And as has happened for the entire duration of the second Cold War, any action by the US was promptly met with a just as provocative reaction by Russia. In this case, a leftist member of the Russian Duma said the US Senate’s decision to arm the Kiev regime should prompt ‘adequate measures’ from Russia, such as deploying military force on Ukrainian territory before the threat becomes too high.

In other words, in addition to the global energy meltdown which is about to send oil exporting nations into a state of shock matched only by owners of US High Yield energy bonds, the Ukraine conflict, which the algos and carbon-based Portfolio Manager forgot about, is about to re-escalate, with Russia now set to recreate the Crimea annexation after it officially sends its troops on Ukraine soil.

From RT:

“The decision of the US Senate is extremely dangerous. If it is supported by the House of Representatives and signed by their president, Russia must reply with adequate measures,” Mikhail Yemelyanov of the Fair Russia party told reporters on Friday.

 

“It is quite possible that we should return to the decision by our Upper House and give the Russian president an opportunity to use military force on Ukrainian territory preemptively. We should not wait until Ukraine is armed and becomes really dangerous,” the lawmaker stated.

 

Yemelyanov also noted that in his opinion the US Senate’s decision to arm Ukraine had revealed that Washington wasn’t interested in the de-escalation of the Ukrainian conflict. He then said that US actions gave him the impression they was seeking to turn Ukraine into some sort of an “international militant targeting the Russian Federation.”

 

“In a few years Ukraine will turn into a poor and hungry country with an anti-Russian government that will teach its population to hate Russia. They will be armed to the teeth and Ukraine and US reluctance to recognize the Russian Federation within its current borders would always provoke conflicts,” the MP said.

So does this mean that what was a lingering proxy cold civil war in east Ukraine between NATO-armed Ukraine troops and Russia-armed Separatists and local militias is about to escalate into a shooting precursor to something greater? There is still hope an all out escalation can be avoided. From Bloomberg:

White House press secretary Josh Earnest said today that the administration hadn’t finished reviewing the language and isn’t ready to take a position on the legislation. He said the administration wants to ensure that the U.S. and its European allies are working together, that any sanctions are effective and that they minimize harm to U.S. and European companies.

 

“This is delicate work,” Earnest said.

Did we say “there is hope”? Never mind.

The good news is that preparations for yet another world war are taking place, the US will “prove” it has the moral superiority by offsetting Russian propaganda…. with its own propaganda!

From the last line of the Ukraine Freedom Support Act:

“Directs the Chairman of the Broadcasting Board of Governors to submit to Congress a plan for increasing the quantity of Russian-language broadcasting into the countries of the former Soviet Union in order to counter Russian Federation propaganda. Requires such plan to prioritize broadcasting into Ukraine, Georgia, and Moldova by the Voice of America (VOA) and Radio Free Europe/Radio Liberty.”

Which can only mean one thing: the US is about to flood the airwaves east of the Dnieper river with reruns of Rocky 4 all over again.

via Zero Hedge http://ift.tt/1Du1VD7 Tyler Durden

By EconMatters

 

The Bond Market Bubble is Reaching Epic Proportions

 

Too Much Cheap Money Sloshing Around Financial Markets

 

 

 

 

Wages Starting to Spike

 

 

 

 

 

 

 

 

 

 

© EconMatters All Rights Reserved | Facebook | Twitter | Email Subscribe | Kindle

via Zero Hedge http://ift.tt/1Du1U24 EconMatters

Courtesy of the Cronybus(sic) last minute passage, government was provided a quid-pro-quo $1.1 trillion spending allowance with Wall Street’s blessing in exchange for assuring banks that taxpayers would be on the hook for yet another bailout, as a result of the swaps push-out provision, after incorporating explicit Citigroup language that allows financial institutions to trade certain financial derivatives from subsidiaries that are insured by the Federal Deposit Insurance Corp, explicitly putting taxpayers on the hook for losses caused by these contracts. Recall:

Five years after the Wall Street coup of 2008, it appears the U.S. House of Representatives is as bought and paid for as ever. We heard about the Citigroup crafted legislation currently being pushed through Congress back in May when Mother Jones reported on it. Fortunately, they included the following image in their article:

 

 

 

Unsurprisingly, the main backer of the bill is notorious Wall Street lackey Jim Himes (D-Conn.), a former Goldman Sachs employee who has discovered lobbyist payoffs can be just as lucrative as a career in financial services. 

We say explicitly, of course, because taxpayers have always been on the hook implicitly for the next Wall Street meltdown.

Why?

Exhibit A: US banks are the proud owners of $303 trillion in derivatives (and spare us the whole “but.. but… net exposure” cluelessness – read here why that is absolutely irrelevant when even one counterpaty fails):

 

Exhibit B: Here are the four banks that are in complete control of the US “republic.”

At least we now know with certainty that to a clear majority in Congress – one consisting of republicans and democrats – the future viability of Wall Street is far more important than the well-being of their constituents. Which also, implicitly, was made clear when Hank Paulson was waving a three-page “blank check” term sheet, and when Congress voted through the biggest bailout of banks in US history back in 2008.

The only question is when the next multi-trillion (or perhaps quadrillion now that all global central banks are all in?) bailout takes place.

Source: OCC

via Zero Hedge http://ift.tt/1wmN3QJ Tyler Durden

From Howard Hill of Mind on Money

Three Conditions and Three Warning Signs

How to Tell if the Next Financial Crisis is Upon Us.

In the last post, it was suggested that the rapid collapse in oil prices might have set up a repeat of the 2008 financial crisis. Before we all run for the bunkers and the freeze-dried food, we should know the conditions needed for a crisis to happen, and the signposts we’ll see if the crisis gets going.

For a sector correction to become a meltdown, and for that to turn into a global crisis, several preconditions need to be in place.

The first condition is a serious market sector correction.

According to some participants in the market for energy company bonds and loans, such a correction is already underway and heading toward a meltdown (the second condition). Others are more sanguine, and expect a recovery soon.

 

That smaller energy companies have issued more junk-rated debt than their relative size in the economy isn’t under debate. Of a total junk bond market estimated around $1.2 trillion, about 18% ($216 billion, according to a Bloomberg estimate) has been issued by energy-related companies. Yet those companies represent a far smaller share of the economy or stock market capitalization among the universe of junk-rated companies.

If the beaten-down prices for junk energy bonds don’t stabilize or recover a bit, we might see the second condition: a spiral of distressed sales of bonds and loans. This could happen if junk bond mutual funds or other large holders sell into an unfriendly market at low prices, and then other holders of those bonds succumb to the pressure of fund redemptions or margin calls and sell at even lower prices.

The third condition, which we can’t determine directly, would be pressure on Credit Default Swap dealers or hedge funds to make deposits as the prices of the CDS move against them. AIG was taken down when collateral demands were made to support existing CDS agreements, and nobody knew it until they were going under. There simply isn’t a way to know whether banks or dealers are struggling until the effect is already metastasizing.

The unknown is how much of the $2.77 trillion of junk CDS on bank balance sheets on June 30 this year was energy-related. If history is any indicator, the CDS in the distressed energy sector already far outweighs its 18% share of the junk bond market.

But if we watch for the following three signposts, we’ll know that the crisis play is happening again:

• One sign would be for non-energy junk bonds to begin dropping in price. That would mean large holders are exiting from all junk bonds, not just those companies affected by low oil prices.
• Another sign would be sudden drops in share prices for banks or insurance companies that hold small amounts of energy-related bonds or bank loans, a clue that some market participants think they have derivative exposure.
• A third sign to look for would be the rumors or news that the big, investment-grade energy companies are having trouble renewing their Commercial Paper, bank loans or maturing bonds (the Exxon-Mobils and Shells of the world).

If we see all these signs in a matter of days or weeks, then our global financial system is being tested once again by the small community of speculators that profit from betting against industries, countries, or markets. They made a fortune betting against mortgages. Most of them didn’t retire to enjoy that wealth. They moved on to the next trade, and every day they try to repeat their investing success.

The next time their presence was really visible was the European Debt Crisis of 2011/2012. That didn’t take down the global financial system, but it was close. If Spain, Portugal, Italy and Ireland had followed Greece into debt restructuring, we would have had another global crisis, most likely even larger than the 2008/2009 episode. Only a major commitment from Germany kept the rest of Europe’s weaker countries from failing on their debt, too.

In March of 2012, the Greek “credit event” that triggered payment on CDS was estimated to apply to CDS that equaled 30% of the €300 billion Euro Greek sovereign debt market, or roughly €90 billion, (about $118 billion in US dollars at the time). The “settlement price” for that CDS event was 21.5%. So the winners in the CDS bet took home 78.5% times $118 billion, or approximately $93 billion. That was nearly twice the size of the CDS payoff when Fannie Mae and Freddie Mac went into receivership. Nice trade for those who made it.

Do we need to remind ourselves that Fannie and Freddie were the Exxon-Mobil and Shell of the mortgage business? Or that no target is too big if trillions of dollars can be used to make the bets?

So where will the “next trade” be?

Anywhere there might be weakness.

This month, it’s in energy companies that borrowed more than $200 billion while planning on oil prices staying over $100 a barrel, and gasoline staying over $3 a gallon.

Only time will tell whether there have been enough bets against those optimistic energy companies to make it a problem for everyone, and not just them.

via Zero Hedge http://ift.tt/1wtwOBi Tyler Durden

A week ago, after seeing Barron’s latest cover, we said : “This time is never different…. unless, of course, one acknowledges
apriori that “this time is different” thus making this time, er,
different? At least that is the logic according to the latest
headline-grabbing edition of Barron’s which observes that with the
Nasdaq approaching 5000 again, “fears have been raised about the
possibility of yet another market collapse.” But fear not, because “this time it’s different“…”

 

Seven days later, it remains to be seen if market bubblemania on the back of central bank multiple expanion around the world can thrive, especially as corporate cash flow (and revenue, and GAAP EPS) growth trickles to a halt, coupled with an energy and junk bond market implosion, but when it comes to Barron’s covers top-ticking the market, it is never different.

h/t @Not_Jim_Cramer

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Submitted by David Stockman of Contra Corner

The Curse Of Keynesian Dogma: Japan’s Lemmings March Toward The Cliff Chanting “Abenomics”

According to Takahiro Mitani, trashing your currency, destroying your bond market and gutting the real wages of domestic citizens is a sure fire ticket to economic success. Yes, that’s what the man says,

“I have no doubt that the economy is in a recovery trend if you look at the long run….”

After two years of hoopla and running the BOJ’s printing presses red hot, however, there is not a shred of evidence that Abenomics will lead to any such thing. In fact, after the recent markdown of Q3 GDP even deeper into negative territory, Japan’s real GDP is no higher now than it was the day Abenomics was launched in early 2013; and, in fact, is no higher than it was on the eve of the global financial crisis way back in 2007.

In the meanwhile, the Yen has lost 40% of its value and teeters on the brink of an uncontrolled free fall. Currency depreciation, of course, is supposedly the heart of the primitive Keynesian cure on which Abenomics is predicated, but there is no evidence or honest economic logic to support the proposition that—–over any reasonable period of time—–a nation can become richer by making its people poorer.

That’s especially true in the case at hand, which is to say, a Pacific archipelago of barren rocks. Japan imports virtually 100% of every BTU and every ton of metals and other raw materials consumed by its advanced $5 trillion industrial economy.

Yet thanks to the mad money printer who Prime Minister Abe seconded to the BOJ, Hiroki Kuroda, import prices are up by a staggering 30% since 2012. Even with oil prices now collapsing, the yen price of crude oil imports is still higher than it was two years back. Not surprisingly, input costs for Japan’s legions of small businesses have soared, and the cost of living faced by its legendary salary men has risen far faster than wages.

Accordingly, domestic businesses that supply the home market—and that is the overwhelming share of Japan’s output—are being driven to the wall, bankruptcies are at record highs and the real incomes of Japan’s households have now shrunk for 16 consecutive months and are down by 6% compared to 2 years ago. And the purpose of all this punishment?

Well, its something right out of the Keynesian “Sesame Street”. We are talking here about our friend the letter “J” that was scribbled on a napkin in Cambridge MA more than a half-century ago. That is to say, when you trash your currency your trade balance is supposed to get worse for a while, and then it gets all better. Hence, the “J-curve”.

Needless to say, its not working for Japan. The fact is, Japan is an old age colony that is in debt up to the eyeballs of what will soon be  a retirement population larger than its work force. So it desperately needs to run a trade balance—and better still, a surplus—-with the rest of the world in order to accumulate acorns for its long time future as an economic rest home.

As shown below, however, Abenomics has had the very opposite effect. Japan’s normal moderate surplus since its 1990 crisis has plunged into deep red ink since the onset of Abenomics. Stated differently, Seasame Street economics has been an unmitigated disaster for Japan.

The idea of the J-Curve and getting richer by getting poorer is nonsense anyway. But when you apply this misbegotten Keynesian dogma to a unique economy that is essentially a one-of-a-kind materials conversion machine, which transforms raw resources from the rest of the planet into advanced industrial, consumer and technology goods, you are essentially committing economic hari kari.

Even before taking into account the potential for trade and currency retaliation owing to this blatant beggar-the-neighbor policy, Japan will never get off the bottom of its J-Curve because is inherently a big importer. And unlike Germany, for example, where exports amount  to 40% of GDP, Japan’s exports now average less than 12%.

So in terms of the Keynesian preoccupation with “flow” (that is, current period income and outgo), here is what you have on the trade front. Exports have risen barely 18% in yen terms and not at all in physical quantity. By contrast, imports are up 35% in yen terms—-not because Japan Inc is thriving, but because the BOJ has flooded the world with yen that nobody wants.

But the “nobody wants” part is the heart of the matter. Keynesian economic models have no balance sheet concept, and therefore its high priests roam the world preaching the same one-size-saves-all dogma to governmental congregations, whether they are flush with cash or are buried in debt. But that is just plain stupid when it comes to today’s monumental debtors.

The latter desperately need to reduce their consumption and increase their savings—–especially if they are rapidly getting old demographically and need to build their individual and collective nest eggs. Needless to say, the BOJ’s vicious assault on savers makes the Fed look like a model of decorum.

Forget the overnight rate, which is ZIRP on most of the planet. In Japan, 10-year money on the supposed risk-free JGB is now exactly 0.398%. Consequently, there is not a single sentient buyer for Japan’s monumental government debt left anywhere in the known universe. Germans and Martians, who count their wealth in something other than yen, are most certainly not going to buy bonds denominated in a vanishing exchange rate.

The same story holds domestically. The long suffering Japanese banks are getting out of government bonds, and not just because the MOF and BOJ are telling them to. Indeed, along with the life insurance companies, other institutional investors and even the proverbial Mrs. Watanabe of the household sector, they are getting out of JGBs because Kuroda and Abe are making them a proposition they can’t refuse. Namely, these madmen through the open market desk at the BOJ are “bid” any and all bonds on offer; and at nose-bleed prices (that is, the inverse of the 0.398% yield) that vastly exceed the true economic value of debt that one day the Japanese government must and will default on.

In other words, blindly following the Keynesian dogma that has been impressed upon them by the IMF economists, the G-7 and G-20 apparatchiks, and the parade of itinerant snake oil salesman like Krugman, Bernanke, and Larry Summers, the BOJ has become some kind of infernal vacuum cleaner that intends to suck-up every last bond the bankrupt Japanese government can issue. And as a reminder, that is  already a financial Mt. Fuji and then some.

Needless to say, bidding the entire world out of its JGBs creates two gargantuan problems. In the case of domestic investors, what do they do with the cash? Well, in the paradigm of Keynesian central bankers the world over—they, perforce, put it in “risk assets”.

And that brings us back to Mr.Takahiro Mitani——the man with utmost confidence that Japan’s economic future is bright and the nominal head of Japan’s giant $1.4 trillion Government Pension Investment Fund (GPIF). But let’s state that more plainly. Mitani is the utterly naïve and clueless long-time BOJ-GPIF financial bureaucrat who has been ordered by Abe to flush the GPIF of upwards of $400 billion of government bonds which it has held for years, and upon which it has earned virtually nothing, in favor of buying the Japanese stock market and a global equity basket, too.

Stated differently, these Keynesian preachers like Summers and Krugman, who have the government of Japan in their thrall, are downright cruel and malevolent. One of the few things that can keep Japan’s projected 35 million retirees from resort to cat food someday is their $1.4 trillion GPIF nest egg.

But under the influence of these financial terrorists—–and there is no other way to describe them—– the government of Japan has ordered that a huge chunk of that nest egg be put four-square in harm’s way. That is, be invested at the tippy top of the greatest stock market bubble the world has every seen.

Upwards of 40% of the fund is to go into equities and other alternative assets and two-thirds of that is earmarked for Japanese equities. So it is no wonder Mr. Mitani is whistling a happy tune about Abenomics. He has no choice. After all, he has been “invited” to put hundreds of billions into the Japanese stock market after it has doubled in response to an economic program that amounts to a suicide mission.

This is where Keynesian dogma has taken Japan—–it has turned its vaunted elite bureaucracy and historic governing class into a pathetic band of financial lemmings. In particular, the GPIF desperately needs to earn a robust return now before the real demographic tsunami hits.  That is, before its current 80 million strong work force shrinks to just 40 million over the next 50 years, while its army of retirees swells from 25% to more than 40% of its population over the period.

But its central bank is now all-in for Keynesian money printing ,and has thereby vaporized any yield at all in the fixed income market; and has also knowingly or not, invited all the fast money punters of Wall Street, London and the rest of the world to front-run an insane Tokyo stock market bubble—–confident that at the first sign of trouble they can drop their inflated shares on the retirement population of Japan.

Calling that scenario a reverse Pearl Harbor would be only a mild resort to metaphor. Yet “Pearl Harbor” is the right metaphor because it is forever connected with the brutal war which raged across the length and breadth of East Asia thereafter.

This time it will be a currency war, but no less devastating for all parties involved. The yen FX rate is currently in a temporary holding pattern around 120, but just wait for the up-coming snap election and the likelihood that the Japanese people will follow its lemming leaders toward the terrible cliff of Abenomics.

But upon news of Prime Minister Abe’s electoral “mandate” to plow full stream ahead, the Yen could plunge through 120 in an instant, and be well on its way to 140 and not so far down the road to 200. But as George H.W Bush said in another context—- and not the one which brought him to the feet of Prime Minister Miyazawa in 1992—–the upcoming cliff dive of the Japanese yen “cannot stand”. It will amount to a thundering frontal assault on the export mercantilism on which the entire bloated edifice of China and the rest of East Asia is built.

One thing is certain about the ensuing “race to the bottom”. Japan’s retirement colony will end up with the hindmost.

And they will surely burn professors Krugman and Summers in effigy—-even if driftwood is the only fuel they have left.

via Zero Hedge http://ift.tt/1xf081o Tyler Durden