Author: admin

By Chris at http://ift.tt/12YmHT5

It was my daughter’s 10^th birthday on the weekend and, aside from a raft of giggling girls high on sugar, there was a standout gift from Mum and Dad that featured.

A pair of soccer boots? Yeah, I know. She’s a girl and soccer is a boys’ sport, but this girl loves soccer and I’m all for it. Anything that gets her kicking something other than her brother features strongly on my list.

Problem with these boots is that they’re actually a teensy bit small. She loves them to bits and insists they’re perfect but truth is they’re not really. A size up would probably be better but not perfect either as they’d be a wee bit big. Then there is the fact that her foot shape isn’t exactly shaped for the boot, a problem solved by wearing them in.

All of this is understandable since they’re produced in some Chinese factory on a production run and we can’t expect the Chinese factory to be able to tweak the machine to make my daughters’ pair just a little bit wider than usual and a teensy bit longer.

Industrial manufacturing was never designed for this. And as much as I love my daughter I’m not getting tailor made soccer boots made for her either. That would cost a fortune and I’d be forced to sell one of my children for medical experiments to pay for it.

Complexity in the industrial age was an issue. For every complex product produced a complex manufacturing machine or set of machines is required for only one or two products to be manufactured.

All of this is changing thanks to Chuck Hull, the original inventor of 3D printing.

A couple of years ago Nike began 3D printing football cleats for soccer boots and this is of course the tip of the proverbial iceberg.

Complexity with 3D printing is free. The computer doesn’t care about how complex any design is. This is turning design and manufacturing on its head.

In the not too distant future shoes along with other garments are going to be tailor-made based on your foot shape, arch, posture, stance, and any other variables which make your foot unique.

Making Sense of It All

Now anytime the human mind encounters some concept which it hasn’t seen before the reference points are difficult to find. And it is those reference points which help us to understand our world.

Let me therefore provide a reference point.

Dial back the clock to, say, 1990.

Your mates are telling you all about something called a “Game Boy” which sounds amazing; you’ve just watched the latest episode of Seinfeld; Kirsty Alley hasn’t turned into a ball of lard yet; and flicking through a newspaper you find a photograph of Princess Diana in a bikini. You love it and want it. You’ll get it blown up and framed above your new bar.

You hunt down the photographer and thankfully you can actually buy a print. This is then packaged and sent to you and two weeks later you are excitedly opening your package to reveal your prized photograph.

Quaint!

Of course, today we have Flickr, Instagram, Pickit and a dozen other sites where you will simply download any photo and have it printed. And if it’s not quite right you’ll Photoshop it till it is.

Digital Distribution World

Just as we no longer pick up a physical CD to play music (or a DVD from a video store), but instead stream or download what we want so, too, will go the way of manufactured goods. When a part for your car snaps, manufacturers will be sending you a digital file to download and print a new part. Digital distribution of physical items to be printed is no leap of the imagination.

Sitting on our collective horizon is printing of mixed material products. So for example, today you can print a toy car complete with the rubber tyres, a plastic see-through windshield, and a metal chassis.

Where this gets really interesting is when electronics can be included with circuits and sensors and logic. Couple this with the advances made in robotics and you’ll see why we’re on the brink of some of the most amazing disruptive and exciting changes the world’s seen.

Speaking of which… We’ve been working hard over the last few months at putting together a truly amazing event and disruptive technology such as 3D printing is featured strongly.

We have limited seats available so if you want to attend then I suggest going to the event website and booking now in order to avoid missing out what will be an orgy of intellectual brainpower.

– Chris

“Mass production keeps the world divided between consumer and producer. Demassification of production may hasten the speed towards an era of prosumers.” ? Michael Petch

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The residents of West Texas are accustomed to a life dependent on hydrocarbons. As Bloomberg reports, the small communities built into the flat desert are dotted with oil pumps and rigs, and the chemical smell of an oil field hangs in the air.

 

Here the economy rises and falls on drilling.

 

When the drilling is good, everyone in the town benefits. When it's bad, most of West Texas feels the pinch.

 

Oil prices have plunged as much as 75 percent since June 2014. That drop has dismal consequences for residents, and not just the ones working in oil fields. Bloomberg spoke with some of the people trying to endure the historic dip in oil prices. This video tells some of their stories….

via Zero Hedge http://ift.tt/1P7la5a Tyler Durden

Authored by Mark St.Cyr,

It was U.S. Supreme Court Justice Potter Stewart’s candor which famously described his test in an obscenity trial (“…I know it when I see it,”) when arguments were posed as to why something did, or did not, meet the threshold exceeding the Roth test. Today, the obscenity as to just how adulterated the very fabric of the financial markets have become was ripped clean and laid bare for all to see this past week.

The markets were sent screaming first down, then up, by nothing more than some economic two-bit fantasy both during, and after, the latest ECB’s monetary dictates. These perversions are so visibly adulterating they can no longer be denied by anyone with a modicum of business, or common sense. They are both fiscally and economically disgusting perversions. Period.

As shameful as this has become, what’s just as disgraceful is the cohort of so-called “smart people” arguing why not only is all this trash good, but also, giving detailed explanations of economic theories, equations, formulas, extrapolations, causation, blah, blah, blah as to explain the nuances of it all. I have just one statement for the so-called “smart crowd.” Please stop it. You are now not only embarrassing yourselves ever the more (if it were even possible at this stage) You are now annoying everyone with any decency of what free markets are supposed to represent. You’ve gone past the once laughable stage to the outright vulgar. So please – spare us.

Today’s Ph.D’s within the Ivory Towers of academia, along with their minions throughout Wall Street, have shown they are nothing more than a gaggle of fantasy enablers and promoters as to perpetuate the delusion that there will be financial ecstasy in the end. Just like there always is for the “whomever” that knocks on the door in all those adult movies. Problem here is: this is the world economy they’re screwing with. Not the entertainment industry.

Today, if you’re trying to run a business of any size just how can one use, or view, the latest move in the markets for possible insights on what to do next? Hint – you can’t. Nothing of it made any sense at all, let alone gave one clues as to whether or not one could properly take meaningful advantage for gains or de-risk accordingly. Want just one example?

Hedged your exposure to volatility via the FX markets? How’d that work out last week? I thought things like that only happened in EM (emerging market) currencies? Well, look no further because the €uro just joined that cast with size and swings that would make an adult star proud.

I have a question for all the “Ph.D” styled economists currently touting their interpretations of why this, and that, or, why that, and not this, will equate into monetary bliss. After all; all I hear, read, or watch is one after another giving their hypothesis and back it up with the implied insinuation others should listen because they’re called “Dr.” more times during an interview than a real doctor is addressed at a hospital. Here’s that question:

What does R²+D/K-(34/8√)X52=? Hint: Absolutely nothing. Just like all the current equations, hypothesis and examples of economic theories spewed across most of the financial media as well as prevalent in Ivy Leagues across the globe. It’s all made up, meaningless, gibberish now shown as the outright alchemy it always was.

Today, it’s all about “the printing press.” (e.g., central bank interventionism) Economy falling off the cliff? Answer: Print. Need to cover over all those troubling data points? Print. Want to keep your place as “player” in the political hierarchy and remain on the “VIP” list? Print. Want to remain in the world spotlight? Print. Want to pick who wins or who loses? Trick question: Print and go deeper into NIRP. (negative interest rates) This way you get them both coming and going. (Sorry, the pun was unavoidable)

However, just when this pornographic display of adulteration into everything financial was thought to be contained on just the “pay per view” terminals. It’s now so endemic it’s reached the mass media as they watch in horror their 401K’s along with their hard-earned savings being exposed to this perversion no matter how far they try to remove themselves from its insidious effects or, even shield their eyes. Today it’s everywhere. And it’s being propagated in ways that would make Larry Flint proud.

It is now being not only acknowledged, but rather, cheered that the “Full Monty” most certainly will include the move into the outright purchasing of corporate bonds. And one thought that was only for the theaters of a “banana republic.” Again, the pun just writes itself. It would be funny if it weren’t so tragic.

I hear from friends, family members, along with others at events that are beginning to show the early stages of outright panic as to what is happening. Many (just like those addicted to porno) constantly now look at their screens whether it be on their phones, terminals et al, more times a day than ever before just to watch their balances go up and down in moves that would make a porn star blush. Why? Absolutely no other reason than a most likely intentional, well manufactured, and placed attention grabbing headline that may, or may not, be proved factual.

Another variation of this outright, blatantly manipulative theater is the latest full-frontal-assault now commonly used by many a central banker that takes to the stage and iterates incoherent remarks resembling “This was not that. Unless it’s this or that. However, be that as it may, it certainly will not be that, unless that is what we need, or not.”

Again, all gibberish as to say nothing more than possibly give the headline reading algorithmic, HFT (high frequency trading) parasites a cue to rip through whatever stop losses deemed “harmful” to the narrative, and clear the sheets of any so-called “true price discovery” that’s somehow discovering the wrong price that the bankers want.

You don’t need to be told what you’re viewing and just how debouched it has now become. It makes it all clear on its very own.

This was once perfectly summarized years ago by Themis Trading™ co-founder Joseph Saluzzi in response to the now routinely used “ambush styled” questioning when demanded he back up his insinuation there was manipulation taking place within the markets. He succinctly replied (I’m paraphrasing) “Proof? All I have to do is look at my screens!”

And there you have it as to explain the “markets” of today. Just like the former Justice once implied: All you need to do is acknowledge what you’re seeing – for what it is. No matter who is arguing differently.

So now the markets are all breathless awaiting the next release in this series of manipulative, market moving, economic dogma to be contemplated, then released, for the markets viewing pleasure (or horror) via this weeks FOMC meeting. All I’ll say is this.

For the sake of civility, refinement and taste – I’ll end here.

via Zero Hedge http://ift.tt/1TZbz8K Tyler Durden

We’ve written quite a bit about P2P or, more accurately, “marketplace” lending over the years.

Most recently, we noted that write-offs for five-year LendingClub loans were coming in at between 7% and 8% as opposed to the forecast range of between 4% and 6%. “Their business is to take data and use that to underwrite risk,” Compass Point’s Michael Tarkan told Bloomberg by phone. “If you’re an investor in the loans on the platform, this creates a concern around that underwriting model.”

Or, as we put it, “the algorithms LendingClub uses to assess credit risk aren’t working. Plain and simple.”

We also recently checked in on Prosper, the P2P site that inadvertently (we hope) financed Syed Farook and Tashfeen Malik’s San Bernardino jihad with a $28,000 loan. Prosper is raising rates to an average of 14.9% from 13.5% and last month told investors in a letter that estimated losses on loans have been increasing over the last six months.

That came on the heels of a warning from Moody’s who said some Prosper-linked bonds could face downgrades as the loans backing the deals began to go sour. “Charge-offs have been coming in at a higher rate than expected, very simply,” Amy Tobey, a senior credit officer at the ratings agency remarked at the time. “It is not a two-month blip,” she added.

No, it’s not, and concerns about the health of the US economy and the true state of the labor market will likely mean that demand for marketplace-backed paper won’t exactly be what one would call “robust” going forward. Of course that’s a problem for lenders like SoFi, which pools its loans and sells them to free up space on the books for still more loans. It’s the same “originate to sell” model that was used in the lead-up to the housing crisis and that’s now a part of the subprime auto space (although Citi will tell you that it’s not endemic there).

These companies need to be able to offload the loans in order to keep the model running, and if they can’t tap the securitization market, their ability to lend will suffer. But don’t worry, because SoFi – which originates billions in personal loans – has an idea. They will start a hedge fund and buy their own loans.

No, really.

“Social Finance Inc., a rapidly growing online lender, is hoping to stoke investor demand for the debt it originates by starting a hedge fund that will buy its own loans — and potentially those of its competitors,” Bloomberg reports.

The fund, called SoFi Credit Opportunities Fund, has raised $15 million so far. “It’s seeking to attract more money from wealthy individuals, funds of hedge funds and other institutional investors that may not want to buy whole loans directly from the company or securities backed by the debt,” Bloomberg goes on to note.

According to a company spokeswoman, there’s no annual fee and the fund will simply charge 25% on anything above a 3% return. The fund may also look to buy loans sold by other online lenders, in what certainly sounds like the beginning of an absurd P2P merry-go-round where everyone is selling loans to each each other. 

SoFi Credit Opportunities could eventually grow to a $500 million to $1 billion fund, WSJ, who originally reported the story said. The company brought its first ABS deal of the year to market this month, but the rate investors demanded on the highest rated tranche was notably higher than it was last year, reflecting market angst. Rather than argue with the market, the company figures it can get around the issue with the hedge fund idea. “[This is] a real chance to solve the balance-sheet problems facing the industry,” Chief Executive Mike Cagney said. Along with CFO Nino Fanlo, Cagney worked at Wells’ prop trading desk, and still works part-time at macro-focused Cabezon Investment Group.

(Cagney)

Now obviously, there are any number of things that can and probably will go on here. First the incestuous relationship not just among the fund and Sofi itself, but between the fund and the rest of the industry (assuming they do indeed decide to buy loans from other P2P lenders) means the entire thing is self-referential.

If losses on these loans continue to rise, the hedge fund obviously shouldn’t keep buying them, but they’re putting themselves in a position where they’ll have to, unless lending at SoFi were to grind to a halt. ABS issuance in the space will dry up altogether in a stress scenario and so, the only way for the model to keep going will be for Sofi to keep giving itself money to loan to other people. That will embed more and more bad loans in the hedge fund, which would then invariably see an investor exodus on poor performance. After that, if the securitzation market is slammed shut, it’s not clear what happens next.

Further, although as WSJ goes on to write, “Mr. Cagney said the fund has an independent trustee who must approve purchases of SoFi’s loans to head off conflicts of interest,” both he and Fanlo “sit on an investment committee that must approve trades.”

Obviously, when the going gets tough, Cagney’s not going to not favor SoFi if his company needs money to keep making loans. As a reminder, this entire thing depends on non-deposit funding.

At the end of Q4, Peer IQ wrote that the Marketplace ABS market was hardly shutting down. In fact Q4 was “a busy one” for securitizations.

But that won’t continue in perpetuity if charge-offs continue to rise.

It’s worth noting that LendingClub has a subsidiary called LC Advisors which does something similar to what SoFi is doing, but technically, LC isn’t a hedge fund. We hope LC hasn’t been buying the parent’s five-year loans.

Consider the following excerpts from EuroMoney:

Take the peer-to-peer lending industry, which is often anything but. As the size and number of participants has grown, it has morphed into marketplace lending with banks originating the loans, selling them to marketplace intermediaries who subsequently sell to institutional investors. If that doesn’t sound a million miles away from originate-to-distribute, it is because it isn’t. 

 

There are now more than 100 marketplace lenders in the US, the largest of which are Lending Club and Prosper Marketplace. Both of these firms have relied on a small, Salt Lake City-based lender, WebBank, for much of their business. Lending Club disbursed more than $4 billion in 2014, most of which was originated by WebBank and Prosper Marketplace used WebBank to source $1.6 billion of lending last year. 

 

The bank, which has an ROE of 44%, originates the loan but immediately sells the risk on to the marketplace lender. It all sounds eerily reminiscent of banks originating sub-prime mortgages and selling them to third party vehicles to securitise.

Exactly. And now, in addition to the securitizations which are likely to experience waves of downgrades, you have the lenders starting their own hedge funds just to keep the model going. 

This will one day seem like a laughably bad idea in retrospect. Especially when people start figuring out what the borrowers were spending the loans on.

Finally, if you needed another reason to not trust SoFi’s new hedge fund, here you go (again, from Bloomberg): “Last month, SoFi said it had hired former Deutsche Bank AG co-Chief Executive Officer Anshu Jain as an adviser.”

via Zero Hedge http://ift.tt/1RYza5O Tyler Durden

In the aftermath of Friday’s market “reassessment” and subsequent surge, when the ECB’s “bazooka” was found quite stimulative for risk assets after all (as opposed to the Thursday post-kneejerk reaction) one would think that Goldman which still has a 2,100 year end target on the S&P500, would be delighted. Oddly enough, just like Bank of America, Goldman’s reaction is somber, and instead of joining the euphoria unleashed by the surge in energy, momentum and corporate debt-related risk, the firm’s chief strategist David Kostin says the bounce won’t last as it is on the back of firms with “Weak Balance Sheet”, and that both energy and momentum stocks will return their downward trajectory once the dollar it rise as soon as the week when the Fed reverts to a far more hawkish stance.

As Kostin explains, a big part of the unwind of the recent renormalization in value-vs-momentum factors, is on the back of the spike in oil:

Earlier in the week commodity prices, and specifically crude oil, caused violent swings in market momentum that has dominated investor focus. After rising by 31% in 2015, our momentum factor (ticker: GSMEFMOM) has declined by 5% YTD, with its volatility leaping to the highest levels since 2009. This month alone the factor has experienced daily returns falling in the 2nd percentile (-3%) and 99th percentile (+5%) since 1980. Energy firms currently account for 25% of the factor’s short leg. Since bottoming at $26 on February 11, WTI crude has risen by $12 (44%) and driven the S&P 500 Energy sector to outperform the broad market by 265 bp (12% vs. 9%).

These unprecedented whipsawed moves have caught most by surprise:

The correlation between major macro trends has caught many popular investment themes in the momentum spin cycle. In 2015 and the first weeks of this year, lower oil prices were accompanied by lower Treasury yields and downward revisions to US growth expectations, boosting the performance of popular growth stocks and defensive equities while weighing on banks. At the same time, the US dollar, which carries a strong negative correlation with oil, strengthened by nearly 15% and presented another headwind to the US economy. The combination of growth concerns and low oil prices widened credit spreads to recessionary levels and benefitted the performance of stocks with strong balance sheets. All of these trends have reversed sharply in recent weeks (see Exhibits 1 and 2).

 

Kostin warns, just as Jeff Currie did earlier this week, that the oil rally is not sustainable and is actually counterproductive to eliminating near term supply imbalances, as the higher the bear market rally pushes oil, the more production will go back online, ultimately defeating the purpose of the Saudi shale “cleanse”, perhaps forcing the Saudis to boost output once again.

Our commodity strategists believe that the surge in commodity prices is premature and unsustainable. They believe that an extended period of lower prices is necessary to force the financial stress that will cause a reduction in supply, rebalance the market and lead to an eventual sustainable rally. They continue to forecast a trendless but volatile oil market, with spot crude prices in 2Q 2016 ranging between $25 and $45/bbl.

Which brings us to the main point of this post: what Goldman thinks is not being priced in by investors: a return to a hawkish Fed, and a resumption in the climb of the dollar.

While investors focus on oil and the ECB, they overlook the largest current macro market risk – and opportunity – which centers on the Fed. Next Wednesday the FOMC will announce a rate decision, release its revised projections, and hold a press conference. Although our economists expect rates will remain unchanged, a credible argument can be made for the FOMC to proceed with the “flight path” it had previously outlined. The unemployment rate stands at 4.9%, and core inflation has surprised to the upside, with PCE rising to 1.7% in February. Our economists expect three 25 bp funds hikes in 2016. However, despite the Fed standing within striking distance of its dual mandate, investors have rejected this forecast. Fed futures prices currently imply less than a 50% chance of a hike in June, and only two full rate hikes through the end of 2017.

 

The punchline: “The market’s eventual acceptance of the Fed tightening path will spur some parts of the momentum trade to resume and others to unwind.“

In other words, just as we took the elevator up after taking it down just as fast in February, and then again in early January, the whole process may repeat, especially if the stronger USD leads to the now well-known retaliation by the PBOC. To wit:

Fed tightening, especially contrasted with easing by the ECB and BOJ, should drive the dollar higher and benefit domestic-facing US stocks. As we discussed last week, our FX strategists expect policy divergence and interest rate differentials will drive the USD higher by 8% this year.

Who knows, maybe Goldman’s FX strategist Robin Brooks will finally get one right.

As for Kostin’s forecast…

We forecast a tightening Fed and lower oil prices will return upward momentum to the performance of stocks with strong balance sheets. Strong balance sheet stocks began to outperform their weak balance sheet counterparts as QE ended. We believe the trend will continue as the Fed normalizes policy given that leverage for the median S&P 500 stock stands at the highest level in a decade

For Goldman to be warning about the market’s near record leverage ratio (when coupled with the ECB’s scramble to unlock the debt/buyback issuance channel) things must be perilously close to getting unhinged.

In summary:

Although the recent oil rally tightened credit spreads and eased the pressure on weak balance sheet stocks, we expect high leverage and tighter financial conditions will support strong balance sheet stocks as the cycle matures. The reversal in crude oil prices expected by our commodity strategists should hasten the dynamic.

How to trade this? For the Goldman faders (after all Goldman got exactly one of its Top 6 trades for 2016 right) it means buy momentum and sell value; for those who believe that the market will actually appreciate the fundamentals that not only we, but even Goldman is now pounding the table on, the time to fade the momentum and energy rally has arrived, and the best trade to put on is long companies with less net debt, while shorting those companies which continue to see their leverage rise, mostly as a result of another year of record debt-funded stock buybacks.

Here’s the problem though: while this trade would have worked easily before the ECB decided to start buying corporate debt, now that the European central bank is backstopping bond issuers, it will almost certainly lead to even more outperformance by weak balance sheet companies as yet another central bank intervention unleashes another divergence between fundamentals and central planning.

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

Submitted by Art Berman via ArtBerman.com,

Oil prices should fall, possibly hard, in coming weeks. That is because fundamentals do not support the present price.

Prices should fall to around $30 once the empty nature of an OPEC-plus-Russia production freeze is understood. A return to the grim reality of over-supply and the weakness of the world economy could push prices well into the $20s.

A Production Freeze Will Not Reduce The Supply Surplus

An OPEC-plus-Russia production cut would be a great step toward re-establishing oil-market balance. I believe that will happen later in 2016 but is not on the table today.

In late February, Saudi oil minister Ali Al-Naimi stated categorically, “There is no sense in wasting our time in seeking production cuts. That will not happen.”

Instead, Russia and Saudi Arabia have apparently agreed to a production freeze. This is meaningless theater but it helped lift oil prices 37% from just more than $26 in mid-February to almost $36 per barrel last week. That is a lot of added revenue for Saudi Arabia and Russia but it will do nothing to balance the over-supplied world oil market.

The problem is that neither Saudi Arabia nor Russia has greatly increased production since the oil-price collapse began in 2014 (Figure 1). A freeze by those countries, therefore, will only ensure that the supply surplus will not get worse because of them. It is, moreover, doubtful that Saudi Arabia or Russia have the spare capacity to increase production much beyond present levels making the proposal of a freeze cynical rather than helpful.

Saudi Arabia and Russia are two of the world’s largest oil-producing countries. Yet in January 2016, Saudi liquids output was only ~110,000 bpd more than in January 2014 and Russia was actually producing ~50,000 bpd less than in January 2014. The present world production surplus is more than 2 mmbpd.

By contrast, the U.S. plus Canada are producing ~1.9 mmbpd more than in January 2014 and Iraq’s crude oil production has increased ~1.7 mmbpd. Also, Iran has potential to increase its production by as much as ~1 mmbpd during 2016. Yet, none of these countries have agreed to the production freeze. Iran, in fact, called the idea “ridiculous.”

Growing Storage Means Lower Oil Prices

U.S. crude oil stocks increased by a remarkable 10.4 mmb in the week ending February 26, the largest addition since early April 2015. That brought inventories to an astonishing 162 mmb more than the 2010-2014 average and 74 mmb above the bloated levels of 2015 (Figure 2).

The correlation between U.S. crude oil stocks and world oil prices is strong. Tank farms at Cushing, Oklahoma (PADD 2) and storage facilities in the Gulf Coast region (PADD 3) account for almost 70% of total U.S. storage and are critical in WTI price formation. When storage exceeds about 80% of capacity, oil prices generally fall hard. Current Cushing storage is at 91% of capacity, the Gulf Coast is at 87% and combined, they are at a whopping 88% of capacity (Figure 3).

Prices have fallen hard in step with growing storage throughout 2015 and early 2016. Since talk of a production freeze first surfaced, however, intoxicated investors have ignored storage builds and traders are testing new thresholds before they fall again.

The truth is that prices will not increase sustainably until storage volumes fall, and that cannot happen until U.S. production declines by about 1 mmbpd.

Despite extreme reductions in rig count and catastrophic financial losses by E&P companies, production decline has been painfully slow. The latest data from EIA indicates that February 2016 production will fall approximately 100,000 bpd compared to January (Figure 4).

That is an improvement over the average 60,000 bpd monthly decline since the April 2015 peak.  It is not enough, however, to make a difference in storage and storage controls price.

EIA and IEA will publish updates this week on the world oil market balance and I doubt that the news will be very good. IEA indicated last month that the world over-supply had increased almost 750,000 bpd in the 4th quarter of 2015 compared with the previous quarter. EIA data corroborated those findings and showed that the surplus in January 2016 had increased 650,000 bpd from December 2015.

Oil Prices and The Value of the Dollar

Why, then, have oil prices increased? Partly, it is because of hope for an OPEC production freeze and that sentiment is expressed in the OVX crude oil-price volatility index (Figure 5).

The OVX reflects how investors feel about where oil prices are going. It is sometimes called the “fear index.” That suggests that investors are feeling pretty good and less fearful about the oil markets than in the last quarter of 2015 when oil prices fell 47%. Since mid-February, prices have increased 37%.

But there is more to it than just hope and that may be found in the strength of the U.S. dollar. The negative correlation between the value of the dollar and world oil prices is well-established. The oil-price increase in February was accompanied by a decrease in the trade-weighted value of the dollar (Figure 6).

Now, that trend has reversed. The U.S. jobs report last week was positive so continued strength of the dollar is reasonable for awhile. Assuming the usual correlation, that means that oil prices should fall.

 Oil Prices Should Fall Hard

It is a sign of how bad things have gotten in oil markets that we feel optimistic about $35 oil prices. It should also be a warning that the over-supply that got us here has not gone away.

Oil storage volumes continue to grow and that is the surest indication that production has not declined enough yet to make a difference. It is impossible to imagine oil prices rising much beyond present levels until storage starts to fall. In fact, it is difficult to understand $35 per barrel prices based on any measure of oil-market fundamentals.

The OPEC-plus-Russia production freeze is a cynical joke designed to increase their short-term revenues without doing anything about production levels. An output cut would make a difference but a freeze on current Saudi and Russian production levels means nothing.  It apparently made some investors feel better but it didn’t do anything for me. Iran got this one right by calling it ridiculous.

No terrible economic news has surfaced in recent weeks but that does not change the profound weakness of a global economy that is burdened with debt and weak demand. The announcement last week by the People’s Bank of China that it sees room for more quantitative easing may have comforted stock markets but it only added to my anxiety about reduced oil consumption and future downward shocks in oil prices.

I hope that oil prices increase but cannot find any substantive reason why they should do anything but fall. As market balance reality re-emerges in investor consciousness and the false euphoria of a production freeze recedes, prices should correct to around $30. A little bad economic or political news could send prices much lower.

via Zero Hedge http://ift.tt/1V4GyPM Tyler Durden

Some Venezuelans aren’t happy with Nicolas Maduro, and it’s easy to see why.

Inflation in the socialist paradise is projected to run at a mind boggling 720% this year after topping 200% in 2015. Long queues are common at grocery stores, where the country’s beleaguered citizens wait in hopes of grabbing the last of increasingly scarce basic staples like rice and, famously, toilet paper. According to a trade group of drug stores, 90% of medicines are now scarce.

As we documented last month, the acute economic crisis – Venezuela is the worst performing economy in the world – is the result of years of disastrous policies pursued by the socialist government which has pushed out private industry and badly mismanaged the country’s oil wealth. Default is now virtually assured, as 90% of crude revenue needs to be diverted to debt payments. Thanks to rising imports and falling oil sales, the CA deficit has worsened, forcing Caracas to liquidate assets to fund a budget deficit that’s projected to hover near 20% of GDP for the foreseeable future.

The economic malaise has fueled a political crisis. Last month, Maduro used a Supreme Court stacked with allies to push through a decree granting the presidency “emergency powers.” Opposition lawmakers – who, you’re reminded, in December won 99 of 167 seats that were up for grabs in what amounted to the worst defeat in history for Hugo Chavez’s leftist movement – were livid and decided to accelerate plans to remove to the hapless leader.

Those plans will include a recall referendum and an amendment aimed at reducing the length of the President’s term. Oh, and those plans also include inciting mass protests.

“Venezuela’s opposition held a national day of protest Saturday, the opening salvo in its new strategy to oust President Nicolas Maduro, who responded with a rally of his own,” AFP reports. “With shouts of ‘Resign now!’ thousands of Venezuelans demonstrated against Maduro in northeast Caracas, as the socialist president gathered thousands of his own red-clad supporters in the center of the capital to chants of ‘Maduro won’t go!’”

As AFP goes on to note, it’s a small miracle no one was killed considering the tension and what happened in 2014 when anti-government protests left dozens dead. Here are the visuals from the capital:

“Venezuela is in chaos … more misery, more crime and more destruction,” one law student among opposition supporters told Reuters. “I came because what we want is change, because we cannot continue standing in line to buy medicine, food, for everything, for car parts, for everything,” another demonstrator said.

Maduro was predictably defiant, giving a “thundering” speech to supporters at what he called an “anti-imperialist rally.” “Let them come for me. Nobody’s giving up here!” he said. “I imagine him in Miraflores (presidential palace.) My God, save us from that! There’d be a national insurrection a week later,” he added, referencing opposition leader Henry Ramos.

Of course there’s already a “national insurrection” – and he’s the target.

“My opponents,” Maduro boomed, “have gone crazy [and I will] hang on to power until the final day.” Here’s an amusing picture from the speech:

Although some in the opposition crowds said they were “expecting more people,” you can bet the groundswell of support for the anti-Maduro movement will only grow – especially now that a majority of lawmakers want to President gone.

There’s only so long the populace is going to tolerate inflation that appears as though it may eventually top 1,000% and without higher oil prices, the country’s reserves (along with its gold) will be gone in a matter of months. A desperate attempt on Energy Minister Eulogio Del Pino’s part to convince fellow OPEC members to come to an agreement on lifting prices was a miserable failure last month and as documented earlier today, Iran isn’t about to budge.

Perhaps it will take a sovereign default for the parts of the population who still buy Maduro’s “blame the imperialists” rhetoric to finally wake up, but make no mistake, Maduro’s pledge to “hang to power until the final day” will be put to the test in relatively short order. Whether or not that test comes from lawmakers or angry, torch-waving Venezuelans demanding toilet paper remains to be seen.

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