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Submitted by Keith Dicker of IceCap Asset Management

What goes up can also come down

Whether unknowingly or not, the media and the investment industry has created an information gap wedging the 2008 debt crisis with today’s debt crisis. Chart 4 shows the difference in debt outstanding from 2008 compared to today. The Public Sector consists of government and tax payers, while the Private Sector is made up of individuals and companies.

Notice the enormous gap that has developed between the two groups over the last 6 years. This is the part that isn’t talked about by the big banks, fund companies and advisors with their clients. The debt crisis was never really resolved. Instead, governments decided to simply transfer the debt problem from the private sector to the public sector.

This is important as it is one of the key reasons for the current crisis.

As a result, capital markets were never allowed to reset. Instead, our governments and central banks have created a financial  environment where traditional savers receive little to no interest on their cash deposits, and an economic environment whereby sophisticated investors are slowly withdrawing investment.

This combination is creating deflationary trends around the world, and it is causing the Velocity of Money to plummet. Ironically, this central-bank induced economic combination, is causing central banks and governments to do even more of the same. Insanity at its best.

At some point very soon, this financial-spin-top will lose a few riders and the key one to watch is the government bond sector. Chart 5 illustrates the size and difference between the bubbles in our all too recent past.

And as they say in California – the next one will be a big one. As the bubble in government bonds blows higher and higher, the following investment groups will become considerably risky:

– Government bonds
– Bank & insurance stocks
– Pension funds
– Target Date Mutual Funds

Practically every investor in the world has exposure to the bond market, as well as bank and insurance stocks. Some investors have little exposure while others have a lot of their eggs in this seemingly low-risk basket.

We’ll next explain why we are nervous about these, 4 investment groups (page 9) and then go into greater detail about each one in future Global Market Outlooks.

First, note the following amount of global debt outstanding.

Next, note that over $58 TRILLION is owed by governments, and over $45 TRILLION is owed by banks and insurance companies.

Also, understand that banks and insurance companies are required by regulators to hold safe investments as their capital.

And finally, understand that regulators say government bonds are recognised as risk-free investments and therefore should make up the majority of a bank’s capital.

So, if you accept our view that government bonds are in a bubble phase and that eventually this bubble will burst, governments as well as anyone holding government bonds will be affected the most.

And because banks and insurance companies invest their required capital in government bonds, they are extremely vulnerable to a popping of the government bond market. To summarise, the groups who hold a whole bunch of government bonds include:

– Bank & insurance companies
– Pension funds
– Target Dated Mutual Funds

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Continue reading below

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“What is going on?”, Deutsche Bank asks, in the bank’s latest European equity strategy snapshot.

Investors, Deutsche says, can’t seem to figure out why it is that European equities have plunged by some 20% since peaking in November. The usual suspects are trotted out (China, renewed concerns about NPLs, and the shocking realization that central bankers’ are more impotent than they are omnipotent) but the real problem, the bank says, is threefold: 1) there’s a very real risk that China finally throws in the towel on the whole “controlled,” “orderly” devaluation thing in the face of worsening capital flight and simply moves to a float to relieve the pressure, 2) global growth is stuck in the doldrums, and 3) the US is about to enter a default cycle thanks to the fact that the country’s uneconomic energy producers are all about to go bankrupt in the face of shrinking borrowing bases and a HY primary market that is suddenly slammed shut.

Remember, this is a collection of companies who are and pretty much always have been insolvent. The whole damn space is cash flow negative, which means if someone doesn’t step in to plug the funding gap, the music stops. No more drilling. No more pumping. No more coupon payments. Game over.

Until now, Wall Street has stepped up to the plate with cheap cash and by providing access to what until recently were wide open capital markets. Now, all that’s changed. There’s not enough yield in the world to entice investors to buy new issuance from US HY energy producers and the revolver raids that started in October will likely continue in April.

Barring some sort of dramatic turnaround in oil prices, the defaults are coming, and as Deutsche goes on to note, once the speculative default rate hits 4%, it’s almost guaranteed to shoot up to 10%. Although we’re only at 3% now, spreads are already at levels consistent with a speculative default rate of 5%.

Have a look at the following two charts which suggest that the US is indeed entering a default cycle and if history is any guide, it’s about to get very messy, very quickly.

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From Deutsche Bank

Over the past 100 years, when defaults have risen above 4%, they have typically continued to rise close to 10% (i.e. a full default cycle). This is because of the tendency for credit stress to become self-fuelling: a rise in expected defaults pushes up financing costs, which tips some marginal borrowers over the edge, further increasing defaults and so on. With non-energy spreads rising in line with overall spreads and issuance down sharply, this process seems to be under way (and explains the sharp underperformance by banks).

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Originally posted at The Saker,

The situation in Syria has reached a watershed moment and a dramatic escalation of the war appears imminent. Let’s look again at how we reached this point.

During the first phase of the operation, the Syrian armed forces were unable to achieve an immediate strategic success. This is rather unsurprising. It is important to remember here that during the first weeks of the operation the Russian did not provide close air support to the Syrians. Instead, they chose to systematically degrade the entire Daesh (Note: I refer to *all* terrorist in Syria as “Daesh”) infrastructure including command posts, communication nodes, oil dumps, ammo dumps, supply routes, etc. This was important work, but it did not have an immediate impact upon the Syrian military. Then the Russians turned to two important tasks: to push back Daesh in the Latakia province and to hit the illegal oil trade between Daesh and Turkey. The first goal was needed for the protection of the Russian task force and the second one hit the Daesh finances. Then the Russians seriously turned to providing close air support. Not only that, but the Russians got directly involved with the ground operation.

 

The second phase was introduced gradually, without much fanfare, but it made a big difference on the ground: the Russians and Syrians began to closely work together and they soon honed their collaboration to a quantitatively new level which allowed the Syrian commanders to use Russian firepower with great effectiveness. Furthermore, the Russians began providing modern equipment to the Syrians, including T-90 tanks, modern artillery systems, counter-battery radars, night vision gear, etc. Finally, according to various Russian reports, Russian special operations teams (mostly Chechens) were also engage in key locations, including deep in the rear of Daesh. As a result, the Syrian military for the first time went from achieving tactical successes to operational victories: for the first time the Syrian began to liberate key towns of strategic importance.

 

Finally, the Russians unleashed a fantastically intense firepower on Daesh along crucial sectors of the front. In northern Homs, the Russians bombed a sector for 36 hours in a row. According to the latest briefing of the Russian Defense Ministry, just between February 4^th and February 11^th, the Russian aviation group in the Syrian Arab Republic performed 510 combat sorties and engaged 1’888 terrorists targets. That kind of ferocious pounding did produce the expected effect and the Syrian military began slowly moving along the Turkish-Syrian border while, at the same time, threatening the Daesh forces still deployed inside the northern part of Aleppo. In doing so, the Russians and Syrian threatened to cut off the vital resupply route linking Daesh to Turkey. According to Russian sources, Daesh forces were so demoralized that they forced the local people to flee towards the Turkish border and attempted to hide inside this movement of internally displaced civilians.

This strategic Russian and Syrian victory meant that all the nations supporting Daesh, including Turkey, Saudi Arabia and the USA were facing a complete collapse of their efforts to overthrow Assad and to break-up Syria and turn part of it into a “Jihadistan”. The Americans could not admit this, of course, as for the Saudis, their threats to invade Syria were rather laughable. Which left the main role to Erdogan who was more than happy to provide the West with yet another maniacal ally willing to act in a completely irresponsible way just to deny the “other side” anything looking like a victory.

Erdogan seems to be contemplating two options. The first one is a ground operation into Syria aimed at restoring the supply lines of Daesh and at preventing the Syrian military from controlling the border. Here is a good illustration (taken from a SouthFront video) of what this would look like:

According to various reports, Erdogan has 18’000  soldiers supported by aircraft, armor and artillery poised along the border to execute such an invasion.

The second plan is even simpler, at least in theory: to create a no-fly zone over all of Syria. Erdogan personally mentioned this option several times, the latest one on Thursday the 11^th.

Needless to say, both plans are absolutely illegal under international law and would constitute an act of aggression, the “supreme international crime” according to the Nuremberg Tribunal, because “it contains within itself the accumulated evil of the whole.” Not that this would deter a megalomaniac like Erdogan.

Erdogan, and his backers in the West, will, of course, claim that a humanitarian disaster, or even a genocide, is taking place in Aleppo, that there is a “responsibility to protect” (R2P) and that no UNSC is needed to take such clearly “humanitarian” action. It would be “Sarajevo v2” or “Kosovo v2” all over again. The western media is now actively busy demonizing Putin, and just recently has offered the following topics to ponder to those poor souls who still listen to it:

1. Putin ‘probably’ ordered the murder of Litvinenko.
2. Putin ordered the murder of Litvinenko because Litvinenko was about to reveal that Putin was a pedophile (seriously, I kid you not – check for yourself!).
3. WWIII could start by Russia invading Latvia.
4. According to the US Treasury, Putin is a corrupt man.
5. According to George Soros, Putin wants the “disintegration of the EU” and Russia is a bigger threat than the Jihadis.
6. Russia is so scary that the Pentagon wants to quadruple the money for the defense of Europe.
7. The Putin is strengthening ISIS in Syria and causing a wave of refugees.

There is no need to continue the list – you get the idea. It is really Bosnia, Kosovo, Iraq, Libya all over again, with the exact same “humanitarian crocodile tears” and the exact same rational for an illegal aggression. And instead of Sarajavo “martyr city besieged by Serbian butchers” we would now have Aleppo “martyr city besieged by Syrian butchers”. I even expect a series of false flags inside Aleppo next “proving” that “the world” “must act” to “prevent a genocide”.

The big difference, of course, is that Yugoslavia, Serbia, Iraq and Libya were all almost defenseless against the AngloZionist Empire. Not so Russia.

In purely military terms, Russia has taken a number of crucial steps: she declared a large scale “verification” of the “combat readiness” of the Southern and Central military districts. In practical terms, this means that all the Russian forces are on high alert, especially the AeroSpace forces, the Airborne Forces, the Military Transportation Aviation forces and, of course, all the Russian forces in Crimea and the Black Sea Fleet. The first practical effect of such “exercises” is not only to make a lot of forces immediately available, but it is also to make them very difficult to track. This not only protects the mobilized forces, but also makes it very hard for the enemy to figure out what exactly they are doing. There are also report that Russian Airborne Warning and Control (AWACS) aircraft – A-50M – are now regularly flying over Syria. In other words, Russia has taken the preparations needed to go to war with Turkey.

Needless to say, the Turks and the Saudis have also announced joint military exercises. They have even announced that Saudi aircraft will conduct airstrikes from the Incirlik air base in support of an invasion of Syria.

At the same time, the Russians have also launched a peace initiative centered around a general ceasefire starting on March 1^st or even, according to the latest leaks, on February 15^th. The goal is is transparent: to break the Turkish momentum towards an invasion of Syria. It is obvious that Russian diplomats are doing everything they can to avert a war with Turkey.

Here again I have to repeat what I have said already a million times in the past: the small Russian contingent in Syria is in a very precarious position: far away from Russia and very close (45km) to Turkey. Not only that, but the Turks have over 200 combat aircraft ready to attack, whereas the Russians probably has less than 20 SU-30/35/34s in total. Yes, these are very advanced aircraft, of the 4++ generation, and they will be supported by S-400 systems, but the force ratio remains a terrible 1:10.

Russia does, however, have one big advantage over Turkey: Russia has plenty of long-range bombers, armed with gravity bombs and cruise missiles, capable of striking the Turks anywhere, in Syria and in Turkey proper. In fact, Russia even has the capability to strike at Turkish airfields, something which the Turks cannot prevent and something which they cannot retaliate in kind for. The big risk for Russia, at this point, would be that NATO would interpret this as a Russian “aggression” against a member-state, especially if the (in)famous Incirlik air base is hit.

Erdogan also has to consider another real risk: that, while undoubtedly proficient, the Turkish forces might not be a match for the battle-hardened Kurds and Syrians, especially if the latter are supported by Iranian and Hezbollah forces. The Turks have a checkered record against the Kurds whom they typically do overwhelm with firepower and numbers, but whom they never succeeded in neutralizing, subduing or eliminating. Finally, there is the possibility that Russians might have to use their ground forces, especially in the task force in Khmeimim is really threatened.

In this regard, let me immediately say that the projection of, say, an airborne force so far from the Russian border to protect a small contingent like the one in Khmeimim is not something the Airborne Forces are designed for, at least not “by the book”. Still, in theory, if faced with a possible attack on the Russian personnel in Khmeimin, the Russians could decide to land a regimental-size airborne force, around 1’200 men, fully mechanized, with armor and artillery. This force could be supplemented by a Naval Infantry battalion with up to another 600 men. This might not seem like much in comparison to the alleged 18’000 men Erdogan has massed at the border, but keep in mind that only a part of these 18’000 would be available for any ground attack on Khmeimin and that the Russian Airborne forces can turn even a much larger force into hamburger meat (for a look at modern Russian Airborne forces please see here). Frankly, I don’t see the Turks trying to overrun Khmeimin, but any substantial Turkish ground operation will make such a scenario at least possible and Russian commanders will not have the luxury of assuming that Erdogan is sane, not after the shooting down of the SU-24. After that the Russians simply have to assume the worst.

What is clear is that in any war between Russia and Turkey NATO will have to make a key decision: is the alliance prepared to go to war with a nuclear power like Russia to protect a lunatic like Erdogan? It is hard to imagine the US/NATO doing something so crazy but, unfortunately, wars always have the potential to very rapidly get out of control. Modern military theory has developed many excellent models of escalation but, unfortunately, no good model of how de-escalation could happen (at least not that I am aware of). How does one de-escalate without appearing to be surrendering or at least admitting to being the weaker side?

The current situation is full of dangerous and unstable asymmetries: the Russian task force in Syria is small and isolated and it cannot protect Syria from NATO or even from Turkey, but in the case of a full-scale war between Russia and Turkey, Turkey has no chance of winning, none at all. In a conventional war opposing NATO and Russia I personally don’t see either side losing (whatever ‘losing’ and ‘winning’ mean in this context) without engaging nuclear weapons first. This suggests to me that the US cannot allow Erdogan to attack the Russian task force in Syria, not during a ground invasion and, even less so, during an attempt to establish a no-fly zone.

The problem for the USA is that it has no good option to achieve its overriding goal in Syria: to “prevent Russia from winning”. In the delusional minds of the AngloZionist rulers, Russia is just a “regional power” which cannot be allowed to defy the “indispensable nation”. And yet, Russia is doing exactly that both in Syria and in the Ukraine and Obama’s entire Russia policy is in shambles. Can he afford to appear so weak in an election year? Can the US “deep state” let the Empire be humiliated and its weakness exposed?

The latest news strongly suggests to me that the White House has taken the decision to let Turkey and Saudi Arabia invade Syria. Turkish officials are openly saying that an invasion is imminent and that the goal of such an invasion would be to reverse the Syrian army gains along the boder and near Aleppo. The latest reports are also suggesting that the Turks have begun shelling Aleppo. None of that could be happening without the full support of CENTCOM and the White House.

The Empire has apparently concluded that Daesh is not strong enough to overthrow Assad, at least not when the Russian AeroSpace forces are supporting him, so it will now unleash the Turks and the Saudis in the hope of changing the outcome of this war or, if that is not possible, to carve up Syria into ‘zones of responsibility” – all under the pretext of fighting Daesh, of course.

The Russian task force in Syria is about to be very seriously challenged and I don’t see how it could deal with this new threat by itself. I very much hope that I am wrong here, but I have do admit that a *real* Russian intervention in Syria might happen after all, with MiG-31s and all. In fact, in the next few days, we are probably going to witness a dramatic escalation of the conflict in Syria.

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Two weeks ago, in our latest report on the Hong Kong housing market, we observed that according to the local Centaline Property Agency total Hong Kong property transactions in January were on track to register the worst month since 1991, when it started compiling monthly figures. In other words, the biggest drop in recorded history.

Centaline estimated that only 3,000 transactions will have registered with developers slowing down new launches, while only 394 units were sold in the first 27 days of January, 80.3 per cent lower than the 2,127 deals lodged in December. Meanwhile, sales of used homes fell by a fifth to 1,276 deals in January.

But while the number of transactions was crashing, prices – while down 10% from the recent all time highs…

 

… have been relatively tame, as sellers have not been desperate enough to hit the collapsing bids, yet.

Yet one place that provides some glimpse into true price discovery was the just completed government tender, in which a parcel of land sold by the government in the New Territories went for nearly 70% less per square foot than a similar transaction in September.

In the deal that could not be postponed “because the seller waits for a better market”, the 405,756 square foot (37,696 square meter) site in Tai Po sold for HK$2.13 billion ($274 million) or HK$1,904 per square foot, in a tender that closed on Feb. 12, according to the Hong Kong Lands Department website. According to Bloomberg, the buyer was Asia Metro Investment Ltd., a subsidiary of China Overseas Land & Investment Ltd.

As we have noted previously, the Hong Kong housing bubble has already suffered a “spectacular collapse”, and all that is left now is confirmation not only in terms of transactions, but prices. We already had the former; now we have the latter.

Hong Kong home prices surged 370 percent from their 2003 trough through the September peak before the correction began, spurred by a rising supply of housing and a slowdown in China. As Bloomberg notes, lower prices paid for land could eventually lead to cheaper home prices down the road, and are viewed as a leading indicator of the negative sentiment on the market.

Making matters worse is that just like in the oil market, Hong Kong is now facing a spike in supply: “adding to the downward pressure on prices was the government on Jan. 13 raising its five-year target for new housing supply to 97,100 new homes, up from a previous estimate of 77,100 units.“

It is unclear who will be the biggest victims of Hong Kong’s housing bust: recent land sales have been dominated by mainland Chinese developers. Hong Kong property companies have been less active, as they’re struggling to sell existing units in their inventories and offering discounts of more than 12 percent to entice new buyers.

Yet stunningly, even the bursting of the Hong Kong housing bubble will not be fully clear as Chinese construction companies are merely using the HK real estate market as yet another way to circumvent Chinese capital controls and park their funds offshore: according to Nicole Wong, head of property research at CLSA Ltd. said mainland companies are outbidding their Hong Kong counterparts because they expect lower margins and are also anxious to park money offshore given the devaluation of the yuan.

One can imagine where HK real estate prices would be, if it weren’t for the ingenuity of mainlanders to park hot money into one of the few remaining venues willing to accept it, and that hasn’t been blocked by Beijing.

Still, local real estate experts remain “cautiously optimistic” even in the face of a property tsunami:

Wong cautioned against drawing conclusions on the basis of two land transactions, as it’s impossible to find two sites that are identical. She estimates land prices overall have fallen about 15 percent since their peak, based on the assumption that housing prices have fallen about 10 percent and land accounts for about 60 percent of overall development costs.

Ironically, it was Hong Kong Chief Executive Leung Chun Ying who introduced a raft of measures to cool the property market since 2012 after a rally in home prices fueled complaints of a widening wealth gap. Well, can now now undo those measures. Now that prices are finally starting to fall, property analysts including Raymond Ngai of Bank of America Corp.’s Merrill Lynch unit expect the government will ease the measures and pray to reflate the bubble once more.

However, one way to be absolutely certain that the housing crash will be far worse before all is said and done, comes courtesy of Standard & Poor’s which just issued a report today projecting a 10% to 15% decline in property prices, and said that they would need to fall 30 percent before triggering a ratings downgrade on Hong Kong developers. With S&P’s track record, a 50% collapse is now virtually assured.

The ultimate winner, however, from the bursting of the HK housing bubble are local residents, for whom housing may finally become affordable once again: Hong Kong ranked as the most expensive housing market among 87 major metropolitan regions, according to the annual Demographia International Housing Affordability Survey, which used data from the third quarter of 2015. The median home in Hong Kong costs 19 times the median annual pretax household income, the highest multiple Demographia has measured, and up from 17 in last year’s report, according to the company’s website.

Now if only the Chinese would stop buying up every piece of real estate in the US and Canada as well…

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Submitted by Ron Paul via The Ron Paul Institute for Peace & Prosperity,Last week US stock markets tumbled yet again, leaving the Dow Jones index down almost 1500 points for the year. In fact, most major world markets are in negative territory this year. There are many Wall Street cheerleaders who are trying to say that this is just a technical correction, that the bottom is near, and that everything will be getting better soon.They are ignoring the real message the markets are trying to send: you cannot print your way to prosperity.

People throughout history have always sought to acquire wealth. Most of them understand that it takes hard work, sacrifice, savings, and investment. But many are always looking for that “get rich quick” scheme. Monetary cranks throughout history have thought that just printing more money would result in greater wealth and prosperity. Every time this was tried it resulted in failure. Huge economic booms would be followed by even larger busts. But no matter how many times the cranks were debunked both in theory and practice, the same failed ideas kept coming back.

The intellectual descendants of those monetary cranks are now leading the world's central banks, which is why the last decade has seen an explosion of money creation. And what do the central bankers have to show for it? Lackluster employment numbers that have not kept up with population growth, increasing economic inequality, a rising cost of living, and constant fear and uncertainty about what the future holds.

The past decade has been a lot like the 1920s, when prices wanted to drop but the Federal Reserve kept the price level steady through injections of easy money into the economy. The result in the 1920s was the Great Depression. But in the 1920s prices were dropping because of increased production. More goods being produced meant lower prices, which the Fed then tried to prop up by printing money. Unlike the “Roaring 20s” however, the economy isn't quite as strong today. It's more of a gasp than a roar.

Production today is barely above 2007 levels, while heavily-indebted households already hurt during the financial crisis don't want to keep spending. The bad debts and mal-investments from the last Federal Reserve-induced boom were never liquidated, they were merely papered over with more easy money. The underlying economic fundamentals remain weak but the monetary cranks who run the Fed keep trying to pump more and more money into the system. They fail to realize that easy money is the cause, not the cure, of recessions and depressions. They didn't realize that prices needed to drop in order to clear all the bad debt and mal-investments out of the system. Because they don't realize that, we are on the verge of yet another financial crisis.

Don't be confused by any stock market rallies over the next few months and think that the worst is over. Remember that after Black Tuesday in 1929 the Dow Jones rallied over the next year before it began slowly and steadily to sink again. The central bankers will do everything they can to delay the inevitable. If they had allowed housing prices to fall in 2008 and hadn't bailed out the big Wall Street banks, the economy would have corrected itself. Yes, it would have been a severe correction, but it would have been nothing compared to the inevitable correction that will present itself when the Fed runs out of easy money options. The Fed may try to cut interest rates again, maybe even going negative, or it will do more quantitative easing, but that won't work. Creating more money does not lead to economic growth and well-being. The more money the Federal Reserve creates, the more ordinary Americans will end up suffering.

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For the past two weeks recurring flashing red headlines of an agreement, or at least a meeting, between Russia and Saudi Arabia – the world’s two largest oil producers – have led to aggressive short-covering rallies in oil on just as recurring hopes that the Saudi strategy of flooding the market with excess supply (by its own calculations as much as 3 million barrels daily) adopted during the 2014 Thanksgiving Day OPEC meeting, will come to an end.

Tomorrow this endless “headline hockey” will come to an end, following what is now a confirmed “secret” meeting between the two oil superpowers when, as Bloomberg reports, Saudi Arabia’s oil minister will meet with his Russian counterpart in Doha on Tuesday “to discuss the oil market.”

According to Bloomberg, Ali al-Naimi, the most senior oil official of the world’s biggest crude exporter, will speak with Russia’s Alexander Novak in the Qatari capital, “according to the person, who asked not to be identified because the talks are private.” The person didn’t say what the agenda of the meeting will be, which will also be attended by the kingdom’s fellow OPEC member Venezuela. The energy ministries of Russia and Saudi Arabia declined to comment.

Going into the meeting, one thing is certain: over the past 15 months Saudi Arabia has never once indicated any interest in curtailing production: after all, that would go against its unstated directive of putting marginal oil producers, read US shale companies, out of business:

Saudi Arabia has insisted that it won’t reduce production to tackle the global oil glut unless major producers outside the Organization of Petroleum Exporting Countries co-operate. While Novak has said he could consider output cuts if other producers joined in, Igor Sechin, chief executive officer of the country’s largest oil company Rosneft OJSC, said last week he would defend traditional markets and expressed doubts over coordinated action.

To be sure, the Saudis have felt the pain from collapsing oil prices resulting in a record budget deficit, accelerating austerity at home, and the alleged liquidation of Saudi FX reserves, including European financial stocks and potentially US and other sovereign bonds. The market has gone as far as pricing in a very high probability of a Saudi Riyal devaluation as expressed by the currency’s forward market as observed here previously.

It is this “pain” that has made the market doubt Saudi’s steadfastness in sticking to its excess production plan: “the slightest signs of an accord have roiled oil markets. West Texas Intermediate futures rallied 12 percent on Feb. 12, the biggest surge since 2009, after the United Arab Emirates reiterated OPEC’s long-held position that the group is prepared to engage with non-members.”

But even if the Saudis are receptive to some token compromise, Russia itself may be unable to cut production. As Bloomberg writes in a separate piece, “neither a recession nor a collapse in revenue has yet been enough to convince Russian President Vladimir Putin that it’s time to join with OPEC in cutting oil output to boost prices. His reasons may be pragmatic rather than political.”

As Russia’s oil minister meets his Saudi Arabian counterpart in Doha on Tuesday, the world’s second-largest crude producer faces numerous obstacles in cooperating on such a deal even if Putin decides it’s in the national interest. Reducing the flow of crude might damage Russia’s fields and pipelines, require expensive new storage tanks or simply take too long.

To be sure, the jawboning on Russia’s side has been quite loud: energy minister Alexander Novak has said he could consider reductions if other producers joined in. Igor Sechin, chief executive officer of the country’s largest oil company Rosneft OJSC and a close Putin ally, said last week in London that coordination would be difficult because no major producer seems willing to pare output.

Still, many are skeptical that just like in the case of Mario Draghi, talk will escalate into actions: “The history of relations with OPEC suggests that Russian companies are not keen to cut production,” James Henderson, an oil and gas industry analyst at the Oxford Institute for Energy Studies, said by phone. “There are certain practical difficulties, and the companies would rather somebody else did that, and they could benefit once the price goes up.”

Here are some of the all too practical challenges facing Russia should it indeed plan to cut production:

In Siberia, Russia’s main oil province, winter temperatures can go below minus 40 degrees Celsius (minus 40 Fahrenheit). That’s a challenge for anyone thinking of turning off the taps.

 

The oil and gas that flows from wells always contains water, so once pumping stops, pipes may freeze, Mikhail Pshenitsyn, who has worked for more than 10 years in the Russian oil industry, said by e-mail. The problem goes away in summer, but there’s still the risk of a long-term reduction in output because a halted reservoir can become polluted with salts and residues, he said. Production from a shut-in well might never be restored in full, Maxim Nechaev, director for Russia at consulting firm IHS Inc., said by phone.

Furthermore, Russia is running into a problem that is facing both the U.S. and China: running out of land-based storage space:

Russia could reduce exports to global markets without cutting production simply by putting more crude into long-term storage. Trouble is, the country has too few facilities.

 

The bulk of onshore storage capacity in Russia is owned by pipeline company AK Transneft OAO and already in full use to ensure steady flows to refineries and ports, Vladimir Feigin, head of the Moscow-based Institute for Energy and Finance, said by phone. Building the massive new reservoirs required to store a significant proportion of production for an extended period would cost billions of dollars and couldn’t be done quickly, he said.

Additionally, unlike the U.S., Russia has little offshore storage: while crude can be stored in vessels moored just offshore, Russia has “only seven tankers — four products and three crude — in floating storage,” Antonia Mitsana, marketing manager at London-based Drewry Maritime Advisors, said by e-mail. Their total capacity is just over 643,000 metric tons, according to Drewry, or about 0.1 percent of the nation’s production last year.”

And while chartering foreign vessels to store significantly more oil could be done, it would be very expensive. Freight rates are up in the short-term tanker market and ships in limited supply, Mitsana said. Also, keep in minda that this is a Russia which is now considering dumping diamonds in the market just to sporadically fill holes in its budget.

Ironically, when taking Russia’s deteriorating financial situation in consideration, Russia actually has an incentive to boost not reduce production: the government is seeking ways to increase revenues from the energy industry, which generates more than 40 percent of the national budget. Finance Minister Anton Siluanov suggested cutting the price threshold for oil exempt from production taxes to $7.50 a barrel from $15, according to a report from RIA Novosti, a domestic news agency. More production therefore would mean more taxes; less production would lead to an immediate hit to the Russian budget.

Also, as Bloomberg notes, changing the tax regime is a slower process than the “emergency” response Venezuela is seeking. “Usually such big tax changes would come into force from January of the next year” if they were included in the annual draft budget due in October, Sergei Likhachev, associate director for tax practice at Moscow-based law firm Goltsblat BLP, said by phone.

Finally, as a reminder, after his recently concluded meetings in Moscow and Tehran, Venezuelan Oil Minister Eulogio del Pino said six nations were ready to meet and discuss output cuts. The problem is that as the above demonstrates, the probability of such an agreement including Russia remains distant.

“Last year, things didn’t move beyond talks,” said IHS’s Nechaev. “I am sure the same is going to happen this year.”

Which means that all that will happen tomorrow is that the biggest short squeeze trigger, the threat of an imminent production cut and recurring flashing headlines hinting at this, will be eliminated. At that point the market can focus on the real underlying dynamics: not only excess supply but clearly slowing global demand…

 

… and U.S. oil land storage, which as we and the market have been warning, is about to overflow.

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Submitted by Simon Black via SovereignMan.com,

According to financial research firm ICI, total retirement assets in the Land of the Free now exceed $23 trillion.

$7.3 trillion of that is held in Individual Retirement Accounts (IRAs).

That’s an appetizing figure, especially for a government that just passed $19 trillion in debt and is in pressing need of new funding sources.

Even when you account for all federal assets (like national parks and aircraft carriers), the government’s “net financial position” according to its own accounting is negative $17.7 trillion.

And that number doesn’t include unfunded Social Security entitlements, which the government estimates is another $42 trillion.

The US national debt has increased by roughly $1 trillion annually over the past several years.

The Federal Reserve has conjured an astonishing amount of money out of thin air in order to buy a big chunk of that debt.

But even the Fed has limitations. According to its own weekly financial statement, the Fed’s solvency is at precariously low levels (with a capital base of just 0.8% of assets).

And on a mark-to-market basis, the Fed is already insolvent. So it’s foolish to think they can continue to print money forever and bail out the government without consequence.

The Chinese (and other foreigners) own a big slice of US debt as well.

But it’s just as foolish to expect them to continue bailing out America, especially when they have such large economic problems at home.

US taxpayers own the largest share of the debt, mostly through various trust funds of Social Security and Medicare.

But again, given the $42 trillion funding gap in these programs, it’s mathematically impossible for Social Security to continue funding the national debt.

This reality puts the US government in rough spot.

It’s not like government spending is going down anytime soon; it already takes nearly 100% of tax revenue just to pay mandatory entitlements like Social Security, and interest on the debt.

Plus the government itself estimates that the national debt will hit $30 trillion within ten years.

Bottom line, they need more money. Lots of it. And there is perhaps no easier pool of cash to ‘borrow’ than Americans’ retirement savings.

$7.3 trillion in US IRA accounts is too large for them to ignore.

And if you think it’s inconceivable for the government to borrow your retirement savings, just consider the following:

1) Borrowing retirement funds is becoming a popular tactic.

 

Forced loans have been a common tactic of bankrupt governments throughout history.

 

Plus there’s recent precedent all over the world; Hungary, France, Ireland, and Poland are among many governments that have resorted to ‘borrowing’ public and private pension funds.

 

2) The US government has already done this with federal pension funds.

 

During the multiple debt ceiling fiascos since 2011, the Treasury Department resorted to “extraordinary measures” at least twice in order to continue funding the government.

 

What exactly were these extraordinary measures?

 

They dipped into federal retirement funds and borrowed what they needed to tide them over.

 

In fact, the debt ceiling debacles were only resolved because the Treasury Department had fully depleted available retirement funds.

 

3) They’ve been paving the way to borrow your retirement savings for a long time.

 

Two years ago the government launched a new initiative to ‘help Americans save for retirement.’

 

It’s called MyRA. And the idea is for people to invest retirement savings ‘in the safety and security of US government bonds’.

 

Since then they’ve gone on a marketing offensive involving the President, Treasury Secretary, and other prominent politicians.

 

(Most recently Nancy Pelosi published an Op-Ed in the San Francisco Chronicle a few days ago promoting the program.)

 

They’ve also proposed a number of legislative reforms to ‘encourage’ American businesses to sign their employees up for MyRA.

 

Just last week, Congress introduced the “Making Your Retirement Accessible”, or MyRA Act, which would charge a penalty to employers whose workers don’t have a retirement account.

 

The proposed penalty is $100. Per worker. Per day.

 

Imagine a small business with, say, 10 employees who don’t have retirement accounts. The penalty to Uncle Sam would be a whopping $30,000 PER MONTH.

 

There’s a word for this. It’s called extortion.

 

Obviously when facing a $30,000 monthly penalty, an employer will pick the easiest option.

 

Given the absurd amount of government regulation on the rest of the financial industry, MyRA is the fastest choice.

This isn’t about fear or paranoia. It’s about facts.

And the reality is that the government in the Land of the Free is moving in the direction of borrowing more and more of your retirement savings.

If you still remain skeptical, remember that last year the government stole more from its citizens through Civil Asset Forfeiture than thieves in the private sector.

Or that just 45-days ago a new law went into effect authorizing the government to strip you of your passport if they believe in their sole discretion that you owe them too much tax.

No judge. No jury. No trial. They just confiscate your passport.

This is happening. It’s a reality that rational, thinking people should plan for.

And yes, there are solutions for now.

For example, it’s possible to set up a more robust retirement structure that protects your savings and gives you much greater influence over your funds.

This is something that may make sense no matter what; it may be a good idea regardless to do some long-term financial planning that increases your influence over your own retirement savings and expands your investment options.

And if you want to learn more about the risks and solutions for your retirement savings, click here to access our free black paper.

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

Presented with no comment…

 

 

h/t The Burning Platform

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Submitted by PandaHedge

Finally, China’s Alan Greenspan speaks out

Finally, China’s Alan Greenspan, Mr. Zhou Xiaochuan speaks out in an interview with Caixin Magzine.  The market has been waiting for his comment on Yuan since the RMB exchange rate reform in Aug 2015.  However, he has been hiding and did not “give a clear message” as asked by IMF chief Lagarde.  Just before the lunar new year holiday, even the Chinese local media started to ask him to show up, which is really unusual in China.  And last Friday, Caixin published its 12000 words interview with Mr. Zhou Xiaochuan.  This is the most important interview for China’s economy and Yuan in 2016.  I translate the key Q&A points as below and add my comment in blue:

• How do you see China’s GDP slowing and hard landing potential?

1. In 2009 and 2010, China contributes more than 50% of global GDP growth while its GDP only accounts for less than 10% of global GDP. We must realize that’s unusual situation in an unusual period of time.  Now China still contributes around 25% of global GDP growth, so it’s unfair to say China is hard landing;
2. A country’s currency has no strong relationship with the GDP or GDP growth. Actually current account is the most important factor, and China still has high current account surplus in 2015 (goods trades surplus stands at record high $600B).  In addition, China’s CPI is only 1.4%, which is good for stable exchange rate

• Which international factors are important to RMB exchange rate?

1. Yuan has been following US dollar to appreciate with other currencies (such as Euro and Yen) in the last two years. The market believes Yuan has to “catch up with other currencies” to depreciate.

On surface it’s a USD appreciation story, but the reality is ECB and BOJ’s “currency war”.  The downside potential for Yuan would be much lower in USD terms if DXY starts to depreciate, as the Fed may have to cut the rate and even pushes for QE4.  That’s one of the reasons why I don’t buy in the “big collapse of Yuan” argument.  Yuan will depreciate over time but not act like a collapse.

2.The change of US Fed’s policy in 2013 and 2014 has made huge impact to other EM countries but not too much impact to China. However, the Fed’s interest raise in Dec 2015 is a huge shock to China.

Since Bernanke announced the end of QE3, USD’s negative impact to RMB already started.  PBOC underestimated the power of USD’s appreciation (or how “easy” are ECB and BOJ).  But now, PBOC implies that Fed’s raise is “policy error” and it would not tolerate a further appreciation of USD.

3. There are a lot of speculative funds shorting China recently. As the central bank of China, we have confidence of China’s economy, but we also need patience as we have to wait for the data speaking for themselves continuously.  However, for those speculative funds who already made the bet, they are trying to make profit as soon as possible, and that’s why they spread out rumors and create noises in the market.

Yes, that’s how the “$200B decline of foreign reserve in Jan 2016” rumor begins.  PBOC has come out an approach to fight with those speculative funds: increase the volatility of CNH and CNY to increase short sellers’ cost. 

4. Since 2008, global central banks have adopted easing monetary policies which have boost asset bubbles around the world. The asset price need to adjust, and the process is painful.  Everyone tries to find someone to blame for, and they pick China as the unlucky one.

Chinese government and PBOC are already sick of being accused because everyone points China as the major reason of global sluggish growth.    

5. In general, when people analyze the depreciation of RMB to USD, they should consider the appreciation of USD to other currencies and short term market sentiment. People may worry that China will join the “currency war” to improve export.  However, as the net export already contribute a significant part to GDP, we don’t need to depreciate RMB to boost export.  In addition, China imports more commodity in terms of volume (although the value drops because of lower prices), so it’s unfair to say the commodity bear market is driven by lower China demand.

PBOC tries to avoid using the word “currency war”.  However, as the world’s NO.2 economy, it’s inevitable that RMB will have impact to other countries’ economy.  PBOC should consider Yuan’s future with a global view as the value of currency is the power balance between countries.

• Does PBOC has estimation of the size of “hot money”

1. There’s no clear definition of “hot money”. The speculative money (aka hot money) is not the major force to impact the balance of payment.  The major speculative money plays their games in the offshore market, but their behavior will have negative influence on the onshore market sentiment;
2. Export companies are influenced by this kind of depreciation expectation, and thus adjust their FX strategy and operation (such as buying foreign currencies in advance). However, as they eventually need to pay the expense and cost through Yuan, this kind of adjustment will end pretty soon.
3. Local Chinese companies may adjust their foreign debt with the depreciation expectation. Their foreign debt balance is around USD 800B at the end of 2014.  Right now it’s easy for them to get cheap RMB debt to replace the foreign debt, and it’s their own decision to make it or not.  This kind of adjustment will see a bottom soon.

There are three reasons behind the capital outflow since 2014:  a. domestic corporates and residences increase holding of foreign assets; b. corporates pay down USD debt; c. speculative funds.   The major reason is the first one, so it’s “internal problem”.  PBOC is comfortable to let Chinese residences to keep foreign currencies on their hands, just like China let residences hold gold by themselves.  PBOC seems confident that corporate and individuals will adjust their behavior when the Yuan return to relatively stable stage. 

• Will PBOC reinforce capital control?

1. We hope the process of RMB internationalization will move smoothly. However, it is a back and forth process in reality.  When the speculative funds become a major issue and the FX is volatile, we may hold off the internationalization process and focus our power to handle them.  When the FX markets come back to stable stage, then we will continue to push the internationalization of RMB.

This is PBOC’s bottom line.  To protect the domestic economy, it’s possible to delay the process   of RMB internationalization.   For example, PBOC may delay loosening its capital account.  I believe it’s an appropriate approach after we see the incompetent policies in A share market pushed by China’s financial officials.  It’s hard to believe these officials have ability to control a potential currency chaos after the capital account is opened, especially when China’s economy still would experience restructuring in the next couple year.  The right way is to set up a more comprehensive financial system and resolve China’s own economy problems (such as overcapacity and overleveraged) before PBOC let Yuan become a free circulated currency  

2. We have tightened the control of foreign currency exchange with the aim to ban the illegal fund transfers such as money laundering and fake merchandise trades. For legal and normal request of currency exchange, we always will meet their needs.

PBOC is not stupid.  The biggest power to consume China’s foreign reserve is the domestic corporations and residences.  If PBOC bans their normal needs of foreign currencies, they will have stronger depreciation expectation and accelerate the pace of capital outflow

3. Financial market is different than the real economy, as confidence plays a very important role in the former one. Speculative funds spread rumors to help their trade.  For example, there’s rumor that the foreign companies cannot transfer their earning out of China.  It’s actually a current account item but not a capital account item, so there’s no way SAFE will block this kind of action.  Even for capital account items, companies are able to get foreign exchange as long as they follow the rules.

Honestly, I don’t think any hedge funds in the world has the power to fight with PBOC.  The size difference is so huge, and I think the smart hedgies understand this well.  So they leverage market sentiment to put pressure on Yuan.  Actually, the Yuan is not their main battle field.  The size and liquidity of Yuan is so small, and the hedgies are easily squeezed by PBOC.  The smart hedgies actually target other weaker countries who compete with China in the global export market.  As the expectation of Yuan depreciation rises, those competitors’ currencies will see more pressure, and their central banks have much weaker power than PBOC to defend their currencies.  

4. Capital control does not work in an open economy. In addition, it is more effective to control capital inflow rather than capital outflow.  China is a big open economy and relies on international trades more than other major economies.  Every year, China has around $4trn trade transactions which involve more than one million companies.  China also has around 100 million outbound travelers now.  Therefore, any improper capital will have negative impact on confidence and balance of payment.

• Many people have concerns about the decline of foreign reserve. How PBOC views and handles the speculative funds?

1. It’s difficult to differentiate between speculative funds and normal risk management transactions. China has the biggest foreign reserve in the world, and we would not let speculative funds lead the market sentiment.  As long as China’s fundamentals have no big issues, foreign reserve will not be a problem even the balance will vary from time to time.
2. Although we will not let speculative funds lead the market sentiment, it does not mean we will fight with them face to face. We have to consider how to use our reserve more effectively and find a lowest cost approach.  The RMB exchange reform enables us to handle the speculative funds with more flexibility as we do not focus on USD only anymore.

• What will be the direction and pace of RMB exchange rate regime reform going forward?

1. We will continue the RMB exchange rate regime reform in the next five years. The direction is to build an effective floating exchange rate mechanism which is based on market’s supply/demand and refers to a basket of currencies (not only focus on USD).

A reasonable expectation for internationalization of RMB is at least five years.

2.We emphasize the importance of market’s supply and demand of RMB. Although there are some speculative funds participating the FX market, we still need to respect the market.  We don’t have a model to come out a perfect exchange rate for RMB.  We like to keep the RMB in a relatively stable stage which is close to reasonable balanced level

3. Referring to a basket of currencies is an inevitable process to RMB as China has so many trade partners. We did not do a good job before as RMB focus too much on USD.  In the future we will rely more on reference to a basket of currencies. The result of this direction is that RMB will be relatively stable to a basket of currencies but become more volatile to USD.

The market was used to a stable appreciation path of RMB to USD.  PBOC tries to break this kind of expectation and push the volatility higher.  It’s a normal case for major currencies in the world, so I don’t think the market should panic about this.  Higher volatility also means higher cost for short sellers.

• How PBOC can improve its communication with the market?

1. The current financial market has many uncertain factors and participants hope the central banks will come out to comfort them. However, central banks are not God.  Therefore sometimes we have to say: ”wait a minute, we need more data”
2. For forward guidance, we have to consider couple issues: Whether central banks have better information than the market? Whether central banks have a better forecast model than the market?  If central banks themselves cannot align opinions internally, whether the forward guidance really can relive the markets’ concerns?
3. Central banks should have different communication strategies to various market participants. We would not told our action plan to the speculative funds, but we will deliver reasonable expectation to the organizations (such as merchandise traders) which need to use foreign currencies in their normal business transactions.

PBOC should improve its communication to the market. Central bank should work as a manual of economy, and the market can read through the manual to make their own judgement.  The manual should be designed as simple, clear and easy to read, otherwise the market has to guess and may misunderstand central banks.   

 

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Last week, in “Welcome To Obama’s Recovery: Carrier Moving 1400 Jobs To Mexico,” we showed what happens the moment hundreds of American manufacturing workers learn that their services will no longer be needed thanks to cheap labor south of the border.

Carrier – a unit of United Technologies – is closing two Indiana plants and moving them to Mexico, a move that will ultimately leave more than 2,000 people jobless. The announcement that the Carrier facility on Indianapolis’ west side will be closed was met with angry jeers from a crowd gathered to hear the news and was greeted with profound dismay by city officials.

Today’s surprise announcement was without warning and incredibly disappointing,” mayor Joe Hogsett said. “While I am obviously concerned about the economic impact, my top priority is the well-being of the hardworking families affected by this decision.”

Economists called the move “highly unusual.”

Actually, we said, it’s not “unusual” at all. Here’s why (from The Indianapolis Star): “Carrier’s workers are separated into a two-tier wage system. A quarter of the workers make about $14 an hour, or about $30,000 a year. The rest make about $26 an hour, or about $55,000, but make well above $70,000 a year with overtime.”

Something tells us labor costs will be “slightly” lower south of the border.

On Monday we learn that US companies aren’t just sending jobs to Mexico. They’re sending them to Cuba, where, thanks to the Obama administration’s move to restore diplomatic relations with Raul Castro, US businesses can now operate factories.

Entrepreneurs Horace Clemmons and Saul Berenthal were notified last week by the Treasury Department that they will be allowed build tractors on the island at a $5-$10 million facility.

“Cuban officials already have publicly and enthusiastically endorsed the project,” AP reports, adding that “letting an American tractor company operate inside a Cuban government facility would have been unimaginable before Presidents Barack Obama and Raul Castro declared on Dec. 17, 2014, that they would restore diplomatic relations and move to normalize trade, travel and other aspects of the long-broken bilateral relationship.”

Clemmons and Saul Berenthal plan to commence production by the first quarter of 2017 with 30 Cuban employees, a number they hope will grow to 300 within five years.

“Everybody wants to go to Cuba to sell something and that’s not what we’re trying to do. We’re looking at the problem and how do we help Cuba solve the problems that they consider are the most important problems for them to solve,” Clemmons said. “It’s our belief that in the long run we both win if we do things that are beneficial to both countries.” Here’s a bit more from AP:

The Oggun tractor plant, named after a god in Cuba’s syncretic Santeria religion, will assemble commercially available components into a durable and easy-to-maintain 25-horsepower tractor selling for less than $10,000, Clemmons and Berenthal said. The men believe they can sell hundreds of the tractors a year to Cuban farmers with financing from relatives outside the country and to non-government organizations seeking to help improve Cuban agriculture, which suffers from low productivity due mostly to excessive control of both basic supplies and prices by an inefficient, centrally planned state bureaucracy.

 

Berenthal said they are optimistic that they will also be able to export Oggun tractors to other Latin American countries, which have low or no tariffs on Cuba products, making them competitive on price. The men expect a 10-20 percent profit on each tractor.

 

For the project’s first three years, Clemmons and Berenthal say they will export components from the United States for assembly in Cuba.

 

Clemmons and Berenthal will publish all the schematics of their tractors online in order to allow Cubans and other clients to more easily repair their equipment and come up with designs for other heavy equipment based on the same frame and motor that Cleber can then produce at their Mariel factory.

Berenthal is Cuban-born, so to a certain extent, this is a story about an entrepreneur that wants to give back to his birthplace and that’s certainly understandable. That said, Clemmons is from Alabama and you can bet the headline “Alabama Man To Build Tractor Plant In Cuba Thanks To Obama-Castro Reconciliation” won’t go over well with Donald Trump voters.

The next question is this: how long before John Deere decides that making tractors in Cuba or Mexico might be a whole lot cheaper than building them in America’s heartland? 

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