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In what, if true, is the most incendiary allegation of the day, Israel’s Haaretz newspaper reports that Belgian security services and other Western intelligence agencies had “advance and precise intelligence warnings” regarding Tuesday’s bombings. According to the paper, “the security services knew, with a high degree of certainty, that attacks were planned in the very near future for the airport and, apparently, for the underground railway as well.”

Here is the full Haaretz report:

The Belgian security services, as well as other Western intelligence agencies, had advance and precise intelligence warnings regarding the terrorist attacks in Belgium on Tuesday, Haaretz has learned.

 

The security services knew, with a high degree of certainty, that attacks were planned in the very near future for the airport and, apparently, for the subway as well.

 

Despite the advance warning, the intelligence and security preparedness in Brussels, where most of the European Union agencies are located, was limited in its scope and insufficient for the severity and immediacy of the alert.

 

As far as is known, the attacks were planned by the headquarters of the Islamic State (ISIS) in Raqqa, Syria, which it has pronounced as the capital of its Islamic caliphate.

 

The terror cell responsible for the attacks in Brussels on Tuesday was closely associated with the network behind the series of attacks in Paris last November. At this stage, it appears that both were part of the same terrorist infrastructure, connected at the top by the terrorist Salah Abdeslam, who was involved in both the preparation for the Paris attacks and its implementation.

 

Abdeslam escaped from Paris after the November attacks, hid out in Brussels and was arrested last week by the Belgian authorities.

 

Abdeslam’s arrest was apparently the trigger for Tuesday’s attacks, due to the concern in ISIS that he might give information about the planned attacks under interrogation, particularly in the light of reports that he was cooperating with his captors.

 

The testimony of the detained terrorist, alongside other intelligence information, part of which concerned ISIS operations in Syria, should have resulted in much more stringent security preparedness in crowded public places in Brussels, along with a heightened search for the cell.

If this report is accurate, it leads to many unpleasant and frankly disturbing questions for both local as well as international authorities, like why in the aftermath of the Salah Abdeslam capture did Belgium not at least issue a heightened state of alert as it did in November in the aftermath of the Paris bombings, when overnight Brussels looked like an army ghost town; at least it was safe. Recall from our November report of how Brussels looks like a warzone after the Paris terrorist attack:

 

This time, however, the local police did nothing and the result was over 30 deaths and hundreds of injuries.

What’s worse as of this moment the third suspect remain at large: as Haaretz reminds us, “the search is focused on the terrorist Najim Laachraoui, who created the explosive vests used by the bombers and escaped from the airport at the last moment.”

There is concern, however, that other cells connected to ISIS in Western Europe will attempt to carry out additional attacks in the near future, either in Belgium or in other countries involved in the war against the terror organization in Syria and Iraq.

How Europe will handle the ongoing deadly fallout from the bursting of this one terrorist cell, will be closely watched, and should Tuesday’s event recur when local authorities had been warned about an upcoming terrorist attack leading to no specific action, perhaps some will finally ask if the local governments were at least partially complicit in the deaths of dozens of innocent people, for motives first hinted at in that infamous 2008 AIG Banque presentation which has so far predicted with absolute accuracy the future of the Eurozone.

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“The Greatest Crash Of Your Life Is Just Ahead…” – Harry Dent Warns

Harry Dent, best-selling author and economist, has warned that the stock bubble in the U.S. today is the biggest in history and that the “greatest crash of your life is just ahead…”

Writing on his website EconomyandMarkets.com, Dent warned that

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One month ago, just as Cushing storage was rapidly approaching its operational capacity, we warned that Cushing (and increasingly all parts of PADD 2) is denying storage requests. We also said that overall PADD 2 inventories had risen to a new record high 155 million barrels…

… hinting that it was just a matter of time before excess production would be shifted to other regions, most notably the Gulf Coast, or PADD 3.

In the intervening month, this is precisely the dynamic we have observed, which culminated with today’s weekly DOE announcement which saw not only a massive inventory build, one which surpassed the estimate threefold (surpassing yesterday’s gargantuan API build in the process), but also has confirmed that oil storage is now shifting away from Cushing and PADD 2 to PADD 3 just as we expected, to wit:

• PADD 1: East Coast +1.8
   
• PADD 2: Midwest -0.1
   
• PADD 3: Gulf Coast +9.0
• PADD 4: Rocky Mount +0.1
• PADD 5: West Coast -1.4  

This confirms that the shift away from Midwestern storage to the Gulf Coast has begun in earnest, which was to be expected for a region that is already at operational capacity, even when netting out the excess oil that is being “exported” out of the US to Europe, Asia or Latin America. In fact, as shown in the chart below, with over 533 million barrels in storage, it is only a matter of time before oil overflows into swimming pools and household buckets.

 

Unfortunately, while most of this was as expected and suggests  that the excess supply situation in the US is getting worse by the day, not even we expected the dour picture painted by some key industry participants.

According to Reuters, trading houses such as Vitol, Glencore, Gunvor and Trafigura whose most profitable business line in recent months has been oil transit and offshore storage, are betting on oil markets remaining oversupplied for at least two more years even as crude prices stage a recovery driven by early signs of falling production.

These traders are looking to extend or lock in new leases on storage tanks for crude oil and refined products in key hubs as far out as the end of 2018, sources at storage firms and trading houses say.

As we have shown repeatedly in the past by demonstrating surging contangos, storing oil in a heavily oversupplied market has been a cash cow for traders and oil companies in recent years as markets bet that future oil prices will be significantly higher than current ones.

Or, looked another way, that current prices will remain very low. Indeed, “lower for longer.”

Ian Taylor, chief executive of top oil trader Vitol, said on Tuesday that “stocks of crude and products continue to build and these will weigh upon the market.”  Like other traders, Vitol has invested in recent years in storage, and last August acquired the other half of its VTTI storage subsidiary for $830 million.

As we also showed two weeks ago, with oil prices rising substantially since mid-February to around $40 per barrel, this has led to a significant narrowing of the crude contango despite a stock overhang of 300 million barrels, which means storage plays such as Vitols are suddenly far less lucrative.

Indeed, crude oil has found more of a balance in recent weeks through supply disruptions in Iraq, Libya and Nigeria (all of which are transitory).

However, while upstream, or crude, supply may have artificially stabilized modestly, downstream products have continued to build, something we also noted one month ago in “There’s A Feeling Of Bits Of Ice Cracking All At Once” – This Is The ‘Big New Threat’ To Oil Prices” in which we showed the dramatic buildup of gasoline and distillate products. 

Reuters today also touches on this and cautions that “refined oil products have not followed suit” the broader oil rebalancing. In fact “gasoline and blending components have been quietly building, squeezing the amount of storage left in Europe. U.S. gasoline stocks, when adjusted for current consumption, are just at the top of their 10-year range.”

Krien van Beek, head of sales at RVB Tank Storage Solutions, a tank storage broker in the Netherlands, said traders are seeking storage on 12-month leases for products such as gasoline and naphtha outside key hubs in northern Europe, Singapore and the United States. “They are prepared to look at storage for the longer term because of the contango in the market but everyone is cautious about costs because we are at the top of the storage market,” van Beek said. “Since the standard storage options are taken, traders are considering less conventional and less attractive locations.”

According to RVB, global commercial tank capacity is around 900 million cubic meters across 4,400 facilities – not including “captive tanks” in refineries that are not open to commercial buyers.

In short: because the US is already on the verge of operational capacity for most liquidity commodities, soon the entire world will likewise be full to the brim with excess oil, distillates and gasoline as oil production continues to ooze into what the Saudis recently characterized as a 3MM b/d oversupplied market.

Which brings us to what Reuters describes as a key production “choke point”, one which is “forming in middle distillates – the diesel used to power trucks and generators, and the heating oil that warms homes around the world in winter.”

Typically, these stocks fall over the winter. But warm weather this year kept this from happening – all while refineries worldwide ran full steam to feed seemingly insatiable demand for gasoline in the United States, China and India.

Global distillate stocks in the developed world are close to a record high, in the thick of refinery maintenance season, and in the run-up to the time when gasoline use hits its summer high point, but interest in diesel typically fades.

“Absent run cuts, the market faces another round of rapid stockbuilds once refineries return from maintenance,” Robert Campbell of Energy Aspects said in a note.

At that point, the oversupply becomes self-fulfilling as the supply curve inverts that much more while producers scramble to find any marginal buyer in a world drowning with product, and unless some dramatic solution is found to stem the supply of the most upstream product, namely oil, whose dynamics we explained one month ago as follows…

As Paul Horsnell, global head of commodities research at Standard Chartered puts it, “There’s a feeling of various bits of ice cracking all at once” in the oil market, with both crude-oil and gasoline inventories at extremely high levels… People are worried about a short-term issue, particularly in the U.S., particularly at Cushing.”

 

The good news is that we are likely very close to the worst case scenario playing out: refiners are unlikely to start buying more crude in the coming weeks. Instead, many will begin seasonal maintenance ahead of the busy summer-driving season. That could leave some oil producers scrambling to find places to store their output. Prices in some regions might have to drop sharply to justify the cost of shipping the oil to where it can be stored.

… with every passing week in which nothing changes in the fundamental supply/demand picture, the most likely outcome will be a violent inventory liquidation over the next few weeks, one which will be accompanied by a substantial plunge in oil prices resulting from wholesale dumping as producers rush to sell product to anyone who will buy it.

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In February, Cripsin Odey’s quite bearish $11 billion Odey Asset Management had a tumultuous month: it was down -10.6% as the overall market levitated relentlessly on low volume hopes of central bank stimulus and intervention ever since the February 11 lows, leading to the biggest short squeeze in history and the most overbought market ever.

 

However, as Crispin himself would go on to admit, February’s 11% drop was just an appetizer. Because what happened in March, when Crispin went on to not only fight the Fed but declare war on every single central bank, was unprecedented. In his own words “by mid-March the fund was rising and falling by over 5% per day. At which point this was no longer an investment market but a battlefield.”

Does he regret it? Not at all – Odey is convinced these desperate central bank interventions are just a confirmation that they have run out of ammo, and for the most part, he is absolutely spot on:

Central banks can ignore the CDS market, but they cannot imagine away the losses coming through the system. They cannot save the banks now, without creating a recession, with all the consequences that has for bad loans and falls in GNP. The fall in productivity is already encouraging companies to eschew capital spending in favour of buy backs, which compounds the problem of credit growing faster than the economy. Profit margins are naturally falling as wages rise faster than prices and overcapacity rules out pricing power. No wonder that central banks feel that they are nearly out of ammunition. There is not a good choice to be made.

For now their choice has been to save preserve the markets, as the next crash in stocks may well be the last before the Fed and its central planning peers have no choice but to unleash the helicopter money.

In the meantime, we eagerly look forward to observing Odey’s valiant daily fight with Yellen et al, armed with the following top 10 positions…

 

… resulting in a net exposure of just about -110% net.

 

* * *

Here are his latest monthly thoughts:

Bull markets do not die of old age. They are murdered by central banks. How far away we are from that old adage. The last six weeks have seen yet again central banks responding to further weakness in the world economy, by lowering or at least not raising interest rates and continuing to subsidise the weakest. Wherever they see any sign of distress as with the CDS market in Europe, their response is to believe that risk premiums are unfairly rising and immediately to take action to cancel the effect.

However, several years of watching central banks responding to ever falling productivity numbers by reducing interest rates have shown that they can effect asset prices with their actions, but that not only do they have almost no effect on economic activity, but they positively damage it.

The reason is simple. Banks work, like everyone else, off profit margins and the lower and longer interest rates remain close to zero, the more that net interest margins shrink and the less inclined, because profits are falling, are they to countenance new lending.

Without credit expansion there can be no strong nominal growth of GNP globally. Strangely even where there is strong credit growth, nominal incomes have responded sluggishly. For this is the good news. Over the last twelve months there have been 20% more dollars created in relation  to GNP in the USA than a year ago. In China there have been over 30% more renminbi created. This should have resulted in blow out growth of nominal incomes, but in fact GNP in the USA has grown by 4.5% and in China by just under 7%. In both instances private indebtedness has grown by multiples of that. That a 20% increase in dollars has only resulted in inflation of 2.1%, reveals that strange things are happening. It has not just been worrying us here, but also seems to have unnerved the Fed. On all our numbers such credit growth would have resulted in over 5 or 6 interest rate hikes by this time in the cycle.

What frightens them and should frighten us all is that the overcapacity built up post 2008/9 in so many industries linked with China is now coming through in a severe credit down cycle. An unwillingness to countenance closure of capacity, even as new capacity was still being added, in the face of prices that were far below fair value, have ensured these industries have ongoing losses which are still not abating. And this is where it gets interesting, because these losses are undermining the loans that these industries have. As bonds due for redemption trade below par, companies are drawing down credit lines, which would usually be the signal that bankruptcies would follow. However, because of the very weak profitability of the banking sector, these banks are not able to absorb these losses. As they wait, their loan becomes the cash to pay back the bonds and their losses expand. Banks now need rights issues but the central banks’ attention remains on trying to lower rates to reflect falling productivity. There is thus no story to attach to a rights issue for a bank. The only way that the banks would be a buy is if interest rates were to go up, repricing assets relative to deposits, but that can never be because down that route lies recession. And strangely recessions are no longer permitted. However, negative productivity rates are already telling the central banks that any growth in nominal GNP is the equivalent of eating your capital.

Central banks can ignore the CDS market, but they cannot imagine away the losses coming through the system. They cannot save the banks now, without creating a recession, with all the consequences that has for bad loans and falls in GNP. The fall in productivity is already encouraging companies to eschew capital spending in favour of buy backs, which compounds the problem of credit growing faster than the economy. Profit margins are naturally falling as wages rise faster than prices and overcapacity rules out pricing power. No wonder that central banks feel that they are nearly out of ammunition. There is not a good choice to be made.

Markets need equilibrium to prosper. When the authorities have a problem, markets have a problem. We have been hurt by this rally in China-related companies, and indeed we reduced the gross and net positioning of the fund significantly in mid-March, to help reduce the short term volatility of the fund, but we remain convinced that China is in many ways in an even greater bind over policy than the developed world. By mid-March the fund was rising and falling by over 5% per day. At which point this was no longer an investment market but a battlefield. On the day that Draghi came out with his massive market support operation, the stock markets rose 2.5% and then closed down 1.5% on their lows. Imagine how painful it was to see the markets bounce the next day and celebrate his success. At that point I reduced the short book by a third and the long book by 10%.

Despite this strong rally, there is, aside from a pickup in government spending in China, little to support growth in the world economy. Everything from rising default rates in the booming auto financing industry to new lows in LNG, dry bulk shipping prices, points to slowdown everywhere.

For equity markets, a world without credit is for now a deflationary world. The underperformance of the banking, insurance and asset management industry warn that this is when equities can de-rate as the Japanese stock market did between ’96 and ’98.

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Safe haven buying is ignoring precious metals and piling into bonds today with the long-end notably outperforming (-6bps) today. This has compressed the yield curve even more, putting more and more pressure on the “rate-hike environment” hopers who bought banks like they were told…

 

 

This has compressed 2s30s below the “Dimon Bottom”

 

Fool me three times?

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Turkish President Recep Tayyip Erdogan is a man who knows something about “terrorists.” After all, he’s surrounded by them. Kurds are terrorists. Opposition lawmakers are terrorists. Journalists are terrorists. Lawyers are terrorists. Hell, even teachers are terrorists in Turkey these days.

Fortunately, Erdogan knows how to deal with the “problem.” Ideally you kill them, but if for whatever reason that’s not possible (turns out some people get all hung up over the whole “human rights” thing), you throw them in jail or you deport them. 

The other thing about Erdogan is that he’s an exceptionally benevolent man who just wants to help, which is why when he finds a militant he can’t kill and needs instead to deport, he likes to warn his “friends” in the EU that he’s sending trouble their way. On Wednesday, Erdogan claimed one of the Brussels attackers was deported to Belgium in June after Ankara determined that he was a “foreign fighter”. Here’s AP:

Turkish President Recep Tayyip Erdogan said one of the Brussels attackers was caught in Turkey in June and deported to Belgium.

 

Erdogan said Wednesday that the Belgian authorities released the suspect despite Turkish warnings that he was “a foreign fighter.”

 

Erdogan did not name the attacker.

 

He said the man was detained at Turkey’s border with Syria at Gaziantep and that Turkey formally notified Belgian authorities of his deportation on July 14.

 

Erdogan said “despite our warnings that this person was a foreign terrorist fighter, Belgium could not establish any links with terrorism.“

Under the EU’s new agreement with the Turks, Erdogan will effectively be responsible for vetting all Syrian refugees that enter Western Europe (that’s part of the whole one-for-one swap arrangement).

For his trouble, he’ll get as much as €6 billion from Brussels.

We suppose the above means the EU will be much safer now that Erdogan will be able to provide an early warning on potential jihadists. It’s a good thing Ankara has never been suspected of having any ties to Sunni extremist elements…

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