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Following his WSJ letter comparing the “progressive war on the 1% in America” to fascist Nazi Germany persecution of the Jews and “just as Kristallnacht was unthinkable in 1930, the descendant ‘progressive’ radicalism in American thinking is unthinkable now“, Tom Perkins appeared on Bloomberg TV to explain himself. His first step was to apologize for the analogy but not the message that “the creative 1% is being threatened.” The interview with Emily Chang is fascinating and wends it way from Rolexs, yachts, and underwater airplanes to trailer parks; and from disconnects with reality to implying Krugman’s craziness. However, Perkins sums his message up thus:”the solution is less interference, lower taxes and let the rich do what the rich do – that is get richer… and they will bring everyone else along with them when the system is working.” It appears the ‘system’ needs a different final solution.

 

Clip 1

CHANG: So more than 90 Jews were killed in Kristallnacht, 30,000 people put in concentration camps. What were you going for (inaudible) analogy?

PERKINS: The Jews were only 1 percent of the German population. Most Germans had never met a Jew, and yet Hitler was able to demonize the Jews and Kristallnacht was one of the earlier manifestations, but there had been others before it. And then of course we know about the evil of the Holocaust. I guess my point was that when you start to use hatred against a minority, it can get out of control. I think that was my thought. And now that as the messenger I’ve been thoroughly killed by everybody, at least read the message.

CHANG: You mentioned the word hatred. Do you feel threatened?

PERKINS: I don’t feel personally threatened, but I think that a very important part of American, namely the creative 1 percent, are threatened.

[Jerry Brown]tells me the number-one problem in America is inequality, and that’s probably and possibly true. And I think President Obama’s going to make that point tomorrow night. But the 1 percent are not causing the inequality. They are the job creators. Silicon Valley is – I think Kleiner Perkins itself over the years has created pretty close to a million jobs and we’re still doing it. It’s absurd to demonize the rich for being rich and for doing what the rich do, which is get richer by creating opportunity for others.

CHANG: How do you feel threatened?

PERKINS: I said I didn’t feel personally threatened. I feel however that as a class I think we are beginning to engage in class warfare. I think the rich as a class are threatened through higher taxes, higher regulation and so forth. And so that is my message.

…

I think the 99 percent is struggling and really struggling to get along in America. We have ever-increasing regulation, higher costs I think caused by more government than we need. Small businesses – it’s difficult to form and prosper in a small business these days. It’s difficult to hire. And that in my view is what is hurting and causing – hurting the 99 percent and causing the inequality.

So I think that the solution is less interference, lower taxes. Let the rich do what the rich do, which is get richer. But along the way, they bring everybody else with them when the system is working.

PERKINS: I regret the use of that word. It was a terrible misjudgment. I don’t regret the message at all. In fact —

 

CHANG: What is the message?

PERKINS: The message is any time the majority starts to demonize a minority, no matter what it is, it’s wrong and dangerous. And no good ever comes from it.

Clip 2

As far as Perkins is concerned Kleiner Perkins disavowal of his Op-Ed is them “throwing him under the bus” and missing the warning that any time a majority

Perkins goes on to note that his partner Kleiner fled Austria and Hitler and would have agreed with him…

CHANG: All right. Well let’s talk a little bit about the solution here. You mentioned your friend Eugene Kleiner, the late Eugene Kleiner, fled Austria, fled Hitler. Do you think he would have agreed with you?

PERKINS: Yes, I think he would have because I – I was not talking about the Nazis. I was talking about the persecution of a minority by the majority. And Kleiner always distrusted those sorts of trends in American politics.

CHANG: You have conservatives out there though like Marc Andreessen calling you leading A-hole in the state.

PERKINS: Yes. It wasn’t a very nice word. And considering that he doesn’t know me and I don’t know him, I don’t think he’s entitled to his opinion. If he knew me, perhaps. Paul Krugman called me crazy in today’s New York Times.

 

CHANG: Paul Krugman also pointed out that rising income inequality can have very negative economic and financial consequences in the sense that if there is – if it leaves us more economically vulnerable and the people who are rich can’t pay for stuff, then everyone suffers.

PERKINS: Well, just what you said is such a contradiction of intermixed ideas. He won the Nobel prize in economics. I can’t argue economics with him, but to demonize the job creators is crazy and to demonize the rich who spend and buy things and stimulate the economy is crazy. I heard on the news hour with – gosh, name escapes me. Anyway, New York Times, and they got into a discussion about the idiocy of Rolex watches and why does any man need a Rolex watch and it’s a symbol of – of terrible values and it’s – et cetera. Well, I think that’s a little silly. This isn’t a Rolex {it’s a Richard Mille}. I could buy a six pack of Rolexes for this, but so what?

CHANG: You were called the king of Silicon Valley I believe at one point. How would you describe yourself?

PERKINS: I certainly have enough arrogance to be royal, but I – I’m an old man. I look back upon my career with great happiness. I think I’ve accomplished a lot. If I had to do it again, I don’t know what I’d change. And I’m at peace with myself. And the fact that everybody now hates me is part of the game. And I’m sorry about that, but that isn’t what I meant to do.

via Zero Hedge http://ift.tt/LhL8de Tyler Durden

There
appears to be a somewhat interesting controversy afoot in explaining the reason
for the emerging markets panic and in establishing a solution for it. The
approach of Gavekal would simply like to keep the Ponzi scheme of past years
rolling forward. According to that view because the US has the reserve currency
the US current account deficit is theoretically unbounded and the US should use
its domestic demand to drive global growth stimulating the rest of the world
particularly in the developing economies.

Been there.
Done that.

shrink

Instead, of
going back to the old mistakes, we should all be aware that the reason for
these ongoing US deficits has been the export targeting of the US market by
developing economies wishing to tap US domestic demand. They have done this by
keeping their currencies artificially weak and have done this by buying dollars
to keep the dollar strong and by investing in the US… when there has been no
good reason to do so.

It should
be perfectly obvious that with the US unemployment rate having risen, with US
consumption outstripping investment  and
with the US as a relatively high-wage country around the world there hasn’t
really been any reason for firms to invest funds in the US market. Nor were US
banks adept at recycling, choosing instead to over-lend in the US housing
sector. As a result monies that were invested in the US for the purpose of
keeping foreign currencies weak versus the dollar necessarily went hunting for
unproductive investments. Because there were far more funds available than
there were profitable investments to be funded trouble ensured. Can we be
surprised that a crisis developed? Now Gavekal want to do it again.

If your
view of the US is a suckling pig that must offer a teat to any developing
country that wants one, surely that’s a model for trade to get in trouble.

By now
everyone should be aware that Germany has the largest current account surplus
in the world and it shows no sign of dissipating it. The US is starting to
contract its current account deficit but not because it has improved its
competitiveness but because it’s developing its natural resources namely
energy. The US nonoil deficit continues to get worse. Gavekal is right about exploitable
net demand becoming more scarce.

The Gavekal
explanation of the recent market panic is that the Fed sought a weaker dollar
with negative real interest rates…this is another example of someone arguing
from ‘the facts’ to a convenient –if incorrect- conclusion. Central banks
around the world kept interest rates low; inflation was low too. The US was
aiming its policy at domestic demand, by far the biggest effect from low rates
was on demand at home. There may have been some international fallout but the
Fed was definitely not aiming to weaken the dollar. As someone who has worked
at the Federal Reserve Bank of New York and in the currency area I can assure
you that the Fed does not view itself as the principal architect of US exchange
rate policy. It is widely recognized that that option belongs with the US Treasury
and when it comes to foreign-exchange matters the Fed has a minor toehold to
have some say in the discussion. There can be no doubt the US interest-rate
policy was aimed at the domestic economy and at domestic demand with the
foreign-exchange aspect viewed as a side effect rather than as a principal
policy goal.

 

The US
rarely aims its policy at international matters. But it is a large open economy.
Its policies are aimed at its economy but because the economy is ‘open’ there
are international repercussions.

Still, it
would be far better for the developing economies to balance their growth and to
develop their own domestic demand. China is being forced to do it out of
necessity. China is the quintessential bull in the china-shop that ran such an
aggressive exchange and trade policy that ruined the playing field. China, a developing
economy, ran current account surpluses! China sought to get a growing share of
global production and, as its GDP grew, the consumption share of GDP in China fell…
so much for ‘development.’  China was mercantilist.
China kept its wages low and never allowed its exchange rate to matriculate. China
broke the exchange rules which call for a surplus country’s exchange rate to
rise. And now with the Western economies floundering and so highly in debt,
China can no longer expect to gain the export penetration that once fueled its
growth and it must turn to domestic demand. It’s a lesson that other smaller
developing economies need to learn.

The US central
bank’s reserves also need to be pulled and as a share of GDP and in no way
should we look for those to expand or to take that expansion is a sign of
continued growth or anything good going on in the US economy. In fact these
sorts of arguments made by Gavekal given time would almost certainly bring about
the antithesis argument criticizing these policies for driving the US into even
greater debt and to a larger consumption share of GDP.

 

Instead, in
the time, the US  should be redressing
these excesses.

Panics come
when markets lose their grip or focus. When the paradigm begins to change in a
way that’s inexplicable and when market participants are no longer sure who or
what is in control you can get panic selling. Developing economies need to
change their models. And change can be destabilizing. They need to balance
their growth. They need to develop their own internal demand along with
production. The watchword needs to be balance- not more US dependency.

 

And the US
needs to shrink its current account deficit. And, perhaps ominously for the
rest of the world, it needs to shrink even the nonoil portion. The US needs to
improve the competitiveness of its good sector in order to create jobs. And
developing the energy sector alone is not going to do that.

The
international paradigm is changing. It should change. It must change. This
challenge is bound to create some turmoil. We can hope that at the end of the
turmoil we get policies realigned in the right direction rather than
backtracking on the progress we’ve made. To continue to make more of the same
old problems worse would be a real shame.

via Zero Hedge http://ift.tt/1b2SVSF RobertBrusca

Put down that prom dress. It seems, as ConvergEx's Nick Colas notes, Retail isn’t the only service moving from the brick and mortar world to the virtual one. Online high schools have been popping up (on the internet, of course) more and more often in the last few years: even Stanford University started a program in 2006. Of the 22 million high-school aged (14-18) population in the US, about 1 million are estimated to be enrolled in a class or a full-time high school online. That said, virtual schools are unlikely to replace traditional classrooms anytime soon: they’re still used mostly for supplemental or make-up courses rather than a complete education. But, Colas adds hopefully, the technology points in a positive direction: free high school education means more high school diplomas, which could lead to a higher labor force participation rate, lower unemployment, and higher earnings for those who might have otherwise dropped out.

 

Via ConvergEx's Nick Colas,

Online high schools may not become the norm, and they might not bring graduation rates to 100%, but they could be changing secondary education – and the workforce – for the better.

Note from Nick: Online education is moving upstream, from college to high school. Today Sarah looks at this emerging trend to see what it may mean for long term trends in unemployment, labor force participation, and social welfare.  Bottom line: Americans without a high school education face far worse economic prospects than any other cohort; anything that helps this group is worth exploring.

What if there was a way to add 3 million Americans to the labor force, increase earnings, reduce the unemployment rate, and increase labor force participation? Might sound too good to be true. But there is one way we might accomplish this: send the 25 or so million non-high school graduates back to school to get their diplomas. We’ll get to exactly how we can do that in a minute, but first a brief outline of the problem:

Of the 25 million or so US adults with less than a high school diploma, only 11.3 million are actually in the labor force; their participation rate was a dismal 43.7% in December 2013. In other words, if you don’t finish high school, you’re more likely than not to drop out of the labor force or never engage with it in the first place.

 

Men actually have a much higher rate of participation here – 57.9% – compared to women, of whom only 33.4% are active in the workforce.

 

The unemployment rate for those in the labor force currently stands at 9.8% – a full 3 percentage points above the headline number. That said, 9.8% is a significant improvement from November’s 10.6% and last year’s 11.6%.

So what would the labor force look like if all of these workers – who represent “only”  7.3% of employed Americans – were to complete their secondary educations, giving them the same employment outlook as high school graduates? We ran a few quick calculations, and this is what we came up with:

More than 3.5 million people would join the labor force. High school graduates – who now make up about 27% of the workforce, would then represent about 38%.

 

Of that number, 3.3 million would be employed – and would make about $10k more a year than they would have without a diploma, according to the Bureau of Labor Statistics earnings data.

 

The overall participation rate would rise to 64.2%. Still not up to par with historical standards, but certainly higher than current rates.

 

Unemployment would drop to 6.5% overall – and the absolute number of unemployed persons would drop by about 40k. Again, not a huge improvement – but it’s getting there.

The US population has been slowly moving towards a labor market with more high school graduates with increasing graduation rates, but there’s one relatively new service that could help us accelerate the process: online high school. Almost every state has founded some form of online primary education in the last decade or so; the idea has actually been around since about 1993 when the EBUS Academy in Canada began offering virtual classes. Originally, it was intended to be supplementary to established high school classes, not a replacement for them: students could take higher level or more challenging courses that may not have been offered locally.

As it’s evolved, though, more and more online schools are offering full-time programs that result in a diploma in four years or less; even Stanford University founded its own online high school in 2006. It’s the luxury version of online education, of course: seminar-style and directed-study courses, full-time or part-time, for $16k a year. And it’s been quite successful; the school is currently home to a few young superstars in science and the arts. But it offers the same essential service as the free public school programs: students dictate their own schedule, and thus learn on their own terms and in their own time.

Still, online high schools are nowhere near replacing their brick and mortar counterparts just yet. While researchers agree they have a few advantages over traditional classrooms, some doubt its efficacy in the short and long term. Here are a few of the facts they highlight in the literature:

Out of about 22 million high school-aged kids in the US, 16 million are enrolled in some sort of high school – but less than 1 million are enrolled in online classes, according to estimates from Anthony Picciano and Jeff Seaman of the Sloan Consortium. More than half of these are online part-time students, or students only taking one supplementary class; very few are enrolled full-time.

 

A 2000 study (Bigbie & McCarroll) found that more than half of the students who completed an online course in Florida scored an A or higher; only 7% received a failing grade. Another study in 2009  by Barbour and Mulcahy showed that in more than 200,000 cases, students enrolled in online classrooms performed as well as traditional classroom students on exams.

 

Not all the news is positive, though. Researchers Ballas and Belyk (2000) reported that participation rates for virtual students were up to 30% lower than classroom-based students; Bigbie and McCarroll (2000) reported that 25-50% of the students they followed dropped out of their virtual courses over the period, skewing the year-end exam results higher.

 

Students in online high school courses tend to come from one of two backgrounds: highly motivated and overachieving, or underperformers required to repeat a class. According to Barbour, this bipolarization skews the literature of virtual school students to focus on the high performers – giving virtual schools a better rep than they might otherwise get. In 2007, the two classes with the highest enrollment in the US were Algebra I and Algebra II – and many of the students enrolled in the course were taking it for the second or third time. Put simply, there is a split between those students who take courses to challenge themselves – like those enrolled at Stanford – and those that John Watson (2008) calls “at-risk” students: those who probably would have dropped out of traditional schools. Online schooling might be effective for the former, but the jury is still out on the latter.

Despite some of these setbacks, its existing and potential advantages make online schooling a theoretical boon for society at large. Aside from offering out-of-reach classes to students who want them, there are three major benefits to virtual schools:

It gives everyone the opportunity to get a high school diploma – anywhere, any time – which means a more educated workforce, a larger workforce, and higher earnings potential. Currently, those without a high school diploma make about $10,000 less per year than someone who graduates: they’re also more likely to be unemployed, if they are even in the labor force. If they’re given the chance to complete their education on their own time and at their own pace, though, it’s possible that graduation rates will rise – quite a few states, in fact, have created public online schools for exactly this reason. With a high school diploma, those who may otherwise have dropped out increase their earnings potential and employment opportunities – and as we showed before, increase the participation rate and reduce unemployment.

 

As Stanford’s experiment exemplifies, it lets schools (and society) identify the all-stars even before they reach college age. It’s no fluke that Stanford’s online student body has so many award winners; they’re specifically selected because of their high potential and intellectual capabilities. Moreover, online education gives Stanford (and other schools) the chance to recruit from abroad, and thus bring the best and brightest in the world. And since the school can shape the education of its students, it would not be surprising if Stanford’s OHS became a funnel for the university: catching the students early on gives the school the possibility of enrolling an exceptionally bright or entrepreneurial student before they’re even teenagers.

 

Finally, like most online operations, virtual schooling helps lower costs. According to UC Berkeley, online classes each take about $50k-$100k to develop; but once they’re finished, they require very little maintenance. Eliminating the classroom, the books, the desks – all leads to lower costs for schooling. Some private online schools cost a pretty penny, yes – Stanford will set you back $16k for a year – but free public schools could benefit from this lower cost alternative to summer school or class repeats. And not to worry, teachers, you’re safe: online classrooms require an instructor, a grader, and a mentor. While you may not be teaching in front of a classroom, you can keep your job – and potentially work in your pajamas.

Again – online high school is not likely to take over the role of the traditional classroom anytime soon. And more research is necessary to determine its efficacy – though school districts in Georgia and Alabama are already touting the benefits of their programs. Overall, though, virtual schooling is a net positive: not only does it foster a larger, more educated workforce, but it also allows us to identify outperformers and lower costs. The only thing it’s missing is the prom.

via Zero Hedge http://ift.tt/1b2SU0V Tyler Durden

While the stats of the union remain unremarkable at best, it would appear that despite the rancor in Washington, President Obama will get his way “whatever it takes.” As the WSJ reports, the State of the Union address Tuesday night will emphasize his intention to use unilateral presidential authority — bypassing Congress when necessary — to an extent not seen in his previous State of the Union speeches. “We need to show the American people that we can get something done,” Dan Pfeiffer, a senior White House adviser, told CNN; it seems no matter how totalitarian and unconstitutional it would appear to be.

 

Via WSJ,

President Barack Obama’s State of the Union address Tuesday night will seek to shift the public’s souring view of his leadership, a challenge the White House sees as critical to shaping the nation’s policy direction over the next three years.

 

Mr. Obama will emphasize his intention to use unilateral presidential authority—bypassing Congress when necessary—to an extent not seen in his previous State of the Union speeches, White House officials said.

 

…

 

Mr. Obama will stress that he intends to take unilateral action on a host of other issues: infrastructure development, job training, climate change and education. Administration officials hinted broadly at the assertive new direction Sunday.

 

“We need to show the American people that we can get something done,” Dan Pfeiffer, a senior White House adviser, told CNN as part of a round of interviews previewing the speech.

 

The more aggressive, executive-led approach marks a recalibration by the White House after seeing how congressional Republicans responded in 2013 to the president’s re-election, a senior administration official said. Several key White House initiatives stalled in Congress last year, including an immigration revamp, an increase in the minimum wage, gun-control legislation and economic proposals.

 

…

 

“He says, ‘Oh well, it’s hard to get Congress to do anything.’ Well, yeah, welcome to the real world. It’s hard to convince people to get legislation through. It takes consensus,” said Sen. Rand Paul (R., Ky.). “But that’s what he needs to be doing is building consensus and not taking his pen and creating law.”

 

Sen. Chuck Schumer (D., N.Y.) said in an interview that Mr. Obama’s speech wouldn’t present “a grandiose agenda. It’s going to be a very practical agenda aimed at middle-class people.”

 

…

One big agenda item is apparently a “pledge” to hire more by US companies…

He also is expected to announce that some of the nation’s largest employers, have signed a White House pledge agreeing not to discriminate against the long-term unemployed when making hiring decisions, according to a draft of the policy and interviews with several people familiar with the matter.

But the corporate hiring pledge also shows the limits of executive power. Under the nonbinding agreement, companies won’t be obligated to hire the long-term unemployed, and it is unclear how the administration will monitor progress.

More lip-service, more class-warfare, more totalitarianism… just what we need for ‘growth’… It does make one wonder if the surge in t-bill yields around the debt-ceiling dates are indicative of some reaction by the Republicans to this aggression?

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

That margin debt kept rising into the last month of last year is no surprise: after all, with a market that was destined to follow the Fed’s balance sheet through thick and thin, there was “no risk” – just remember what David Tepper said: no taper is bullish, a taper is even more bullish as it means the economy is recovering and 20x P/E multiples are just around the corner. Sure enough as reported earlier by the NYSE, margin debt rose by another $21 billion in December to an all time high of $445 billion, and up 29% from a year ago – incidentally almost identical to the increase in the S&P.

This much should come as no surprise to anyone.

However what may come as a shock to many is that the other key metric provided by the NYSE – total net free credit – also known as investor net worth (calculated as Free Credit Cash plus Credit Balances in Margin Accounts less Margin Debt) just dropped to a whopping $148 billion, double where it was in February 2013, and double where it was during the peak of the last stock (and credit and housing) bubble, when it rose to a then-all time high of $79 billion in June 2007. It was all downhill from there.

Of course, this is elementary margin debt as reflected by the simplest of analysis using NYSE data – something that in a world of near-infinite rehypothecation is irrelevant. To get a sense of what is really going on out there, we repost from an article we did in November of last year when we showed the ridiculous levels leverage has reached with the “ultra-sophisticated” hedge fund investor class (where apparently the one with the highest beta leverage, wins) in this case Balyasny Asset Management.

Behold a chart that needs no explanation:

From BAM:

During our soft-close period over the last two years, we have doubled the size of our allocations and our balance sheet while keeping AUM roughly the same. Our plan is to accept only enough new capital to allow us to keep our assets / notional dollars allocated ratio at 1 to 5.

 

We find that portfolio managers on average utilize about 70-80% of their maximum allocations – so $1 of assets to $5 in notional allocated dollars typically results in our target gross leverage of 3.5-4x. We will be very disciplined with this so please let us know as early as possible if you are interested in increasing your allocation next year.

Of course, when one is levered nearly 5x, being “very disciplined” is usually a good idea.

So a pop quiz: if a hedge fund is levered 5x, and there is a 20% drop in the market, what happens?

For some more thoughts on margin debt, here is Deutsche Bank who Hopes “Not All Margin Calls Come At Once In Case Of A Sell-Off“

via Zero Hedge http://ift.tt/1f4ulVh Tyler Durden

We hear, read and listen day in and day out that it’s the Dollar that’s dead, that’s it’s the USA that will be knocked off the top of the roost and come hurtling to the ground with its neck being throttled by 1.364 billion Chinese hoards. We learn that it’s the USA that is the corrupt one and that the Federal Reserve can’t solve the financial woes of the country. The banks don’t have the money and no end of Quantitative Easing will solve the problem. But, it’s the Middle Kingdom that looks as if it’s in for a rough ride now as the credit crunch gets ready to punch the Chinese guys right in the eyeballs.

The People’s Bank of China has announced that it’s going to be delaying transfers of cash funds in both Dollars and also Yuan. Hey! I thought the Yuan was meant to be the up-and-coming world reserve currency that knew no problems and felt no crisis? It was only the Dollar that suffered, wasn’t it? The People’s Bank has invoked the need to update systems and do some maintenance. Apparently, it’s nothing to worry about and is just the ‘normal system maintenance’ that always takes place at this time of the Chinese Lunar-New Year celebrations. Transfers will be delayed right after January 30th until February 2nd for domestic transfers and it will continue until February 7th and the end of the holiday for foreign currency transfers. 
Right, so there is no problem and the maintenance in the systems are going to take that long to deal with? Let’s hope they don’t get a glitch in there somehow and the entire Chinese banking system goes up in a cloud of mushrooms. There are always delays at the New Year period in China, but, the ones that have taken place in previous years haven’t had the backdrop of the previous problems with liquidity in China. That’s the whole difference in this story and that should be making the rest of us just slightly worried. The Chinese might be stealing the industrial rug from under our feet, but a world without the Chinese finances (at least what they tell us they have) would be a whole different spring roll ahead of us.

Admittedly, as many are willing to express, there is now the race that is on to be the first that predicts the fall of China. But, no need to race, that crystal-ball prediction was forecasted years ago before China even got out of its Communist pants after its long march. 
But, today the financial sector in China is having liquidity problems that are getting worse. January 20th saw the interbank rates increase as much as 10%, when the PBOC stepped in. That was an increase from 3% the previous week. It is now at more stable (although still high) levels of 4.65%.

The POBC has urged banks in China to deal better with liquidity in particular at this time of year and to rely less on short-term funding.
But, the holiday-period is a frightening time for the banks as their liquidity drops and therefore trust between the banks gets worse as cash is depleted. The system maintenance comes at a wonderful time. The Chinese are taking a leaf out of the books of the best spin-doctors around and telling the world exactly what isn’t true, but what will be good to hear. Telling us all ‘hey, we’re up it without a paddle’ just isn’t going to instil confidence in the market is it? Welcome to the world of marketing in China.

Lies, lies and wool over your eyes. Until the penny drops, that is.

Originally posted: China’s Credit Crunch

You might also enjoy: Working for the Few | USA:The Land of the Not-So-Free  

 

via Zero Hedge http://ift.tt/LhkEsw Pivotfarm

Submitted by Nick Cunningham via OilPrice.com,

There are two major factors that have emerged in the last five years that have sparked a surge in LNG investments. First is the shale gas “revolution” in the United States, which allowed the U.S. to vault to the top spot in the world for natural gas production. This caused prices to crater to below $2 per million Btu (MMBTu) in 2012, down from their 2008 highs above $10/MMBtu. Natural gas became significantly cheaper in the U.S. than nearly everywhere else in the world.  

The second major event that opened the floodgates for investment in new LNG capacity is the Fukushima nuclear crisis in Japan. Already the largest importer of LNG in the world before the triple meltdown in March 2011, Japan had to ratchet up LNG imports to make up for the power shortfall when it shut nearly all of its 49 gigawatts of nuclear capacity. In 2012, Japan accounted for 37% of total global LNG demand.

The combined effect of shale gas production in the U.S. and skyrocketing LNG demand from Japan opened up a wide gulf between the Henry Hub benchmark price in the U.S. and much higher oil-linked prices around the world. LNG markets, which are not liquid, could not meet the surge in Japanese demand. Platts’ Japan/Korea Marker (JKM) price for spot LNG floated between $4-$10/MMBTu the year and half before Fukushima. In the few months after the meltdown, the JKM price quickly jumped to $18/MMBTu. Almost three years later, the JKM price for month-ahead delivery in January 2014  hit $18.95/MMBTu.

In contrast, Henry Hub prices – despite reaching a more than two year high – were only $4.50/MMBTu for the first week of 2014. After factoring in the costs of liquefaction and transportation – somewhere in the range of $4-$5/MMBTu – companies could still make a substantial profit taking U.S. gas and exporting it to Asia.

Thus ensued a scramble to permit and build LNG export facilities in the U.S., often by retooling and turning around what were once import terminals. As of December 6, 2013, the U.S. Department of Energy had 28 applications for LNG export facilities to countries without which the U.S. has a free-trade agreement (five of them have been approved).

Cheniere Energy (NYSE: LNG) has been the primary beneficiary of DOE’s policy to incrementally approve LNG exports. Cheniere has already signed contracts to deliver gas to Britain’s BG Group, France’s Total, India’s Gail, Spain’s Gas Natural Fenosa, and South Korea’s Kogas. Its stock price has soared since it received permission to begin construction on its Sabine Pass liquefaction facility on the U.S. Gulf Coast, which would allow the export of 18 million tonnes of LNG per annum (MTPA) in Phase 1. From August 6, 2012 – the day before it received its permit – until the market close of January 10, 2014, Cheniere’s stock price climbed from $14.66 to $46.37 per share, more than a three-fold increase.

Other companies are lobbying the government to quickly approve more export terminals, but it is more than likely that only the first-movers will make some serious money with the stragglers left behind. While its competitors are awaiting permit approvals, construction is already underway at Cheniere’s Sabine Pass liquefaction facility.

LNG Expansions Around the World

Australia plans to triple its LNG capacity over the coming four or five years, which will allow it to surpass Qatar as the largest LNG exporter in the world. There are seven liquefaction facilities under construction in Australia, with a capacity of 62 million tonnes per year. This means that by 2017, according to the International Gas Union (IGU), Australia’s LNG export capacity will reach 83 MTPA.

Australia’s projects are further along and closer to their target market of Japan, so many will beat out U.S. proposals. Despite all the buzz in the U.S. about LNG export terminals, and the more than 190 MTPA of applications on backlog with the DOE, very little of that will be actually constructed (it is pretty easy to merely submit an application). The IGU estimates the U.S. will only bring online an additional 8 MTPA or so over the next four to five years, up from about 2 MTPA last year. Australia is where the action is.

Chevron (NYSE: CVX) is heavily invested in Australian LNG and already has several terminals up and running with more capacity coming online in 2015. BG Group (LON: BG) is scheduled to start exports of LNG at its Queensland Curtis facility this year. These companies are well-positioned to serve the insatiable demand from Japan.

Market Disruptor – Japan’s Nuclear Restarts

So conventional wisdom tells us that there is a boat load of cash to make riding the LNG wave. But aside from the historic price volatility for natural gas that should give investors reason for pause, looking over the horizon, there is one big factor that could disrupt LNG investments: if Japan moves to restart some or all of its nuclear reactors, many LNG terminals may cease to be profitable.

Japan was once the third largest producer of nuclear power after the U.S. and France. After the Fukushima meltdown, Japan replaced its 49 GW of nuclear capacity with imported LNG (which jumped 24%) as well as imported coal and oil. Yet Japan may be in the cusp of a return to nuclear. According to DNV GL’s LNG blog, the restart of all of Japan’s 50 nuclear reactors would mean it could displace about 51 million tonnes of imported LNG.

This amounts to about one-fifth of the entire global LNG trade, and would cause a significant drop in the JKM spot price. This means the spread between the landing price of LNG in Asia and the wellhead prices of say, Australia, or the United States, would narrow. Without that arbitrage, it wouldn’t make sense to send liquefied gas around the world from many places. Marginal projects would be forced out virtually overnight.

The Japanese government put in place new safety regulations last summer that utilities must meet in order to receive approval to restart their reactors. Japan’s Nuclear Regulatory Authority (NRA) is currently reviewing applications from seven utilities to restart a total of 16 nuclear reactors, or about one-fourth of Japan’s nuclear fleet. More applications are in the offing.

While anti-nuclear resentment runs strong in Japan these days, the government is facing quite a bit of pressure to return to its nukes. Post-Fukushima, Japan posted a trade deficit for the first time in decades due to the huge cost of importing coal, gas, and oil. By one estimate, turning half its nuclear fleet back online could save $20 billion per year, good enough to wipe out a big chunk of its trade deficit – which widened to $12.6 billion in November 2013. Prime Minister Shinzo Abe supports nuclear power, making a return to nuclear more likely.

If the Japanese public and government can begin to trust the new regulatory regime, and accept a return to nuclear power, its LNG demand will plummet. As the largest LNG importer in the world by far, this would leave many LNG projects stuck at sea.

In particular, LNG terminals in the U.S. – which are not the lowest cost producers – would be in trouble. Not all companies that have applied for permits will actually move forward with investment, and thus, would be less vulnerable to nuclear restarts. But the ones that do move forward are taking on the risk as well as the potential reward. But with LNG projects proliferating around the world, many companies will be competing for a smaller pie should Japan return to nuclear power.

Cheniere Energy is the first that comes to mind. Dominion Resources (NYSE: D) is another. Dominion hopes to move forward with a $3.8 billion retrofit of its Cove Point facility on the Chesapeake Bay, which is also the subject of a growing environmental backlash. Some Australian projects that are further behind may lose out as well, such as the Arrow LNG project, a 50-50 venture between Royal Dutch Shell (NYSE: RDS.A) and PetroChina (NYSE: PTR). Woodside Petroleum (WPL) has already scrapped its original plans for the Browse LNG project because of high costs. Its Sunrise project, mired in political disputes, may yet get off the ground, but would be vulnerable to Japanese reactors. Russia has major LNG expansion plans, which would face stiff competition if Japan’s reactors turn back on. Novatek (LON: NVTK) has plans to invest $15-$20 billion in its liquefaction facility on the Yamal peninsula, and Gazprom hopes to put $13.5 billion into a facility at Vladivostok – although the latter would at least be in a very advantageous location.

The future of LNG may indeed be bright, especially when considering that global energy demand has nowhere to go but up. But, investors should be aware of the very large threat that Japanese nuclear reactors present to upstart LNG projects.

via Zero Hedge http://ift.tt/L4hvvj Tyler Durden

As the nation anxiously awaits President Obama's State of the Union speech tomorrow, we thought a brief reflection on the nation's view of him and his government was worthwhile. A glance at Gallup's front page tells us all we need to know. A mere 17% of respondents say their representatives deserve re-election; Obama's approval ratings are among the most polarized on record; 65% are unsaitsified with how government works; and, at 40%, the President's overall approval rating is practically at record lows.

 

Gallup's homepage…(hope?)

 

Despite record low approval ratings…

 

The American people extremely polarized over the President's abilities…

 

As a record low number of Americans believe their congressional representative deserves re-election…

 

As Gallup notes,

The enduring unpopularity of Congress appears to have seeped into the nation's 435 congressional districts, as a record-low percentage of registered voters, 46%, now say the U.S. representative in their own congressional district deserves re-election.

 

Equally historic, the share of voters saying most members of Congress deserve re-election has fallen to 17%, a new nadir.

But, apart from that, we are sure the state of the union will be strong and it's nothing but up from here…

 

 

via Zero Hedge http://ift.tt/L4bizn Tyler Durden