Tag: finance

I have written about my town, Palo Alto, many times here on the Slope of Hope (a sampling can be found by clicking here), and these posts tend to focus on the rapidly-escalating real estate prices. I personally think we’re past the top at this point, since I’ve noticed the For Sale signs in my neighborhood are actually just sitting there. It used to be that houses sold instantly. At this point, I’m noticing the signs lingering for weeks. Something has changed.

In spite of this, I noticed something on my regular early morning dog walk that I wanted to mention. In the twilight of 5:30 a.m., I noticed a small home around the corner from mine had a For Sale sign. I had long noticed this little house, because it was on a surprisingly large lot, almost completely devoid of anything but squirrels, and it was a cute little cottage. Having seen the sign, I was curious what they were asking. Two million? Three million, perhaps?

It just goes to show how outlandish things have become, since I couldn’t even guess the asking price. I present it to you now:

You read that correctly. Ten million bucks. (OK, nine million nine hundred ninety eight thousand). You can see the palace on the left side of the image. How big is this mansion, you ask? I can also tell you that:

Almost one thousand square feet! Two bedrooms! One FULL bath! Got more than one person in your household? Sorry, you’ll have to wait in line.

Of course, they are not pretending to be selling this property for the value of the house. It’s just the dirt beneath it, which is a little more than half an acre. In many parts of the country, half an acre is a basic middle class lot size. Here in Palo Alto, it is seriously offered, as shown above, as the potential site for “a family compound.” A compound. What, like multiple residences for your clan?

I guess the mint blue paint was supposed to sex it up, since as you can see from Google Street View below, it used to be, well, kind of brown. But take a moment to drink in the ambience of the property and consider whether or not you want to get your checkbook out.

via http://ift.tt/1O0JvKN Tim Knight from Slope of Hope

We  continue to see articles by so called “experts” trashing Gold and Silver as investments. Gold is everything from a “Pet Rock” to a “Dumb Investment” or “Barbarous Relic.”

Do these people even bother doing research? Or are they just stock shills?

First and foremost, you cannot compare Gold’s performance relative to stocks anywhere before 1967.

Why?

Because Gold was pegged to currencies up until that point. Any comparison of Gold’s performance relative to other asset classes prior to 1967 is completely misleading because Gold’s performance was limited by currency pegging.

However, once began to be de-pegged in 1967, the story changes.

As Bill King notes, Gold’s performance has absolutely DEMOLISHED that of stocks post 1967. The below chart normalizes both asset classes.

As you can see, even with Gold having lost nearly 40% of its value since 2011, and stocks soaring to all time highs over 2,100 on the S&P 500, the comparison isn’t even close.

This outperformance has continued recently despite the Fed juicing the market at every turn.

Between the year 2000 and today, stocks have been in two of the biggest stock bubbles in history. Over this time period the Fed has done almost nothing but prop stocks up by printing money or maintaining interest rates far below where they should be.

And yet, Gold has once again CRUSHED stocks’ performance. Again, the comparison isn’t even close (and that includes Gold’s terrible performance from 2011 onwards).

Despite these two facts, you rarely if ever see pro-Gold articles appear in the media.

It’s odd… for an asset class that less than 1% of investors actually own, “reporters” and “analysts” sure spend an awful lot of trashing it. How come they don’t spend an equal amount of time trashing uranium or other under-owned asset? Why spend so much time focusing on an asset that so few people even own?

Probably because:

1)   Gold doesn’t generate any revenue for financial institutions (brokers, investment managers, etc.)

2)   Gold doesn’t benefit the banks, as you can store it if your own safe.

3)   Gold and its performance run counter to the view that you can generate wealth via money printing.

At the end of the day, buying Gold represents pulling your money from the financial system… which is the last thing the Fed wants anyone to do.

Meanwhile, as Central Banks turn up the printing presses again, Gold is once again beginning to show signs of life, turning upwards against all major currencies.

We believe the next leg up is about to begin for Gold. Those who remember form the last Gold bull market in the ‘70s, it was the second leg of Gold’s bull market that saw the most gains.

From 1970 to 1974, Gold rose 550%. It then took two-year breather before beginning its second, much larger leg up. During that second leg, it rose over 900% in value.

If Gold were to stage a similar move now, it would rise to over $10,000 per ounce.

On that note…

We just published a Special Investment Report concerning a secret back-door play on Gold that gives you access to 25 million ounces of Gold that the market is currently valuing at just $273 per ounce.

The report is titled The Gold Mountain: How to Buy Gold at $273 Per Ounce

We are giving away just 100 copies for FREE to the public.

To pick up yours, swing by:

http://ift.tt/1TII1fq

Best Regards

Graham Summers

Chief Market Strategist

Phoenix Capital Research

via http://ift.tt/1YWqwa3 Phoenix Capital Research

One month after we learned that the Brussels suicide bombers had planted hidden cameras at the home of the top Belgian nuclear official, we now learn that in a disturbing continuation of this story, the entire population of Belgium will be receiving iodine tablets, which helps to limit the effects of radiation on the body, as fears increase around the security of its nuclear power plants.

Iodine pills, which can help block radioactive iodine from being absorbed by the thyroid gland, had previously only been given to people living within 20km (14 miles) of the Tihange and Doel nuclear plants, but Health Minister Maggie De Block said that coverage was extended to 100km. The extended coverage area now encompasses essentially the entire country of 11 million people. “We will provide iodine pills in the whole country.”

She added: “It is not linked with the safety of our nuclear plants. The recommendation came after Fukushima … because obviously after Fukushima, we have more information regarding nuclear risks.”

The pills will be sent to pharmacies, and the public would be ordered to collect their ration in the event of a meltdown, with children, pregnant women, and those breast-feeding being given top priority.

In response to the announcement, Belgian politician Jean-Marc Nollet said “the government is finally accepting the recommendation of the Health Ministry. Given the population density and the risk of a nuclear disaster, this was absolutely necessary.“

The plan to increase the coverage area comes just after Germany had asked Belgium to take two of their reactors offline until “open safety questions are cleared up.” Belgium’s nuclear regulator AFCN said that it was surprised by Germany’s request, and added that the nuclear reactors meet the most strictest of standards. According to RT, the two 33 year old reactors were taken offline in 2012 after defects were found in the walls of the reactors’ pressure vessels. AFCN cleared their re-start in November, saying the cracks were hydrogen flakes trapped in the walls of the reactor tank and had no impact on safety.

As we previously reported, following the investigation into the Brussels bombings, it was discovered that the bombers were planning attacks on Belgian nuclear power stations. The brothers involved in the suicide bombing had planted a hidden camera in front of the home of Belgium’s nuclear research program director.

Belgium’s Tihange nuclear plant as seen from a nearby cemetery

As a reminder, just recently a nuclear power plant in Germany was infected with not one but several computer viruses, and while authorities tried to quickly downplay any concerns, we can’t help but wonder if Europe’s next “terrorist event” take place at a nuclear power plant.

via http://ift.tt/23e2b0y Tyler Durden

In an interesting interview with Finanz und Wirtschaft, Bianco Research president Jim Bianco discusses a variety of topics such as negative interest rates turning the entire credit process upside down, bank balance sheets being even more complex and concentrated than before the financial crisis, energy loans being an accident waiting to happen, the markets having veto power over the Fed, and gold having more room to run.

* * *

Mr. Bianco, negative interest are causing a lot of stir at the financial markets. It looks like even the Bank of Japan is having some doubts now, since it didn’t launch more monetary stimulus this week. What’s your take on negative interest rates?

Even if you go back to the Egyptian pharaohs and the Fertile Crescent in Mesopotamia we have never consistently seen negative interest rates in the reported human history until two years ago. That’s why investors are worried that negative rates are going to create distortions and what you see out of Japan are some of those distortions. The Bank of Japan is not getting the market reaction that it expected. So if negative yields are not a mistake then central bankers have to do a better job in explaining to the world why this is going to work out just fine.

Why are many investors so skeptical about negative interest rates?

People are still staring at negative interest rates and still not comprehending them. When the ECB introduced negative interest rates two years ago the world viewed it just as a temporary gimmick. But then, on January 29th, the Bank of Japan comes in and they go negative as well. After the Bank of Japan decided to go negative, the number of outstanding bonds with a negative yield suddenly doubled in about two days. If you exclude the US market, around 45% of sovereign bonds in the world are now yielding negative.

Why is it so hard to understand negative interest rates?

The problem with negative rates is two-fold. Firstly, it’s a procedure problem. Even though we at the financial markets look at our screens and see negative numbers, negative interest rates don’t exist at the consumer level. The banks in Europe are not offering negative mortgages, they’re not offering negative deposits and they’re not issuing bonds with negative coupons yet. If a country like Switzerland was to issue a negative coupon sovereign bond that means that every owner of that bond has to pay the issuer. But how do you collect that money? Nobody’s got a system in place that can reach out to bondholders and get all those checks. Or how does a negative mortgage work? With a negative mortgage, instead of you paying the bank, the bank pays you. But how does the bank pay you? They don’t have a system in place to mail out all those checks.

And secondly?

Negative interest rates turn the whole credit process upside down. Let’s say we have a system in place and a company has thousand and thousands of bondholders that own its bond with a negative coupon. What’s the credit rating of that security? It’s not the credit rating of the company. It has to be some kind of total of the people that own this bond and that’s probably a junk rating. So how does the company get the money from everybody? What happens if some bond holders don’t pay? And what are the collection procedures for people that are in arrears? That’s the problem with such kind of securities and that’s why people thought it was just a gimmick.

So what are the consequences of negative interest rates?

In a negative interest rate world currencies yield zero and that’s actually a high yield. As a matter of fact, according to former Fed-chief Ben Bernanke the Federal Reserve did a very interesting study that looked at the volume of all of the vault space at the major banks in the US and they calculated a break-even. They calculated that if the Fed Funds Rate ever got below -35 basis points, the banks would be better off by stacking in the volume of their vault space with $100 bills yielding zero as opposed to taking a Funds Rate at -35. There is no such study for European banks. But Bernanke believes that their break-even would be even closer to zero, something like -20 or -15 basis points because they have a 500 Euro note which is six times the monetary value of a $100 bill and roughly the same size. Yet, we’re seeing no movement out of the European banks to stack 500 Euro notes in their vaults. That means they’re acting irrationally. They’re not acting that way because they don’t believe it or they don’t understand it. So we’re still all trying to feel around in the dark as to what this means. And that means that the chance of an accident is very high.

Also, when you look at the poor performance of European bank stocks, negative interest rates seem to cause severe concerns among investors in the financial sector.

Deutsche Bank’s share price is under its 2009 low. That was the level at which we thought the world was ending. So what does it mean that Deutsche Bank’s share price is lower than that? Does it mean the world is ending for the largest European bank by assets? And by the way, Credit Suisse is not far behind. Of course, Deutsche Bank’s on the hook for a lot of other things, too. They’ve missed on regulation, they’ve missed on capital, they’re in the wrong line of business and they have significant risk. Deutsche Bank is the largest holder of Euro denominated derivatives. So what happens if it comes to a Brexit or if it comes to a Grexit? The problems in Greece never went away. We’ve just decided that we got bored to talk about it.

And what about the big banks in the United States. The performance of US bank stocks is pretty disappointing as well.

Coming out of the financial crisis, the five largest financial institutions in the United States now have a higher concentration of financial assets. Not only do they have a higher concentration of assets than they did before the financial crisis but it’s the largest concentration ever. So we’ve made the too-big-to-fail-problem worse because we have bigger, more systemically important financial institutions now than we did in 2007 – and nobody seems to know what to do about it.

But regulators claim that the financial system has become much safer since the financial crisis.

At our offices, we laugh about a running joke: Every time when somebody talks about large financial institutions there are only two answers to any question: Either you respond: »I don’t understand it because it’s too complicated» or you’re lying. Therein lies the problem. When people start picking through JP Morgan’s balance sheet nobody understands it. I don’t know if even Jamie Dimon understands it. The complexity of these institutions is beyond the comprehension of the human mind. So am I concerned about the financial system? Yes, with respect to more concentrated and more complicated banks. Am I concerned that there’s an imminent accident coming? In one additional respect: Energy.

Why?

Energy could be the tripwire because low oil prices heighten the likelihood of a credit event. It looks a lot like the housing problem in 2007. At that time people said: «Housing never goes down, and if it goes down it’s a buying opportunity. Don’t worry about this stuff, it’s all going to work itself out.» Today, crude oil prices are very important for financial markets. If we get a plunge in crude oil prices then that’s bad, as it means the bankruptcies come, the write downs come, investors run away and losses pile up. And then we’re back looking at financial institutions and asking ourselves: How much of those energy loans do they have? The banks will tell you that they’re not exposed and there’s no problem – just like in 2007, when they claimed that they had no exposure to subprime lending. But that wasn’t quite the way it worked out. So maybe we have to do the whole exercise again that we had to do during the financial crisis and listing out all the write downs of the banks.

How bad could it get?

It’s not going to be the level of the housing market, it’s not going to produce another great recession. But it is going to hurt. There are going to be some real problems as we move forward from here. The Bank for International Settlements estimates that there are about 3 trillion dollars worth of energy lending world wide. So we’ve got a market of 3 trillion dollars worth of loans and the primary pricing of that market has fallen apart: the world wide price of oil. And the price doesn’t even need to go down much lower. It just needs to go back down to around $35 and we’re going to start looking at those 3 trillion dollars worth of lending and all of the investments in oil. And if investors see how much it really is, it’s going to be bad.

Then again, oil has rallied strongly since February.

I don’t see any skepticism or fear. The reason investors haven’t hit the panic button yet is because they still believe that the price is going to be $60 in a year and $75 to $80 at the end of 2017. So oil is »not a problem». But what I would like to have seen on a large scale is energy companies on the verge of failure  going bankrupt and production falling of a cliff, a changing of investor behaviour which is setting up the mood for the next move up in the price of oil. But we’re getting the opposite of that. If you’re an energy company that’s losing astronomical sums of money and you go to Wall Street you will get more money to burn. You’ll get it because there is a fundamental belief in energy. Money is pouring into the energy sector. Investors think they’re buying a lottery ticket that is going to pay off big time when the oil price goes back to $100. That encourages energy companies to keep their foot on the gas, to keep overproducing and that could give us $25 to $30 oil again. And when we go back down again than we’re going to dust off the whole credit issue all over again.

So is there no way out?

The only thing that could save us from this oil glut is a strong comeback in demand. That’s the only way we could get rid of all those bloated inventories. We need somebody using this oil, we need demand. That’s a nice way of saying that we need strong growth for energy out of China. But we’re not getting anything near strong growth out of China or out of Europe or out of the United States.

The lack of growth seems also to be a concern for the Federal Reserve as the FOMC statement for the April meeting showed. What does that mean for the Fed’s plans to raise interest rates?

The Fed is raising rates in a very generic view of the world. It’s their signal to the markets that things are getting better, everything is returning to normal: »mission accomplished» to use an old line from George W. Bush. But right after the Fed raised interest rates on the 16th of December the gold price took off, treasury yields plunged and stock and oil prices dropped. That’s not the reaction the Fed wanted. I think the Fed was surprised by this reaction, especially by what happened in the gold market. Gold literally turned around on the day of the Fed move and it had its best quarter in 30 years in the first quarter.  It’s almost like the gold market initially said: »Oh boy, I think the Fed made a mistake by raising rates.»

Nevertheless, the rally in gold seems to have lost some of its steam recently. What’s your outlook for gold?

Gold turned higher when the Fed raised rates and it turned even higher when Japan went negative. Some say gold is a barbaric relic that for 5000 years never paid interest. That’s true, but in a negative interest rate environment the barbaric relic that does not pay an interest is actually a high yielding investment. So if you want to put your money in a high yielding investment, put it in zero yielding gold. That’s what’s got the world so upside down right now. What was coincident with gold taking off since the Fed move is that all the measures of speculation in gold with respect to futures traders and ETF buyers took off, as well. Enormous sums of money came flying into the gold market. Gold has not seen a speculative frenzy for four years. Now, it’s starting to get some speculative interest but it’s still far from overbought. That’s why I’m not thinking the rally in gold is over. Gold has room to go.

And what about the next step of the Federal Reserve?

The markets have a veto over the Fed policy. The Fed suggests a policy, the markets bless it. If the markets don’t bless it, eventually the Fed will engage in some kind of push-pull-strategy. But at the end of the day, the markets have the final say and if they’re not ready for another rate hike, they throw a fit and the Fed refrains from upsetting them. This is not new. The markets have been driving Fed policy for a long time. It’s just that our awareness is higher about recently. The FOMC statement was invented in 1994. Since then, the Fed has never raised rates without a move being at last 60% priced in the markets the day of the Fed meeting. So if a rate hike is not priced in the Fed is not going to do it.

So when do you expect another hike?

The Fed seems to be very dovish. They’re afraid to upset the financial markets at this point. We’ve started the year with everybody confident that we are going to get four rate hikes. But we could very well get out of 2016 with zero or just one rate hike.

Obviously, the financial markets love this dovish tone. In the US, stocks are even close to the record high of May 2015.

If the markets are understanding that they got a veto over the Fed then they can do what they want. This runs the risk that stocks take off to overvalued range, go to immense multiples, go bubble because investors don’t believe that this Fed would ever step on the breaks. That is the concern that I have because I am still not a believer that the economy is doing well. Of course, Wall Street’s job is to torture the data to find something positive out of it. But I see negative year-over-year earnings, I see the forecast for the next couple of earnings seasons with negative year-over-year earnings growth, I see sub 1% growth in the US economy and I see low expected inflation. Except for the payroll reports, there is no consistency that things look robust.

via http://ift.tt/1N7q4oI Tyler Durden

After its earlier pump and rapid dump, WTI crude is unable to bounce for now despite the biggest rig count decline in 6 weeks. The oil rig count declined by 11 to 332 – the lowest since October 2009 – tracking lagged crude prices. If the co-dependence continues we would expect to see rig counts begin to rise (or stop declining) very soon. Total US rig count dropped to 420 – a new all-time record low.

• *U.S. TOTAL RIG COUNT DOWN 11 TO 420 , BAKER HUGHES SAYS

• *U.S. OIL RIG COUNT DOWN 11 TO 332, BAKER HUGHES SAYS

Will we see rig counts stabilize here – tracking the legged price of crude?

via http://ift.tt/1SPkypT Tyler Durden

What until now was mostly effete jawboning over US complaints surrounding China’s territorial expansion ambitions in the South China Sea, including the occasional sailing of a US ship deep inside the disputed territorial waters (with zero impact especially now that China may soon start building maritime nuclear power plants in the area), changed dramatically earlier today when China officially denied a U.S. carrier strike group’s request for a port visit to Hong Kong next week.

The Stennis strike group

As Stripes writes, the Chinese Ministry of Foreign Affairs notified the United States Thursday of its decision to deny the USS John C. Stennis and its escort ships access to the former British colony, Darragh Paradiso, a spokeswoman for the U.S. Consulate General in Hong Kong, said by phone. The ministry provided no explanation for the move.

While U.S. warships frequently visit Hong Kong, port calls have been canceled at times of diplomatic strain between the two Asia-Pacific powers. In 2007, China denied access to the city’s port by the aircraft carrier USS Kitty Hawk.

The decision follows weeks of increasing diplomatic sparring between China and the U.S. over Beijing’s claims to more than 80 percent of the South China Sea. The nuclear-powered Stennis has played a central role in U.S. efforts to demonstrate its continued security presence in the disputed waters, with Defense Secretary Ashton Carter visiting the warship on patrol there in April.

A plane carrying U.S. Secretary of Defense Ash Carter lands on the deck of the USS
John C. Stennis on April 15, 2016, as the ship sailed through the South China Sea.

According to Shi Yinhong, director of the Center on American Studies at Renmin University in Beijing, and a foreign policy adviser to the State Council, the Stennis has become a “symbol of efforts to spark strategic tensions between China and the United States. The cancellation is a snapshot of the current intensity in China-U.S. security relations. Without significant security need, routine port calls would not have been canceled.“

While the US has been complaining about China’s territorial expansions over the past year, culminating with the current recent incident, China’s claims to the South China Sea have resulted in numerous other disputes with other neighboring Southeast Asian nations that assert rights to the area, including Vietnam and the Philippines. Tensions are running high as the region braces for a ruling by an international arbitration panel on a Philippine challenge to China’s claims.

“We have a long track record of successful port visits to Hong Kong, including with the current visit of the USS Blue Ridge, and we expect that will continue,” Paradiso said, referencing the U.S. Navy command ship already moored in the city.

Finally, earlier today the US State Department confirmed that indeed China has refused to allow Stennis to dock in Hong Kong.

#China denied Hong Kong port call by USS Stennis aircraft carrier, @StateDept confirms. #VOAalert

— Steven L Herman (@W7VOA) April 29, 2016

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Submitted by David Yager via OilPrice.com,

Never is a long time. The dictionary definition is, “at no time in the past or future; on no occasion; not ever.” In the volatile oil and gas industry, those who try to look that far into the future and predict anything with certainty are invariably wrong. Here’s hoping.

But it’s not all bad, oil prices are gradually rising because of market physics and investor sentiment. Federal and provincial politicians are softening their opposition to, and have even publicly declared support for, pipelines to tidewater. The worst is over.

However, it is increasingly certain that the future will not be like the past. Previous downturns have been equally devastating but the primary causes eventually reversed themselves; low commodity prices recovered and damaging government policies were rescinded.

This recovery will be different for a variety of reasons which will combine to cap growth, opportunity and profits, even if oil and gas prices spike. The following major changes appear permanent.

Oil Is Destroying the World

“New research shows that the fossil-fuel era could be over in as little as 10 years, if governments commit to the right policy measures… If you think workers are suffering in Alberta now, wait until you see what Canada’s economy looks like if we miss the huge opportunities for jobs and prosperity offered in renewable energy and a truly climate-friendly economy.”

Written by a climate and energy campaigner for the Sierra Club, this appeared on top of page 13 in the April 23 edition of Victoria’s Times Columnist, under the headline, “Pipelines not the pathway to Paris solutions.” B.C.’s views on pipelines are well known.

Whether you or the tens of thousands of laid-off oil workers believe the first paragraph or not, on April 22 at the United Nations in New York, 171 countries signed the Paris climate change agreement negotiated last year. At the event, UN Secretary-General Ban Ki-moon said: "Paris will shape the lives of all future generations in a profound way – it is their future that is at stake.” He said the planet was experiencing record temperatures: "We are in a race against time. I urge all countries to join the agreement at the national level. Today we are signing a new covenant for the future."

Showing support, in the Globe and Mail April 26, the Minister of Foreign Affairs for the island country of Maldives wrote, “Our ratification (of the Paris agreement) is based on the clear and present danger of losing our country completely to rising tides. How critical this has become can be seen in a report released only this month that questioned the stability of our polar ice sheets. We now know March, 2016 was the hottest month in recorded history.”

This is all caused by burning carbon fuel. True or not, this debate will not die anytime soon.

The anti-carbon movement is already affecting the oil industry in ways nobody would have imagined two years ago. Alberta’s comprehensive carbon tax regime will become law January 1, 2017 apparently to prove that the province deserves a social license to stay in the oil business from carbon fuel opponents. The recent Canada / U.S. commitment to reduce methane emissions will come at an enormous cost to the oilpatch if implementation is not preceded by a significant study and comprehensive cost / benefit analysis.

These are just part of a growing trend to dismiss and / or deny the essential role hydrocarbon fuel plays in powering the world’s economy. Oil doesn’t matter any longer. University endowment funds have been pressured for years to divest shares in oil and gas companies. The Royal Bank of Scotland now refuses to provide funding for oilsands development. Historically, people sought jobs in the oilpatch and were proud of their work. This is changing fast.

Canada is one of the few major oil and gas-producing jurisdictions determined to push rapidly forward with major and expensive anti-carbon policy changes despite being only a nominal contributor to global emissions. We won’t be followed anytime soon by Russia, Saudi Arabia, Kuwait, Kazakhstan, Iran, Iraq, Mexico, Venezuela, Nigeria and so on. They will be happy to supply Canada with oil, whether Canadian supplies continue or not.

“Quantitative Easing” No Longer Stimulating Economy

Following the 2008 / 2009 recession the world’s central bankers embarked on a program of near-zero interest rates that would be expanded into something called “quantitative easing.” Investopedia’s definition is, “Quantitative easing is an unconventional monetary policy in which a central bank purchases government securities or other securities from the market in order to lower interest rates and increase the money supply.” This has now been expanded in some countries to include experimental negative interest rates where banks and, ultimately, savers are penalized for holding cash and not spending their money.

The purpose has been to juice spending to keep the western economic miracle alive while government debt balloons and the economy stagnates. If interest rates ever approached the double-digit levels of 30 years ago, the economic devastation would be staggering. Prime lending and mortgage rates peaked at 22.5 percent in the early 1980s, long before it was believed (then accepted) governments could print money without collapsing the economy or creating runaway inflation.

But it isn’t working anymore. Past recessions were caused by high oil prices and cured when they fell. Not this time. An article at Oilprice.com on April 19 by Gail Tverberg read, “…consumers are the foundation of the economy. If their wages are not rising rapidly, and their buying power (considering both debt and wages) is not rising very much, they are not going to be buying many new houses and cars – the big products that require oil consumption. In fact, in order to bring oil demand back up to a level that commands a price over $100 per barrel, we need consumers who can afford to buy a growing quantity of goods made with oil products.”

Oops. This time oil prices collapsed and so did demand. The International Energy Agency is forecasting, despite low prices, demand growth of only 1.2 million barrels (b/d) per day this year compared to 1.6 million b/d or higher in 2015 and prior years. Middle class incomes, the main driver of growing oil consumption in the past, are no longer rising in the western world. Quantitative easing has run its course. What growth in oil demand may occur will be in Asia and other foreign markets. Should governments reverse policies on near-zero or sub-zero interest rates or people lose confidence in the long-term stability of central banks printing money as required, oil consumption and prices are doomed.

The U.S. Shale Boom Was Financed By Low Interest Rates

The hunt for yield in the era of lower to zero interest rates leads to peculiar investment decisions. In 2008 the collapse of the housing bubble – driven by an endless investor appetite for high-yield mortgage bonds of questionable quality – was said to cause the global recession. This precipitated the collapse of major financial institutions like Lehman Brothers and the bailout of many more. Regulators frowned and tried to bring in policies to ensure it would not happen again.

The great light tight oil (LTO) or shale boom in the U.S. since 2010 has all the hallmarks of a similar asset bubble. Exploration and production (E&P) companies were able to finance significant drilling through the sale of subordinated bonds with an attractive yield of 6 percent or more. They were for the most part interest-only and due in several years. The problem with drilling high decline LTO wells with high-yield debt is by the time the bonds mature, the production from the wells the debt paid for has declined to the point the assets are only worth a fraction of the leverage outstanding. Many companies in the U.S. are already broke and more will follow. Much analysis has been done to show some of the top LTO drillers in the U.S. spent $2 on drilling for every $1 of cash flow prior investments had generated. The difference was made up by seemingly limitless capital inflows.

This has created two problems for Canada’s oil future.

The first is even if commodity prices rise and transportation issues are solved, the ability of companies to raise cheap debt will be impaired for some time, perhaps forever, depending on what happens to interest rates. Historical E&P spending has almost always exceeded cash flow providing investment, jobs and opportunity that would not exist otherwise. External capital inflows are essential to feed the machine.

 

The other is the impact debt-financing has had on oilfield services (OFS) sector balance sheets. As has been written on these pages before, in 2014 and 2015 alone 21 diversified Canadian OFS operators invested $37 billion adding new rigs, frack spreads, camps, processing plants, midstream facilities and pipelines for a growing North American oilpatch. Three large Canadian pressure pumpers alone carried a combined $2.6 billion in debt and one has gone broke. A lot of E&P demand was financed by debt, which is no longer available. Now OFS is overbuilt and many operators over-levered. It will take some recovery to clean this up.

Middle East Production About Volume, Not Price

Why Middle East producers do what they do remains a mystery. But whatever the plan or strategy, the cash cost of finding and producing the next barrel in this region remains the lowest in the world. In the past it seemed Middle East oil strategy was about price with oil sales assured. Now it looks like volume and market share.

The Middle East may soon be the world’s most active market for drilling rigs. According to the Baker Hughes worldwide rig count, the only area of the world (Latin America, Europe, Africa, Middle East, Asia Pacific, U.S., Canada) still operating about the same number of rigs in 2016 as it was in 2014 is the Middle East. The only region that has increased its active rig count from 2013 and 2012 and its share of the global active drilling rigs is the Middle East.

(Click to enlarge)

Source: Baker Hughes Worldwide Rig Count April 22, 2016, average rigs operating for the period

Why? Because they can, and to sustain output, they must. Whatever the financial situation may be for the governments in charge, there is clearly sufficient cash flow from existing production to fund more drilling. With the Baker Hughes U.S. total active rig count for April 22 down to 471, the average 403 rigs drilling in the Middle East in the first three months of 2016 make it the second-busiest region in the world. Unless prices recover soon, it could become number one.

This is not a price war Canada can win. One of the attractions of Canada in recent years is foreign capital was welcome to develop massive, if expensive, oil reserves. Now Iran is said to be open for business. As is Mexico. Saudi Arabia wants to diversify its economy away from oil and sell its refining operations to global investors. The Saudis are talking bravely about an economy no longer dependent upon oil profits as soon as 2030.

Western Canada is not the only oil-producing jurisdiction wondering about its future. It is, however, the highest cost oil-producing jurisdiction wondering about its future.

Canada Down But Not Out

Canada produces 7 million barrels of oil equivalent per day of bitumen, crude oil, natural gas liquids and natural gas, making it the fifth largest hydrocarbon-producing jurisdiction in the world. The country won’t be going off the oil and gas business anytime soon, so keeping it going will remain good business and the largest resource industry in Canada.

But the current mantra of “lower for longer” is wrong. This is only the price of oil. In terms of the Canadian oil and gas industry there are multiple reasons it could be “lower for a long time, possibly forever.” As a country that performs all elements of producing still-essential hydrocarbons as well or better than anyone else in the world – everything from broad economic participation to worker safety to environmental protection – that is a tragedy.

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While this should be no surprise to any rational non-establishment-teet-suckling economist, former McDonalds' CEO Ed Rensi exclaims, in a recent Forbes Op-Ed, that "a $15 minimum wage won’t spell the end of [fast-food brands]. However it will mean wiping out thousands of entry-level opportunities for people without many other options." The $15 minimum wage demand, which translates to $30,000 a year for a full-time employee, is built upon a fundamental misunderstanding of a restaurant business (and we add simple supply and demand fundamentals) – just "do the math" Rensi rants…

“They’re making millions while millions can’t pay their bills,” argue the union groups, suggesting there’s plenty of profit left over in corporate coffers to fund a massive pay increase at the bottom.

 

In truth, nearly 90% of McDonald’s locations are independently-owned by franchisees who aren’t making “millions” in profit. Rather, they keep roughly six cents of each sales dollar after paying for food, staff costs, rent and other expenses.

 

Let’s do the math: A typical franchisee sells about $2.6 million worth of burgers, fries, shakes and Happy Meals each year, leaving them with $156,000 in profit. If that franchisee has 15 part-time employees on staff earning minimum wage, a $15 hourly pay requirement eats up three-quarters of their profitability. (In reality, the costs will be much higher, as the company will have to fund raises further up the pay scale.) For some locations, a $15 minimum wage wipes out their entire profit.

 

Recouping those costs isn’t as simple as raising prices. If it were easy to add big price increases to a meal, it would have already been done without a wage hike to trigger it. In the real world, our industry customers are notoriously sensitive to price increases. (If you’re a McDonald’s regular, there’s a reason you gravitate towards an extra-value meal or the dollar menu.)  

 

Instead, franchisees can absorb the cost with a change that customers don’t mind: The substitution of a self-service computer kiosk for a a full-service employee.

Rensi concludes rather ominously…

I suspect that the labor organizers behind this campaign for a $15 minimum wage are less interested in helping employees, and more interested in helping themselves to dues money from their paycheck.

 

They’re unlikely to succeed in their goal of organizing the employees of McDonald’s franchisees, but they may well succeed in passing $15 into law in other sympathetic locales.

You’ll see their legacy every time you visit the Golden Arches, where “would you like fries with that” is a button on a computer screen rather than a phrase spoken by an employee in their first job.

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The initial refugee welcome in Germany is rapidly turning to rejection as the nation plan to ban EU migrants from most unemployment benefits for five years after arrival as a senior German politician has called for an "Islam law" that would limit the influence of foreign imams and prohibit the foreign financing of mosques in Germany.

As The FT reports, Germany is planning to ban EU migrants from most unemployment benefits for five years after their arrival in dramatic response to rightwing populist assaults on chancellor Angela Merkel’s liberal immigration policies.

The proposals, which are far tougher than had been expected even a few months ago, highlight the government’s concern over growing public anxiety about immigration and the related advance of the Alternative for Germany party, the most popular rightwing grouping since the second world war.

 

“I full and clearly support freedom of movement [of workers in the EU],” said labour minister Andrea Nahles, detailing the plans. “But freedom of access to social welfare is something else.”

 

It is a sign of how much the AfD is shaking German politics that the proposals come from Ms Nahles, a leftwing social democrat. The SPD is suffering even more than Ms Merkel’s CDU/CSU bloc in the face of the AfD’s advance. Opinion polls show it around 20 per cent, an all-time low.

 

The German debate on curbing EU migrants’ benefits echoes the intense arguments in the UK, as it prepares for its EU membership vote in June. Ms Merkel has previously promised to work with prime minister David Cameron in cutting welfare abuse.

And as if that was not 'welcoming' and 'integrative' enought, The Gatestone Institute's Soeren Kern reports a senior German politician has called for an "Islam law" that would limit the influence of foreign imams and prohibit the foreign financing of mosques in Germany.

The proposal — modelled on the Islam Law promulgated in Austria in February 2015 — is aimed at staving off extremism and promoting Muslim integration by developing a moderate "European Islam."

The move comes amid revelations that the Turkish government is paying the salaries of nearly 1,000 conservative imams in Germany who are leading mosques across the country. In addition, Saudi Arabia recently pledged to finance the construction of 200 mosques in Germany to serve migrants there.

In an interview with the newspaper Die Welt, Andreas Scheuer, the General Secretary of the Christian Social Union (CSU), the Bavarian sister party to German Chancellor Angela Merkel's Christian Democrats (CDU), said that Berlin should restrict Turkish financing of mosques in Germany and begin training and certifying its own imams. Otherwise, he argued, Muslim integration will be difficult or impossible to achieve. He said:

"We need to become more critical in our dealings with political Islam, because it hinders Muslim integration in our country. We need an Islam Law. The financing of mosques or Islamic kindergartens from abroad, e.g. from Turkey or Saudi Arabia, should be banned. All imams need to be trained in Germany and share our core values.

 

"It cannot be that we are importing different, partly extreme values ??from other countries. German must be the language of the mosques. Enlightened Europe must cultivate its own Islam.

"We are still at the beginning of our efforts. We must start now. We cannot on the one hand enact an Integration Law and on the other side close our eyes to what is being preached in mosques and by whom."

Scheuer's comments come amid reports that the Turkish government has sent 970 clerics — most of whom do not speak German — to lead 900 mosques in Germany that are controlled by the Turkish-Islamic Union for Religious Affairs (DITIB), a branch of the Turkish government's Directorate for Religious Affairs, known in Turkish as Diyanet.

Successive German governments are responsible for this state of affairs. An essay in Der Tagesspiegel states: "Over past decades, the federal government has welcomed the fact that the Turkish religious authority exercises a great influence on German mosques. Turkey was considered a secular state, and their influence was viewed as a shield against religious extremism."

This was before Turkish President Recep Tayyip Erdogan embarked on a mission to turn the formerly secular nation an Islamic country.

According to Die Welt, Erdogan has increased the size, scope and power of the Diyanet, which now has a budget of 6.4 Turkish lira ($2.3 billion; €1.8 billion), which is more than the budgets of 12 Turkish government ministries, including the interior ministry and the foreign ministry. The Diyanet now has 120,000 employees, up from 72,000 in 2004.

The Turkish clerics in Germany are effectively Turkish civil servants who do the bidding of the Turkish government. Critics accuse Erdogan of using DITIB mosques to prevent Turkish migrants from integrating into German society.

German politician Cem Özdemir, co-chairman of the Green Party, said that DITIB is "nothing more than an extended arm of the Turkish state." He added: "Rather than being a legitimate religious organization, the Turkish government has turned DITIB into a political front organization of Erdogan's AKP party. Turkey must let go of the Muslims in Germany."

Erdogan has repeatedly warned Turkish immigrants not to assimilate into German society.

The Cologne Central Mosque, run by DITIB, is used as a key base in Germany for Turkey's intelligence agency, where they run a local "thug squad" to mete out "tough punishments" to Turkish dissidents in Germany. (Image source: © Raimond Spekking/CC BY-SA 4.0, via Wikimedia Commons)

During a trip to Berlin in November 2011, Erdogan declared: "Assimilation is a violation of human rights." In February 2011, Erdogan told a crowd of more than 10,000 Turkish immigrants in Düsseldorf: "We are against assimilation. No one should be able to rip us away from our culture and civilization." In February 2008, Erdogan told 16,000 Turkish immigrants in Cologne that "assimilation is a crime against humanity."

For his part, Saudi Arabia's King Salman recently announced a plan to finance the construction of 200 mosques in Germany to provide for the spiritual needs migrants and refugees who arrived there in 2015. The mosques would, presumably, adhere to Wahhabism, the official and dominant form of Sunni Islam in Saudi Arabia. Wahhabism is an austere form of Islam that insists on a literal interpretation of the Koran.

On April 11, Hans-Georg Maassen, the head of Germany's domestic intelligence agency (BfV), expressed alarm at the growing number of radical Arab-language mosques in Germany. "Many mosques are dominated by fundamentalists and are being monitored because of their Salafist orientation," Maassen said in an interview with Welt am Sonntag. He added that many of the mosques were being financed by donors in Saudi Arabia.

It remains uncertain, however, whether Merkel will back the "Islam Law," which is certain to antagonize Erdogan, who effectively controls the floodgates of Muslim mass migration to Europe. If Merkel were openly to support a ban on foreign financing of mosques in Germany, Erdogan likely would threaten to pull out of the EU-Turkey deal on migrants, a deal Merkel desperately needs to stanch the flow of mass migration to Germany. It is yet another indication of the tremendous leverage Erdogan has gained over Merkel and German policymaking.

Germany's coalition government has, however, reached a compromise deal on a new "Integration Law."

On April 14, Merkel announced the broad outlines of the law, which will spell out the rights and responsibilities of migrants in Germany. Under the law, the text of which will be finalized by May 24, asylum seekers must attend German language classes and integration training or have their benefits cut.

The government pledged to make it easier for asylum seekers to gain access to the German labor market by promising to create 100,000 new "working opportunities." The government will also suspend a law requiring employers to give preference to German or EU job applicants over asylum seekers.

In an effort to prevent the spread of migrant ghettoes in Germany, the new law, which is expected to enter into force this summer, will prohibit refugees from choosing where they live until they have secured asylum. Migrants who abandon state-assigned housing would face unspecified sanctions.

The new law also includes a counter-terrorism provision, which would allow German intelligence agencies to work more closely with their European, NATO and Israeli counterparts.

"We will have a German law on integration," Merkel said. "This is the first time in post-war Germany that this has happened. It is an important, qualitative step."

But critics say the proposed law does not go far enough because it does not threaten with deportation those migrants who refuse to integrate. In his interview with Die Welt, Scheuer insisted that Muslim immigrants must integrate or be deported:

"Anyone who fails to attend integration and language courses attests that they are not prepared to integrate and accept our values. Moreover, it is important that people who want to stay in Germany register with the Federal Employment Agency [Bundesagentur für Arbeit] and provide for their own livelihood. The message is clear: Those who are not integrated cannot stay here. We need to cease having romantic views of integration. Multiculturalism has failed. Those who are not integrated must count on deportation."

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