Tag: news

While 2014 has not quite panned out (so far) as the traveling-strategist-roadshow would have hoped, the last few days have been outright perilous for the record high numbers with bullish sentiment sucked into a world of central-bank-suppressed volatility and jawboned utopia. The following charts show where the pain has been (e.g. Greece, Spain, Argentina, European banks) and where it has not been (e.g. gold miners, China, Philipinnes, and Egypt) with the US indices sitting squarely in the middle with some of their biggest losses in months. For now, the BTFATH'ers are absent – even though the drooling mouths of asset-gatherers are demanding the 'cash on the sidelines' use this 2-3-4% drop from the all-time highs to load the boat for retirement heaven… However, some have increasing concerns…

 

The last 5 days…

 

But the names change notably for the year so far…

 

And as a bonus chart (h/t @M_McDonough) here is an interactive chart with the entire dataset described…

 

 

 

As John Hussman notes – Increasing Concerns and Systemic Instability

…

 

Increasing our concern is also a very well-defined log-periodic bubble running from 2010 to the beginning of this year, which we estimate is now past its “finite-time singularity” (see A Textbook Pre-Crash Bubble).

 

 

Increasing our concern is the shift to increased short-interval volatility just at the point of that singularity (which we estimate as January 13 – when 2-10 minute fluctuations began looking like the p-wave on a seismogram). Increasing our concern is the highest level of option “skewness” in history as option prices reflect extreme "tail risk" as they did prior to the 1987 crash (the 30-day average of skewness reached a record high on Friday – see Estimating the Risk of a Market Crash).

 

Increasing our concern is a 10-week average of advisory bulls at 57.7% versus just 14.8% bears – the most lopsided bullish sentiment in decades. Add the record pace of speculation on borrowed money, with NYSE margin debt now at 2.5% of GDP – an amount equivalent to 26% of all commercial and industrial loans in the U.S. banking system.

 

Add the currency collapses in Argentina and Venezuela, as well as fresh credit strains and industrial shortfall in China, and one has any number of factors that could be viewed in hindsight as a “catalyst” (as the German trade gap was viewed after the 1987 crash, in the absence of other observable triggers).

 

Against all of these concerns is the recognition that the market doesn’t move in a straight line, and that the risks that concern us here have concerned us – though at less extreme levels – too long for many investors to give them much immediate credibility. Immediacy wasn’t really our strong suit in 2000 or 2007 either, but by the time our concerns played out, we still found ourselves far ahead over the complete cycle, with far less pain than speculators endured. Despite the challenges of an unusual but also unfinished half-cycle, and despite our awkward stress-testing transition, I'm comfortable that the tools we've developed and the benefits of discipline will be evident enough over the completion of this cycle and throughout future ones. But as Kierkegaard wrote, “patience is necessary, and one cannot reap immediately where one has sown.”

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First HSBC bungles up an attempt at pseudo-capital controls by explaining that large cash withdrawals need a justification, and are limited in order “to protect our customers” (from what – their money?), which will likely result in even faster deposit withdrawals, and now another major UK bank – Lloyds/TSB – has admitted it are experiencing cash separation anxiety manifesting itself in ATMs failing to work and a difficult in paying using debit cards. Sky reports that customers of Lloyds and TSB, as well as those with Halifax, have reported difficulties paying for goods in shops and getting money out of ATMs.

All three banks are under the Lloyds Banking Group which said: “We are aware that some customers are unable to use their debit cards either to make purchases or to withdraw money from ATMs. “We are working hard to resolve this as swiftly as possible and apologise for any inconvenience caused.”

Further from SkyNews, TSB, which operates as a separate business within the group, issued a statement saying: “We are aware that some TSB customers are unable to use their debit cards either to make purchases or to withdraw money from ATMs. “This has impacted all Lloyds Banking Group brands. We are working hard to resolve this and unreservedly apologise for any inconvenience caused.”

TSB chief executive Paul Pester said in a tweet: “My apologies to TSB customers having problems with their cards. I’m working hard with my team now to try to fix the problems.”

Clients were not happy:

On the microblogging site, one TSB customer Nicky Kate said: “Really embarrassed to get my card declined while out shopping, never had any problems with lloyds then they changed my account.”

 

Hannah Smith: “I am a TSB customer with a Lloyds card still (like everyone else). And I’ve been embarrassed three times today re: card declined.”

 

Another customer Julia Abbott ‏said: “Lloyds bank atm and card service down. 20 mins on hold to be told this. Nothing even on website. Shoddy lloyds. … shoddy.”

 

Helen Needham ‏said: “#lloyds bank having problems with there card service… Can’t pay for anything or get money out!”

 

Another Twitter user wrote: “This problem is also affecting Halifax debit cards as I found out trying to pay for lunch with my wife!”

 

And Jane Lucy Jones tweeted Halifax, saying: “Why can’t I get any money out of any cashpoints, what is going on?

What is going on is known as a “glitch” for now, and perhaps as “preemptive planning” depending on who you ask. Sure, in a few months in may be called a bail-in (see Cyprus), but we will cross that bridge when we get to it.

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The global capital markets imploded in the second half of last week and investors spent the weekend contemplating the significance.  The main focus was on the emerging markets, which were especially hard hit.  

 

American-firsters (the tendency on the political right and left to blame the US first for all the undesirable things that happen in the world) jumped at the opportunity.   Even in the Financial Times, which acknowledged other factors at work deemed worthy of a call out that the “Exit of money from Argentina has been driven by renewed concern about the US Fed”.   Really? 

 

That concern ostensibly is that the Fed is going to proceed with its tapering strategy announced last month. As the Fed reduces its yield compression efforts (QE), interest rates are expected to rise and making those emerging market countries reliant on foreign capital inflows (current account deficit countries) particularly vulnerable.    We have seen in this in the recent past.  Emerging market crisis have often happened when the Fed tightened.  It is happening again.  Q.E.D.  Any further analysis has been rendered superfluous.  

 

Rather than deduce the recent crisis from such rules, a quick reality check suggests a far more complicated picture.  Moreover, the fact of the matter is the US interest rates have fallen not increased so far this year.  Since peaking near 3.05% at the very start of the month, the US 10-year yield slipped 20-25 bp even before the equity market slide in the second half of last week.  The short-end of the curve has been steadier, with the 2-year yield off about 4 bp this month.  The short-dated T-bills have come under some pressure amid increased anxiety over the debt ceiling deadline and discordant rhetoric from Washington.

 

There are two levels of analysis that are relevant in a proper analysis:  international and national. The international level of analysis would note other forces beside the Fed tapering.  Four are in fact readily apparent.  Two of them relate to China.  

 

First, the HSBC flash manufacturing PMI was below the 50 boom/bust level, warning that economy is still slowing.  Many emerging markets have grown on the back of China’s growth.  Brazil and South Africa, for example, appear particularly sensitive to such a development.  Second, there is heightened fear that China may accept the failure of a wealth management product that is thought to expire at the end of the month, just before the Lunar New Year, which is also absorbing liquidity.  

 

Some fear a slippery slope, where one failure would be the spark panic in a situation fraught with moral hazard.   Wealth management products appeared to offer investors significantly higher short-term yield than available in the market and seemingly guaranteed by the big bank distributors  

 

The third international pressure on emerging markets came from pressure to unwind yen (and to some extent Swiss franc) cross positions.  Many leveraged participants were using the yen as a financing currency to fund the purchase of some emerging markets.  As the  Commitment of Traders report from the CME currency futures show, the short yen position was extreme.  Ironically, the decline in US Treasury yields may have helped spark the yen short squeeze that forcing players out of the long end of the position.  

 

The fourth international factor involves the increasing reliance of central banks on forward guidance. Comments by BOE Governor Carney and one of the acknowledged innovators of forward guidance, suggested that it was GTC (good-til-close).  

 

Some saw in Carney’s comments an abandonment of forward guidance.   Contagion was a word thrown around last week in terms of price action, but questions raised by Carney’s comments put the Fed’s forward guidance under question as well.   It seemingly removed an anchor of monetary policy.  

 

We have argued that the confidence of the Fed’s forward guidance was on fragile footing.  First, it was announced by a Fed chairman that was not going to implement it.  Second, Obama and Bernanke have done nearly everything one would advise if one wanted to prevent Yellen from exerting strong leadership: have her predecessor lay out, in some detail, the path of the Fed for the next year; do not have Bernanke resign upon Yellen’s confirmation; and nominate as the vice-chairman a person whose track record of accomplishments and experience cannot help buy overshadow the Yellen.   

 

After Obama’s first choice to succeed Bernanke (Summers) was not successful, the President had little choice but to accept Yellen. His reluctance seems painfully obvious and we suspect to the detriment of investor confidence.  

 

We have argued that forward guidance is a communication style that is simply being emphasized now, as central banks (except for the BOJ) move away from unorthodox policies.  Just as the Fed tried, initially with little success, to convince investors that tapering was not tightening, so too officials will have to help investors appreciate the difference between thresholds and triggers.  

 

The threshold has been approached in the UK.  In effect, Carney said, “Yes, the unemployment is near the threshold we identified.  We have reviewed the situation and have decided that it will still be some time before we think we will need to raise interest rates.”  The lack of wage pressure suggests plenty of slack still in the labor market.  

 

Yet one would be remiss if the analysis stops with these factors without considering the national level. Indeed, when looking what is happening in several countries, the international factors look relatively minor.   Surely, one cannot ignore the domestic developments in Ukraine and Thailand for example. 

 

Argentina, without much good will among investors, lost more confidence, not because the Fed tapering or China challenges, but because the President replaced her economic team in November and still has failed to rein in the large current account deficit or deal with the near 25% officially recognized inflation.  Last week the central bank stopped throwing its reserves away (losing a third over the past year).  Even with the peso’s decline, it is still well above the black market rate.  

 

Look at Turkey.  The political leadership is struggling as two Islamic factions clash.  Turkey has a current account deficit of 7.5% and inflation around 7.5% as well.  Seemingly due to political pressure, Turkey’s central bank refused to hike the overnight lending rate, which at 7.75%, is barely positive.  Turkish reserves are only a little higher than Argentina’s.  

 

This is not meant to be exhaustive, just suggestive of the role that national developments played last week in the meltdown seen in many emerging markets.  We note that China’s shares were the best performer, with the Shanghai Composite up 2.5% and the smaller-cap Shenzhen Composite was up a little more than 5%. Equities also advanced in Taiwan, India, Thailand and Indonesia.  According to data Bloomberg receives from the local stock exchanges, India, Indonesia, Philippines and especially Taiwan saw net foreign purchases last week.  

 

Some emerging markets have made significant strides in the past decade or two.  Others have benefited more from a rising tide of liquidity.  We suspect that many investors exaggerate the structural reforms and minimize the role of liquidity.  Emerging markets, as an asset class, have been under-performing for months. The acceleration last week seems largely a result of local events and position adjustment rather than higher US interest rates.  The lack doubts over forward guidance in the UK and US is in the direction of keeping policy looser for longer, not in tightening sooner.  

 

There are many events and economic reports due in the week ahead that could capture the imagination of market participants, though the directive of preserving capital may be dominant.  The increased volatility may encourage participants to wait for the event risk to pass before re-engaging.   A number of emerging market central banks meet, (India, Malaysia, Israel, South Africa and Mexico), but no policy changes are expected.  

There are two highlight for the US.  The first is the FOMC meeting that concludes Wednesday, without a press conference.  We suspect the risk of lowering the 6.5% unemployment threshold is minor compared with the likelihood that it will underscore that rates will remain low until unemployment is well below that threshold.  We expect it to continue to taper, reducing its asset purchases in February to $65 bln  This still seems significant and about 50% larger than QE3 before Operation Twist’s purchases were rolled into it. 

 

Second, the US reports its first estimate of Q4 GDP the following day.  The second half of last year was particularly strong for the US and a 3-handle on Q4 GDP seems a reasonable bet.  And that is with inventories accumulation acting like a modest drag on growth.  Final sales then could be in the 3.5%-4.0% area.    Growth is expected to slow here in Q1, partly weather induced.  

 

Turning to the euro area, we expect next week’s data to help stabilize deflationary fears and argues against the ECB unveiling any new initiative next month.    We have argued that disinflation, and even deflation, in the periphery is seen by many officials as necessary and evidence of a internal devaluation that will boost competitiveness.  Money supply in the euro area is expected to have ticked up in December from 1.5% to 1.7%.  It is still too low, but the lack of fresh declines means that the urgency to act may wane.  Similarly, the preliminary January CPI may also show a small increase (0.9% year-over-year from 0.8%), confirming no further deterioration.   The December unemployment rate may have remained steady (12.1%).  

 

The UK reports its initial estimate of Q4 GDP on Tuesday.  The recovery of the UK economy in 2013 was one of the biggest pleasant surprises of the year.  It is expected to have finished the year in good form, expanding around 0.8% on the quarter.    The risk may be slightly on the downside, due to construction. Separately, BOE Governor Carney has promised an update on forward guidance with the quarterly inflation report on February 12, before which there will be another round of CBI/PMI reports.   

 

Japan reports December trade figures first thing Monday in Tokyo. Another lag deficit is expected as a weak yen has boosted import prices more than Japanese produces have cut export prices.  Yet export growth and domestic demand is seen as  sufficient to boost industrial output (+1.3%-1.5%).  Overall household spending is expected to have risen 1.2% (year-over-year) in December after only 0.2% in November.  The December CPI will be reported, and is expected to be unchanged at 1.5% on the headline and 1.2% on the core (excludes fresh food). 

 

The Reserve Bank of New Zealand meets on January 29.   The RBNZ is widely expected to lift its cash rate this year.  However, the odds of a move now were always slim and got slimmer last week.   There is no great urgency; March will suffice.

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Following the quiet update that HSBC had decided to withhold large cash withdrawals from some if its clients – demanding to know the purpose of the withdrawal before handing over the customers’ money – it appears the anger among the over 60 thousand readers who found out about HSBC’s implied capital shortfall just on this website, has forced HSBC’s hands.

The bank issued a statement (below) this morning defending their actions – it’s for your own good – but rescinding the decision – “following feedback, we are immediately updating guidance to our customer facing staff to reiterate that it is not mandatory for customers to provide documentary evidence for large cash withdrawals.” After all the last thing the bank, which over the past few years has been implicated in aiding an abetting terrorists and laundering pretty much anything, wants is an implied capital shortfall to become an all too explicit one.

Via HSBC – Statement On Large Cash Withdrawals

25 Jan 2014

 

As a responsible bank we ask our customers about the purpose of large cash withdrawals when they are unusual and out of keeping with the normal running of their account. Since last November, in some instances we may have also asked these customers to show us evidence of what the cash is required for. The reason being we have an obligation to protect our customers, and to minimise the opportunity for financial crime. Large cash transactions have inherent security issues and leave customers with very little protection should things go wrong, by asking customers the right questions, we can explore whether an alternative payment method might be safer and more convenient for them.

 

However, following feedback, we are immediately updating guidance to our customer facing staff to reiterate that it is not mandatory for customers to provide documentary evidence for large cash withdrawals, and on its own, failure to show evidence is not a reason to refuse a withdrawal. We apologise to any customer who has been given incorrect information and inconvenienced.

Indeed, as one HSBC customer exclaimed, “you shouldn’t have to explain to your bank why you want that money. It’s not theirs, it’s yours.”

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Something has bothered me of late: why is the price of crude oil still elevated? Other commodities have taken a battering since 2011. Gold, copper and iron ore – all are way down off their peaks. But oil has seemingly defied gravity. And that’s despite increased supply from shale oil in the U.S., still soft demand particularly in the developed world and declining rates of inflation growth across the globe.

What gives? Well, shale oil proponents will say falling oil prices are just a matter of time. And that the boom in shale oil will reduce U.S. reliance on foreign oil, leading to cheaper local oil, which will free up household budgets and spur consumption as well as the broader economy. Perhaps … though I’d have thought all of that would be already reflected in prices.

On the other side, you have “peak oil” supporters who suggest high oil prices are perfectly natural when oil production has peaked, or at least the good stuff has disappeared. Yet the boom in U.S. shale oil appears to put at least a partial dent in this thesis.

There may be a better explanation, however. It comes from UK sell-side analyst, Tim Morgan, in an important new book called Life After Growth. In it, he suggests that the era of cheap energy is over. That the new unconventional forms of oil are far less efficient than old ones, meaning they require significant amounts of energy to produce. In effect, the energy production versus energy cost of extraction equation is rapidly deteriorating.

Morgan goes a step further though. He says cheap energy has been central to the extraordinary economic growth generated since the Industrial Revolution. And without that cheap energy, future growth will be permanently impaired.

It’s a bold view that’s solidified my own thinking that higher energy prices are here to stay. And the link between cheap energy and economic growth is fascinating and worth exploring further today. Particularly given the implications for the world’s fastest-growing and most energy-intensive region, Asia.

Real vs money economy

First off, a thank you to Bob Moriarty of 321gold for tipping me off to Morgan’s work in this well-written article. Morgan’s book is worth getting but if you want the skinny version, you can find it here.

Morgan begins his book outlining four key challenges facing economies today:

1. The biggest debt bubble in history
2. A disastrous experiment with globalisation
3. The massaging of data to the point where economic trends are obscured
4. The approach of an energy-returns cliff edge

The first three points aren’t telling us much new so we’re going to focus on the final one.

Here, Morgan makes a key distinction between what he terms the money economy and the real economy. He suggests economists around the world have got it all wrong by focusing on money as the key driver of economies.

Instead, money is the language rather than the substance of the real economy. The real economy is a surplus energy equation, not a monetary one, and economic growth as well as the increase in population since 1750 has resulted from the harnessing of ever-greater quantities of energy.

In fact, society and economies began when agriculture created surplus energy. Before agriculture, in the hunter-gatherer era, there was an energy balance where the energy which people derived from food was largely equivalent to the energy that they expended in finding the food.

Agriculture changed that equation. It allowed for the creation of surplus energy. In essence, three people could be supported by the labor of two people, allowing one person to engage in non-subsistence activities. This person could make better agricultural tools, build bridges for better infrastructure and so on. In economic parlance, this person didn’t have to concentrate on products for immediate consumption but rather the creation of capital goods. The surplus energy equation allowed for that.

The second key development was the invention of the heat engine by Scottish engineer James Watts in 1769, although a more efficient version was produced later in 1799. This invention allowed society to access vast energy resources contained in oil, natural gas, coal and so forth. In other words, the industrial revolution allowed the harnessing of more energy to apply vast leverage to the economy.

In sum, the modern economy is the story of how society overcame the limitations of the energy equation. Or as Morgan puts it: “…all goods and services on which money can be spent are the products of energy inputs, either past, present or future.”

The creation of surplus energy during the Industrial Revolution and subsequent explosion in economic and population growth isn’t an accident. They’re tied at the hip.

Understanding the distinction between the money economy and the real economy can also help us better understand debt. Debt is a claim on future energy. The ability of indebted governments to meet their debt commitments will partially depend on whether the real (energy) economy is large enough to make this possible.

Era of cheap energy is over

Morgan goes on to say that the era of surplus energy, which has driven economic growth since 1750, is over. The key isn’t to be found in the theories of “peak oil” proponents and the potential for absolute declines in oil reserves. Instead, it’s to be found in the relationship between the energy extracted versus the energy consumed in the extraction process, also known as the Energy Return on Energy Invested (EROEI) equation.

The equation maths aren’t difficult to understand. If the EROEI is 10:1, it means that 10 units are extracted for every 1 unit invested in the extraction process.

From 1750-1950, the EROEI of oil discoveries was very high. For instance, discoveries in the 1930s had 100:1 EROEIs. That ratio declined to 30:1 by the 1970s. Today, that ratio is at about 17:1 with few recent discoveries above 10:1.

Morgan’s research suggests that going from EROEIs of 80:1 to 20:1 isn’t disruptive. But once the ratio gets below 15:1, energy becomes a lot more expensive. He suggests the ratio will decline to 11:1 by 2020 and the cost of energy will increase by 50% as a consequence.

Non-conventional sources of oil will provide little respite. Shale oil and gas have EROEIs of 5:1 while tar sands and biofuels are even lower at 3:1. In other words, policymakers who pin their hopes on shale oil reducing energy prices are seriously deluded.

And further technological breakthroughs to better locate and extract oil are unlikely to help either. That’s because technology uses energy rather than creates it. It won’t change the energy equation.

While some unconventional sources offer hope, such as concentrated solar power, they won’t be enough to offset surplus energy turning to a more balanced equation.

Oeuvre to growth tool

If the real economy is energy and the days of surplus energy are coming to an end, then so too is economic growth, according to Morgan. In his own words:

“…the economy, as we have known it for more than two centuries, will cease to be viable at some point within the next ten or so years unless, of course, some way is found to reverse the trend.”

This terribly pessimistic conclusion requires some further explanation. Morgan explains the link between energy and the economy thus. If your EROEI sharply declines, it means more energy is needed for extraction purposes and less energy is available to the economy. Ultimately, this results in the cost of energy rising as a proportion of GDP, leaving less value for other things. Put another way, with the leverage from surplus energy diminished, there’s less energy available for discretionary uses.

Implications

Now I don’t have total buy-in to Morgan’s thesis. It certainly solidifies my thinking that the era of cheap energy is indeed over. It provides a unique and compelling way to think about this. And the proof is seemingly all around us. It explains the high oil prices and the surge in agriculture prices (agriculture relies on energy inputs).

You can’t help but being more bullish on energy and agriculture plays in the long-term. Oil drillers for one as they’re more reliant on increased work than the price of oil. Also, the likes of fertiliser companies given agriculture land is tapped out, making an increase in output essential and thereby requiring greater quantities of fertiliser.

Morgan thinks inflation is on the way given a squeezed energy base with still escalating monetary bases. Regular readers will know that I am a deflationist over the next few years. But nothing is certain in this world and Morgan’s arguments on this front have some credibility.

As for whether this spells the end of a glorious 250 year period of economic growth, well, I’m not so sure. The link between energy and economies is compelling. But whether we’re at a tipping point where surplus energy disappears is a guess. I’m convinced that we’re coming up against resource constraints that will inhibit economic growth. To say that we’re imminently coming to the end of economic growth requires further evidence, in humble opinion.

Impact on Asia

Asia has been the largest demand driver for energy over the past decade. The region’s net oil imports total 17 million barrels of oil a day. China is now the largest net oil importer, having recently overtaken the U.S.. Other large net oil importers in Asia include India and Indonesia. Obviously, higher oil prices would be detrimental to these net importing countries.

It may be somewhat offset by agricultural prices staying higher for longer. China and India are agricultural powerhouses. And the impact of agriculture on their economies is still profound (agriculture accounts for 14% of Indian GDP and 10% of China).

On the other hand, higher agricultural prices mean higher food prices. And given lower incomes in Asia, the proportion of household budgets dedicated to purchasing food is much higher than the developed world. Therefore higher food prices has a larger impact on many Asian countries. Witness periodic recent protests on this issue in Indonesia, Thailand and India. So net-net, higher energy prices would still be a large negative for Asia.

Turning to resource constraints potentially inhibiting future economic growth: given Asia has the world’s strongest GDP growth, it would be disproportionately hit if this scenario is right. The past decade may represent a peak in the region’s economic output. Whether there’s sharp drop or gradual fade is impossible to forecast.

These are but a few of the potential implications for Asia.

AC Speed Read

– The real economy is a surplus energy equation, or the harnessing of ever-greater quantities of energy.

– That equation has deteriorated to such an extent that one can now declare the era of cheap energy over.

– If the economy is energy and cheap energy is gone, future economic growth will be inhibited.

– Consequently, higher energy and agricultural prices can be expected in the long-term.

– The impact on Asian growth may be disproportionately large.

This post was originally published at Asia Confidential:
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How does a group of Davos billionaires resolutely crush inequality? Well, it all starts by spending CHF 80,193.00 on assorted fingerfood plates, drinks and of course: Bollinger. And don’t forget – you aren’t really fighting the great war on inequality unless you spend 30 Swiss Francs on water and 460 francs for snacks. Anything less than that and your 0.001% peers may think you are merely an imposter in the great class convergence war…

Via Bloomberg’s Erik Schatzker

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