Baltic Dry Index. 757 -05 Brent Crude 48.10
LIR Gold Target in 2019: $30,000. Revised due to QE programs.
"You
can be on the right track and still get hit by a train!"
Mad
Magazine.
We open with the Great Disconnect starting to wobble.
What if the great oil bust isn’t a “great tax cut?” What if it’s merely another
commodities bubble bust? A correction in the Great QE Malinvestment. What if
the “talking chair’s” put is a mere grand delusion? What happens when the
supply of greater fools runs out in Tulipmania?
We open with Mad Magazine’s panel of paid economists, Wot
me worry, say one and all.
Faced with the choice between changing one's mind and proving that there is no need to do so, almost everyone gets busy on the proof.
John Kenneth Galbraith
What, Us Worry? Economists Stay Upbeat as Markets See Trouble
Jan 14,
2015 9:36 PM GMT
The U.S. consumer, that dynamo of the global economy, just took a step back.
Relax. It’s not that bad, economists say.
News Wednesday that U.S. retail sales unexpectedly declined in December reverberated through financial markets, but few economists read the report as a sign of trouble for the nation’s economy.
In fact, many economists say the U.S. economy is doing just fine.
So why did the markets react the way they did? The answer, in part, is that the report added to a wall of worry confronting investors. Topping the 2015 angst-list are the plunge in oil and other commodities, as well as slowdowns in China and Europe.
“It feels like a global recession when you look at the markets,” said David Hensley, director of global economics for JPMorgan Chase & Co. in New York. But looking at economic data, “we’re certainly not seeing anything that’s unnerving us.”
For the moment, the 0.9 percent decline in December retail sales reported by the Commerce Department has pushed back market expectations for when the Federal Reserve will start raising interest rates. It also has bond investors betting that inflation will stay low.
Forecasts change all the time. But before anyone panics over one economic number, here are four reasons to stay optimistic about the U.S. economy, which is still in the driver’s seat of global growth.
* December sales figures aside, U.S. consumers aren’t running scared. Yes, last month’s decline was the biggest in a year. But consumer spending probably rose at an annual rate of more than 4 percent during the fourth quarter as a whole, according to Ted Wieseman, an economist Morgan Stanley. The first quarter of this year is looking just as good, Wieseman wrote in a note today to clients.
* The U.S. jobs market is perking up. Less than a week ago, investors were cheering news of another big rise in U.S. payrolls. In all, the economy added about 3 million jobs last year. “The U.S. is doing great relative to the rest of the developed world,” said Jim O’Sullivan, chief U.S. economist at High Frequency Economics in Valhalla, N.Y.
* The plunge in oil and other commodities is mostly good news for consumers. Cheaper oil means cheaper fuel. And most economists say that’s good for global growth. The plunge in oil, for example, largely reflects an increase in supply, from shale and the like, rather than a decrease in demand. U.S. production of crude oil rose to 9.19 million barrels a day last week, the highest in Energy Information Administration weekly estimates going back to 1983.
More
Inside The December Retail Report: “Disappointing” Isn’t The Half Of It
by David Stockman •
Today’s 0.9% decline in December
retail sales apparently came as a shock to bubblevision’s talking heads. After
all, we have had this giant “oil tax cut”, and, besides, the US economy has
“decoupled” from the stormy waters abroad and is finally on its way to “escape
velocity”.
The Wall Street touts and
Keynesian economic doctors have been saying that for months
now—-while averring that all the Fed’s massive money printing is finally
beginning to bear fruit. So today’s retail report is a real
stumper—–even if you embrace Wall Street’s sudden skepticism about
government economic reports and ignore the purported “noise” in the
seasonally maladjusted numbers for December.
All right then. Forget the
December monthly numbers. Why not look at the unadjusted numbers in
the full year retail spending report for 2014 compared to the prior year. Recall that the swoon from last
winter’s polar vortex overlapped both years, and was supposed to be a temporary
effect anyway—–a mere shift of consumer spending to a few months down the road
when spring arrived on schedule.
On an all-in basis, total retail
sales in 2014 rose by $210 billion or a respectable 4.0%. But 58% of that
gain was attributable to two categories—auto sales and
bars&restaurants—which accounted for only 28% of retail sales in 2013. And
therein lies a telling tale.
New and used motor vehicle
sale alone jumped by $86 billion in CY2014 or nearly
9%. Then again, during the most recent 12 months auto loans outstanding
soared by $89 billion. Roughly speaking, therefore,
consumers borrowed every dime they spent on auto purchases and took home a few
billion extra in spare change.
The point here is that no economy
can thrive for long—especially one already at “peak debt”—-based on
consumer “spending” that is 100% dependent upon borrowed
funds. Yet that has been the essence of the retail sales rebound
since the Great Recession officially ended in June 2009. Auto sales, which have
been heavily financed by borrowing, are up by about 70%; the balance of
non-auto retail sales, where consumer credit outstanding is still
below the pre-crisis peak, has gained only 22%.
Stated differently, the only
credit channel of monetary policy transmission which is still working is auto
credit. Yet as indicated earlier this week (see, “The US Hasn’t
“Decoupled” And There Ain’t No Giant “Oil Tax Cut”) that
actually amounts to a proverbial “accident” waiting to happen.
On the margin, the boom in
auto loans, which are now nearing $1 trillion in outstandings, is on
its last leg. The latest surge of growth has been in “subprime”
credit based on the foolish assumption that vehicle prices never come down; and
that the junk car loan boom led by fly-by-night lenders is
nothing to worry about since loans are “collateralized”. That is,
they could be made to derelicts and deadbeats as long as their location
is known to the repo man.
The problem with that glib
assumption is that it ignores the lesson of the housing crisis, where it was
also said—by Bernanke himself—-that nationwide housing prices never fall. Yet
what happened in 2006-2007 is that the residential housing stock got
massively over-priced, and was then collaterized at these lofty,
unsustainable levels. So when the last deadbeat mortgage borrower got funded,
the price level broke and the house of cards came tumbling down, pulling prime
borrowers as well as subprimes underwater as valuations plunged.
And so it goes with autos.
Including the backdoor debt on rental fleets and leased vehicles, there is
now more than $2 trillion of debt on the auto fleet, and there are
millions of vehicles coming off-lease owing to the financing surge of recent
years. When the subprime car loans begin to fail at double digit
rates—-and frisky lenders like Santander are already there—-the repo man will
get busy like never before. And that will mean, in turn, a tsunami of discount
vehicles at the used car auctions, and a subsequent bout
of price destruction up-and-down the entire auto food chain.
More
"Today, if you ask a car dealer to let you see
something for 10 grand, he'll show you the door!"
Mad Magazine.
In oil news, crude got a dead cat bounce from options expiration. “Drill
baby drill,” said North Dakota’s Republican Governor Dalrymple, before adding “we’re
saved.” “Let’s go for independence again,” demanded former Scots “Stalin” “Wee
Eck.”
“No one believes more firmly than Comrade
Salmond that all Scots are equal. He would be only too happy to let you make
your decisions for yourselves after independence. But sometimes you might make
the wrong decisions, comrades, and then where should we be?
From the Orwellian
thoughts of former SNP Chairman Salmond:
Oil Rebounds From 5 1/2-Year Low
Jan 14, 2015 9:28 PM GMT
Crude oil surged the most in more than 2 1/2 years after falling to the
lowest since 2009. Oil futures rose 5.6 percent in New York and 4.5 percent in London. Options expiration bolstered activity, while technical indicators signaled that crude was due for a rebound. Futures have dropped the past six months, the longest stretch in six years. During this period West Texas Intermediate posted five weekly gains before resuming its slide.
“We’ve fallen so far so fast that some folks think it’s time to call a bottom,” Michael Wittner, head of oil research at Societe Generale in New York, said by phone. “It’s way premature to say the bear market is over. We’ve been stair-stepping down all along and at several stages the market has had to take a breather.”
Oil slumped almost 50 percent last year, the most since 2008, as the Organization of Petroleum Exporting Countries resisted calls to cut output even as the U.S. pumped at the fastest rate in more than three decades. WTI briefly traded higher than Brent yesterday for the first time since July 2013, a signal that Saudi Arabia’s strategy of curbing shale output growth is working, according to Societe Generale.
More
Gravy Train Derails for Oil Patch Workers Laid Off in Downturn
Jan 14, 2015 9:49 PM GMT
The first thing oilfield geophysicist Emmanuel Osakwe noticed when he
arrived back at work before 8 a.m. last month after a short vacation was all
the darkened offices. By that time of morning, the West Houston building of his oilfield services company was usually bustling with workers. A couple hours later, after a surprise call from Human Resources, Osakwe was adding to the emptiness: one of thousands of energy industry workers getting their pink slips as crude prices have plunged to less than $50 a barrel.
“For the oil and gas industry, it’s scary,” Osakwe said in an interview after he was laid off last month from a unit of Halliburton Co. (HAL), which he joined in September 2013. “I was blind to the ups and downs associated with the industry.”
It’s hard to blame him. The oil industry has been on a tear for most of the past decade, with just a brief timeout for the financial crisis. As of November, oil and gas companies employed 543,000 people across the U.S., a number that’s more than doubled from a decade ago, according to data kept by Rigzone, an employment company servicing the energy industry.
Stunned by the sudden plunge in the price of oil, energy companies have increasingly resorted to layoffs to cut costs since Christmas, shocking a new generation of workers, like Osakwe, unfamiliar with the industry’s historic boom and bust cycles.
Workers who entered the holiday season confident they had secure employment in one of the country’s safest havens now find themselves in shrinking workplaces with dimming prospects.
More
U.S. Oil Output Will Grow Even When Rigs Are Idle: Chart
Jan 15, 2015 12:00 AM GMT
U.S. oil production will reach new highs even after drillers idled the most
rigs since 1991, deepening a supply glut that’s driven prices down to five-year
lows, according to Barclays Plc. The CHART OF THE DAY shows the U.S. oil rig count fell by 61 to 1,421 last week, the steepest weekly decline since February 1991, according to Baker Hughes Inc. Petroleum-liquids production will increase by about 1 million barrels a day this year, according to Barclays forecasts. Output has gained about 1 million barrels a day annually since 2012.
“We are still riding the wave of the drilling activity that took place when prices were higher,” said Michael Cohen, an analyst at Barclays Plc in New York. Oil production may grow even as the rig count falls due to “the rapid productivity gains in many different places,” he said.
Oil production stayed below 6 million barrels a day from 2009 to 2011 while the rig count jumped. Output was 8.60 million in 2014, according to the Energy Information Administration.
Increased U.S. Output Bolsters Oil Glut Fears Sending Prices Back Down
Jan 15, 2015 6:03 AM GMT
Oil resumed its decline after the biggest gain since June 2012 as U.S. crude
production increased, bolstering speculation a global supply glut that spurred
last year’s price collapse may persist. Futures dropped as much as 1.3 percent in New York. U.S. output surged to 9.19 million barrels a day last week, the fastest pace in weekly records dating back to January 1983, the Energy Information Administration reported yesterday. Crude may fall below a six-month forecast of $39 a barrel and rallies could be thwarted by the speed at which lost shale production can recover, according to Goldman Sachs Group Inc.
Oil slumped almost 50 percent last year, the most since the 2008 financial crisis, as the Organization of Petroleum Exporting Countries resisted cutting output even amid the U.S. shale boom, exacerbating a surplus estimated by Kuwait at 1.8 million barrels a day. Prices rose yesterday as a relative strength index rebounded after more than two weeks below 30, a level that typically signals the market is oversold.
“You tend to arrive at points every now and then in major trends like this where you just see a little bit of short covering and profit taking,” Ric Spooner, a chief strategist at CMC Markets in Sydney, said by phone today. “Supply is still the general theme.”
Oil is leading this week’s slide in commodities after a decade-long bull market led companies to boost production and a stronger dollar diminished their allure to investors. The Bloomberg Commodity Index of 22 energy, agriculture and metal products decreased to the lowest level since November 2002 on Jan. 13, extending a 17 percent loss last year.
More
At the Comex silver
depositories Wednesday final figures were: Registered 65.69 Moz, Eligible 108.23
Moz, Total 173.93 Moz.
Crooks and Scoundrels Corner
The bent, the seriously bent, and the totally
doubled over.
"What
do I care about the law ? Hain't I got the power."
Mario
Draghi, with apologies to Cornelius Vanderbilt, 1794-1877.
Europe's imperial court is a threat to all our democracies
The European Court of Justice has this time departed a long way from the rule of the law, even by its own elastic standards
The European Court of Justice has
declared legal supremacy over the sovereign state of Germany, and therefore of
Britain, France, Denmark and Poland as well.
The ECJ's advocate-general has
not only brushed aside the careful findings of the German constitutional court
on a matter of highest importance, he has gone so far as to claim that Germany
is obliged to submit to the final decision. "We cannot possibly accept
this and they know it," said one German jurist close to the case.
The matter at hand is whether the
European Central Bank broke the law with its back-stop plan for Italian and
Spanish debt (OMT) in 2012. The teleological ECJ - always eager to further the
cause of EU integration - did come up with the politically-correct answer as
expected. The ECB is in the clear.
The opinion is a green light for
quantitative easing next week, legally never in doubt.
The European Court did defer to
the Verfassungsgericht in Karlsruhe on a few points. The ECB must not get mixed
up with the EU bail-out fund (ESM) or take part in Troika rescue operations.
But these details are not the deeper import of the case.
The opinion is a vaulting
assertion of EU primacy. If the Karlsruhe accepts this, the implication is that
Germany will no longer be a fully self-governing sovereign state.
The advocate-general knows he is
risking a showdown but views this fight as unavoidable. "It seems to me an
all but impossible task to preserve this Union, as we know it today, if it is
to be made subject to an absolute reservation, ill-defined and virtually at the
discretion of each of the Member States," he said.
In this he is right. "This
Union" - meaning the Union to which EU integrationists aspire - is
currently blocked by the German court, the last safeguard of our nation states
against encroachment. This is why the battle is historic.
"His opinion is a direct
affront to the German court. It asserts that the EU court has the final say in
defining and creating the EU's own powers, without any national check,"
said Gunnar Beck, a German legal theorist at the University of London.
"This would be a fundamental
transformation of the EU from a treaty organisation, which depends on the
democratic assent of the sovereign states, into a supranational entity."
Germany's judges have never
accepted the ECJ's outlandish claims to primacy. Their ruling on the Maastricht
Treaty in 1993 warned in thunderous terms that the court reserves the right to
strike down any EU law that breaches the German Grundgesetz or Basic Law.
They went further in their
verdict on the Lisbon Treaty in July 2009, shooting down imperial conceits. The
EU is merely a treaty club. The historic states are the “masters of the Treaties”
and not the other way round.
They set limits to EU
integration. Whole areas of policy “must forever remain German”. If the drift
of EU affairs erodes German democracy - including the Bundestag's fiscal
sovereignty - the country must “refuse further participation in the European
Union”.
The opinion of the ECJ's
advocate-general is not binding. But he works alongside the judges in the same
building on the Kirchberg Plateau and it is fair to assume that he is cleaving
closely to the court's outlook in such a pivotal case.
In a free speech case that I once
covered - Connolly v Commission (C-274/99 P) - another advocate-general
suggested that criticism of the EU is akin to "blasphemy" and may
legitimately be suppressed. His musings on blasphemy did not reach the final
judgment, but everything else did.
The European Court has this time
departed a long way from the rule of the law, even by its own elastic
standards. The opinion contradicts previous ECJ case law in the 2012 Pringle
case, when the court ruled that the ECB's purchases of government bonds amount
to economic policy, and implies fiscal union by the back door.
It gives the ECB almost
unfettered discretion, adding for good measure that the courts should refrain
from meddling in monetary policy. Not only is this an attempt to tie the hands
of the Verfassungsgericht when the inevitable case against QE is filed, it is
also enthrones the ECB over a monetary dictatorship answerable to nobody.
A
permanent Governor of the Bank of England [ your central bank here] would be
one of the greatest men in England, [your nation here.] He would be a little
'monarch' in the City; he would be far greater than the 'Lord Mayor.' He would
be the personal embodiment of the Bank of England; he would be constantly
clothed with an almost indefinite prestige. Everybody in business would
bow down before him and try to stand well with him, for he might in a panic be
able to save almost anyone he liked, and to ruin almost anyone he liked. A day
might come when his favour might mean prosperity, and his distrust might mean
ruin. A position with so much real power and so much apparent dignity would be
intensely coveted.
The monthly Coppock Indicators finished December.
DJIA: +138 Up. NASDAQ:
+247 Down. SP500: +198 Down.
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