MEA CULPA No. 1 : Last week’s Gleanings noted ” dilbit … is more corrosive than other crudes”. One of you pointed out to me that research by the Alberta Innovates Energy Solutions Board has disproven this assertion. And those who might prefer a third part perspective on the issue need to look no further than a study made public last June 25th by the National Academy of Sciences, done for the US Pipeline and Hazardous Materials Administration under a Congressional mandate to study ‘whether the pipeline transportation of dilbit carries an increased risk of release’, that came to the same conclusion & “did not find any causes of pipeline failure unique to the transportation of diluted bitumen.” – this does not, however, invalidate the argument that 38 year-old pipe is well past its “Best Before” date; thus that involved in Enbridge’s 2010 Kalamazoo pipeline break, the clean-up of which cost it US$800MM, involved pipe four years past its 30 year estimated useful life that the National Transportation Safety Board found had shown signs of leaking five years before the event.
MEA CULPA No. 2 :Someone else pointed out that the new Prime Minister of Australia, Tony Abbott, heads the Liberal-, & not the Labor-, Party as stated last week – here I only take part blame since it was something I got from the source used.
Quote of the week : “Opposition is 90 percent theatre and 10 percent hard policy grind (and) government the reverse.” – Tony Abbott, Australia’s Prime Minister-elect. Practicing what he preached he had at last report not had a single press conference & the MP’s about to become Ministers had laid low as they were said to be ‘working quietly and methodically (behind the scenes) to prepare for an orderly and unhurried transfer of the levers of power’ . As a result, this is said to be ‘the quietest ever transition of power to a new administration’ whose policy bias is signaled by the renaming of ministries with Environment, Heritage and Water becoming just Environment, Finance and Deregulation just Finance, and Immigration, Multicultural Affairs and Citizenship just Immigration.
The two lead items this week challenge the CW that the financial crisis is history & no longer something to be concerned about, reflecting a kind of ‘Leibnizian optimism’ that this is once again ‘the best of all possible worlds’. Instead they suggest, & seem to substantiate, that the opposite is more likely to be the case, i.e. that we ain’t seen nothing yet & that the financial crisis ahead of us may well make the last one looks like child’s play.
As to the Putin letter, one blogging wit called it, rather aptly, “Putin doing donuts in Obama’s front yard” while Mark Steyn opined “Tsar Vlad is telling Obama : The world now knows you haven’t got a clue how to play the Great Game, or even what it is …” – It’s sentiments like these, & the waffling that prompted it, that really endanger US national security & world peace. And in a speech in Chicago on September 16th, Sen. Lindsey Graham (R-SC), with John McCain the two biggest hawks in Congress on Syria, compared putting Putin in charge of Syria’s chemical weapons’ disarmament to “Putting Al Capone in charge of Prohibition in Chicago”.
The cover of the September 2nd Barron’s screams “The Bull is in Charge”. But historically being featured on the cover page of a major business magazine has more often than not been the kiss of death for the individual/institution/phenomenon in question; thus in early 2000, when the Dow was at 11,000, Barron’s cover page trumpeted “Still Bullish” only to have it sink to 7,500 three years later and again, in early 2007, when the Dow had recovered to 13,000, it blared “Dow 14,000″ only to have it crater to 6,500 (albeit only after first hitting 14,000).
JPMorgan has announced plans to boost spending on compliance & control by US$1BN, incl. the hiring of 3,000 new employees – this is a case of “locking the barn door after the horse has bolted”; for its cost in losses, fines & the reimbursement of clients hurt by the London Whale fiasco is now closing in on 8x that amount. And in practical terms compliance & control efforts can never be fully effective as long as management fosters, & actually encourages, a corporate culture in which the only thing that matters is short-term profit (which in turn means it must start becoming more immune to investor pressures for ever-increasing quarterly profits).
On Friday September 13th the less than bullish economic news included the September preliminary widely-followed Thomson Reuters/University of Michigan US Consumer Confidence Index coming in at a six-months’ low 76.8 (down from 82.1 in August & well below the 82.0 expected), August retail sales being up only 0.2% while the forecast had been for them to match July’s upwardly revised 0.4%, & the PPI (Producer Price Index) being up 0.3% whereas, after a flat July, only a 0.2% increase had been expected. This was followed on Monday September 16th with news from the Fed that industrial production in August had increased 0.4% MoM, while 0.5% had been expected, & from the New York Fed that its Empire Manufacturing Index in September had declined to 6.3 from 8.2 in August , whereas a rise to 9.1 had been expected
In September, despite mortgage rates continuing to creep up, the National Association of Home Builders/Wells Fargo Housing Market Index was said to have been “steady” at 58 – this ignored the fact that August’s 58 had been revised downward from the initial 59 (for this index 50 is the tipping point between bearishness & bullishness).
The wholly unexpected decision by the FOMC not to start tapering prompted a stampede into “risk-on” assets, with gold, that had been under pressure recently to the point where it dipped briefly below US$1,300, jumping US$60 in a matter of minutes). The failure to act was interpreted by some as Janet Yellen starting to remake the Fed in her own image, her being the most dovish of doves. And in the process the market all but overlooked the fact that, in the communique issued after the FOMC meeting, the Fed reduced its GDP growth forecast for this year from 2.3-2.6% to 2.0-2.3% & for next year from 3.0-3.5% to 2.9-3.1%.
Last weekend, during a phone call with President Obama, Larry Summers, his supposed first choice, withdrew from the race for the Fed Chairmanship; in his follow-up letter he explained “I have reluctantly concluded that any possible confirmation process for me would be acrimonious and would not serve the interest of the Federal Reserve, the Administration or, ultimately, the interest of the nation’s ongoing economic activity” – admirable sentiments (albeit out of character for him), if only they were genuine. What really happened was that when the White House started counting noses, it found at least five Democratic Senators who couldn’t be counted on to vote for Summers. So nominating him would risk Obama wasting precious political capital on a lost cause (Bernanke’s re-nomination confirmation in 2010 had already been “tight”, as had been his subsequent Fed governor nominations). Elizabeth Warren, the Senior Democratic Senator from Massachusetts, was one of the five & now (with support from inside the Fed) likely will lead the charge to have Janet Yellen become the Fed’s first-ever female head.
One thinks of military bases as conglomerations of young people leavened with a smaller number of older people, not many of them over age 50, to keep them focused. Not so apparently in the case of the Washington Navy Yard; for the list of fatalities of the shooting there was more what one might have expected from a ‘mature citizens’ residence : only one of the twelve was below age 50 (he was 46), eight in their 50’s, & three in their early 60’s & 70’s.
Peter Schiff founded & is CEO of Westport, Conn.-based Euro Pacific Capital Inc.. A Republican who in 2010 was defeated in his party’s primary to run for one of the state’s two Senate seats, he has long been bearish on the US economy & dollar, and bullish on foreign equities & currencies. But in a recent diatribe in MoneyNews on the outlook for Americans he looked like a pussy cat, even though he warned that daily life will get much worse for them & opined “If we keep doing this policy of stimulus and growing government, it’s just going to get worse for the average American. Our standard of living is going to fall … People who are expecting Social Security can’t get all that money. People expecting government pensions can’t get all their money … We simply cannot afford to pay them.” And on September 10th he told a Manhattan audience that choosing between the candidates for the Fed’s top job is like “choosing how you want to be executed “ & that “Bernanke learnt to take off and fly but has no idea how to land the plane that … eventually is going to run out of gas … (and) thinks he sees light at the end of the tunnel [but] doesn’t know it’s an oncoming train.”
GLEANINGS II – 529
Thursday September 19th, 2013
WHAT HAVE WE LEARNED FROM THE BANK CRASH?
(The Independent, Michael Moore)
$ Four years after the Lehman collapse only one question remains, have we done enough to keep it from happening again; in other words, has Washington created a safe banking system or have the politicians & regulators given in to the immense pressure by the banks to maintain the status quo? Unfortunately the simple answer to the former two is NO & to the latter YES. While the six largest banks may have doubled the capital they now hold as a buffer against losses, many politicians, & even some Wall Street veterans, say this isn’t enough since the system is still too leveraged & interconnected to withstand a panic and regulators still too ill-equipped to head one off. The largest banks remain too Byzantine with hundreds of subsidiaries around the world, the six regulators with overlapping jurisdictions that often clash are continually besieged by an army of highly-paid lobbyists (many of them former lawmakers & regulators), leverage is still too high & derivatives still mask who is at risk.
$ One of the main reasons for this failure to make much progress with reforming an obviously flawed & pratfall-prone system has been the intensity of Wall Street’s push-back; thus bank executives, lobbyists & lawyers have had over 700 meetings with regulators on just one section of Dodd-Frank, albeit a for the banks critical one, the one that would limit their ‘proprietary trading. Work on the Volcker rule is still not finished & is now so shot full of exemptions that even Volcker himself is no longer sure whether it will achieve what it was supposed to. That is not to say there has not been some improvement; thus Morgan Stanley has reduced its leverage from 38x to 14x although, even so, it is still well short of the new Fed rule for banks’ equity/assets ratios, while it has increased its exposure to derivatives (which are mostly off-balance sheet). And the banks’ ability to hide risk was demonstrated in JPMorgan’s “London Whale” fiasco when it lost US$6.2BN on US$150BN in derivatives that had a far smaller notional value on its balance sheet. As 74 year-old John Reed, former Co-CEO of Citigroup, subsequent to that Chairman of the NYSE & currently Chairman of MIT’s Board of Trustees. puts it “There are some banks that would believe the longer the delay of real reform the better … The world looks pretty benign right now. But it always does until it isn’t” any longer.
Tropical storms pack a one-two punch, with a typically calm & blue-sky “eye” sandwiched between them. Applying this weather phenomenon to the financial system suggests that what we experienced in 2008 wasn’t just the one-time passage of a cold front, but the first instalment of the financial equivalent of a tropical storm & that the current benign environment is merely its eye, with more foul weather ahead. To continue the weather analogy, having survived its first phase, the system, weakened by it, hasn’t trimmed its sails enough to deal with a second, possibly more virulent, instalment.
BIS VETERAN SAYS GLOBAL CREDIT EXCESS WORSE THAN PRE-LEHMAN
(Telegraph, Ambrose Pritchard-Evans)
$ The Basle, Switzerland-based BIS (Bank for International Settlements), the “central bank for central banks”, in its latest quarterly review, published just before the Fed’s September 17th & 18th FOMC meeting at which it was to have decided to start its “tapering” (thereby draining liquidity from the system), which in the event (by coincidence?) it didn’t, noted that investors’ ‘hunger for yield has lured them en masse into high risk instruments in ways reminiscent of the irrational exuberance of the pre-2007/08 financial crisis era, snapping up “covenant-lite”debt that provides them with little protection in case of an untoward event. And it identified the following warning signs :
$ the issuance of more subordinated debt that leaves lenders more exposed to bigger losses if things go wrong – has more than tripled in Europe to US$52BN & increased tenfold in the US to US$22BN;
$ investors loaded up with Cocos, bank debt that, if the issuer’s capital ratio falls too low, will automatically convert into equity (transferring risk to bond holders that hitherto was typically dumped onto taxpayers);
$ in the banks’ syndicated loan market high risk ’leveraged loans’ now account for 46% of the total, up from 36% in 2007 (& a low of < 10% in early 2009); and
$ while the Fed Fund futures curve this spring ranged from next to nothing for the near dates to 35bps (i.e. 0.35%) at two years. The latter has since risen to 1+%, suggesting a lack of faith in the market in the Fed making good on it’s claims it will keep the rate at ‘extraordinarily low levels’ into 2016.
$ Claudio Borio, its research chief, added to this that events in emerging markets since the Fed turned hawkish (or, likely more correctly, somewhat less dovish) should be a warning to investors that nobody knows how far global borrowing costs will rise as the Fed tightens, or how disorderly the process might be, referring to “an illusion of liquidity” & mildly scolding BoE Governor Mark Carney & his ECB counterpart Mario Draghi, saying that trying to use “forward guidance” to hold down long term interest rates by rhetoric “has essentially failed … There are limits as to how far communications can still markets. Those limits have become all too apparent.”
$ William White, while Chief Economist of the BIS ten years ago, correctly predicted, & identified the factors that would lead to, the 2007-2008 financial crisis, and now, in retirement, heads the OECD’s Economic Development & Review Committee. He all but simultaneously with the above went on record as saying that “This looks to me like 2007 all over again, but even worse … All the previous imbalances are still there. Total public and private debt levels are 30 pc higher as a share of GDP in the developed economies as they were then, and we have added a whole new problem with bubbles in the emerging markets that are ending in a boom and bust cycle … the four years since Lehman have largely been wasted, leaving the global financial system even more unbalanced and running out of lifelines … and addicted to easy money.”
The question they’re really asking is ‘how long do the powers that be think they can keep this charade going?”
HOW NOT TO HANDLE AN INTERNATIONAL CRISIS (sub-title “After the Syrian fiasco, who will take America’s warnings seriously?” (Postmedia News, Andrew Coyne)
$ Obama’s latest diplomatic triumph in the Middle East was in reality a disaster of the first order for world peace, America & Obama himself, in that order. The only possible way it could have been worse would have been if there had been active North Korean or Iranian involvement. Following are reviews by three parties with a direct interest in it :
$ Syria’s Minister of National Reconciliation : “A victory for Syria, achieved thanks to our Russian friends”;
$ Georgy Mirsky of the Moscow-based Institute for World Economy & International Relations : “Russia has won. America didn’t so much lose as it was humiliated;
$ Qassim Saadeddine, a rebel commander in Northern Syria : “Let the Kerry-Lavrov plan go to hell. We reject it and we will not protect the inspectors.”
$ Last week witnessed a blunder by Kerry (or was it a policy fumble by his boss?), Putin picking up the ball, an Obama speech asking Congress not to vote on what he had specifically asked it to vote on the week before, a condescending op-ed piece by Putin in the NYT, & then, as the final indignity, Obama clinging to a Russian lifeline to get out from under Congress. Following are the steps leading up to this debacle :
$ failure to support the Syrian opposition in the aftermath of its April 2011 uprising (two months after the start of the Arab Spring) when it looked Assad too might be headed for the exit;
$ two years of dithering that allowed Assad to slowly regain the upper hand as the opposition became riven with division & was radicalized;
$ the drawing of a “red line” at chemical warfare with promises of “enormous consequences” if it were crossed;
$ the instantaneous abandonment of that promise when the red line was crossed;
$ a sudden reversal & vow of action when YouTube videos started making the rounds of convulsing, or dead, children; and
$ an equally sudden deferral of action, pending a vote of Congress, when talk of intervention proved unpopular with the American public.
$ But the ultimate indignity is still ahead, when Assad & his Russian patrons won’t keep their end of the bargain (an early indication that the former won’t, lies in his response to the agreement, i.e. to resume the bombing campaign he had suspended when it looked like Obama might actually do something). And the worst case scenario will see an emboldened Assad, an ascendant Putin, an emasculated West, an end to the taboo on chemical weapons, & a US president who wants to engage Iran in talks … on Syria (because those on Iran’s relentless pursuit of WMDs have gotten nowhere), maintaining “they shouldn’t draw a lesson that since we haven’t struck in Syria we won’t strike Iran.”
What message will America’s allies & enemies in Asia & elsewhere take away from this? Obama could, & should, have taken a page out of Reagan’s 1986 playbook when, after in late 1985 & early 1986 there had been a number of terrorist incidents in Europe attributed to people under Gadhaffi’s control, they crossed his red line when on April 5th, 1986 they bombed the La Belle nightclub in Paris, a hangout for off duty American military, killing three & injuring 229. After consulting with his allies in Europe & learning that France, Spain & Italy wouldn’t give the US Airforce overflight rights for a raid on Libya, he nevertheless had the Airforce launch one, a double-barrelled airstrike involving 40 aircraft on Gadhaffi’s residence & military establishments (although there was some collateral damage), even though they had to fly a much longer roundabout route to get there, from England South over water & then East into the Mediterranean via the Strait of Gibraltar (with only one plane being shot down due to the surprise nature, severity & multi-pronged nature of the attack). If Obama made a single on Syrian military establishments, the media after a brief media frenzy might have returned to ‘more pressing’ matters, whereas the policy option he chose gave the story “legs”. The difference between the two was that, while Reagan, warts & all, was a leader who lived the Truman dictum that “The buck stops here”, Obama’s leadership style is biased towards leading from behind (the polls) & to be long on talk & short on walk.
GOVERNMENT SHUTDOWN? NOT THIS TIME National Journal, Ben Terris)
$ While the drumbeat in the media has started, the Congressional Republican leaders know it’s in their interest not to shut down government; for the latest CNN poll shows voters would blame them, not the Democrats. So they are seeking to convince their rank & file that passing a budget that keeps sequestration intact is a victory in & by itself.
But in an interview on ABC on September 15th, and again at a press briefing the next day, Obama left the distinct impression he is in no way going to tolerate any Republican attempt to mess around with the entitlement programs. In any case the real battle ground will not be the budget, but the debt limit which, according to Treasury Secretary Jack Lew, the government will bump up against by October 16th (with any failure to increase it by that time having an effect not dissimilar to not passing a budget).
GLOBAL OIL DEMAND TO AVERAGE 92 MMBLD IN 2014 (Oil & Gas Journal, Conglin Xu)
$ Based on the forecast in the IMF’s July World Economic Outlook that the global GDP growth rate will accelerate from this year’s 3.1% to 3.8% next year, the IEA’s most recent Oil Market Report calls for global oil demand to increase 1.2% YoY in 2014 to 92MM bbld, despite the adverse impact on demand of the sharp decline in many emerging market currencies due to the expectation of an end to the Fed’s “tapering”.
The IEA’s forecasts have often not been ‘on the mark’ & it wouldn’t be surprising if their forecast in this case will fall short of the eventual outturn.
OBAMA ADMINISTRATION AUTHORIZES MORE LNG EXPORTS
(FuelFix, Jennifer A. Dlouhy)
$ Last week Washington approved the second LNG liquifaction plant proposal in a month, bringing the total approved to date to four, with a potential twenty more in a line up for consideration. While a government-commissioned study last year concluded there were big benefits for the US economy in exporting more LNG & that any effect on the domestic price would be “modest”, and export enthousiasts say more foreign sales will help sustain the current drilling boom, critics say more natural gas exports will drive up the domestic price, eroding the global competitiveness of US manufacturers & disadvantaging US consumers. And according to Deb Nardone, Director of the Sierra Club’s Beyond Natural Gas campaign ”Exporting LNG to foreign buyers will lock us in to decades-long contracts which … will lead to more drilling and more hydraulic fracturing, more air and water pollution, and more climate-fueled weather disasters.”
To put all this in perspective the gas to be exported by the four now approved plants will amount to 7½% of the US’ current consumption & the next two would bring the total up to about the volume the US currently imports (almost exclusively from Canada – another case of us mindlessly having our products exported by the US & letting it ‘take a cut’ on the way through). The growing US ambitions in global LNG markets is alarming Australia out of concern it will result in lower LNG prices in Asia (if so, US manufacturers could get hit by a ‘double whammy” of higher natural gas prices at home & lower natural gas prices for their Asian competitors.
POLISH REFINER BUYS CALGARY-BASED FIRM (EJ, Business Briefs)
$ State-controlled, Plock-based PKN Orlen, Poland’s largest oil refiner, has agreed to buy Calgary-based TriOil Resources Inc. for $183.7MM cash, its first foreign expansion into crude oil production. The Company said on September 18th that, given its assumption of TriOil’s net debt, the deal has a Net Enterprise value of $240.1MM.
This proposal is a puzzler & doesn’t look serious (possibly the reason why there hasn’t been a peep out of Ottawa about a foreign government-controlled entity buying into the Calgary oil patch). For the takeover price was right “on the market” (i.e it didn’t incorporate a premium over the current market price) & iTriOil’s share price promptly declined to a level well below the proposed takeover price, suggesting the market thinks it’ is a non-starter. And TriOil, while small (production of just 4,500 bbld) seems to have too much going for it to be sold ‘on the cheap’, incl. a set of Second Quarter production & financial numbers that were well above, & in some cases double, those in the year-earlier period. Having said that, it would make sense for Poland to gain a foothold in the Calgary oil patch so as to get a window on the latest technology, especially as relates to shale oil & gas. For while it has gigantic coal reserves & generates the lion’s share of its electricity from coal, it must import all of its oil & gas, most of it from Russia (which gives the latter clout over Poland’s internal affairs). And there is believed to be scads of shale gas, & some shale oil, under much of Europe, incl. Poland (in 2011 the US Energy Information Administration put the cat among the pigeons with an estimate that Poland may have shale gas reserves of as much as 5TR cubic metres; while since reduced by the Polish Geological Survey by up to 90%, it would still be enough for decades of local consumption. This prompted a headlong rush into shale gas exploration & drilling in the country that has since petered out somewhat due to a lack of results (although last month a Conoco Phillips subsidiary company announced it was producing 28 MMCF from a test well, an amount that, while still not commercial, is nevertheless the best to date, and PKN Orlen itself is expected to announce soon the results of what some believe to be one of the most promising drilling prospects in the country). Discovery of large, commercial-grade shale gas reserves in Poland, & elsewhere in Europe, could have major geopolitical implications since it could knock one of the props out from under the Russian economy’s oil & gas-driven business model (& thereby scupper Putin’s megalomanic super power dreams), undermine its natural gas-driven influence in the Continent and, if it were to result in lower gas prices, improve the global competitiveness of Europe’s industries. Small wonder therefore that Gazprom is in the van of those pressuring the EU to severely constrain the use of fracking in its member countries.
Ted Kaufman was a US Senator for Delaware for 18 months replacing Joe Biden after he became Vice President & subsequently succeeded Elizabeth Warren as Head of the Congressional Oversight Panel established under TARP to monitor its implementation as well as the operation of the financial & regulatory systems. He likely summed their position well when he said “We find ourselves five years later, not really having dealt with what we wanted to have dealt with in reforming the financial system and they’re about to … appoint a central banker that doesn’t believe in this, who led the fight against this?”
A Canadian born in Kenora, Ontario and educated at the Universities of Windsor & Manchester of all places, he worked briefly at the Bank of England before spending 22 years at the Bank of Canada until he joined the BIS in 1994 where he spent 14 years until his retirement in 2008, the last 13 as its Chief Economist. He was among the first questioners/non-admirers of Alan Greenspan & his policies to the point where he wrote a paper, together with the current BIS research chief, Claudio Borio, for the 2003 Jackson Hole central bankers clambake that assailed his policies as making a financial crisis inevitable (which greatly displeased the Maestro). A year ago he authored the Dallas Fed’s Working paper No. 126 which argued that central banks affect the financial system far more than the real economy, that the impact of its policies on GDP and/or inflation is overrated & that, as a result, easing monetary policy may not produce the desired results (this is not a new idea as witnessed by the old market adage that “you can’t push on a string”), and that in a balance sheet recession (such as we had in 2009) low interest rates do more harm to savers than good to borrowers, that the collapse of the yield curve threatens the viability of financial intermediaries, thereby constraining lending, that the expansion of the central bank’s balance sheet deprives the system of safe collateral and that central bankers, rather than solving the immediate problem, have been making it worse and may actually have sown the seeds for the next bubble (all of it anathemous to the Greenspan/Bernanke/Carney/Draghi/Yellen way of looking at the role of central banks in the early 21st century.
Some “boom” : the number of rigs drilling for gas in the Continental US is down over 75% from five years ago because the super-low gas prices make drilling for gas a losing proposition (although their number now appears to have stabilized & in the past year increased marginally).