The Peanut Gallery

Statements, comments and forecasts that have no substance, but just might turn out to be relevant.

1. Two NYPD police officers have been murdered by an African American (muslim?). CNN and co will be pointing a finger at everything from racist cops, prosecutors, judges, sentencing guidelines and drug laws. Obama and Holder will discuss gun control while the NAACP will gripe about racial profiling, all from their middle and upper class homes in the suburbs. Fact: more than 50% of murders in the US in 2013 were committed by African Americans, a group who are 13% of the population.
Peanut Gallery: Any volunteers ready to discuss this undeniable fact?

2. Less than two percent of the $5.4 billion of aid pledged by international donors to help rebuild Gaza following Operation Protective Edge has been transferred, and none of the Arab states have come through yet on their promised share, according to Palestinian officials. Even more ridiculous is the minimal transfer by arab states of funds promised in the previous war (2012).
PG: looks like an unconscious/conscious admission by Gaza's allies not to throw good money after bad money!

3. News media in Israel is reporting that FC Barcelona plans to end its controversial business partnership with the government of Qatar over concerns about terrorist connections. The La Liga giants initially signed the $200 million sponsorship deal with Qatar in December of 2010.
PG: Go Barca!

4.Belarus has blocked access to shopping and news websites to prevent a run on the Belarusian ruble, France24 reported Dec. 21. Because its economy is so dependent on Russia, Belarus has seen its currency fall with the Russian Ruble.. Citizens have sought to minimize the negative impact of the devaluation by unloading their cash reserves. The government has also placed a moratorium on price increases and announced that all exporters will be required to hold half their revenues in the local currency. Purchases of foreign exchange are now being taxed at 30 percent. 

5. On Friday news outlets reported that Russia added to its gold reserves for the eighth straight month adding 600,000 ounces of gold to its reserves. On Friday, Bloomberg reported that as of Dec. 1 Russia’s stockpile of gold rose to 38.1 million ounces up from 37.6 million ounces. And now China  has offered to help the Russians out with currency swaps. 
PG: Is this a new alliance? Nothing is ever what it seems...sigh!

6.The Saudi government released its 2015 budget Dec. 25 with a $38.6 billion deficit due to the recent fall in oil prices, according to an official statement on state-run television, AFP reported. The govenment raised spending slightly over 2014 to 860 billion riyals ($229.3 billion), with revenues at 715 billion riyals ($190.7 billion). 
PG: With currency reserves at $800 billion, the Saudis can afford to sit and watch its rivals (mostly Russia and Iran) writhing.

7.Relations between Cuba and Venezuela significantly improved during the Presidency of Hugo Chávez. Chávez formed a major alliance with Cuban president Fidel Castro and significant trade relationship with Cuba since his election in 1999. The bilateral relation includes development aid, joint business ventures, large financial transactions and exchange of energy resources. The warm relationship between the two countries continued to intensify until the death of Chavez and, more importantly, the crash in the oil price which devastated Venezuela's economy. 
PG: So now the beginning of a new alliance with the US of A. Follow the money baby!

8.TOI: An Iranian scientist claimed this week that he had invented a radar system which can detect drug addicts from nearly a mile away, and measure the level of narcotics flooding their systems. Scientists from the Islamic Republic have in the past touted other improbable inventions. In April 2013, an Iranian businessman and scientist said he had successfully invented a time machine, but that a prototype won’t be launched currently because “the Chinese will steal the idea and produce it in millions overnight.”
PG: They must be drinking their oil!

Read more: Iran touts 'drug addict radar' | The Times of Israel http://www.timesofisrael.com/iran-touts-drug-addict-radar/#ixzz3Mw5ubsFC

Life is uncertain. Eat dessert first. - Ernestine Ulmer

2015...A Balancing Act

One of the biggest myths sold to the public after 2008, was that the world economy would go through a period of deleveraging (reduction of debt). Take a look at this chart:

Clearly the numbers do not match up to this myth. In reality the 2008 US real estate bubble bust was  and is presently being replaced by an even larger international debt bubble, the likes we have never witnessed. Just so that we do not lose proportion...as long as the economic global village continues to grow evenly across the planet, the air in this bubble will be slowly released to the point that we will all applaud a job well done by our leaders.

Now with that in mind, I would like to concentrate on the two key macroeconomic drivers upon which the international fulcrum rests in 2015 and arguably for the next four or five years. They are the GLOBAL CURRENCY WAR and a rising BULL MARKET IN THE US DOLLAR. Japan recently kicked off this war by announcing a program of Quantitive Easing (printing) and allowing its currency to fall. Another word for this is "devaluation". Europe is expected to follow and we are now witnessing the rapid decline of the Euro. Interestingly, Switzerland has announced that from 22nd January 2015 Swiss interest rates will be negative. Even more interesting, on the same date the European Central Bank (ECB) will be discussing the possible implementation of its own QE program. What is it the Swiss know that we don't?

The decline in the Japanese Yen has made Japanese exports cheaper. So what is the obvious move by Japanese competitors? Devalue their own currencies. The countries most affected are South Korea, China, Hong kong, Taiwan, Singapore, Malaysia, the Philippines and Thailand. Now think Europe. Let the fun begin! 

Assuming that most international debt is denominated in USD (it is) and that every time the USD appreciates in value, the debt chart above looks more ominous. Since 2008 there has been an orgy of cheap dollar loans to emerging economies. Now that the dollar is rising, this same debt is more difficult to repay.  the Bank for International Settlements, estimates that total USD-denominated credit to non-banks outside the United States is more than $9T. Phoenix Capital Research: "Imagine if the entire economies of both Germany and Japan exploded and you’ve got a decent idea of the size of the potential impact on the financial system". The Massive USD-China Yuan carry trade (Borrow USD and switch to Yuan for higher Yuan interest rate) has created a shadow banking system in China estimated to be  monumental in size. 

To combat the carry trade and the fall in emerging market currencies, China has reduced their interest rates, trying to make the Yuan less attractive. The Inconvenient Truth believes that this is too little too late and that nothing less than a devaluation of the Chinese currency will suffice, especially if the USD continues to strengthen while the Yen deteriorates. Mauldin Economics: "There are no cases in modern history where an economy has managed to avoid a banking crisis or outright bust after experiencing rapid lending growth anything like China’s ongoing credit boom." 

As we move into 2015, every potential crisis creates potential opportunities. For example, a strong USD and a weak Yen is one possibility. My cousin Hilton is predicting the Japanese Yen will fall to historical lows. I tend to agree. And on that note, I wish you all health, happiness and family love over the holidays, forever and a day. 

We are all wrong so often that it amazes me that we can have any conviction at all over the direction of things to come. But we must.
Jim Cramer 

Expect the best. Prepare for the worst. Capitalize on what comes.
Zig Ziglar 

People in Glass Houses...

There appears to be a quietly gleeful atmosphere about the distress that Russia and Putin are embr(oil)ed in. Perhaps we should take a closer look at the potential US fallout from the crisis. The obvious conclusion is that US interest rates will not rise any time soon. Some facts about the US economy and the crash in the price of oil.

Earlier this year, The Manhattan Institute published the following findings:

1. In recent years, America’s oil & gas boom has added $300–$400 billion annually to the economy – without this contribution, GDP growth would have been negative and the nation would have continued to be in recession.

2. America’s hydrocarbon revolution and its associated job creation are almost entirely the result of drilling & production by more than 20,000 small and midsize businesses, not a handful of “Big Oil” companies. In fact, the typical firm in the oil & gas industry employs fewer than 15 people.

3. The shale oil & gas revolution has been the nation’s biggest single creator of solid, middle-class jobs – throughout the economy, from construction to services to information technology.

4. Overall, nearly 1 million Americans work directly in the oil & gas industry, and a total of 10 million jobs are associated with that industry. Three times that many Americans are indirectly connected to the industry.

The important takeaway is that, without new energy production, post-recession US growth would have looked more like Europe’s – tepid, to say the least. Job growth would have barely budged over the last five years.

John Mauldin: Texas has been home to 40% of all new jobs created since June 2009. In 2013, the city of Houston had more housing starts than all of California. Much, though not all, of that growth is due directly to oil. Estimates are that 35–40% of total capital expenditure growth is related to energy.

It is no wonder that so many people feel like they are still in a recession; for where they live, it still is. Houston, we have a problem. With a third of S&P 500 capital expenditure due from the imploding energy sector (and with over 20% of the high-yield market dominated by these names), and when Reuters reports a drop of almost 40 percent in new well permits issued across the United States in November, its time for a reality check.

The reality is that the recent energy boom was financed by $500 billion of credit extended to mostly “subprime” oil companies, who issued what are politely termed high-yield bonds – to the point that 20% of the high-yield market is now energy-production-related. The holders of these high yield Junk bonds need to be very nervous, to say the least. The high-yield shake-out, by the way, is going to make it far more difficult to raise money for energy production in the future, when the price of oil will inevitably rise again. The Saudis know exactly what they’re doing. (Thank you John Mauldin.)

About a third of US oil production is via shale oil. Goldman Sacks published their breakeven prices for shale oil to be profitable as $70-$80 a barrel. One does not have to be a rocket scientist to work out the consequences if oil stays low.

In conclusion, The US CPI (inflation) rate for November published today was a negative 0.3% compliments of falling energy prices. The possibility of the fed raising interest rates at this point in time, and while this situation continues, is a pipe dream. We will witness huge attempts to reflate and cheaper and diverging currencies. The danger from this is the possibility of diverging policies between central banks, whom up to now have worked in unison. And finally, if one is looking for "too big too fail", Russia is the perfect example. I would not be too surprised to see those same Western Governments who placed sanctions on Russia, rushing to save the Bear. My advice to the hotshot politicians...Don't poke the Bear!

"It's one thing to shoot yourself in the foot. Just don't reload the gun." - Lindsey Graham

A Double Whammy?

There is a huge difference between a market in decline and a collapsing market. As oil crashes from $115 to $60 bucks (Brent crude) over a short period of time, it would be a fair assessment to say that this market has disintegrated to the "collapsed" category. The "double whammy" might just be that another large crisis is lurking in the shadows getting ready to reveal itself. The rise in the US dollar has far reaching consequences and will arguably compound other crises, probably on a larger scale than the oil rout.

But I am getting ahead of myself. Back to oil and the collapse of this commodity. Some say that when political leaders abuse the market place, these markets take over and create honest souls out them. Too little, too late. Glancing back a few years, the  US relied on some of its energy from foreign sources. Then the discovery of new methods of oil extraction (fracking) increased US oil production to the point where the foreign energy producers had to find new and developing markets for their product. This in turn led to an economic war for market share. Oversupply and market share antagonism has brought us to this point in time.

A knee jerk reaction to the fall in oil prices is one of satisfaction. Cheaper oil means cheaper gas prices, lower expenses and more to spend. So why the commotion in the capital markets? Think 2008 and the collapse in real estate prices and what followed. If oil prices had taken a year or more to decline, the markets would have had time to adjust. The suddenness of this reversal in primary trend took most markets by surprise. Energy producing countries find their budgets under extreme pressure as income evaporates. Many consumers have signed long term contracts at what are now exorbitant prices. A large part of world energy infrastructure finds itself with nowhere to turn.

Two decades ago emerging markets (china, India and others) accounted for about 20% of world GDP. Today these markets account for about 50% of world GDP. A very different story. A slowdown in these markets will have a definite effect on world GDP, especially since average growth in Europe and Japan is close to zero. With inflation rates close to zero, the fall in energy prices brings many countries terrifyingly close to deflation. With negative inflation, interest rates become very real. And this brings us to the mighty US dollar.

The USD continues to be the world's accepted reserve currency. Most international deals are made in the US currency and it accounts for one side of 87% of all international trades. The Bank for International Settlements just released its quarterly review, with an urgent warning: "The appreciation of the dollar against the backdrop of divergent monetary policies may, if persistent, have a profound impact on EMEs [emerging-market economies]". Remembering that emerging markets now account for 50% of world GDP, lets take a look at a small academic example and then multiply by zillions.

Its the year 2008. The US economy is in tatters. Interest rates drop close to zero. The USD is out of fashion. A small company in an emerging market (EMC) decides to raise funds by issuing a bond denoted in dollars. The EMC local currency is rising as a result of dollar weakness. The EMC converts the dollars to local currency and as the local currency strengthens, the debt in USD shrinks. His balance sheet looks great and of he goes to his local bank and using his balance sheet as collateral, he takes out a further loan in dollars. And so the dollar debt grows. Now its 2014. Out of the blue, the dollar begins to rise. The EMC has dollar debt which it cannot cover by converting local currency into dollars. As the dollar rises against the local currency, the US denominated bond holders see this and begin selling. This sends up interest rates (yields) to stressful heights. A major slowdown. Now multiply by zillions.

This is what is happening in countries that represent at least 50% of world GDP. Now add Europe and Japan. In 2014 the dollar has risen by an average of 13% against a basket of international currencies. Bottom line, international debt has risen on average by 13%. Most International oil contracts are denoted in dollars and this raises the question. Is the year 2015 the year in which OPEC unravels? Who will go down with them? Will the central banks continue to co-operate or is it every man/woman for him/herself?

The rule of bubbles is that all bubbles come to an end. In this case there appears to be a bubble within a bubble and the only question is how rapidly the air escapes from these balloons.  Slow and easy or......perhaps this is just paranoia at work.

Hopefully the logic in this blog is coherent. If not, please don't hesitate to drop me a line. I welcome fruitful discussions.

Doug Kass, “When everyone thinks central bankers, money managers, corporate managers, politicians or any other group are the smartest guys in the room, you are in a bubble.”

Barry Ritholtz, “I am hard-pressed to recall when any sort of bubble was accurately identified in real time on the cover of a major media publication. If anything, the opposite is true.” 

The Peanut Gallery

Statements, comments and forecasts that have no substance, but just might turn out to be relevant.

1.In his annual address to the nation on Thursday, Russian President Vladimir Putin announced that the country's reserve funds, usually earmarked for investment in state projects, should be used to bail out troubled Russian banks. In doing so he revealed just how grim the prospects for financial institutions have become following the rouble's collapse. The Russian private sector appears to be on state-funded life support.

Comment: The price of oil! How the mighty are falling. A word of warning...a wounded animal is at its most dangerous when cornered. A shaky Russian banking system in a global economy, is worse than a shaky Greek economy. 

Read more:http://www.businessinsider.com/putin-russia-emergency-funds-bank-bailout-dollar-2014-12

2.China has toppled America to become the biggest economy in the world, according to figures from the International Monetary Fund. For the first time in 142 years, the US has been overtaken as the worlds largest economy. Valued at $17.6 trillion, the IMF expects China to  surge to $27 trillion in the next five years. After moving sideways for five years, (and while most stock markets jumped 2-300 percent), the Shanghai Stock index has spurted by 37% since July of this year. 

Comment: The price of oil! The fall in prices will benefit China immensely.

Read more: http://www.dailymail.co.uk/news/article-2785905/China-overtakes-U-S-world-s-largest-economy-IMF-says-economy-worth-17-6trillion-America-falls-second-place-time-1872.html

3. Jihadist rebels have shot their way into the heavily fortified Chechen capital, Grozny, in a night-time attack which left as many as 20 people dead. This is the first attack in many years. 

Comment: Do the Jihadists sense the economic weakness in Russia and feel the time has come to make a move?  

Read more:http://www.bbc.com/news/world-europe-30323751

4.George Friedman: In politics as in economics, the decision-makers usually do things that have unintended consequences, don't understand fully what they are doing, but are caught within impersonal forces that move them in a certain direction. It is interesting watching Obama. Obama had a very different vision for his presidency. History didn’t care. He was going to be dealing with the Middle East, he was going to have bad relations with the Russians, his idea that because he had a marvellous personality he was going to charm for a miracle, all of these went away. The similarities between the presidency of Barack Obama and the presidency of George Bush is startling, and what's interesting to see is he genuinely didn’t think it would be this way. It shows you the limits of power.

5.Stratfor: The Mexican drug cartels have sought to diversify their operations beyond drug trafficking, expanding into fuel theft. Crime groups have the capacity to organize hydrocarbon theft on a massive scale across multiple regions with a high level of efficiency. Although these fuel theft operations are ongoing along virtually every pipeline route, the territories in the east have seen the greatest uptick since 2010.

Comment: Drugs and fuel. Easy money....

Read more: http://www.stratfor.com/weekly/amid-mexicos-energy-reform-fuel-theft-poses-risks#axzz3Kys2CPS2

6.The fear of genetically modified (GM) crops, whipped up by environmentalist hysteria in Europe and America, has prompted many African countries to ban ALL U.S. food aid because it may contain GM corn. This occurs even as desperate Zambians and Angolans break into government silos to “steal” donated GM food that is being denied them. There are no restrictions on these foods in industrialized nations, yet people too poor to buy their next meal are denied the same foods even when it’s free. They could realistically starve without it, yet Greenpeace prides itself on stopping shipments of GM food to starving people.  The policy borders on genocide. Penn Jillette (always good for a quote) sums it up nicely: “Unless you and yours are starving, you need to SHUT THE $#@! UP.”

“Beware the fury of a patient man.” - John Dryden

Follow The Money

The price of Brent crude has collapsed from $115 to $70 dollars a barrel. US light crude to $66 a barrel, all in a very short time. The US dollar has risen by 10-15% against most currencies. The US has ended QE (Quantitave Easing = money creation) and has now been replaced by zero growth Japan, soon to be joined QE in zero growth Europe. After many years of high interest rates in China, they have now initiated lower rates resulting in a 40% jump in the Shanghai Index. And what of Russia and Putin? Goodness, so much is happening...how to make sense of all this?

Economics and political power go hand in hand, though by watching news media, one would probably not notice this (Ferguson and the racist colour of Black Friday seem to be the rage). What are the consequences of the collapse in energy prices? logically most oil producing nations will find themselves in a spot of bother. OPEC are no longer the political or economic power they were in the previous decades. The interesting part of this conundrum  is that both Saudi Arabia and the Emirates voted against reducing supply to shore up prices and the question is why? Texas, Colorado and North Dakota shale-drilling has increased U.S. production by nearly three million barrels a day since 2011. arguably, the break even for shale is around $70 a barrel. The conclusion is that the Saudis are fighting for market share.

Importantly, the Saudis have foreign currency reserves of $800 billion which gives them breathing room to take it easy for a year. Who does not have that breathing room? Iran, the venomous Saudi rival is in big trouble from this turn of events which could be termed as a crushing blow to Iran's oil exports and therefore, to its budget. Another victim of this crisis is Russia. The majority of Russia's income is from energy exports. The Russian budget next year is based on $100 a barrel oil, creating quite the income shortfall. The obvious way for Putin to to avert attention from the economic malaise, is to focus on military undertakings like the Ukraine, Crimea and Afkhazia (in Georgia), and then blame the West.

World economic policy, since 2008 is to create inflation. The opposite of inflation, being deflation (another word for recession or depression). Imagine economies who have close to zero inflation and positive interest rates, of say 1%. With the fall of oil prices, many country's inflation rates will fall into negative territory. With positive, or even zero interest rates, the real interest rates will rise, making expansion more difficult. Japan is one of those countries, and thus announced a QE program and allowed its currency to fall.

The US dollar strength is also creating anxiety everywhere. The USD is the world's reserve currency, so nearly all international debt is in USD. A rise of 10-15% in the USD has automatically increased all international debt (except for the US) by that amount. Which countries are best placed to handle this situation? China and India. Both have cash in the bank and both benefit tremendously from the fall in oil prices. Further, with their manufacturing and export capacity, they can take advantage of the US dollar strength to increase income.

Are we seeing a change in world order, with China and India beginning to flex their economic muscles? Is a desperate Russia flexing its military muscle? Interesting world. How will the markets react to these developments....any ideas?

Islam Imploding

A few years ago I wrote that about the population explosion on planet Earth. At the beginning of the twentieth century, world population stood at one billion. Today we are well over seven (7) billion.The logical conclusion was that at some point the competition over raw materials, water and food between different players would be fierce and not all would survive. My belief was that Islam and specifically arab Islam (but not only), would implode.

This conclusion was arrived at for different reasons. The main reason was that Islam as a religion would not be able to adapt to an economical environment on the same footing as others. Extreme Islam spreads amongst poor and extremely poor folk. It does not thrive in an atmosphere of prosperity or in a system of democracy. It is uncompetitive simply because the majority of the population do not work (the women). Until recently they used the leverage created by energy to maintain their importance to the economically developed communities. This however has been greatly negated by the huge discoveries of LNG (liquid natural gas) in many places on the globe. As the economic deterioration continues the split in Islamic society is becoming more evident.

The Sunni Muslims have split into controlling sects of extreme religious (ISIS, Al Qaeda, Boko Harem, Muslim Brotherhood and Hamas), religious (Saudi Arabia, Qatar, Turkey and Jordan) and secular Militarists (Egypt, Palestinian Authority, Emirates). The Shiites appear to be united but all on the extreme polarity (Iran, Syria, Hizbullah and parts of Lebanon). The confrontation between the different groups appears to have created some strange bedfellows. Clearly Israel is militarily aligned with Egypt, Jordan, PA, Emirates and believe it or not, Saudi Arabia.

At the same time we are witnessing civil wars in Syria, Iraq, Libya, Yemen and Sudan. Interestingly, all these countries water levels have fallen to or below sea level. Another addition to the water level crisis is Afghanistan. Expect a new civill war when the Americans depart. Except for Israel and to a certain extent, Turkey, the Middle East is deteriorating into a quagmire of hatred, war and destruction.

In conclusion, the vacuum created by the US in the mid-east for whatever reasons, known maybe only to US president Barack Obama, or simply as a result of his naive world view, is leading the world to the creation of a new cycle of turmoil. This, characterized by attempts by Islam to survive via  a creeping occupation of Europe, anti-semitism cloaked by anti-Israel elements, personality problems that Mr Obama has with almost all and sundry (Putin, China, Netanyahu, the Sunni world etc.). American deterrence has been neutralized worldwide and even at home (Ferguson...the Obama parasites turning on each other in a surreal comedy of culture or lack thereof). Bottom line, Gaza is just another symptom of the hypocritical cancer of political correctness imposed upon us by Intellectuals on the left. Justifying Hamas terrorism has led to ISIS and ISIS will be coming to a theatre in your vicinity soon. The bed has been made...sleep in it. Sweet dreams.

Hypocrisy is not a way of getting back to the moral high ground. Pretending you're moral, saying your moral is not the same as acting morally.
Alan Dershowitz