Credit deflation and the reflation cycle to come (part 2)

[ashestoashes]

1 hour ago, Sugarlips said:

Can anyone decipher this tweet for the layman pls?

https://mobile.twitter.com/gamesblazer06/status/1236001446627135488

ZH says a chicago market maker blew up

[CVG]

9 hours ago, Ponty Mython said:

CNA another 7.6% down today - based on what?

I rebought my bottom ladder. Effect - not Cause.

[sancho panza]

Hodges with a warning for those of us piling into oilies

https://www.icis.com/chemicals-and-the-economy/2020/03/oil-markets-hit-perfect-storm-as-coronavirus-cuts-demand/

Former Saudi Oil Minister Sheikh Yamani’s warning in 2000 looks increasingly prophetic today:

“30 years from now, there will be a huge amount of oil – and no buyers. 30 years from now, there is no problem with oil. The Stone Age did not end because the world ran out of stones, and the Oil Age will not end because we run out of oil. I am a Saudi and I know we will have serious economic difficulties ahead of us.”

“As King Faisal said in 1974, “In one generation we went from riding camels to riding Cadillacs. The way we are wasting money, I fear the next generation will be riding camels again”.“

Everything that could go wrong, is now going wrong for oil producers.  As the International Energy Agency reports:

“Global oil demand has been hit hard by coronavirus and the widespread shutdown of China’s economy. Demand is now expected to fall by 435 kb/d in Q1, the first quarterly contraction in more than 10 years.”

China and India have been the main source of demand growth over the past decade, and their economies are now clearly struggling.  China’s battle with coronavirus has had a terrible impact on oil demand, as Reuters reports:

• Overall, China’s oil product demand is expected to fall by a third in Q1
• China is also ramping up oil product exports due to the downturn in domestic demand
• International banks have suspended $600m in credit lines to 3 independent Chinese refiners

In turn, as Saudi Oil Minister Prince Abdulaziz confirmed, coronavirus presents a major challenge to the OPEC cartel:

“When your house is on fire, you can either treat it with a garden hose and risk losing the building, or call the fire brigade.”

Remarkably, many on Wall Street still seem to believe in a V-shaped recovery from the coronavirus epidemic. But in reality, the demand picture may well get worse before it gets better, as other major oil consumers including S Korea, Japan and Italy are now suffering from the virus.

Equally important, as the chart shows, oil prices have finally broken out of the ‘flag shape’ that has been building for years, as I last discussed in November:

“It’s been a long journey for the ‘flag’, stretching back to the pre-Crisis peaks at nearly $150/bbl in the summer of 2008. And the bottom of the flag was made back in 2016, after the last collapse from 2014’s peak of $115/bbl .”

The supply position is also not following the story laid out by the hedge funds. They had bought 533mb of oil in Q4, assuming that OPEC+ Russia would happily reduce output to support prices.

But in reality, as the chart shows, Russian output hit a record post-Soviet era high in 2019.  And at December’s OPEC+ meeting, it was allowed to increase condensate output outside the quota – making thoughts of a cutback even more notional. The issue, as Reuters notes is:

“Saudi Arabia needs oil prices of about $80/bbl to balance its state budget while Russia can cope with prices as low as $42/bbl.”

The funds have also been disappointed by the failure of US shale output to collapse:

• Contrary to the views of the “experts” they used, shale oil output is continuing to rise
• What they missed was that the major oil companies are now involved
• These have the cash and the expertise to overcome problems as they develop

So as always, Saudi Arabia has been left to carry the main burden of the cuts.

Saudi has had indirect support from the reduction in Iranian and Venezuelan output as a result of sanctions, along with the current reduction in Libyan output. But clearly the risks are rising for a collapse of the cartel, as happened in 1985 and temporarily in 2015.

Brent prices above $60/bbl were based on the idea of a perfect world – where OPEC+ cuts and a synchronised global upturn would fuel demand; the US-China trade war would end; and sustainability concerns would disappear. None of this looks likely today

And as Sheikh Yamani presciently warned, the Oil Age will not end because we run out of oil.  Unless OPEC+ prove able to make really deep cuts in output at this week’s meeting, oil prices seem highly likely to soon be back at their long-term average, below $30/bbl.

At this point, OPEC countries may regret that they didn’t diversify their economies whilst the oil money was still rolling in.

[sancho panza]

from the 23/2 Hodges.Debt deflationistas to be proved right.

https://www.icis.com/chemicals-and-the-economy/2020/02/coronavirus-epidemic-makes-global-debt-crisis-now-almost-certain/

China’s lockdown makes global debt crisis now almost certain

Beijing has a population of 21.5 million, but you wouldn’t know it from this BBC video from last Thursday.  Normally busy streets and transport systems are eerily empty, with food deliveries often the main traffic on the roads.

It’s the same picture in industry, with the Baidu Migration Index reporting only 26% of migrant workers had returned to work across 19 sample cities by 19 February, compared with 101% a year earlier.

The position is even worse in Hubei province, the most important industrial manufacturing province in the country, as this South China Morning Post video, also from last Thursday, confirms.

China is clearly nowhere near getting “back to normal”, as the SCMP reports:

“Choked off from suppliers, workers, and logistics networks, China’s manufacturing base is facing a multitude of unprecedented challenges, as coronavirus containment efforts hamper factories’ efforts to reopen. 

“Many of those that have been granted permission to resume operations face critical shortages of staff, with huge swathes of China still under lockdown and some local workers afraid to leave their homes. Others cannot access the materials needed to make their products, and even if they could, the shutdown of shops and marketplaces around China means demand has been sapped. 

“Those who manage to assail the challenges, meanwhile, have found that trucking, shipping and freight services are thin on the ground, as China’s famed logistical machine also struggles to find workers and navigate provincial border checkpoints that have popped up across the country.”

Cash-flow is also drying up at thousands of companies, large and small.  It is now a month since the emergency began. Bloomberg reports, for example, that the Hainan provincial government is in talks to takeover HNA’s $143bn airline to property development business empire.

THE LOCKDOWN CONTINUES TO HAVE MAJOR IMPACT ON THE ECONOMY
It would be nice to believe that the epidemic will have no impact on China’s economy. But common sense tells us this can’t be true. We just have to ask ourselves 5 obvious questions.  What would happen to:

1. Our own country’s economy, if our capital and a major manufacturing base shutdown for a month?
2. Businesses, large and small, if orders stopped and transport was severely disrupted?
3. Imports and exports, if critical shipping schedules and flights were cancelled?
4. Cash-flow, if the above happened and we still had to pay interest bills on debt?
5. Supply chains, if workers at one or more partners couldn’t get to work for a month?

South Korea’s president Moon-Jae has given the obvious answer as the Financial Times reports:

“We should take all possible measures we can think of” to support the economy, Mr Moon told a cabinet meeting on Tuesday. “The current situation is more serious than we thought . . . we need to take emergency steps in this time of emergency.”

Of course, ‘this time may be different’. But common sense tells us that China’s economy is under enormous pressure today. The charts above highlight the range of areas that are affected:

• Property sales are down 79%, with Evergrande offering 22% discounts through March
• Construction is 25% of GDP, with Fitch identifying 6 developers with high risk of default
• Ports are often at a standstill – and many shippers have simply stopped calling at Chinese ports
• Car sales collapsed by 92% in the world’s largest auto market in the first two weeks of February

5 LIKELY IMPACTS FROM THE LOCKDOWN
1. Domestic sales.  Thousands of stores have been shut since the epidemic began, and people are understandably too scared to venture out – even if this was allowed. So we must assume most areas of domestic consumption are being hit.

2. Imports for manufacturing. Chemicals are an excellent guide to the overall position, as the charts show based on Trade Data Monitor data. Given the shipping problems, large volumes of cancelled imports must now be sitting in suppliers’ tanks and warehouses, waiting to find a new market

3. Exports as part of supply chains. Apple’s profit warning highlights how even major companies have been caught out, as they cannot obtain the component supplies on which their global sales depend. Car and electronics companies are probably most at risk, and we will no doubt see more profit warnings as companies realise inventory is running short

4. Domestic suppliers. There is little data available about the virus’ impact on smaller Chinese companies. But presumably many have already gone bust, especially if they were unlucky enough to be in the centre of the downturn, such as those in Hubei and Wuhan

5. Oil and currency markets.  Caixin reports that Chinese refinery runs are at just 10mbd, compared to an average 13mbd in 2019:

“The deepening run cuts belie optimism that the impact of the epidemic may have peaked, a sentiment that’s helped spur a recovery in oil prices over the last week and a half. Many people are still trapped in their homes and unable to go to work, while curbs on travel have pummeled demand for transport fuels.”

Currency markets are also realising the worst may yet be to come.  Companies such as HNA have been major borrowers in the offshore dollar market – hoping to take advantage of low US interest rates. But as we have seen many times before, when the currency starts to fall, those debts quickly become impossible to service.

A GLOBAL DEBT CRISIS SEEMS ALMOST INEVITABLE
Observers such as myself have warned about this problem for years.  Earlier this month, an international G20 task force of currency experts warned:

“Central banks have lost control of global liquidity. The dollarised international financial system has become treacherously unstable and vulnerable to a sudden reversal in capital flows.  A decade of ultra-low interest rates and quantitative easing has flooded the globe with highly unstable forms of funding denominated in dollars, with no guarantor standing behind them. Glaring currency and maturity mismatches have accumulated.

“This structure is prone to an abrupt “dollar crunch” should borrowers in China, east Asia, emerging markets, or even parts of Europe suddenly start scrambling for scarce US currency to repay bonds and loans in a crisis.”

Central banks and governments either didn’t realise the risks or, more likely, simply hoped the problem would only hit once they had left the job.  But today, this “dollar crunch” may well be about to arrive:

• After a brief rally, the Rmb has gone back below Rmb 7: US$ 1
• This will make it even more impossible for many companies to repay their dollar loans

Many western pension funds felt forced to rush into the offshore dollar market in a ‘search for yield’. Zero rate interest policies meant they couldn’t get the level of yield they needed to fund future pensions in ‘safer’ markets at home. And employers weren’t willing to fill the gap, as this would have hit their earnings and share prices.

Unfortunately, as I noted 18 months ago, Ernest Hemingway’s The Sun also Rises probably describes the end-game we have entered:

“How did you go bankrupt?” Bill asked.

“Two ways,” Mike said. “Gradually and then suddenly.”

[DurhamBorn]

17 hours ago, TheCountOfNowhere said:

I did try and warn people 😊

No one wants to listen to a looney

@DurhamBornhave you considered the possibility they won't print? 

No,because there is no way they wont.The CBs main job is to stop their society falling apart.For all the hyperbole about protecting the rich etc that is just a side affect.The CBs main job is to make sure there is food on the shelves.They do that by slowly oiling the economy.The only question is amount and speed.

[sleepwello'nights]

1 hour ago, sancho panza said:

Hodges with a warning for those of us piling into oilies

https://www.icis.com/chemicals-and-the-economy/2020/03/oil-markets-hit-perfect-storm-as-coronavirus-cuts-demand/

Former Saudi Oil Minister Sheikh Yamani’s warning in 2000 looks increasingly prophetic today:

“30 years from now, there will be a huge amount of oil – and no buyers. 30 years from now, there is no problem with oil. I

 

 

Looks as if my decision to buy a V8 engined car in spite of peak oil doomsters wasn't so dumb  (not that I'll be around in 30 years time.)

[DurhamBorn]

Oil could still go below $20 in the bust,even below $15 for a short period.The next cycle should see it fly though,and of course those companies that use oil and hedge gain a huge advantage then for a period.Domestic companies that use a lot of oil are the gainers,with a lag as usual.

[Noallegiance]

7 minutes ago, Tdog said:

From 2000 when interest rates should have gone up to deflate the debt bubble they done the opposite.

Whatever their role is meant to be, those doing it in the last 2 decades have been utterly useless at it.

Did society fall apart pre-central banking? Or was central banking a societal watershed?

[onlyme]

25 minutes ago, Tdog said:

From 2000 when interest rates should have gone up to deflate the debt bubble they done the opposite.

Whatever their role is meant to be, those doing it in the last 2 decades have been utterly useless at it.

Paulson went with the threat bail us out or else - $1T wasn't it ? The bankers kept on collecting their mega bonuses, job done.  Markets, investment, cost base absurdities and living standards not been the same since for the general population.

[Errol]

1 hour ago, Tdog said:

From 2000 when interest rates should have gone up to deflate the debt bubble they done the opposite.

Whatever their role is meant to be, those doing it in the last 2 decades have been utterly useless at it.

No. They've kept the game going for the time being. Ultimately the entire system will fail and will have to be replaced. There is no escape from the trap.

[Talking Monkey]

1 hour ago, DurhamBorn said:

Oil could still go below $20 in the bust,even below $15 for a short period.The next cycle should see it fly though,and of course those companies that use oil and hedge gain a huge advantage then for a period.Domestic companies that use a lot of oil are the gainers,with a lag as usual.

I suppose what we are all waiting to see is if there is one last hurrah before the bust. From how last week unfolded it is looking less likely

[Errol]

Fed will move next to buying a much larger range of assets, including (openly) stocks and ETFs.

[Democorruptcy]

1 hour ago, DurhamBorn said:

Oil could still go below $20 in the bust,even below $15 for a short period.The next cycle should see it fly though,and of course those companies that use oil and hedge gain a huge advantage then for a period.Domestic companies that use a lot of oil are the gainers,with a lag as usual.

As you know I sold my SGC because I hadn't seen many buses on the streets in lock down areas in China (Should have immediately shorted them but find that a hard switch).

Hedging in last annual report leaves a lot of scope to fill the gaps with cheap fuel. They could be going to suffer more pain but if they get through it, they could be a poster child for the thread? Low fuel costs built in, rising inflation, increase fares, better margins, cash flow, etc?

 

 

[BearyBear]

When Plunge Protection Team is not doing enough... why the FED can't just print&buy Tesla, Uber and Amazon!

https://www.bloomberg.com/news/articles/2020-03-06/rosengren-says-fed-should-be-able-to-buy-a-wider-range-of-assets

[TheCountOfNowhere]

1 hour ago, Errol said:

Fed will move next to buying a much larger range of assets, including (openly) stocks and ETFs.

Luckily the US people have guns. A stroke of genius by the founding fathers.  The poor wont take this scam forever 

[Loki]

2 minutes ago, TheCountOfNowhere said:

Luckily the US people have guns. A stroke of genius by the founding fathers.  The poor wont take this scam forever 

The Fed has the US Army  

[TheCountOfNowhere]

4 minutes ago, Loki said:

The Fed has the US Army  

The real reason for armies... Help the rich.

Not nany people are willing to fire on their own. 

The US is very interesting. It could easily kick off there. 

[Loki]

11 minutes ago, TheCountOfNowhere said:

Not nany people are willing to fire on their own. 

SIMON SAYS: RUSSIAN ROULETTE EDITION 

[kibuc]

33 minutes ago, Loki said:

SIMON SAYS: RUSSIAN ROULETTE EDITION 

Public will eventually learn that the only way to behave in such situation is to lie on the floor in starfish position and keep responding with "No speak Inglese" to whatever the guy is saying. Any movement, event the exact movement order by the pig, can be an excuse to open fire. Lack of movement with your limbs in clear view can not.

[DurhamBorn]

2 hours ago, Democorruptcy said:

As you know I sold my SGC because I hadn't seen many buses on the streets in lock down areas in China (Should have immediately shorted them but find that a hard switch).

Hedging in last annual report leaves a lot of scope to fill the gaps with cheap fuel. They could be going to suffer more pain but if they get through it, they could be a poster child for the thread? Low fuel costs built in, rising inflation, increase fares, better margins, cash flow, etc?

 

 

Yes,all companies like that should get a big boost once the cycle gets under way.In the near term though could be more pain.Of course it works best when demand holds up or is increasing and that will take a while to come through.

[Talking Monkey]

2 hours ago, Loki said:

SIMON SAYS: RUSSIAN ROULETTE EDITION 

That is one disturbing video

[Democorruptcy]

Amerman latest

A Battle Of Titans: The Coronavirus Versus The Fed

[M S E Refugee]

https://www.hl.co.uk/shares/shares-search-results/i/ishares-ii-plc-s-and-p-timber-and-forestry-usd

I might bet everything on this ETF on Monday.

This could be the smart way to go long on bog roll.

[Errol]

A must for anyone with an interest in the gold market:

 

In Gold We Trust 2020 – Preview Chartbook

https://www.incrementum.li/en/journal/iasf-seasonal-reflections-2020-issue-no-1-2-2/

[TheCountOfNowhere]

Oil price tumbles 

 

https://www.cityam.com/oil-prices-tumble-10-per-cent-as-russia-rejects-opec-deal/