The deteriorating world economy

The thing that trumps everything else is the story of abrupt and catastrophic climate change and the sixth extinction.

However after the "recovery" of the past couple of years the world economy and Peak Oil are raising their heads again, pointing to another collapse in 2015.

Here are some early indications of deep trouble head for infinite growth and human, industrial civilisation.

I shall continue to post on this, but to read the tea leaves I suggest you keep a close look at the digest of stories provided by Rice Farmer which I post here every few days

Junk Bonds Are Going To Tell Us Where The Stock Market Is Heading In 2015

Global Collapse Blog,
19 December, 2014


Do you want to know if the stock market is going to crash next year?  Just keep an eye on junk bonds.  Prior to the horrific collapse of stocks in 2008, high yield debt collapsed first.  And as you will see below, high yield debt is starting to crash again.  The primary reason for this is the price of oil.  The energy sector accounts for approximately 15 to 20 percent of the entire junk bond market, and those energy bonds are taking a tremendous beating right now.  This panic in energy bonds is infecting the broader high yield debt market, and investors have been pulling money out at a frightening pace.  And as I have written about previously, almost every single time junk bonds decline substantially, stocks end up following suit.  So don’t be fooled by the fact that some comforting words from Janet Yellen caused stock prices to jump over the past couple of days.  If you really want to know where the stock market is heading in 2015, keep a close eye on the market for high yield debt.

If you are not familiar with junk bonds, the concept is actually very simple.  Corporations that do not have high credit ratings typically have to pay higher interest rates to borrow money.  The following is how USA Today describes these bonds…

High-yield bonds are long-term IOUs issued by companies with shaky credit ratings. Just like credit card users, companies with poor credit must pay higher interest rates on loans than those with gold-plated credit histories.

But in recent years, interest rates on junk bonds have gone down to ridiculously low levels.  This is another bubble that was created by Federal Reserve policies, and it is a colossal disaster waiting to happen.  And unfortunately, there are already signs that this bubble is now beginning to burst…

Back in June, the average junk bond yield was 3.90 percentage points higher than Treasury securities. The average energy junk bond yielded 3.91 percentage points higher than Treasuries, Lonski says.

That spread has widened to 5.08 percentage points for junk bonds vs. 7.86 percentage points for energy bonds — an indication of how worried investors are about default, particularly for small, highly indebted companies in the fracking business.

The reason why so many analysts are becoming extremely concerned about this shift in junk bonds is because we also saw this happen just before the great stock market crash of 2008.  In the chart below, you can see how yields on junk bonds started to absolutely skyrocket in September of that year…

Of course we have not seen a move of that magnitude quite yet this year, but without a doubt yields have been spiking.  The next chart that I want to share is of this year.  As you can see, the movement over the past month or so has been quite substantial…

And of course I am far from the only one that is watching this.  In fact, there are some sharks on Wall Street that plan to make an absolute boatload of cash as high yield bonds crash.

One of them is Josh Birnbaum.  He correctly made a giant bet against subprime mortgages in 2007, and now he is making a giant bet against junk bonds…

When Josh Birnbaum was at Goldman Sachs in 2007, he made a huge bet against subprime mortgages.

Now he’s betting against something else: high-yield bonds.

From The Wall Street Journal:

Joshua Birnbaum, the ex-Goldman Sachs Group Inc. trader who made bets against subprime mortgages during the financial crisis, now has more than $2 billion in wagers against high-yield bonds at his Tilden Park Capital Management LP hedge-fund firm, according to investor documents.

Could you imagine betting 2 billion dollars on anything?

If he is right, he is going to make an incredible amount of money.

And I have a feeling that he will be.  As a recent New American article detailed, there is already panic in the air…

It’s a mania, said Tim Gramatovich of Peritus Asset Management who oversees a bond portfolio of $800 million: “Anything that becomes a mania — ends badly. And this is a mania.”

Bill Gross, who used to run PIMCO’s gigantic bond portfolio and now advises the Janus Capital Group, explained that “there’s very little liquidity” in junk bonds. This is the language a bond fund manager uses to tell people that no one is buying, everyone is selling. Gross added: “Everyone is trying to squeeze through a very small door.”

Bonds issued by individual energy developers have gotten hammered. For instance, Energy XXI, an oil and gas producer, issued more than $2 billion in bonds just in the last four years and, up until a couple of weeks ago, they were selling at 100 cents on the dollar. On Friday buyers were offering just 64 cents. Midstates Petroleum’s $700 million in bonds — rated “junk” by both Moody’s and Standard and Poor’s — are selling at 54 cents on the dollar, if buyers can be found.

So is there anything that could stop junk bonds from crashing?

Yes, if the price of oil goes back up to 80 dollars or more a barrel that would go a long way to settling things back down.

Unfortunately, many analysts are convinced that the price of oil is going to head even lower instead

“We’re continuing to search for a bottom, and might even see another significant drop before the year-end,” said Gene McGillian, an analyst at Tradition Energy in Stamford, Connecticut.

As I write this, the price of U.S. oil has fallen $1.69 today to $54.78.

If the price of oil stays this low, junk bonds are going to keep crashing.

If junk bonds keep crashing, the stock market is almost certainly going to follow.

For additional reading on this, please see my previous article entitled “‘Near Perfect’ Indicator That Precedes Almost Every Stock Market Correction Is Flashing A Warning Signal“.

But just like in the years leading up to the crash of 2008, there are all kinds of naysayers proclaiming that a collapse will never happen.

Even though our financial problems and our underlying economic fundamentals have gotten much worse since the last crisis, they are absolutely convinced that things are somehow going to be different this time.

In the end, a lot of those skeptics are going to lose an enormous amount of money when the dominoes start falling.

*  *  *

Simply put - ignore this...

The Baltic Shipping Index has always been an indicator of the quantities of goods being shipped around the world - and thus a good indicator of what is happening to the real economy.

The Baltic Dry Index Has Never Crashed This Fast Post-Thanksgiving

We are sure it's nothing - since stock markets in China and The US are soaring - but deep, deep down in the heart of the real economies, there is a problem. The Baltic Dry Index has fallen for 21 straight days, tumbling around 40% since Thanksgiving Day.  

This is the biggest collapse in the 'trade' indicator (which we should ignore unless it is rising) since records began 28 years ago...

As The Index itself hovers very close to the post-crisis lows...

Charts: Bloomberg

Why The US Is About To Be Flooded With Record Oil Production Due To Plunging Oil Prices

Zero Hedge,
19 December, 2014



One would think that plunging oil prices and the resulting mothballing (or bankruptcy) of the highest-cost domestic producers would lead to a collapse in US oil production. And sure enough, if looking simply at headline data like the Baker Hughes count of active rigs in the US, then US oil production grinding to a halt would be all but assured. However, what will actually happen, even as the highest-cost producers and those with the weakest balance sheets are taken to their local bankruptcy court, is that as Bloomberg reports, the US is - paradoxically - set to pump a 42-year high amount of oil in 2015 "as drillers ignore the recent decline in price, pointing them in the opposite direction."

Here is the surprise for all those thinking Saudi Arabia will declare a quick win when half of the US shale is bankrupt and supply plunges: U.S. energy producers plan to pump more crude in 2015 as declining equipment costs and enhanced drilling techniques more than offset the collapse in oil markets, said Troy Eckard, whose Eckard Global LLC owns stakes in more than 260 North Dakota shale wells. That and the scramble to put competitors out of work, before competitors do just that to you.

On one hand oil companies are, logically, shutting down expensive production. However, in borrowing a page from the playbook of the iron ore producers who also are caught in an AMZNian race to the bottom, and are producing more raw materials than ever in hope of putting their competitors out of business as fast as possible, what they are also doing is shifting their focus to their most-prolific, lowest-cost fields, which means extracting more oil with fewer drilling rigs, said Goldman Sachs Group Inc. Global giant Exxon Mobil Corp. the largest U.S. energy company, will increase oil production next year by the biggest margin since 2010. So far, the Organization of Petroleum Exporting Countries’ month-old bet that American drillers would be crushed by cratering prices has been a bust.

In short, what the US energy industry will do at the national level, is precisely what OPEC did as an international cartel: battle plunging prices, and demand, with surge, if not record, production:

“Companies that are already producing oil will continue to operate those wells because the cost of drilling them is already sunk into the ground,” said Timothy Rudderow, who manages $1.5 billion as chief investment officer at Mount Lucas Management Corp. in Newtown, Pennsylvania. “But I wouldn’t want to have to be making long-term production decisions with this kind of volatility.”

Everyone's hope: flood the market with as much cheap oil as possible to take out higher cost competitors, and remove supply as quickly as possible. The problem is that this is precisely what everyone else will also do, and in the biggest paradox of the crude price collapse, the near-term outcome will be an unprecedented surge in oil supply, which will lead to an even greater crash in prices before everything reverts back to a more stable equilibrium... at some point in the distant future.

Some of the facts according to Bloomberg:

• U.S. oil production is set to reach 9.42 million barrels a day in May, which would be the highest monthly average since November 1972, according to the Energy Department’s statistical arm.
  
  
• Exxon, the world’s biggest oil producer by market value, is expected to boost crude and natural gas output by 2.8 percent next year to the equivalent of 4.1 million barrels a day, based on the average of eight analyst estimates compiled by Bloomberg.
  
  
• Existing wells remain profitable even as benchmark crude futures hover near the $55-a-barrel mark because operating costs going forward are usually $25 or less.
  
  

While as we have shown the vast majority of US shale is no longer profitable below $60, when one factors in the entire US energy sector, the average cost to operate an existing well in most parts of the U.S. "is about $20 a barrel,"according to Tom Petrie of Petrie and partners. "It might be $5 higher or it might be $5 lower, that’s the out-of-pocket costs that we’re talking about. Until you dip into that and start losing money on a cash basis day in, day out, you don’t think about shutting in” wells.

So what does this mean for the US energy industry: simple - while capital spending and growth projects are about to be frozen for years to come, companies are about to set existing production on turbo Max, as everyone hopes to not only "make up for lower prices with soaring volume", but to take out their immediate competitors before their competitors do just that to them.

And so the race to the bottom truly begins. The only question is will Saudi Arabia's cash reserves last long enough to keep its "bread and circuses" social fund solvent while the US energy sector implodes under its own weight, or if with a little help from outside, something "black-swany" were to happen to Saudi Arabia and/or its production infrastructure.

Then those very deep OTM 2016 Brent calls we bought a few weeks back will seem like quite the bargain.

$49bn wiped off value of Gulf stock markets

Arabian Business,

16 December, 2014

A fresh wave of panic selling wiped out $49 billion of stock market value across the Gulf Arab economies on Tuesday as the price of Brent crude oil dropped below $60 a barrel for the first time since 2009.

The stock market losses came on top of over $200 billion of value already destroyed since the end of October. Most of the frenzied selling has been by retail investors who fear governments will cut spending in line with falling oil revenues.

"We are in the panic mode now, there is no more support and investors are not rational any more," said Sebastien Henin, head of asset management at The National Investor in Abu Dhabi.

Dubai's index tumbled 7.3 percent to 3,084 points, a one-year low. The market has now retraced more than 50 percent of its massive rally from a multi-year low in January 2012 to this year's peak in May, a rise of 318 percent.

Abu Dhabi's benchmark ended 6.9 percent lower, posting its biggest daily loss in five years and also hitting a one-year low.

Investors ignored statements by officials and economists who said fears of sharply lower spending and growth were not justified.

Speaking at a conference in Dubai on Tuesday, an International Monetary Fund (IMF) official said that although the oil price plunge would cut revenues of Gulf Arab governments, they had big reserves so in general they would not need to reduce state spending significantly.

United Arab Emirates economy minister Sultan bin Saeed Al Mansouri said development projects would not be cut significantly in coming years and urged investors to remain calm.

But investors were dismayed by the speed of oil's decline and the fact that their governments do not appear to have tried to support oil prices. Heavily traded UAE blue chips such as Emaar Properties, Arabtec and First Gulf Bank sank their 10 percent daily limits.

One of the few UAE stocks to gain was Air Arabia, which can be expected to benefit from cheaper aviation fuel. The stock edged up 0.7 percent and was Dubai's third most heavily traded.

Saudi Arabia's bourse, which has the biggest share of petrochemicals among markets in the region, tumbled 7.3 percent in its biggest daily loss in six years and reached 7,330 points, its lowest level since June 2013.

Dozens of Saudi stocks fell by their daily 10 percent limits, indicating further potential weakness. The index has dropped 34 percent from its September peak.

While analysts think earnings in many sectors such as banking and retailing will not necessarily be dampened much by cheap oil, petrochemical firms are exposed as they will lose the competitive advantage they enjoy against foreign rivals from cheap feedstock. Also, the global economic weakness indicated by the commodities rout is a bad omen for petrochemical exporters.

Abdullah Alawi, assistant general manager and head of research at Aljazira Capital in Riyadh, said oil's plunge had served as a catalyst for a correction in an overvalued market, whose trailing price-to-earnings ratio had almost reached 21 in September, exceeding blue-chip benchmarks such as the FTSE 100 and S&P 500.

"That was way too expensive," he said. "Many stocks reached unrealistic valuations."

The market is likely to remain volatile until the Saudi government assures investors that it will at least maintain spending near current levels, many fund managers believe.

"We are waiting, especially in Saudi Arabia, for the government budget for 2015 to see whether the government would maintain its current expenditure levels or if they would cut down significantly," Alawi said.

"We need a big event like that, otherwise we will remain volatile and negative."

Saudi Arabia is expected to announce its 2015 budget by the end of this month, and possibly as soon as on Monday.

Elsewhere in the region, Qatar's index tumbled 3.5 percent and Kuwait lost 2.1 percent. Bahrain's bourse was closed for a national holiday and will reopen on Thursday.

Oman's benchmark dropped 2.9 percent to 5,409 points, its lowest level since August 2012. Unlike its bigger and wealthier Gulf neighbours, Oman is expected to reduce spending substantially and raise taxes to cope with lower oil revenues, and the government has already announced plans that include reducing gas subsidies.

Nigeria, Belarus Halt All FX Trading As Central Bank Urges "Don't Panic"

Zero Hedge,

19 December, 2014

Just because Russia has managed to stabilize its currency for the time being as crude tries to find a floor, that certainly does not mean the soaring dollar tantrum-cum-crude crash episode is anywhere near over, nor that stability has returned to the rest of the oil-exporting countries. Case in point, crude-exporting powerhouse Nigeria, where things are going from worse to #REF!

As Bloomberg reported yesterday, the temporary Russian FX-trading halt appears to have inspired all other nations with plunging currencies (the Nigeria Naira just hit a new record low against the dollar in recent trade), and as a result Nigerian FX dealers halted trading after a central bank rule change meant to "limit speculation" against the plunging naira confused investors. “This raises concerns about the credibility of the central bank,” Kevin Daly, senior portfolio manager at Aberdeen Asset Management Plc, said by phone from London. “If it was their intention to stabilize or see some appreciation of the naira, it’s backfired.”

Bid and ask prices for the naira were quoted from 162 to 190 per dollar with only 16 trades by 1 p.m. in Lagos [yesterday], compared with more than 170 by the same time yesterday, according to data compiled by Bloomberg. The naira fell 12 percent against the dollar this quarter, the worst among 24 African currencies tracked by Bloomberg after Malawi’s kwacha. Investors dropped Nigerian assets as the outlook for Africa’s biggest oil producer worsened with Brent crude prices almost halving since late June.

This is how you implement currency controls like a true boss: "The Abuja-based regulator met currency traders about a circular issued on its website today that cut banks’ maximum foreign-exchange net-open position to zero of shareholder funds by the end of each business day from 1 percent. Interbank naira trading ground to a halt, according to Samir Gadio, head of African strategy at Standard Chartered Plc. The central bank later updated the circular to say the change was temporary."

“Banks have to sell all dollars they buy from the market, not to keep them until the following day,” Deputy Central Bank of Nigeria Governor Sarah Alade said by phone from Abuja. “It is to ensure dollar liquidity. We have noticed some dealers speculating on the currency because of the pressure from declining oil prices.”

Deputy Central Bank of Nigeria Governor Sarah Alade said,  “Banks have to sell all dollars they buy from the market, not to keep them until the following day.”

But the punchline surely was Nigeria's central bank's advice to the public: Don't Panic.

Lenders will still be able to buy dollars on the interbank market if they have orders from customers needing to import goods and services, Gadio said. The central bank will continue to support the naira with sales of dollars in the interbank market, Alade said.

“The banks can’t stop trading because of the circular,” the Deputy Central Bank of Nigeria Governor Sarah Alade said. “It is not supposed to close the market. We have told them we’ll continue intervening in the market, so there is no need to panic.”

Maybe there is:

To be sure, "don't panic" is the only code word investors need to hear to completely bug out:

Aberdeen Asset Management cut its naira holdings completely over the last two months and has no immediate plans to re-enter the market as the currency could fall further, Daly said.

 

“I’m happy to sit on the sidelines and wait to see it go higher against the dollar,” he said. “We’re getting to 200 quicker than I expected. But if someone called me right now and said they’d offer me 200” naira for each dollar, “I’d say no,” Daly said.

This was yesterday. Today the completely halt of FX trading continues: as Bloomberg commented earlier today, "the policy on retaining zero bank’s shareholders funds as FX trading position by close of business remains in effect."

* * *

And just in case there is confusion that the currency crisis is confined simply to energy exporters (as previewed here over a month ago), today the Belarus central bank shocked its own population when it also announced full-blown capital controls designed, releasing additional measures to stem the "negative trends of currency and financial markets " including raising mandatory sales of FX revenue to 0%, suspending all OTC FX trading (so pretty much all FX), introducing a 30% fee on all FX purchases, "recommending" that banks halt BYR lending until February, and sending 1-yr interest rates on liquidity operations with banks to a eyewatering 50% in hopes this leads to an increase in BYR deposit rates. It will. What it won't lead to is stabilization in the deposit market as the natives realize they too are next up on the hyperinflation train.

End result:

Full NBRB press release:

On Measures Taken by the Government and the National Bank with a View to Preventing Development of Negative Trends in the Financial Market

 

Having regard to the situation in the neighbouring states’ economies, primarily in the Russian Federation, the Government and the National Bank of the Republic of Belarus took a number of measures aimed at preventing the development of negative trends in the foreign exchange and financial markets of the Republic of Belarus and rising attractiveness of savings in Belarusian rubles.

 

The National Bank increased the interest rates on standing facilities and bilateral operations designed to support banks’ liquidity to 50% per annum. This measure, in turn, will result in the proportional increase in the rates on deposits in the national currency.

 

All major Belarusian banks should introduce a term guaranteed saving deposit with the mechanism of ruble savings indexation in case of the Belarusian ruble exchange rate changes. This measure will protect the savings in the national currency from the exchange rate risks and raise their attractiveness compared with the savings in foreign exchange.

 

Having regard to the increased demand for foreign exchange in the domestic foreign exchange market, it was resolved to introduce a temporary 30% fee for purchase of foreign exchange by legal and natural persons. Enterprises and banks will pay this fee when purchasing foreign exchange at the stock exchange; natural persons – in the form of commission when purchasing foreign exchange at banks. The paid funds will be directed to the budget.

 

At the same time, the approaches to setting up the exchange rate in the domestic market will remain unchanged. Any citizen may purchase and sell foreign exchange without any limitations; economic entities – at the Belarusian Currency and Stock Exchange. The operations involving purchasing/selling of foreign exchange by economic entities – residents of the Republic of Belarus in the over-the-counter foreign exchange market are temporarily suspended.

 

Besides, the norm of obligatory sale of foreign exchange proceeds inflowing to the country has been increased to 50% since December 19, 2014.

Along with the above-mentioned measures, the approaches to the monetary policy implementation has been tightened for the purpose of limiting money supply growth and increasing the "cost" of money.

 

In particular, the banks have been recommended to avoid the build-up of credit portfolio in Belarusian rubles till February 1, 2015 and not to change the currency of monetary obligations of the borrowers under credit agreements.

 

At the same time, it was resolved not to apply the supervisory response measures to banks for non-compliance with the requirements of Resolution of the Board of the National Bank of the Republic of Belarus No. 260 dated April 22, 2014 "On Maximum Amounts of Interest Rates on the Banks’ Operations Involving Provision of Monetary Funds (Credits) to the Legal Persons – Residents of the Republic of Belarus" from December 18, 2014 to January 1, 2015.

 

The above-mentioned measures will make it possible to raise the attractiveness of savings in Belarusian rubles, balance the foreign exchange market under the conditions of the increased demand for foreign exchange and avoid the growth of speculative expectations.

So as globalization goes into full reverse, and as major countries isolate themselves from global trade, clearly it's time to load up and fall back on that good ole' BTFATH mentality.