Category Archives: Investment outlook

Nomi Prins: The Volatility/Quantitative Easing Dance of Doom

The battle between the ‘haves’ and ‘have-nots’ of global financial policy is escalating to the point where the ‘haves’ might start to sweat – a tiny little. This phase of heightened volatility in the markets is a harbinger of the inevitable meltdown that will follow the grand plastering-over of a systemically fraudulent global financial system.

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Benchmarking the ECB’s QE Program

The ECB is set to announce the details of its QE program tomorrow. Many analysts and investors have been trying to puzzle out how its operations might work, since those details will make a difference in what impact if any it has.

Frankly, we are hugely skeptical of this initiative. The US version, which is bizarrely touted as a success, further zombified the economy. It goosed asset prices, which widened wealth and income inequality. Now respectable economists are decrying the widening gap between rich and poor and the lack of class mobility as a brake on growth, yet they also refused to endorse debt restructuring and much more aggressive fiscal spending. And some experts contend that the reason the Fed decided to end QE last summer was that it came to recognize the costs outweighed what if anything it produced in the way of benefits. Of course, they can never admit that publicly or even privately if true.

In Europe, there is even more reason to be expect QE to be at best ineffective. Unlike the US, where as a matter of policy, a lot of financing takes place through the capital markets (for instance, credit card debt, subprime auto loans, home loans are all securitized to a large degree), in Europe, far more credit is on bank balance sheets, and small to medium sized corporate lending is far more important than in the US. Thus, while as we have repeatedly explained, putting money on sale is unlikely to result in more borrowing unless the cost of money is the biggest cost of running your business (ie, you are a bank or a speculator), in Europe you have the added layer that reducing investment yields is unlikely to change how credit officers view lending to small/medium sized enterprises (assuming they even want to borrow) in a weak, deflationary economy.

This Bruegel post describes the major options that the ECB has in designing its QE program, which will help readers benchmark tomorrow’s announcement. One might politely describe the choices as bad and less bad.

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Blowback from Oil Price War: Sovereign Wealth Funds Selling Investments

While there has been ample discussion the impact of falling oil prices on the national budgets of major oil producing nations, there’s been less media focus on how some of the countries that face budget squeezes are likely to react.

Consider what a difference nine days makes. Moody’s gave six Middle Eastern countries a thumbs up on December 8, based on the assumption that oil prices will average $80 to $85 a barrel in 2015. With WTI now at $55.33, it appears reasonable to assume a price of $60 or below for the first half of 2015. The consensus is that production cuts will lead to much firmer prices in the final two quarters,* but $70 a barrel would now seem a more reasonable forecast for the year.

Here is the money part of the Moody’s assessment (emphasis ours):

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Quiet Distress Among the (Ex) Rich

While the wealthy don’t get much sympathy on this website, the restructuring of the economy to save the banks at the expense of pretty much everyone else has hurt some former members of the top 1% and even the 0.1%. And it’s also worth mentioning that some of the former members of the top echelon occupied it when the distance between the rich and everyone else was much narrower than it is now.

The fact that economic distress has moved pretty high up the food chain is a sign that this recovery isn’t all that it is cracked up to be.

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Yanis Varoufakis: Burst Greek Bubbles, Spooked Fund Managers – A Cause for Restrained Celebration

Yves here. Varoufakis describes a classic case of the old investing adage, “Little pigs get fed, big pigs get slaughtered.” In this case, the big pigs decided to ride what was clearly only a momentum trade on Greek sovereign debt, since anyone with an operating brain cell could tell that Greece was not getting better any time soon, and limited German tolerance for bailouts meant that some sort of restructuring was inevitable. The concern that the Greek bubble will be pricked sooner than expected looks to have wrong-footed some big name investors.

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Who Will Wind Up Holding the Bag in the Shale Gas Bubble?

We’ve been writing off and on about how the sudden fall in gas prices has been expected to put a lot of shale gas development on hold. In fact, quite a few analysts believe that one of the big Saudi aims in refusing to support oil prices was to dent the prospects for competitive energy sources, not just renewables like wind and hydro power, but shale gas.

Even though OilPrice reported that US rig count had indeed fallen as oil prices plunged, John Dizard at the Financial Times (hat tip Scott) gives a more intriguing piece of the puzzle: the degree to which production is still chugging along despite it being uneconomical. The oil majors have been criticized for levering up to continue developing when it is cash-flow negative; they are presumably betting that prices will be much higher in short order.

But the same thing is happening further down the food chain, among players that don’t begin to have the deep pockets of the industry behemoths: many of them are still in “drill baby, drill” mode.

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Wolf Richter: Global Business Outlook “Darkest Picture Since Financial Crisis”

Yves here. Wolf like to paint in bright colors, but the points he makes are consistent with business and financial press reporting, if you cut through the hype. Europe is still teetering on the verge of recession. Growth in Japan has gone negative. China is slowing down, to a degree that led the authorities to give it a monetary shot in the arm. And the US simply is not getting to liftoff. Even with official unemployment falling, consumers are cautious about purchases, with most planning to spend less on Christmas than last year. Corporate capital expenditures in the US are increasing, but so far, this is in the “a robin does not mean it’s spring” category. So with the US as the one possible engine for world expansion, and that one not firing robustly, it’s not hard to see the reason for global business leaders getting more nervous.

And to add a wild card into the mix: contrary to current conventional wisdom, bond maven Jeff Gundlach thinks the Fed will raise rates next year. That seems plausible, given that ZIRP gives the Fed no policy room if anything bad happens to the financial system and that the central bank is also coming under more political heat for its continuing extreme monetary policies. Crisis junkies may recall that the Fed went from 25 basis point interest rate cuts to 75 basis points (“75 is the new 25″), when it wasn’t clear that reductions that large were necessary (ie, signaling that the Fed was on the case and taking matters seriously was probably sufficient). The magnitude of the cuts brought the central bank deeper into super-lowe interest rate terrain. I recall thinking when the Fed cut the Fed funds rate below 2% that they would come to regret that decision.

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Wolf Richter: Signs That the Startup Bubble is Totally Maxed Out

Yves here. Wolf’s longer original headline to this post focused on how gobsmacked he was to get glossy mail pieces to promote supposedly hot Silicon Valley startups. Apparently, the deemed-to-be-transgressive communications medium (by West Coast standards) was a way to cut through the new venture clutter. But what I found more surprising was how obviously lame these ideas were, yet they’ve all already gotten multiple rounds of funding and have eight figure investments so far.

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