Author Archives: Yves Smith

Links 12/17/17

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):

How Putin’s Fealty to the Washington Consensus Made His Currency Crisis Worse

Who needs sanctions when intellectual capture produces such swimming results? The US-led restructuring of the Russian economy after the USSR fell is a gift that keeps on giving.

Hoisted from comments:

Oil, Ruble and Ideology

Yves here. Since the financial media is covering the continuing meltdown of the ruble intensely, we thought it would be helpful to add some information that seems to be missing from most reporting. This post by Jacques Sapir from the 14th (hat tip Michael Hudson) provides important detail on the importance of oil to the Russian economy (far less than typically depicted, although it is the biggest source of foreign exchange), the impact of the fall of the ruble and oil prices on the domestic budgets, and the odds of a Russian default. Note that Sapir is sanguine on the default front and does not see a rerun of 1998 in the offing, by virtue of of Russia having large foreign currency reserves. Note that Menzie Chinn of Econbrowser differs, and uses a chart from the Economist to make his point:

Pepe Escobar: How China’s Eurasia Maneuvers Beat Obama’s Pivot to Asia

Yves here. We’ve commented occasionally on Obama’s failed pivot to Asia, which is clearly an effort to contain China. The centerpiece, the TransPacific Partnership, appears to be going nowhere. A meeting between Communist party chief Xi and Japan’s Abe trumped America’s presence at the ASEAN conference; our Japanese press-watcher Clive says that Putin garnered as much media coverage as did the US president. But you’d get perilous little sense of how China is outmaneuvering the US in Asia, despite considerable worries among its neighbors about its aggressive territorial claims.

This article by Pepe Escobar gives a fine overview of the measures China is taking to create greater economic integration with its Eurasian and European trade partners, to the detriment of US influence. And Washington appears to have been caught flat-footed.

The Economics of P2P Lending

Yves here. The odds are high that if super low interest rates continue (virtually certain), P2P lending will continue to rise rapidly as yield-desperate investors seek better returns. As more money flows through these channels, it virtually assures less careful selection. The question is how bad the downside will be when lenders get bruised and how the market evolves after its inevitable first large-scale setback (the first venture in this market ended in tears, but it was sufficiently small so as not to have burned enough people so as to sour the image of this concept).

Links 12/16/14

What are the Odds of a Commodities-Led Global Financial Crisis?

Yves here. While the odds of commodities-triggered 2008 style meltdown is still not the most likely outcome, recall that that pessimists like yours truly assessed the likelihood of Seriously Bad Things Happening as of early 2008 at 20-30%, which I then saw as dangerously high. In other words, tail risks are bigger than they appear.

Some of the things that favor worse outcomes than one might otherwise anticipate is investor irrationality, or what one might politely call herd behavior. For instance, a major news story today was how investors are dumping emerging markets assets willy nilly, when many are not exposed to much if any blowback from lower commodity prices and quite a few are seen as net beneficiaries. The offset is that central banks have been conditioned to break glass and overreact when banks start looking wobbly. But the Fed may be slow to get the memo, since it sees recent data (the last jobs reports and retail sales data) as strong, and is also predisposed to see its medicine as working even though it is really working only for those at the top of the food chain.

Note that this report is from Monday in Australia, and look how much oil prices have dropped since then. WTI is now at $54.28 per Bloomberg.

Private Equity “Money for Nothing” Tax Game as An Example of Elite Lawlessness

Most members of the great unwashed public, when they hear about unfair results of the tax code, like Warren Buffet’s secretary facing a higher tax rate than he does, or private equity and hedge fund barons paying capital gains tax rates on labor income, assume that those outcomes are the result of a combination of the rich getting the tax code changed over time or succeeding in preserving the exploitation of loopholes that should have been closed ages ago.

But there is another category of tax games that are not discussed much in polite company, that of outright abuses. What is disturbing about that behavior is that it has not only become increasingly common, but members of the bar, including those at white shoe firms, are enablers. “Money for nothing” private equity monitoring agreements are a blindingly obvious example.

IMF, World Bank Halt Lending to Ukraine – Franklin Templeton $4 Billion Ukraine Bet Goes Bad

Yves here. While the financial media is riveted with the spectacle of the ruble meltdown and the Russian government rate hike to 17%, and the investor rush out of all things emerging markets, another drama is playing out in Ukraine. If you’ve been following this drama, the Ukraine economy is substantially intertwined with Russia’s, and Russia was already subsidizing it by giving it a break on gas prices. When things got ugly, Russia revoked the subsidy, demanded repayment of outstanding gas debts, and cut off gas shipments. This made for an ugly situation, since 70% of gas to Europe goes through pipelines that transit Ukraine meaning Ukraine could simply steal European-bound gas if they got desperate, creating a conflict with one of their new patrons. Moreover, it raised the specter that any rescue of Ukraine would wind up routing funds to Gazrpom to pay off the gas bill, another outcome unappealing to a West determined to punish Russia every way it could (the dispute over the outstanding debt is being arbitrated, with a decision due next summer, which also allows Europe to wash its hands of money going to Gazprom).

This detailed account of the wrangling over what to do about supporting the basket case of Ukraine makes a couple of issues very clear: one, the amount of funding needed is much larger than the officials want to admit to, and two, the approaches under discussion are at best stopgaps. A default and restructuring look inevitable.

Did Wall Street Need to Win the Derivatives Budget Fight to Hedge Against Oil Plunge?

Conventional wisdom among banking experts is that Wall Street’s successful fight last week to get a pet provision into the must-pass budget bill (or in political junkies’ shorthand, Cromnibus) as more a demonstration of power and a test for gutting Dodd Frank than a fight that mattered to them. But the provision they got in, which was to undo a portion of Dodd Frank that barred them from having taxpayer-backstopped deposits fund derivative positions, may prove to be more important than it seemed as the collateral damage from the 40% fall in oil prices hits investors and intermediaries.

Japanese Politics: Still 猫に小判

Yves here. Readers asked our Japan-watcher Clive for his take on the snap election in Japan, where voting takes place this Sunday. Contrary to the norm for Japanese politics, there may be less here than meets the eye. In addition, Clive provides an update on Japanese media and official statements on the TransPacific Partnership negotiations.

Links 12/13/14

Joe Firestone: The Lawless Society

Yves here. This post lays bare the depth of corruption in the US. We addressed the problem of what Joe Firestone calls “the lawless society” and presented some initial thoughts about the necessity of pressuring political parties rather than working within them in our Skunk Party Manifesto. A key section:

Corruption is the biggest single problem. Until we tackle that, frontally, it will be impossible to get any good solutions or even viable interim measures to the long and growing list of problems we face. Conduct that would have been seen as reprehensible 40 years ago, like foreclosing on people who were current on their mortgages, or selling drugs even when the company knows they increase heart heart attack and stroke risk enough to be fatal for a meaningful percentage of patients, barely stirs a raised eyebrow today.

As Frederick Douglass said:

Find out just what any people will quietly submit to and you have found out the exact measure of injustice and wrong which will be imposed upon them, and these will continue till they are resisted with either words or blows, or both. The limits of tyrants are prescribed by the endurance of those whom they oppress.

It has become fashionable to talk of outrage fatigue, but political and economic abusers have used that to press for more advantage. And events of recent weeks suggest that even a downtrodden and disenfranchised public is capable of rousing itself and acting when they have finally been pushed too far. Escalating violence by police and the utter indifference of local authorities to it has produced not just a backlash, but sustained protests. Similarly, while the publication of the CIA torture reports is unlikely to lead to real reform of the CIA, it has embarrassed our foreign collaborators and has confirmed the worst of what US critics and skeptics overseas believe. Even if the report produces little change in the US, it has ended any pretense that the US has moral authority in the world at large.