Category Archives: Doomsday scenarios

Ilargi: Oil, Power and Psychopaths

Yves here. One minor caveat to a fine overview. Ilargi mentions at the end that Angela Merkel has said that it is prepared to let Greece leave the Eurozone if it bucks austerity. A regular reader of the German press who also read the report in Der Spiegel thinks this is a bluff to influence the Greek election.

And there is a bigger question that goes unanswered: why so much US warmongering and destructive, and eventually self-destructive behavior (blowback, anyone?). As Karl Polanyi mentions in passing in his The Great Transformation (see our recent post) because it seems so obvious, a peace consensus had emerged among the Great Powers in the nineteenth century, largely because domestic and international commerce were now a major social organizing principle, and businessmen correctly saw war as bad for business. So why has the peace faction been successfully supplanted by a war faction? Is it that (so far) the US wars are not inflicted on parties we consider to be contemporary Great Powers?

Yanis Varoufakis: Greek and European Prospects for 2015

Yves here. Yanis Varoufakis discusses the prospects for negotiations between a new, likely Szyria-led Greek government and the Troika over the next Greek restructuring. Varoufakis in effect argues that the Greeks should go hardball because the Trokia’s demands are unreasonable. We’ll find out soon enough whether the incoming government has the public support and the guts to do so.

As much as a Grexit would be a lose-lose of major proportions, Varoufakis argues that the logic of current Eurzone arrangements is driving members to a break-up. Indeed, some observers believe that Germany would like to kick Greece out of the Eurozone. As Marshall Auerback put it by e-mail:

As far as Germany goes, let me quote Macbeth:

I am in blood
Stepped in so far that, should I wade no more,
Returning were as tedious as go o’er.‎

Stephen Roach Takes the Fed to the Woodshed

While the Fed appears to be getting nervous about increasing (and long overdue) criticism for its undue coziness with banks, it has for the most part ignored opponents of its aggressive monetary policies. And for good reason. Most of them have been fixated on the risk of inflation, which is not in the cards as long as labor bargaining power remains weak. There are other, more substantial grounds for taking issue with the central bank’s policies. For instance, gooding asset prices widens income and wealth inequality, which in the long term is a damper on growth. Moreover, one can argue that the sustained super-accommodative policy gave the impression that Something Was Being Done, which took the heat off the Administration to push for more spending. Indeed, the IMF recently found that infrastructure spending pays for itself, with each dollar of spending in an economy with high unemployment generating nearly $3 in GDP growth. And a lot of people are uncomfortable for aesthetic or pragmatic reasons. Aesthetically, a lot of investors, even ones that have done well, are deeply uncomfortable with a central bank meddling so much. And many investors and savers are frustrated by their inability to invest at a positive real yield without being forced to take on a lot of risk.

Stephen Roach, former chief economist of Morgan Stanley and later its chairman for Asia, offers a straightforward, sharply-worded critique: just as in the runup to the crisis of 2007-2008, the Fed’s failure to raise rates is leading to an underpricing of financial market risk, or in layspeak, to the blowing of bubbles. He argues that has to end badly.

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:

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.

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.

Yanis Varoufakis: How the United States Rolls (Post-Global Minotaur) – by Slavov Žižek

By Yanis Varoufakis, a professor of economics at the University of Athens. Originally published at his website. In this article, aptly subtitled It’s lonely being the global policeman, Slavoj evokes a parallelism between the age of extremes that began as the British Empire was losing its grip with the present moment in history. Now that the […]

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.

Ilargi: Will the Oil Collapse Kill Energy Junk Bonds?

Yves here. Some ahead-of-the-curve analysts have warned of the magnitude of energy debt, mainly junk bonds issued to fund shale gas projects, that are now at risk thanks to plunging oil prices whacking the entire energy complex.

We’ve heard over the last few weeks sunny proclamations of how many shale players have lower cost structure than commonly thought and could ride out weak prices. The supposedly super bearish Bank of America report published earlier in the week called for oil prices to drop to a scary-sounding $50 a barrel. But the document sees that aa a short-term phenomenon. As supply and demand equilibrates (shorthand for “of course some people will drive more, and a lot of wells will get shut down”), it anticipates that oil prices will rebound to $80 to $90 a barrel in the second half of 2015.

The problem with conventional wisdom, even pessimistic-looking conventional wisdom, is that the noose of a lot of borrowings is likely to change the decision-making process of those producers.

Yanis Varoufakis: Ten Questions on the Eurozone, with Ten Answers

Yves here. Yanis Varoufakis’ discussion today focuses on hot-button issues in the Eurozone, which isn’t getting the attention it warrants in the US press right now, given the competition from so many stories closer to home, such as the oil price collapse to sustained protests over police brutality to the CIA torture report.

Admittedly, while a crisis looks inevitable, with Germany committed to incompatible goals (continuing to be export-driven but not lending to its trade partners), the Troika has made kicking the can down the road into such an art form so as to have dulled the interest of most Eurozone watchers. But there’s been a bit of a wake-up call with the possibility that Greek prime minister Antonis Samaras’ gambit of calling for a presidential snap election (which is a vote within the legislature) will fail, leading to general elections. A general election is widely expected to produce a victory for the leftist party Syriza, which is opposed to more bailouts, and one is scheduled to be wrapped up within the next couple of months. Syriza wants the debts restructured and also wants to be allowed to deficit spend, which in an economy so slack, would reduce debt to GDP ratio over time (the austerians keep ignoring the results of their failed experiments: when you cut government spending, the economy shrinks disproportionately. As a result, this misguided method for putting finances on a sounder footing makes matters worse as government debt to GDP ratios rise as a direct result of spending cuts).

As much as the Syriza leader, Alexis Tsipras, has spoken against bailouts, even if he comes into power, it’s not clear that he has the resolve to bluff the Troika successfully. International lenders will rely on the notion that Tsipras can’t afford to threaten a default, since that could trigger bank runs and potentially rescues via depositor bail-ins and are likely to push back hard. But the spike up in Greek government bond yields and the near 12% plunge in the Greek stock market yesterday says investors are plenty worried about the possibility of brinksmanship, and the tail risk that Greece might actually default and print drachmas to fund its government budget, which would be grounds for kicking it out of the Eurozone.

Ilargi: Oil Shock – More Than A Quantum Of Fragility

Yves here. We’ve written that the sudden decline in the price of oil has the potential to deliver some nasty financial shocks, given that shale companies and even the majors have been financing exploration and development with debt.

But while concerns about fragility are well warranted, we wanted to make sure a mention made in this article is not treated with undue alarm. It points out that the BIS is concerned that an unprecedented portion of CDOs are now made of leveraged loans.

The problem is that the term “CDO” has been used inconsistently in the financial media. The CDO that you learned to hate in the wake of the crisis and blew up AIG, monoline insurers, and did a lot of damage to big banks were more formally called “asset backed securities CDOs” or “ABS CDOs” But that was too much of a mouthful, so they were referred to as “CDOs” in the press. There were two periods when that type of CDO existed, the late 1990s, and from the mid 2000 to mid-2007. Ina both cases, that market was a Ponzi, used to make the unwanted parts of subprime securitizatons saleable by making them into financial sausage, with some better assets thrown in, and then re-tranched again. The Ponzi part came about from the fact that these CDOs also had unsaleable parts, which were either put into first generation CDO sausage (CDOs allowed a certain portion of CDOs to be included) or sold into CDO squareds (which were hard to sell).

But the more mainstream type of CDO was one made of credit defaults swaps on corporate credits. That was the original CDO done in the famed JP Morgan Bisto deal in the mid-1990s. Indeed, when I first started researching subprime (ABS) CDOs, and just called them “CDOs” some experts assumed I meant the corporate loan type, since that was prevalent. During the crisis, possibly to make sure no one confused these CDOs with the ones that were blowing up, they were increasingly called CLOs, or “collatearlized loan obligations.” They were also legitimately less risky than the subprime CDOs, since their value didn’t suddenly collapse when a certain level of loan losses was breached.

The cause for pause is that CLOs, which are indeed a type of CDOs have traditionally been made mainly or entirely of investment grade credits. It now appears that junk credits predominate. While their structures and diversification will keep ABS CDO-type total wipeouts from happening, they could still deliver some nasty surprises.

Don Quijones: Mexico on the Verge of a New Tequila Crisis?

As the old adage goes, things have an annoying habit of occurring in threes. It’s particularly true in the case of crises, which tend to fuel each other in a potentially lethal feedback loop. And Mexico is already experiencing blowback from two separate but strongly interlinked crises.

Some Mainstream Italian Parties Now Advocating Euro Exit

Watching the Eurozone limp along has proven to be an instructive exercise in how long political and financial legerdemain can keep a fundamentally untenable situation going beyond its sell-by date. But a wild card is that right-wing parties in Italy that have realistic odds of eventually governing are pumping for a Eurozone exit.

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.