Is China’s economy headed for a crash?

In his assessment of the global economy’s performance 2013, legendary financier George Soros warned of dangers in the Chinese economy:

The major uncertainty facing the world today is not the euro but the future direction of China. The growth model responsible for its rapid rise has run out of steam.

That model depended on financial repression of the household sector, in order to drive the growth of exports and investments. As a result, the household sector has now shrunk to 35 percent of GDP, and its forced savings are no longer sufficient to finance the current growth model. This has led to an exponential rise in the use of various forms of debt financing.

There are some eerie resemblances with the financial conditions that prevailed in the U.S. in the years preceding the crash of 2008. [Project Syndicate]

That, as William Pesek notes, is a rather ominous conclusion. So is China due a crash?

Read More At TheWeek.com

About these ads

Explaining The WTI-Brent Spread Divergence

Something totally bizarre has happened in the last three years. Oil in America has become much, much cheaper than oil in Europe. Oil in America is now almost $30 cheaper than oil in Europe.

This graph is the elephant in the room:

3 year brent spread

And this graph shows how truly historic a move this has been:

brent-WTI-spread

Why?

The ostensible reason for this is oversupply in America. That’s right — American oil companies have supposedly been producing much, much more than they can sell:

This is hilarious if prices weren`t so damn high, but despite a robust export market for finished products, crude oil is backing up all the way to Cushing, Oklahoma, and is only going to get worse in 2013.

Now that Enterprise Products Partners LLP has let the cat out of the bag that less than a month after expanding the Seaway pipeline capacity to 400,000 barrels per day, The Jones Creek terminal has storage capacity of 2.6 million barrels, and it is basically maxed out in available storage.

But there’s something fishy about this explanation. I don’t know for sure about the underlying causality — and it is not impossible that the oil companies are acting incompetently — but are we really supposed to believe that today’s oil conglomerates in America are so bad at managing their supply chain that they will oversupply the market to such an extent that oil sells at a 25% discount on the price in Europe? Even at an expanded capacity, is it really so hard for oil producers to shut down the pipeline, and clear inventories until the price rises so that they are at least not haemorrhaging such a huge chunk of potential profit on every barrel of oil they are selling? I mean, that’s what corporations do (or at least, what they’re supposed to do) — they manage the supply chain to maximise profit.

To me, this huge disparity seems like funny business. What could possibly be making US oil producers behave so ridiculously, massively non-competitively?

The answer could be government intervention. Let’s not forget that the National Resource Defence Preparedness Order gives the President and the Department of Homeland Security the authority to:

(c)  be prepared, in the event of a potential threat to the security of the United States, to take actions necessary to ensure the availability of adequate resources and production capability, including services and critical technology, for national defense requirements;

(d)  improve the efficiency and responsiveness of the domestic industrial base to support national defense requirements; and

(e)  foster cooperation between the defense and commercial sectors for research and development and for acquisition of materials, services, components, and equipment to enhance industrial base efficiency and responsiveness.

And the ability to:

(e)  The Secretary of each resource department, when necessary, shall make the finding required under section 101(b) of the Act, 50 U.S.C. App. 2071(b).  This finding shall be submitted for the President’s approval through the Assistant to the President and National Security Advisor and the Assistant to the President for Homeland Security and Counterterrorism.  Upon such approval, the Secretary of the resource department that made the finding may use the authority of section 101(a) of the Act, 50 U.S.C. App. 2071(a), to control the general distribution of any material (including applicable services) in the civilian market.

My intuition is that it is possible that oil companies may have been advised (or ordered) under the NDRP (or under the 1950 Defense Production Act) to keep some slack in the supply chain in case of a war, or other national or global emergency. This would provide a capacity buffer in addition to the Strategic Petroleum Reserve.

If that’s the case, the question we need to ask is what does the US government know that other governments don’t? Is this just a prudent measure to reduce the danger of a resource or energy shock, or does the US government have some specific information of a specific threat?

The other possible explanation, of course, is ridiculous incompetence on the part of US oil producers. Which, I suppose, is almost believable in the wake of Deepwater Horizon…

America Loves Drone Strikes

This graph shows everything we need to know about the geopolitical reality of Predator Drones (coming soon to the skies of America to hunt down fugitives?).

The American public loves drone strikes:

BC2a006CAAEBSj2

The American public does not approve of the extrajudicial killing of American citizens. But for everyone else, it’s open season.

But everyone else — most particularly and significantly, the countries in the Muslim world — largely hates and resents drone strikes.

And it is the Muslim world that produces the radicalised extremists who commit acts like 9/11, 7/7, the Madrid bombings, and the Bali bombings.  With this outpouring of contempt for America’s drone strikes, many analysts are coming to believe that Obama’s drone policy is now effectively a recruitment tool for al-Qaeda, the Taliban and similar groups:

2_Hands

Indeed, evidence is beginning to coalesce to suggest exactly this. PressTV recently noted:

The expanding drone war in Yemen, which often kills civilians, does in fact cause blowback and help al-Qaeda recruitment – as attested to by numerous Yemen experts, investigative reporting on the ground, polling, testimony from Yemen activists, and the actual fact that recent bungled terrorist attacks aimed at the U.S. have cited such drone attacks as motivating factors.

After another September drone strike that killed 13 civilians, a local Yemeni activist told CNN, “I would not be surprised if a hundred tribesmen joined the lines of al-Qaeda as a result of the latest drone mistake. This part of Yemen takes revenge very seriously.”

“Our entire village is angry at the government and the Americans,” a Yemeni villager named Mohammed told the Post. “If the Americans are responsible, I would have no choice but to sympathize with al-Qaeda because al-Qaeda is fighting America.”

Many in the U.S. intelligence community also believe the drone war is contributing to the al-Qaeda presence in Yemen. Robert Grenier, who headed the CIA’s counter-terrorism center and was previously a CIA station chief in Pakistan, told The Guardian in June that he is “very concerned about the creation of a larger terrorist safe haven in Yemen.”

“We have gone a long way down the road of creating a situation where we are creating more enemies than we are removing from the battlefield,” he said regarding drones in Yemen.

Iona Craig reports that civilian casualties from drone strikes “have emboldened al-Qaeda” and cites the reaction to the 2009 U.S. cruise missile attack on the village of al-Majala in Yemen that killed more than 40 civilians (including 21 children):

That one bombing radicalized the entire area,” Abdul Gh ani al-Iryani, a Yemeni political analyst, said. “All the men and boys from those families and tribes will have joined [al-Qaeda] to fight.

And al-Qaeda’s presence and support in Yemen has grown, not shrunk since the start of the targeted killing program:

Meanwhile Yemen Central Security Force commander Brig. Gen. Yahya Saleh, nephew of ousted president Ali Abdullah Saleh, told Abdul-Ahad that al-Qaeda has more followers, money, guns and territory then they did a year and a half ago.

All at a time when Yemen is facing a “catastrophic” food crisis, with at least 267,000 children facing life-threatening levels of malnutrition. Hunger has doubled since 2009, and the number of displaced civilians is about 500,000 and rising.

As U.S. drones drop bombs on south Yemen villages and AQAP provides displaced civilians with “free electricity, food and water,” tribes in the area are becoming increasingly sympathetic to AQAP.

Let’s be intellectually honest. If a country engages in a military program that carries out strikes that kill hundreds of civilians — many of whom having no connection whatever with terrorism or radicalism — that country is going to become increasingly hated. People in the countries targeted — those who may have lost friends, or family members — are going to plot revenge, and take revenge. That’s just how war works. It infuriates. It radicalises. It instils hatred.

The reality of Obama’s drone program is to create new generations of America-hating radicalised individuals, who may well go on to be the next Osama bin Laden, the next Ayman al-Zawahiri, the next Abu Musab al-Zarqawi. The reality for Obama’s drone program is that it is sowing the seeds for the next 9/11 — just as American intervention in the middle east sowed the seeds for the last, as Osama bin Laden readily admitted.

George Osborne & Big Banks

The Telegraph reports that George Osborne thinks big banks are good for society:

The Chancellor warned that “aggressively” breaking up banks would do little to benefit the UK and insisted the Government’s plans to put in place a so-called “ring fence” to force banks to isolate their riskier, investment banking businesses from their retail arm was the right way to make the financial system safer.

“If we aggressively broke up all of our big banks, I am not sure that, as a society, we would benefit from it,” he said. “We don’t have a huge number of banks, sadly, large banks. I would like to see more.

His comments came as he gave evidence to the parliamentary commission on banking standards where he was accused of attempting to pressure members into supporting his ring-fencing reforms.

“That work has been accepted, as far as I’m aware, by all the major political parties. We are now on the verge of getting on with it,” he said.

Several members of the Commission have argued in favour of breaking up large banks, including former Chancellor, Lord Lawson.

This is really disappointing.

Why would Osborne want to see more of something which requires government bailouts to subsist?

Because that is the reality of a large, interconnective banking system filled with large, powerful interconnected banks.

The 2008 crisis illustrates the problem with a large interconnective banking system. Big banks develop large, diversified and interconnected balance sheets as a sort of shock absorber. Under ordinary circumstances, if a negative shock (say, the failure of a hedge fund) happens, and the losses incurred are shared throughout the system by multiple creditors, then those smaller losses can be more easily absorbed than if the losses were absorbed by a single creditor, who then may be forced to default to other creditors. However, in the case of a very large shock (say, the failure of a megabank like Lehman Brothers or — heaven forbid! — Goldman Sachs) an interconnective network can simply amplify the shock and set the entire system on fire.

As Andrew Haldane wrote in 2009:

Interconnected networks exhibit a knife-edge, or tipping point, property. Within a certain range, connections serve as a shock-absorber. The system acts as a mutual insurance device with disturbances dispersed and dissipated. But beyond a certain range, the system can tip the wrong side of the knife-edge. Interconnections serve as shock-ampli ers, not dampeners, as losses cascade. The system acts not as a mutual insurance device but as a mutual incendiary device.

Daron Acemoglu (et al) formalised this earlier this year:

The presence of dense connections imply that large negative shocks propagate to the entire fi nancial system. In contrast, with weak connections, shocks remain con fined to where they originate.

What this means (and what Osborne seems to miss) is that large banks are a systemic risk to a dense and interconnective financial system.

Under a free market system (i.e. no bailouts) the brutal liquidation resulting from the crash of a too-big-to-fail megabank would serve as a warning sign. Large interconnective banks would be tarnished as a risky counterparty. The banking system would either have to self-regulate — prevent banks from getting too interconnected, and provide its own (non-taxpayer funded) liquidity insurance in the case of systemic risk — or accept the reality of large-scale liquidationary crashes.

In the system we have (and the system Japan has lived with for the last twenty years) bailouts prevent liquidation, there are no real disincentives (after all capitalism without failure is like religion without sin — it doesn’t work), and the bailed-out too-big-to-fail banks become liquidity sucking zombies hooked on bailouts and injections.

Wonderful, right George?

Propping Up The Gold Price?

Izabella Kaminska makes the point that central banks have turned net gold buyers:

Kaminska seems to believe that gold’s price is not just central-bank supported, but its trajectory is downward:

If not for the gold bar/coin frenzy and ETF demand (now substituted by official buying), one might speculate that the collapse in conventional demand (i.e. for industrial and jewelery purposes) may have led to a very different price path for gold post 2008.

Now that ETF demand is waning, however, marginal support for the gold price is actually being provided by the official sector more than ever.

Though, given the gold price reaction of late, clearly even this is not so effective so, either gold and coin buying has started to wane as well – and there is evidencethat this is the case – or it’s taking ever more buying (by official sources) to keep prices supported at the current level.

The recent plateauing of the gold price thus either suggest that today’s spot supply is increasingly catering to tomorrow’s demand expectations, or in the context of more gold being produced all the time, it is taking ever more buying by the official sector to keep prices from falling.

In other words, sans the intervention of central banks on a major level: case bearish.

The obvious thing, though — even if we take central bank buying out of the equation altogether — is that total demand for gold is still increasing. And the price of gold has increased faster than sales, illustrating that the market has struggled and continues to struggle to keep pace with underlying demand. 

And it’s not just demand for gold-denominated paper (i.e. ETFs or other such as-risky-as-anything-you’ll-get-from-MF Global assets) — it’s recently manifested as demand for hard physical gold:

It’s true that central banks are presently supporting the gold price — after years of selling off national wealth at pennies-on-the-dollar into a bear market and thus suppressing prices. Yet it’s not the Western central banks that are pushing demand for gold. It’s the BRICs. As PBOC official Zhang Jianhua noted:

No asset is safe now. The only choice to hedge risks is to hold hard currency — gold.

And as I noted yesterday, BRICs have founded and legitimate fears of buying even deeper into an increasingly ponzified, over-leveraged, rehypothecated and interconnective paper financial system. The PBOC (and other American creditors) already faces the risk of the US Treasury inflating much of their holdings away; the entire point is to get out of such assets into something much harder to duplicate, and impossible to inflate away.

According to China’s State Council’s Xia Bing:

China must make fuller use of the non-financial assets in its foreign reserves, as well as speed up the diversification of investing channels to resist a possible long-term weakening of the dollar.

No; I don’t think it’s particularly wise to announce to the world that you’re going to get elbow-deep into gold bullion either, but this isn’t just a bluff. China is importing hard-to-fathom quantities of gold:


Ultimately, the surge in demand for gold reflects one thing alone: distrust of the increasingly messy, interconnected, over-leveraged and fraudulent financial system. Whether it is China — fearful of dollar debasement — loading up on bullion, or retail investors in the United States or Europe — fearful of another MF Global (or PFG, or Lehman Brothers) — stacking Krugerrands in their basement, demand for gold reflects distrust in finance, distrust in the financial establishment, distrust in banks, distrust in regulators, distrust in government and distrust in the financial media. And it is that distrust — not (by any stretch of the imagination) central bank interventionism — that is the force moving demand for gold.

The distrust is not going anywhere because the system is still rotten. We all know — even Business Insider readers know deep down, I think — that there is something exceedingly rotten at the heart of the global financial system. We don’t know quite how rotten, how deep the rabbit hole goes, who will be implicated, or how fast. But with every LIBOR-rigging scandal (which the Fed, of course, was aware of), every raided segregated account, every devalued pension fund, every failed speculative “hedge”, every Facebook or Zynga pump-and-dump, we get closer to the truth.

There will be no bear market for physical gold until trust in the financial system and regulators is fixed, until markets trade fundamentals instead of the possibility of the NEW QE, until governments represent the interests of their people instead of the interests of tiny financial elites. 

What Peak Oil?

Is peak oil imminent? Lots of people seem to think so.

The data (released by BP a company who have a vested interest in oil scarcity) don’t agree. Proved reserves keep increasing:

The oil in the ground will run out some day. But as the discovery of proven reserves continues to significantly outpace the rate of extraction, the claims that we’re facing immediate shortages looks trashy.

Some may try to cast doubt on these figures, saying that BP are counting inaccessible reserves, and that we must accept that while there are huge quantities of shale oil in the ground, the era of cheap and readily accessible oil is over. They might cite the idea that oil prices are much higher than they were ten years ago. Yet this is mostly a monetary phenomenon resulting from excessive money creation beyond the economy’s productive capacity. Priced in gold, oil is still very cheap — almost as cheap as it has ever been:

The argument that the vast majority of counted reserves are economically inaccessible is fundamentally flawed. In the long run there is only one equation that really matters in determining whether oil is extractable, and that is whether there is a net energy gain; whether energy-in exceeds energy-out. If there’s a net energy gain, it’s feasible. Certainly, we are moving toward a higher cost of energy extraction. Shale oil (for example) has a lower net energy gain than conventional oil, but still typically produces five times as much energy as is consumed in extraction.

But the Earth’s extractable hydrocarbons will eventually dry up, whether that’s in 500 years or 200 years. If we want humanity to have a long-term future on Earth, we need to move to renewables; solar, hydroelectric, thorium, synthetic hydrocarbons. And the market will ensure that, eventually — as the cost of renewable energy continues to fall, more and more of us will adopt it. I don’t buy the myth that markets are stupid — if humanity needs renewable energy (I believe we do) the market will see to it (I believe that is slowly happening). Markets are just the sum of human preferences.

According to the International Renewable Energy Institute:

Power from renewable energy sources is getting cheaper every year, according to a study released Wednesday, challenging long-standing myths that clean energy technology is too expensive to adopt. The costs associated with extracting power from solar panels has fallen as much as 60 percent in just the past few years.The price of  from other renewables, including wind, , concentrating solar power and biomass, was also falling.

So no. I’m not lying awake at night worrying about imminent peak oil. There’s plenty of extractable oil, and renewable energy will eventually supplement and replace it. But will politics get in the way of energy extraction? The United States has huge hydrocarbon reserves, yet regulation is preventing drilling and shipment, leaving America dependent on foreign oil. And the oil companies themselves are largely to blame — after Deepwater Horizon, should anyone be surprised that politicians and the public want to strangle the oil industry?

If there’s an imminent energy crisis, it will be man-made. It will come out of the United States’ dependency on foreign oil. Or out of an environmental catastrophe caused by mismanagement and graft (protected cartels like the energy industry always lead to mismanagement). Or out of excessive red tape. Or war.

The National Attack Authorization Act?

We all know that the National Defense Authorization Act (NDAA) signed by President Obama on New Year’s Eve contained a now-struck-down provision to authorise the indefinite detention of American citizens on US soil.

But did you know that the NDAA also paves the way for war with Iran?

From Dennis Kucinich:

Section (6) rejects any United States policy that would rely on efforts to contain a nuclear weapons-capable Iran. Section (7) urges the President to reaffirm the unacceptability of an Iran with nuclear-weapons capability and opposition to any policy that would rely on containment as an option in response to Iranian enrichment.

This language represents a significant shift in U.S. policy and would guarantee that talks with Iran, currently scheduled for May 23, would fail. Current U.S. policy is that Iran cannot acquire nuclear weapons. Instead, H. Res. 568 draws the “redline” for military action at Iran achieving a nuclear weapons “capability,” a nebulous and undefined term that could include a civilian nuclear program. Indeed, it is likely that a negotiated deal to prevent a nuclear-armed Iran and to prevent war would provide for Iranian enrichment for peaceful purposes under the framework of the Non-Proliferation of Nuclear Weapons Treaty with strict safeguards and inspections. This language makes such a negotiated solution impossible.

At the same time, the language lowers the threshold for attacking Iran. Countries with nuclear weapons “capability” could include many other countries like Japan or Brazil. It is an unrealistic threshold.

The Former Chief of Staff of Secretary of State Colin Powell has stated that this resolution “reads like the same sheet of music that got us into the Iraq war.”

The notion of a “nuclear weapons capability” seems like a dangerously low standard. Let us not forget that Mossad, the CIA and the IAEA agree that Iran does not have a bomb, is not building one and has no plans to build one.

But the bill clearly spells out its intent:

SEC. 1222. UNITED STATES MILITARY PREPAREDNESS IN THE MIDDLE EAST.

Section 2 (A) pre-positioning sufficient supplies of aircraft, munitions, fuel, and other materials for both air- and sea-based missions at key forward locations in the Middle East and Indian Ocean;

(B) maintaining sufficient naval assets in the region necessary to signal United States resolve and to bolster United States capabilities to launch a sustained sea and air campaign against a range of Iranian nuclear and military targets, to protect seaborne shipping, and to deny Iranian retaliation against United States interests in the region;

(D) conducting naval fleet exercises similar to the United States Fifth Fleet’s major exercise in the region in March 2007 to demonstrate ability to keep the Strait of Hormuz open and to counter the use of anti-ship missiles and swarming high-speed boats.

As Kucinich notes:

This is an authorization for the use of military force against Iran. It ignores the warnings of both current and former U.S. top military brass who have spoken in opposition to the use of military force against Iran, including former Secretary of Defense Robert Gates, and current Secretary of Defense Leon Panetta. A February 2012 poll demonstrated that less than 20% of the Israeli public supports an Israeli strike on Iran if approved by the United States. Congress must avoid the same mistakes it made in the Iraq war and reject any language that can be construed as authorizing war against Iran.

It seems like the framers of the bill are exceptionally keen on striking Iran as quickly as possible. Maybe they are receiving lots of money from defence contractors?

Unsurprisingly, the biggest Congressional recipient of donations from defence contractors was Howard “Buck” McKeon, the chairman of the armed services committee who also happens to be the sponsor of the NDAA:

The fact that Ron Paul is the number two recipient is a sign that not all defence contractors are keen to hit Iran. But some are.

Still, even though the bill hints very strongly toward it, it doesn’t mean that it is going to happen. Congressmen might be hungry for a war but the military — already overstretched — isn’t. Admiral Fallon was reportedly the force that kept Bush from hitting Iran, and it would not be surprising to see the Pentagon put up fierce opposition to a future war with Iran. It would be a long, expensive war, with the potential of massive negative side-effects, like dragging in other regional powers, disrupting global trade, and squeezing the US economy by spiking the oil price.