If Oil Prices Are Surprising, Then That Can Only Mean Demand

Submitted by Jeffrey Snider  –  Alhambra Investment Partners

Crude oil futures have been quite volatile of late, particularly in the front months where even the slightest changes in expectations of whatever factor (rig counts, CEO comments, etc.) send WTI surging or tumbling by turn. Despite that, however, the outer years on the curve have seen not just more stability but a steady downward pressure of late. I think a lot of that has to do with futures investors reconciling actual contango options with the idea that demand is far more of not just a problem, but a longer-term problem.

At the front end, rig counts have gained most attention but only as they relate to the surge in inventory. The US is overflowing with oil and production remains at a record high, but the two of those factors together don’t actually count as much in terms of price as is made out by most commentary. It is far too difficult for many to discount the entire economics professions’ complete dedication to the US “booming” economy in order to see a huge demand problem in oil prices; far easier to simply repeat the words “record supply” and leave it at that.

ABOOK Feb 2015 Crude WTI Futures

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De-Dollarization Accelerates: Russia Launches SWIFT-Alternative Linking 91 Entities

Submitted by Tyler Durden  –  ZeroHedge

Back in 2013, The NSA was first exposed for secretly ‘monitoring’ the SWIFT payments flows. This appears to have been among the last straws for Russia (and others) as far as both NSA spying and dollar domination.

Last year, following threats to remove Russia from SWIFT by the UK, (which SWIFT rapidly distanced its ‘independent-self’ from), Russia (and China) announced plans to create its own de-dollarized version. In November, Russia detailed the SWIFT-alternative’s launch date around May 2015, and just last month, Medvedev warned of “unlimited reaction” if Russia was cut off from the SWIFT payments system.

So the news this week that Russia has launched its own ‘SWIFT’-alternative, linking 91 credit institutions initially, suggests de-dollarization is considerably further along than many expected (especially as Russia dumps US Treasuries at a record pace).

As Sputnik News reports,

Almost 91 domestic credit institutions have been incorporated into the new Russian financial system, the analogous of SWIFT, an international banking network.

The new service, will allow Russian banks to communicate seamlessly through the Central Bank of Russia.

It should be noted that Russia’s Central Bank initiated the development of the country’s own messaging system in response to repeated threats voiced by Moscow’s Western partners to disconnect Russia from SWIFT.

Joining the global interbank system in 1989, Russia has become one of the most active users of SWIFT globally, sending hundreds of thousands of messages per day. In general, SWIFT provides a secure communication network for more than ten thousands of financial institutions around the world, approving transactions of trillions of US dollars.

Earlier this month Russian Deputy Prime Minister Igor Shuvalov expressed confidence that Russia would not be disconnected from SWIFT. In her turn, Russian Central Bank First Deputy Chair Ksenia Yudaeva called upon Russian civilians and financial institutions not to dramatize the current situation.

Russian experts point to the fact that Western businesses would face severe losses if they expelled Russia from the international SWIFT system. On the other hand, the alternative system launched by Russia might reduce the negative impacts caused by measures imposed by the West, including possible disconnection from SWIFT, and diminish Western financial dominance over Russia.

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Today’s Financial Thermopylae Beckons—–But Don’t Count On The Greeks

The global financial system desperately needs a big, bloody sovereign default—-a profoundly disruptive financial event capable of shattering the current rotten regime of bank bailouts and central bank financial repression. Needless to say, Greece is just the ticket: A default on its crushing debt and exit from the Euro would stick a fork in it like no other.

But don’t count on the Greeks. Yes, their new government does have a strong mandate to throw off the yoke of its Brussels imposed bailout and associated debt servitude. Were the Syriza government to remain faithful to the raison d’etre of its wholly accidental rise to power, the task of busting the misbegotten euro project would be its own special form of god’s work.

But notwithstanding Tsipras’ resolute speeches (“We will not accept psychological blackmail”) and Varoufakis’ elaborate game theory maneuvering and hair-splitting word games, the odds are against a regime-shattering “grexit” event in the immediate future. If it does happen, it will be the result of political miscalculation among the parties, not the policy agenda and will of the new Greek government.

The problem is that to the extent that Syriza has a coherent program—-and that’s debatable—-it amounts to a left-wing Keynesian smorgasbord that will eventually drive the Greeks to clutch at any fig leaf of compromise which enables them to stay in the Euro. Unlike the Germans, Varoufakis & Co have no scruples whatsoever about central bank financing of state debts, and see the ECB as the ready-made agent of just that form of financial salvation—-for themselves and the rest of Europe, too.

So notwithstanding the current fevered tensions between Greece and its paymasters, nearly every issue of difference between them can be finessed—that is, given enough double talk, weasel words and kick-the-can windage. Certainly wordsmiths in the wee hours of the morning can find phraseology that bridges the difference between an “extension of the current program“, as insisted upon by the Germans, and the Greeks’ most recent proposal to “proceed jointly to a successful conclusion of the present arrangements”.

Even on core substantive issues like the size of the required primary budget surplus, the target number of state employees, minimum pensions for citizens with minimum incomes, the precise slate and schedule of the state properties to be privatized —–all can be worked out during showdown negotiations. After all, these issues are all about splitting numbers and fudging timelines——the very thing that politicians were created to accomplish.

But what can’t be compromised is the one thing that ultimately counts. Namely, a substantial default on the nominal level of Greece’s staggering debts.

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Yes, December Was Indeed A Dramatic Mess

Submitted by Jeffrey Snider  –  Alhambra Investment Partners

With the latest release of the Treasury Department’s TIC statistics there is a lot about December now that makes sense. Much of what is contained within the figures matches the theories I put forward contemporarily, including the severity of the “dollar” problem that month (leading to any number of downstream effects, including seriously heightened bearishness in US credit markets) and Switzerland as a major focal point. In other words, global “dollar” liquidity was indeed the likely cause of so much discomfort and concern.

It appears as if central banks were again busy raising “dollars” in December, somewhat behind the problem as they always are.

ABOOK Feb 2015 TIC Overall Official 6mo

The two arrows on the chart above match up with first the taper selloff, which included global “dollar” tightening, and then the events that began in June 2014. What is amazing about December’s figures is that the banking system itself reported by far thelargest monthly reduction in “dollar” liabilities on record. In fact, adding September 2014, we have seen very closely together the two largest declines in bank “dollar” liabilities going back to the origin of the series in 1978.

ABOOK Feb 2015 TIC Overall Bank Liabilities Monthly

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Europe’s Political Great Rift Valley

Submitted by Raúl Ilargi Meijer  –  The Automatic Earth

NPC Storm of July 30, 1913, Washington DC 1913

So what happened there yesterday? What we know is that European Economic Affairs Commissioner Pierre Moscovici delivered a communiqué, ostensibly coming from European Commission President Jean-Claude Juncker – he at least knew of it – to Greek finance minister Yanis Varoufakis, who later called it ‘splendid’ and said his government had been’ happy’ with it and he had been ready to sign.

The European Commission, the day to day ‘directors’ of the EU, offered Greece four to six months of credit in return for a freeze on its anti-austerity policies. Still quite a sacrifice for Greece to make, it would seem, but they would have signed regardless.

But then, we are told, the eurozone finance ministers threw out the document and Eurogroup head Dijsselbloem presented Varoufakis with a completely different one, which he knew was unacceptable to Greece: an extension of the Troika bailout deal they had already thrown out. A Greek source told Reuters: “..carrying out the bailout programme was off the table at the summit. Those who bring this back are wasting their time.”

I’m wondering who exactly decided to throw that first proposal from the EC out. Did Dijsselbloem have enough time to confer in-depth with all 18 finance ministers, or did he make the decision more or less by himself? It’s a curious thing to do, for a eurozone commission to dismiss the de facto head of the EU in such a way. If the finance ministers had determined it was a no-go beforehand, there would have been no point in presenting it to Varoufakis. So why was he given it?

After the meeting, Moscovici called on the eurozone finance ministers to be “logical, not ideological”. That still sounds polite, and it’s hard to gauge what relations are between the various EU representatives, but it’s obvious they don’t present a united front. There is trouble brewing. And that probably means Juncker and Moscovici don’t agree with the Eurogroup stance, and certainly don’t want to risk Greece leaving the eurozone or even the EU. Continue reading

FOMC Worries About The End Instead of the Beginning…

Submitted by Jeffrey Snider  –  Alhambra Investment Partners

As per usual, the latest FOMC statement conjured up a storm of befuddlement about any number of topics. Most of the concerns, should they even be categorized thusly, amount to debated levels of disingenuousness surrounding oil prices (only a month ago there was nothing “bad” about a 60% collapse in the world’s primary resource input). However, there were a few notes about “market” prices and capacities that sounded almost like veiled warnings, or maybe even just warming to warnings.

The most highlighted passage, and it was emailed to me by several people, was surely this:

Finally, the increased role of bond and loan mutual funds, in conjunction with other factors, may have increased the risk that liquidity pressures could emerge in related markets if investor appetite for such assets wanes.

Apparently we should be worried that if retail fund investors start to actually and fundamentally value their fund holdings they might reach a conclusion irreconcilable with the heretofore unbreachable “reach for yield.” Asset prices that reach unbelievable levels might not stay there forever?

I don’t really see how that is any different than any previous credit cycle, only that we are now supposed to feel differently that it has spread so far into the retail end of things. This might come as a shock to people who are conditioned to think of a “smart money” vs. “dumb money” divide, but if you actually review the panic in 2008 (starting, of course, in August 2007) it was the “smart money” that panicked hardest, fastest and most devastatingly. Retail investors sat on the sidelines, for the most part, glued to their positions by Ben Bernanke’s surety about “contained” and the “worst is behind us.” The plethora of 201(k) jokes was cuttingly precise in that manner. Continue reading

The US Stock Market is at its Most Overvalued Level in History

Submitted by Pater Tenebrarum  –  The Acting Man Blog

The Market Isn’t Cheap 

We frequently run across assertions that the US stock market is allegedly “cheap”, because the trailing P/E of the S&P 500 Index has not yet reached the dizzy heights of 1929 or 2000 (of course, quite often the “forward P/E” is cited rather than the trailing P/E. We believe this to be a worthless indicator, as it relies on overoptimistic analyst estimates that are continually revised lower as time passes).

Apart from the fact that the valuation peaks of the two biggest stock market manias in history hardly represent a useful yardstick for determining whether the market is attractively valued or not, these assertions are focused on an index that is capitalization weighted and the average P/E of which is greatly influenced by a small number of momentum stocks. In 2000, the extreme valuations accorded to technology stocks ended up producing a trailing P/E for the S&P 500 in cloud cuckoo land – however, the market as a whole was actually noticeably cheaper than it is today.


We have already mentioned a few times in the past that the market has never sported a higher valuation in terms price/sales as well as in terms of the median P/E. Dartmouth University Professor Kenneth R. French has calculated the US stock market’s median P/E. We were previously unable to find a chart of it, but have now come across a chart that was published by Bloomberg a little while ago, which we reproduce below. Note that the median valuation is even higher at the moment, as the calculation is apparently only performed once a year in the summer months. So the chart depicts the situation as of July 2014.

Only companies reporting a profit are included, so it would be more precise to state that this is the median P/E of the market segment with positive earnings. For comparison purposes, the S&P’s P/E ratio is shown as well. What is interesting about this is that the median P/E is currently actually higher than that of the S&P 500 on a trailing basis – something that has never happened before.

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Are You a Better Investor Than a Dart-Throwing Chimpanzee?

Submitted by William Bonner, Chairman – Bonner & Partners

Lots of Noise

US stocks were flat on Tuesday. Gold fell $18 – almost back to the $1,200-an-ounce level.

Noise, noise and more noise.

When we were in São Paulo we were asked to give a brief speech to Brazilian investors. They wanted to know what we considered to be the most important things an investor should know.

What follows is more or less what we said. (Long-suffering Diary readers are invited to skip this, since they will find few new ingredients. On the other hand, you may find the new distillation more agreeable.


Photo credit: Aaron Logan

Dart-Throwing Chimpanzees

Bom dia…

What are the most important lessons for an investor? Well, let’s begin at the beginning. If you’re listening to this speech, it suggests you want to improve… that you want to be a better investor. So let’s start there. Is it possible to be a better investor?

Believe it or not, there was a time when most serious thinkers believed it was not possible. I thought so myself. Professors of finance and economics won Nobel Prizes based on research “proving” that you could earn higher than average returns without taking on higher than average risk. Warren Buffett famously demolished this point of view – known as the Efficient Market

Submitted by William Bonner, Chairman – Bonner & Partners

In effect, he said to his opponent, Harvard’s Michael Jensen, “If you were right I couldn’t be so rich. And if I had believed what you believe I wouldn’t be rich.” The idea behind EMH is that a dart-throwing chimpanzee is just as likely to beat the market as you are. In fact, the average investor would be delighted to even keep up with the chimps.

That’s because the average investor tends to listen to TV or read the newspaper too much. He’s trying to keep up with the fads. But his tie is always too narrow or his shoes are too long. And therefore he buys and sells too often.

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Gold Bars Worth Over $500,000 Robbed From Pensioner By Fake Cops in France

Submitted by Mark O’Byrne  –  GoldCore

  • Story of pensioner in Paris who has had €450k of gold stolen by fake police highlights risks of storing gold in home
  • Criminals impersonating cops gained access to home claiming to be investigating gold robbery
  • 13 kilogram bars worth €450,000 taken, pensioner unharmed
  • Gold owners must take precautions
  • Greek depositors taking precautions by taking cash out of banks

A file photo shows French police officers standing at the site of a crime. AFPA file photo shows French police officers standing at the site of a crime. AFP

A curious and sad story broke last night about a pensioner in Paris who had €450,000 worth of gold bars stolen from his home by con-artists posing as police officers.

The criminals arrived at his home claiming to investigate a gold robbery according to Agence France Presse. The pensioner was asked if he had gold bullion and he told them that he did and allowed them into his home to inspect it.

While one of the robbers distracted the 69-year old with paper work the other stole his gold – 13 bars, each weighing 1 kilogram or 32.15 ounces each with a total value of €450,000.

The story lacks details but if it proves to be true then it is a cautionary tale for owners of gold who take possession.

We have no details as to why he may have been targeted. It is unlikely that he was selected at random. The thieves must have had some information regarding his affairs. It highlights how discretion is of utmost importance when buying gold.

Storing gold in the home can be quite risky – especially in very large volumes. If one can afford to own €450,000 worth of kilo gold bars, one can afford storage costs. Insurance for gold held in the home is available although it tends to be prohibitively expensive.

We do not discourage holding gold in the home per se but it is essential to take certain precautions. No matter where one’s gold is held one should not disclose the fact that one owns gold except to one’s closest confidantes and indeed in a will.

It is also highlights the importance of buying from established and trusted bullion brokers who have a track record in terms of  being very protective of client’s confidentiality and privacy.

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The Daily Debt Rattle

Submitted by Raúl Ilargi Meijer  –  The Automatic Earth

The US Will Have To Bail Out Greece (MarketWatch)
Greece – It’s a Revolution, Stupid! (Mathew D. Rose)
Germany Rejects Greece’s Application To Extend Its Loan Agreement (CNBC)
Europe and Greece Are at War Over Nothing (Bloomberg ed.)
How I Became An Erratic Marxist (Yanis Varoufakis)
For Greece And Many Others, Economic Reform Kills Economic Health (Steve Keen)
February 24 To Be The First Crunch Day For Greek State Coffers (Kathimerini)
Greek Debt Payment Plan Offers Huge Haircut (Kathimerini)
Greek Philosophy: Conflict Of Ideas Driving The Crisis (CNBC)
Greece Runs Up The Austerity White Flag In Brussels (Guardian)
Besieged Ukraine Town Debaltseve Falls (Reuters)
‘Guantanamo of the East’: Ukraine Locks Up Refugees at EU’s Behest (Spiegel)
Ukraine Finance Minister’s American ‘Values’ (Robert Parry)
Are the World’s Biggest Banks Moving Money for Terrorists? (Bloomberg)

Much more here: Debt Rattle February 19 2015 – TheAutomaticEarth.com