Globally, there are a multitude of different answers (and even more non-answers) to the economic puzzle of how to account for and financially balance (aka pay for) negative environmental externalities. In Canada, the widely accepted answer to this issue is the polluter-pays principle, a core tenet so simple that a kindergartener could understand it, and indeed, could have written it. Canada’s Globe and Mail explains it like this: “A central tenet of industrial development is the polluter-pays principle: Those who profit must pay for the mess generated by pulling resources from the ground or turning raw materials into goods. If you want to own the upside, you’ve got to own the downside.”
“The last thing Canadians should want are privatized profits, and socialized liabilities,” the Globe and Mail article asserts. Even in Canada, however, where the polluter pays principle is widely accepted and adopted, there were and are still many companies and projects that have managed to skirt the issue when it actually comes to payment. “There are many examples,” reports the Globe and Mail. “Take the Giant mine, near Yellowknife. It was one of Canada’s oldest gold mines, but after trading through various corporate hands numerous times, the last owner went bust and left behind 237,000 tonnes of arsenic trioxide. Giant is part of a $2.2-billion taxpayer-funded cleanup of eight abandoned northern mines that will take 15 years.” CLICK for complete article
- the action of inflating something or the condition of being inflated. “the inflation of a balloon”
- a general increase in prices and fall in the purchasing value of money. “policies aimed at controlling inflation”
an activity done regularly in one’s leisure time for pleasure. “her hobbies are reading and gardening”
Hobby horse [ˈhɒbi hɔː(r)s]
- a child’s toy consisting of a stick with a model of a horse’s head at one end.
- a preoccupation or favourite topic. “Brennan admits that the greenhouse effect is a hobby horse of his”
Yesterday’s FOMC meeting, very much as expected, made clear that US rates are on hold until the end of 2023 at the very least, even as the economic projections were actually upgraded relative to the depths they plunged to in June. (Indeed, Q3 GDP is still apparently tracking above 30% q/q annualized.) For Philip Marey’s coverage of the meeting, please see here.
In short, the Fed, like all central banks, does not understand inflation and cannot control it to either the upside or the downside of any possible target over any credible timeframe. Indeed, it no longer seems to have a theory of inflation: inflation just is; or rather isn’t. We can therefore expect rates to be on hold longer than just flagged. And not just in the US, of course. Japan and Europe, the UK, Australia, and New Zealand – all face the same fate. Zero (or lower) rates and zero ideas about how things will get better.
Emerging markets like Brazil have also moved rates to incredibly low levels. Several are already monetizing debt too. The only major central bank that is not openly easing is China, where ‘rates are set’ in three days as per the new normal: but that is only because the level of rates doesn’t matter in traditional market terms (look at the USD500bn in new lending in August); which is now true in the West too, just at a lower nominal level, at least until deflation kicks in, and with none of the same kind of finesse. They have de facto state planning with a market on top: we have state planning with no plan and markets always coming out on top.
Of course, these views are a favorite hobby horse here. Yet after the Fed has made clear what we had long expected to eventually happen, let me offer some suggestions of worthwhile hobbies for central banks and those who watch them to more usefully spend their time on for the next five years:
- 3D printing (which they do already); Acrobatics ; Acting; Amateur radio (all three are already normal at their press conferences); Animation (they have little of that); Aquascaping (well, liquidity is their thing); Astrology (see their economic forecasts); Astronomy (they are space cadets); Baking (failure into the cake); Baton twirling (for sure!); Blogging (absolutely, and boringly).
- Building (not so much); Board/tabletop games (Dungeons & Draghis); Book discussion clubs (try Kalecki); Book restoration (their copies of Friedman and Hayek are tatty); Bowling (they can’t pick up that spare); Brazilian jiu-jitsu (they don’t lack muscle, just brain); Breadmaking (for the 1%); Bullet journaling (they are out of them); Cabaret (I can almost see Lagarde open the next ECB meeting with the appropriately fin-de-regime “Willkommen, bienvenue, welcome”: yet note that movie then descends to the always-terrifying “Tomorrow Belongs to Me” **Shudder**).
- Calligraphy (make their irrelevance look pretty); Candle making (to not light in the darkness); Candy making (for the 1%); Car fixing & building (outsource it!); Card games (3-card Monty); Cardistry (see press conferences); Cheesemaking (so, so much cheese); Cleaning (this is a hobby?!); Clothesmaking (offshore it!); Coffee roasting (more millennial barista jobs!); Collecting (financial assets); Coloring (green, not red); Computer programming (algos!); Confectionery (for the 1%); Cooking (the books); Cosplaying (which is what this whole sham is, just in the drabbest possible costumes); Couponing (which millions are relying on); Craft(y); Creative writing (not the RBA, obviously); Crocheting (see forecasting); Cross-stitch (see FX forecasting); Crossword puzzles (see central bank minutes); Cryptography (see previous); Cue sports (think ‘The Hustler’).
- Dance (anything that gets actual circulation going would be good); Digital arts (cryptos!); Distro Hopping (fiddling with computers: HFT); DJing (they only have one tune: “The sun will come out tomorrow”); Do it yourself (which is what we will eventually see governments return to as policy); Drama (of the drawn-out, tragi-comic variety); Drawing (see dot plots); Drink mixing (toxic cocktails); Drinking (and boy are they driving us all to that!)
That just covers A-D. But don’t worry, I have five years of the Daily to kill before a rate hike – we will get to the rest.
Of course, the Fed did make clear that the way to avoid me having to write about Zumba is for the government to spend more money, which they will then monetize (even if they won’t say so out loud). On that front, US President Trump is now all in favor of thinking big, reportedly backing at least USD1.5 trillion in further stimulus, and noting “…it all comes back to the USA anyway (one way or another)”.
Which it actually does, apart from the portion that flows to all the countries that produce things that you used to make yourself. So do we have an evolving pro-MMT position from the White House by any other name? That is another hobby horse here, but a discussion with far more relevance to markets than anything major central banks will, or rather won’t, be doing in the next few years. Indeed, imagine the US reflating but not letting those USD flow out to others: and isn’t that what China is trying in some ways and is being cheer-led?
Hurricane Sally has closed down over 1/3rd of US offshore Gulf of Mexico production and with this weeks decline in commercial crude oil stocks, WTI prices are lifting. Josef sees this as temporary as there is now declining US demand and OPEC is overproducing.
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EIA Weekly Data:. The EIA data on Thursday September 16th showed a production recovery from the impact of Hurricane Laura on Gulf coast production. Lower 48 production rose by 900Kb/d to 10.9Mb/d (last week it rose 300Kb/d after the Hurricane passed by to 10.0Mb/d) but is still down 1.54Mb from 12.4Mb/d at this time last year. Production was once again curtailed as Hurricane Sally (a category two with 160 kph winds) hit the gulf coast and caused the shut-in of 3-6M boe/d of offshore oil and gas production. Commercial crude stocks fell 4.4Mb to 496.0Mb (versus a rise expected of 1.3Mb). Total commercial stocks are now at 417.1Mb or 78.9Mb or 18.9% above last year. The current high stock level and rising OPEC production has been putting pressure on WTI crude prices which fell to a low of US$36.13/b last week. Total product demand fell by 1.65Mb/d to 17.0Mb/d or down by 8.8%. Inventories of gasoline fell by 0.4Mb/d despite refinery runs rising by 4.0 points to 75.8% from 71.8% in the prior week. Distillate fuel oil inventories rose by 3.5Mb to 179.3Mb as the industry gets ready for winter 2020-2021.
Overall total stocks (excluding the Strategic Petroleum Reserve) remain high at 1.43Bb or 136.5Mb or 10.6% above the previous year’s level. Total product demand now at 17.0Mb/d is down 3.25Mb/d from a year ago or by 16.8%. Gasoline demand rose a modest 87Kb/d to 8.48Mb but is down 5.2% from 8.94Mb/d consumed last year. Jet fuel consumption rose 83Kb/d to 947Kb/d but is still down 959Kb/d or 50.0% from a year ago. With coronavirus cases picking up again as schools and as more businesses reopen, the US caseload has risen to 6.6M cases (6.4M cases last week) with a new high of 197K fatalities. The next few weeks will be critical for the forecasts as the colder weather and normal flu season starts. If we see a Wave Two situation as is being seen in France, Israel, South Korea and some places in China, then the increased lockdowns will hit energy demand even further and depress crude prices further. The US and World economies are facing fits and starts over the next few quarters as we see if there is a Wave Two and if vaccines can be available and widely distributed in the coming quarters.
World demand now seems to be around 91-92Mb/d now that the summer driving season is behind us. This is below the 100Mb/d demand seen just before the pandemic. Trafigura Group, the giant trading company and second largest independent oil trading entity, is now forecasting that a glut in the oil market is about to occur as the demand recovery stagnates and OPEC raises production into year end taking us back into a surplus situation.
Baker Hughes Rig Data: Last week Friday the Baker Hughes rig survey showed a two rig decline in the US land rig count. The US rig count is now at 254 rigs working, but remains down 71% from 886 rigs working a year ago. The Permian basin had a one rig loss last week to 124 rigs and is now down by 70% from a year earlier level of 419 rigs. The US oil rig count fell by one rig to 180 rigs but is down 75% from 733 rigs working last year.
Canada had no change of the week at 52 rigs working. This level is down 61% from 134 rigs working at this time last year.
OPEC September Monthly Oil Market Report: The monthly report came out this past Monday and showed that OPEC raised production by 763Kb/d to 24.045Mb/d. The biggest increases came from Saudi Arabia (+475Kb/d to 8.89Mb/d), UAE (+180Kb/d to 2.705Mb/d) and Kuwait (+127Kb/d to 2.288Mb/d). This after an OPEC increase of 1.04Mb/d in July to 23.283Mb/d versus 22.243Mb/d in June. This data does not include the increases from OPEC+ member Russia which also raised production in July and August. Of interest in the report was that OPEC lowered 2020 demand by 400Kb/d to 90.6Mb/d and lowered 2021 demand by 770Kb/d to 97.6Mb/d with the highest quarterly demand in Q4/21 at 99.3Mb/d – not expecting demand to return to pre-pandemic levels of over 100Mb/d next year.
OECD inventories are now reported at 109 days down from 124 days during Q1/20 but up from the normal 93-94 days or by nearly 300Mb of excess inventory, which needs to be worked down. The most damaging part of the report was that OPEC projected the call on OPEC for 2020 at 22.6Mb/d for the year. Current production in August of 24.0Mb/d is clearly in excess. As we see storage building once again that should put meaningful pressure on crude prices in the coming weeks unless OPEC reverses course and cuts back quotas and production levels once again.
Conclusion: As we write this, the nearby October WTI contract is at US$39.43/b up $1.13/b on the day as the weekly report showed a drawdown larger than expected and concern is building on how long US gulf coast production may be shut-in. WTI in the last three weeks has traded between US$43.78/b and US$36.13/b. Crude prices should continue to decline in September and October as US consumption normally declines by 1.0-1.5Mb/d when the summer driving season ends. Further pressure is coming from OPEC which raised production In July and August. They meet virtually tomorrow, September 17th, and if they don’t reverse their increases then prices are likely to erode further. The psychological level of US$40/b was breached last week and the low of last week at US$36.13/b is now the next breach level. The break last week of US$38.72/b has now occurred and confirmed a top for WTI crude. The next key support level for WTI is US$34.36/b and then US$30.72/b. If these are breached in the coming weeks then the energy sector will face renewed and increased downside pressure. We see most energy stocks have significant downside risk. The most vulnerable companies are energy and energy service companies with high debt loads, high operating costs, declining production, current balance sheet debt maturities of some materiality within the next 12 months and those that produce heavier crude barrels. Results for Q3 and likely Q4/20 for most energy and energy service companies should be short of the prior year’s level which when reported will add to the downside pressure.
Hold cash and remain patient for the next low risk BUY window expected during Q4/20.
The S&P/TSX Energy Index is flat with last week’s 72 level as Hurricane Sally and EIA report lifts WTI by US$3/b temporarily. From the June high at 96 (when we recommended profit taking) the index is down by 25%. We see much more downside over the coming months. The support at 74.67 has been breached and the next near term downside target is last week’s low of 69.40. Other downside targets in the coming weeks are 58.05 and then the 50 level. Further lows are likely in Q4/20 as tax loss selling could be very nasty this year. Use days of market strength to take profits and build up cash reserves.
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Yesterday I was bombarded with more articles, comments, graphs, data and YouTube links following a Morning Porridge than ever before. I made a conscious effort to check as many as I could out. Some of them were excellent. Some less so. There is still an awful lot of badly-written unsupported conspiracy-theory corona-denial out there. There is some very good fact-based commentary. There is plenty of data and good science – and I missed much of it till y’day!
I’ve put together a list of some YouTubes to watch and articles to read at the bottom.
My conclusion is simple. The evidence shows the coronavirus is not what we feared it might be. It is not the Medical Armageddon we closed down our economy to avoid. As a result we just hot our Economy in the foot. Lockdowns probably achieved very little – aside from wrecking whole swathes of industry, business and commerce.
Covid-19 is serious, it makes many people very ill, and it has culled large number of vulnerable people. Many people remain in danger. But it is not the Big One. It is not a repeat of the 1918 Spanish Flu or the Black Death. The story of the Novel Coronavirus Pandemic started with the assumption it was going to be a global disaster killing millions, but it’s turned out to be something very different and less threatening.
We should be thankful for that. The Big One is surely still coming. What we’ve experienced over the last months allows us to figure out what worked and what didn’t for next time. Hopefully we can face the tragedy and challenges of the next real pandemic without creating economic misery as well. At some point mankind will accidently unleash a new SARs or other virus that could kill millions. COVID-19 wasn’t the killer we thought it might be.
But…. READ MORE
JPMorgan Chase & Co says it has noticed a troubling pattern with its work-from-home employees, particularly those who are of a younger age, Bloomberg reported Monday.
What Happened: CEO Jamie Dimon told analysts Keefe, Bruyette & Woods in a private meeting that productivity was particularly affected on Mondays and Fridays, according to Bloomberg.
“The WFH lifestyle seems to have impacted younger employees [at JPMorgan], and overall productivity and ‘creative combustion’ has taken a hit,” KBW Managing Director Brian Kleinhanzl wrote to clients in a note, citing the meeting with Dimon.
JPMorgan spokesman Michael Fusco told Bloomberg that the productivity of employees was affected “in general, not just younger employees,” but added that younger workers “could be disadvantaged by missed learning opportunities” as they were not in offices….CLICK for complete article