Thursday, December 4, 2014

Here Is Oil's Next Leg Down

Submitted by Raul Ilargi Meijer via The Automatic Earth blog,
News reports about developments in the oil markets are coming fast and furious, and none of them indicate any stabilization, let alone rise, in oil prices. Quite the contrary. There are very large amounts of extra barrels flowing into the market, which is just, as one analyst puts it“even more oil flooding the market that nobody needs.” Saudi Arabia looks set to battle for sheer market share, even if it sends strangely contradictory messages.
While the US shale industry aggressively tries to convey an attitude based on confidence and breakeven prices that suddenly are claimed to be much lower than what seemed common knowledge until recently. Bloomberg says today that most shale is profitable even at $25 a barrel, and we might want some independent confirmation and/or analysis of that. Just hearing the industry claim it seems a bit flimsy; they have plenty reasons to paint the picture as rosy as they can get away with.
Last night, the Wall Street Journal reported on a Saudi price cut for the US, and a simultaneous price hike for Asia.
Oil prices tumbled to their lowest point in more than two years after Saudi Arabia unexpectedly cut prices for crude sold to the U.S., likely paving the way for further declines and adding to pressure on American energy producers. The decision by the world’s largest oil exporter sent the Dow industrials into negative territory for the day amid concerns about the pace of global growth. The move heightened worries over the resilience of the U.S. oil industry, which has expanded rapidly in recent years.

But that growth, driven largely by new production technology used to extract oil from shale-rock formations, has never been tested by a prolonged slump in prices. While lower crude prices generally help consumers by reducing the amount they pay for gasoline, analysts said falling energy prices will squeeze profit margins at many U.S. energy companies, particularly smaller firms or those with large debt loads. Meanwhile, Saudi Arabia raised the prices for its oil in other locations, including Asia, where the country had cut its prices for four consecutive months.
Which led Barron’s to speculate on energy ETFs.
Saudi Arabia’s unexpected price cut to oil it ships to the U.S. is roiling the market for crude and squeezing a host of exchange-traded funds that hold energy stocks. The United States Oil Fund (USO) sinks 2.2% to $$29.12 in early trading, while iPath S&P GSCI Crude Oil Total Return Index ETN (OIL) falls 2.3%. West Texas Intermediate crude futures dropped to the lowest level in three years, recently down 2.1% to $76.77 a barrel.

Oil futures prices have tumbled by about one-quarter in recent months in a world awash with oil after production increases in the U.S. and, more recently, Libya. For weeks, speculation has swirled that the Saudis might be keen to hold prices low in order to keep a tight grip on market share and choke off competitors. Monday’s move by Saudi Arabia to cut prices for crude exports to U.S. customers, while at the same time a raising the prices it charges to countries in Asia, provides more evidence that the Saudis are bent on quashing competition.
But then just now Reuters says ‘recalled’ an email that detailed the cuts:
Saudi Aramco said it was recalling an email it sent on Thursday which had announced a sharp drop in January official selling oil prices for Asia and the United States. Official Selling Prices (OSPs) for oil from Saudi Arabia, OPEC’s largest producer and exporter, have been eagerly watched by the market in recent months for indications of the kingdom’s oil policies.

Some analysts have said sharp drops in OSPs over the past months are an indication the kingdom is fighting for market share with other producers, but others have said the OSPs only reflect the market and are a backward-looking rather than a forward-looking indicator.

“(The) Saudis making it clear they don’t want to lose market share,” Richard Mallinson, analyst at consultancy Energy Aspects told Reuters Global Oil Forum before Aramco recalled prices. It was not clear whether Aramco was recalling all prices or only some prices, or what changes if any had been made. It was also unclear whether and when a new email might follow.

The email, which was later recalled, showed Aramco had cut its January price for its Arab Light grade for Asian customers by $1.90 a barrel from December to a discount of $2 a barrel to the Oman/Dubai average. The Arab Light OSP to the United States was set at a premium of $0.90 a barrel to the Argus Sour Crude Index for January, down 70 cents from the previous month. The email also said Arab Light OSPs to Northwest Europe were raised by 20 cents for January from the previous month to a discount of $3.15 a barrel to the Brent Weighted Average.
That $24 a barrel breakeven price for shale contrasts somewhat with what Abhishek Deshpande, lead oil analyst at Natixis, says about Saudi oil: “..because of how Saudi Arabia uses its oil well to support its entire economy, the country’s budget calls for $90 a barrel to break even, despite that the cost of production is closer to $30.”
OPEC, the largest crude-oil cartel in the world, wanted others to feel its pain as oil prices collapsed. “OPEC wanted … to cut off production … and they wanted other non-OPEC [countries], especially in the US and Canada, to feel the pinch they are feeling,” says Abhishek Deshpande, lead oil analyst at Natixis. But in its rush to influence others, OPEC ended up hurting everyone in the process – including itself. Low oil prices, pushed down further by OPEC’s meeting last week,have impacted world economies, energy stocks, and several currencies. From the fate of the Russian rouble to Venezuelan deficits to American mutual funds full of Exxon or Chevron stock, OPEC’s decision was the shot heard round the world for troubled commodities.

So how low could oil go? Standard Chartered analysts expect a “chaotic” quarter ahead, saying OPEC’s decision to keep the production target unchanged is “extremely negative for oil prices for 2015”. The bank slashed its 2015 average price forecast for Brent crude oil by $16 a barrel to $85. Other forecasts are lower. Citi Research estimated an average 2015 price of $72 for WTI and $80 for ICE Brent. Natixis’s Deshpande said their average 2015 Brent forecast is around $74, with WTI around $69. These prices have real-world effects on world economies. Everyone in the sector is smarting. Deshpande said because of how Saudi Arabia uses its oil well to support its entire economy, the country’s budget calls for $90 a barrel to break even, despite that the cost of production is closer to $30.

Other OPEC members have even higher budgetary breakevens. Saudi Arabia is sitting on a “war chest” of money it stockpiled when prices were high, Deshpande said. Citi analysts said Saudi Arabia has about $800bn in cash reserves. Venezuela, on the other hand, is a prime example of a country squandering its riches. Citi said for every $10 drop in oil prices Venezuela loses about $7.5bn in revenues. “Already weak fiscally, this should call for reducing energy subsidies. But domestic politics including the 2015 election makes this nearly impossible,” they said. OPEC countries as a whole could lose $200bn in revenue if Brent prices stay at $80, which is about $600 per capita annually, Citi said.
And that in turn makes you wonder how the Saudis feel about Bakken shale oil being sold at $49.69 a barrel.
Oil market analysts are debating if oil will fall to $50. In North Dakota, prices are already there. Crude sold at the wellhead in the Bakken shale region in North Dakota fell to $49.69 a barrel on Nov. 28, according to the marketing arm of Plains All American Pipeline LP. That’s down 47% from this year’s peak in June, and 29% less than the $70.15 paid for Brent, the global benchmark. The cheaper price for North Dakota crude underscores how geographic and logistical hurdles can amplify the stress that plunging futures prices have put on drillers in new shale plays that have helped push U.S. oil production to the highest level in 31 years. Other booming areas such as the Niobrara in Colorado and the Permian in Texas have also seen large discounts to Brent and U.S. benchmark West Texas Intermediate.

“You have gathering fees, trucking, terminaling, pipeline and rail fees,” Andy Lipow, president of Lipow Oil Associates LLC in Houston, said Dec. 2. “If you’re selling at the wellhead, you’re getting a very low number relative to WTI.” Discounted prices at the wellhead have been exacerbated by a 39% drop in Brent futures since June 19 to $69.92 a barrel yesterday. Prices have fallen as global demand growth fails to keep pace with surging oil production from the U.S. and Canada. Much of that new output is coming from areas that are facing steep discounts. Bakken crude was posted at $50.44 a barrel Dec. 2. Crude from Colorado’s Niobrara shale was priced at $54.55, according to Plains. Eagle Ford crude cost $63.25, and oil from the Oklahoma panhandle was $58.25.
American consumers probably still feel good about developments like ever lower prices at the pump, but they should be careful what they wish for.
$2 gasoline is back in the U.S. An Oncue Express station in Oklahoma City was selling the motor fuel for $1.99 a gallon today, becoming the first one to drop below $2 in the U.S. since July 30, 2010, Patrick DeHaan, a senior petroleum analyst at GasBuddy Organization Inc., said by e-mail from Chicago. “We knew when we saw crude oil prices drop last week that we’d break the $2 threshold pretty soon, but we didn’t know if it would happen in South Carolina, Texas, Missouri or Oklahoma,” said DeHaan, senior petroleum analyst for GasBuddy. “Today’s national average, $2.74, now makes the current price we pay a whopping 51 cents per gallon less than what we paid a year ago.”

Gasoline is sliding after OPEC decided last week not to cut production amid a global glut of oil that has already dragged international oil prices down by 37% in the past five months. Pump prices have fallen by almost a dollar since reaching this year’s high on April 26. 15% of the nation’s gas stations are selling fuel below $2.50 a gallon, “and it may not be long before others join OnCue Express in that exclusive club that’s below $2,” said Gregg Laskoski, another senior petroleum analyst with GasBuddy. Retail gasoline averaged $2.746 a gallon in the U.S. yesterday, data compiled by AAA show. Stations will cut prices by another 15 to 20 cents a gallon as they catch up to the plunge in oil, AAA’s Michael Green said.
And here’s the reason to be careful with those wishes: job losses.
After the biggest slump in oil prices since the start of the global financial crisis, the prime minister of Norway says western Europe’s largest crude producer must become less reliant on its fossil fuels. “We need new industries, a new tax system and a better climate for investment in Norway,” Prime Minister Erna Solberg said yesterday in an interview in Oslo. The comments follow threats from SAFE, one of Norway’s three main oil unions, which warned this week it will respond with industrial action unless the government acts to stem job losses. Solberg said that far from triggering government support, plunging oil prices should be used by the industry as an opportunity to improve competitiveness.

A 39% slump in oil prices since June is killing jobs in Norway, which relies on fossil fuels to generate more than one-fifth of its gross domestic product. In the past few months, Norway has lost about 7,000 oil jobs and SAFE said this week it was up to the government to reverse that trend. Solberg says protecting oil jobs will ultimately make it harder for the economy to wean itself off its commodities reliance. “We need to lower our cost of production in the development of new fields,” she said. “Oil production is not going to rise, it will slowly fall in Norway.”
And may I volunteer as an aside that Norway’s intentions to become less reliant on oil are perhaps a little past their best before date? They have this large sovereign oil fund, but never thought of using it to diversify their economy?
Perhaps the numero uno reason that oil prices will keep sinking is production becoming available in the Middle East. And in North Africa, where Libya recently reportedly brought an extra 800,000 barrels/day to the fray. Now it’s Iraq’s turn. Bloomberg put 300,000 barrels in its headline, only to say this in the article: “As much as 300,000 barrels a day of Kirkuk blend will be shipped through the Turkish pipeline under the terms of the deal, according to the KRG. Another 250,000 barrels daily of oil produced in the Kurdish region will be exported through the same route”. I corrected the headline.
Not only is OPEC refraining from cutting oil output to stem the five-month plunge in prices, it’s adding to the supply glut. Just five days after OPEC decided to maintain production levels, Iraq, the group’s second-biggest member, inked an export deal with the Kurds that may add about 300,000 barrels a day to world supplies. In a global market that neighboring Kuwait estimates is facing a daily oversupply of 1.8 million barrels, the accord stands to deepen crude’s 38% plunge since late June. Or as Carsten Fritsch, analyst at Commerzbank, put it: There’ll be “even more oil flooding the market that nobody needs.”

Benchmark Brent crude slumped immediately after the deal was signed Dec. 2 in Baghdad, dropping 2.8% to $70.54 a barrel. Prices, which slipped 0.9% yesterday to reach the lowest since 2010, were at $70.38 at 1:30 p.m. Singapore time today. Futures are down about 10% since OPEC’s Nov. 27 decision. The agreement seeks to end months of feuding between the Kurds and officials in Iraq over the right to crude proceeds, a dispute that has hindered their joint effort to push back Islamic State militants. The deal allows for as much as 550,000 barrels a day of crude to be shipped by pipeline from northern Iraq to the Mediterranean port of Ceyhan in Turkey, according to the regional government. The Kurds were already exporting about 220,000 barrels daily, according to data compiled by Bloomberg.

The Kurdish Regional Government expanded its control of Iraq’s oil resources in June when it deployed forces to defend Kirkuk, the largest field in the north of the country, from Islamic militants. The Kurds have been shipping crude through Turkey in defiance of the central government, which took legal action to block the sales, leaving some tankers loaded with Kurdish oil stranded at sea. As much as 300,000 barrels a day of Kirkuk blend will be shipped through the Turkish pipeline under the terms of the deal, according to the KRG. Another 250,000 barrels daily of oil produced in the Kurdish region will be exported through the same route, according to the government in Baghdad.
What it will all lead to, and increasingly so as prices fail to recover and instead keep falling, is the disappearance and withdrawal of financing in the oil industry, especially the insanely overleveraged shale patches. The financiers will need a little more time to consolidate, minimize and liquidate their losses, but they will get up and leave. So all the talk of growing the industry sounds just a tad south of fully credible. This is an industry that lost over $100 billion a year for at least three years running, i.e. didn’t produce sufficient revenue even at $100 a barrel, and at $60 they would be fine, without much of their previous external financing?
Two energy-related companies are postponing financings after a plunge in oil prices made their high-yield, high-risk debt more difficult to sell. New Atlas, a newly formed unit of oil and gas producer Atlas Energy Group, put on hold a $155 million loan it was seeking to refinance debt, according to five people with knowledge of the deal, who asked not be identified because the decision is private. EnTrans International, a manufacturer of equipment used in fracking, delayed selling a $250 million bond, according to three other people with knowledge of that transaction. Investors in bonds of junk-rated energy companies are facing losses of more than $11 billion as oil prices dropped to a five-year-low of $63.72 a barrel this week. This is deepening concern that the riskiest oil explorers won’t be able to meet their obligations, and sending their borrowing costs to the highest since 2010.

More than half of Cleveland, Tennessee-based EnTrans’s revenue comes from equipment sales to the hydraulic fracturing and the energy industry, Moody’s Investors Service said in a Nov. 17 report. The notes, which were being arranged by Credit Suisse, would have been used to refinance debt. Gary Riley, chief executive officer at EnTrans International, said yesterday in an e-mail commenting on the deal status that “the decision to defer or go forward has not been made.” Riley didn’t respond to questions seeking comment today. Deutsche Bank and Citigroup were managing New Atlas’s financing and had scheduled a meeting with lenders for this morning, according to data compiled by Bloomberg.
Perhaps those sub-$50 Bakken prices tell us pretty much where global prices are ahead. And then we’ll take it from there. With 1.8 million barrels “that nobody needs” added to the shale industries growth intentions, where can prices go but down, unless someone starts a big war somewhere? Yesterday’s news that US new oil and gas well permits were off 40% last month may signal where the future of shale is really located.
But oil is a field that knows a lot of inertia, long term contracts, future contracts, so changes come with a time lag. It’s also a field increasingly inhabited by desperate producers and government leaders, who wake up screaming in the middle of the night from dreaming about their heads impaled on stakes along desert roads.

"Draghi Loses The Majority" Blasts A Triumphant German Press

Wondering why stocks suddenly found a soft patch in the last few minutes of trading? Here is the reason: according to a report in German Die Welt, the ECB's president and former Goldman Sachs employee, Mario Draghi, has just lost the majority on the ECB Executive Board:
Back row (left to right): Yves Mersch, Peter Praet, Benoît Cœuré
Front row (left to right): Sabine Lautenschläger, Mario Draghi (President), Vítor Constâncio (Vice-President)
From a just released report (google translated) in Germany's Die Welt:
The outlooks for growth and inflation are bleak. Mario Draghi will therefore open the gmoneyates - and is met with increasing resistance. And on the ECB's Executive Board, he has just lost the majority.
....
According to information obtained by "Die Welt", internal resistance to Draghi is now larger than previously thought. He can no longer count on a majority within the Board currently. In the vote on the official opinion of the Governing Council on monetary policy are for information of the "world" three of the six directors supported by the President to the original tune.

In addition to Sabine Lautenschlager and Yves Mersch, who had already previously expressed skepticism about bond purchases, one can now add the Frenchman Benoît Coeuré who is against Draghi's course.  ...There had been dissenting voices within the Board on several occasions, but there was always a majority behind the President.
Not this time. Then again, "Draghi is still able to enforce his position easily. Because ultimately decides the proportion of votes on the Board, but in the 24-member Governing Council, in addition to the directors and the governors of the national central banks are represented. Among them there were reportedly more votes against, among others, Bundesbank President Jens Weidmann."
So will Draghi follow Obama in pursuing QE by "executive decision" without a clear majority support? Recall that even Kuroda had a slim 5:4 majority when he decided to go full-Krugman. And if he does so, expect the cold war between South and North Italy to go ballistic and make the smoldering cold war 2.0 between Russia and the West seem like a dress rehearsal.

Central Bank Buying Of S&P 500 Futures Extended Until End Of 2015

Three months ago, we revealed that - with absolute certainty - foreign central banks trade (and by "trade" we mean "buy") S&P 500 futures such as the E-mini, in both futures and option form, as well as full size, and micro versions, in addition to the well-known central bank trading in Interest Rates, TSY and FX products. The reason for the certainty was that one of the world's largest futures exchange, the CME, was quietly peddling a service geared exclusively to central banks, called the Central Bank Incentive Program, whose purpose was to "incentivize" central banks to provide market liquidity, i.e., limit orders, by charging them 34% less than ordinary customers on every E-Mini trade.
Back then we left readers wondering "the next time you sell some E-minis, ask yourself: is the ECB on the other side? Or the BOE? Or, perhaps, you are selling S&P 500 futures to Kuroda. Who knows: there is no paper trail anywhere, although a FOIA request and/or the discovery from a lawsuit, class action or otherwise, of the CME's central bank incentive program would likely yield some stunning results."
Actually no it won't: it is now a national security issue that nobody have proof that the biggest marginal buyer of equities are central banks themselves. Otherwise, "confidence" in central planning may crumble, even if everyone knows all too well that without central banks, the equity market's artificially propped up prices would be obliterated overnight.
There was one small piece of good news: the foreign central bank rigging (because the Fed is still technically not allowed to buy equity derivatives directly: instead it has been doing so via Citadel) would end on December 31, 2014:
Well, we have some bad news.
According to a modification of the Central Bank Incentive Program, central bank rigging of, well, everything and certainly the E-mini S&P future, will go on for a much longer time, with the revised deadline now going through December 31, 2015. Further, as the CME notes, "The Exchanges certify that the Program complies with the CEA and the regulations thereunder.There were no substantive opposing views to this Program or the proposed modifications."
Of course, there weren't.
It is amusing to note that the CME decided to hike the fee for US Treasury Futures and Options: the central bank demand there must be soaring.
But that's not the only place where the demand prompted the CME to hike rates. It did so with gold as well:
One wonders just what percentage of the total gold trading on the Globex takes place among the world's central banks, if the CME felt compelled to push up the cost per side.
Finally, for those curious to learn more about this program, or if they are perhaps eligible to enjoy preferential "central bank" terms, they should send an email to CBIP@cmegroup.com or contact CME Group’s International Department in Chicago at 312.466.7473. As the CME conveniently advises, "staff at this office can provide you with additional information and assist you through the application process."

Wednesday, December 3, 2014

Russia's Monetary Solution

The hypothesis that follows, if carried through, is certain to have a significant effect on gold and the relationship between gold and all government-issued currencies.
The successful remonetisation of gold by a major power such as Russia would draw attention to the fault-lines between fiat currencies issued by governments unable or unwilling to do the same and those that can follow in due course. It would be a schism in the world's dollar-based monetary order.
Russia has made plain her overriding monetary objective: to do away with the US dollar for all her trade, an ambition she shares with China and their Asian partners. Furthermore, in the short-term the rouble's weakness is undermining the Russian economy by forcing the Central Bank of Russia (CBR) to impose high interest rates to defend the currency and by increasing the burden of foreign currency debt. There is little doubt that one objective of NATO's economic sanctions is to harm the Russian economy by undermining the currency, and this policy is working with the rouble having fallen 30% against the US dollar this year so far with the prospect of further falls to come.
Russia faces the reality that pricing the rouble in US dollars through the foreign exchanges leaves her a certain loser in a currency war against America and her NATO allies. There is a solution which was suggested in a recent paper by John Butler of Atom Capital, and that is for Russia to link the rouble to gold, or more correctly put it on a gold exchange standard*. The proposal at first sight is so left-field that it takes a lateral thinker such as Butler to think of it. Separately, Professor Steve Hanke of John Hopkins University has alternatively proposed that Russia sets up a currency board to stabilise the rouble. Professor Hanke points out that Northern Russia tied the rouble to the British pound with great success in 1918 after the Bolshevik revolution when Britain and other allied nations invaded and briefly controlled the region. What he didn't say is that sterling would most likely have been accepted as a gold substitute in the region at that time, so running a currency board was the equivalent of putting the rouble in Russia's occupied lands onto a gold exchange standard.
Professor Hanke has successfully advised several governments to introduce currency boards over the years, but we can probably rule it out as an option for Russia because of her desire to ditch US dollar relationships. However, on further examination Butler's idea of fixing the rouble to gold is certainly feasible. Russia's public sector external debt is the equivalent of only $378bn in a $2 trillion economy, her foreign exchange reserves total $429bn of which over $45bn is in physical gold, and the budget deficit this year is likely to be roughly $10bn, considerably less than 1% of GDP. These relationships suggest that a rouble to gold exchange standard could work so long as fiscal discipline is maintained and credit expansion moderated.
Once a rate is set, the Russians would not be restricted to just buying and selling gold to maintain the rate of gold exchange. The CBR has the power to manage rouble liquidity as well, and as John Butler points out, it can issue coupon-bearing bonds to the public which would be attractive compared with holding cash roubles. By issuing these bonds, the public is in effect offered a yield linked to gold, but higher than gold's interest rate indicated by the gold lease rates in the London market. Therefore, as the sound-money environment becomes established the public will adjust its financial affairs around a considerably lower interest rate than the current 9.5%-10% level, but in the context of sound money it must always be repaid. Obviously the CBR would have to monitor bank credit expansion to ensure that lower interest rates do not result in a dangerous increase in bank lending and jeopardise the arrangement.
In short, the central bank could easily counter any tendency for roubles to be cashed in for gold by withdrawing roubles from circulation and by restricting credit.Consideration would also have to be given to roubles in foreign ownership, but the current situation for foreign-owned roubles is favourable as well. Speculators in foreign exchange markets are likely to have sold the rouble against dollars and euros, because of the Ukrainian situation and as a play on lower oil prices. The announcement of a gold exchange standard can therefore be expected to lead to foreign demand for the rouble from foreign exchange markets because these positions would almost certainly be closed. Since there is currently a low appetite for physical gold in western capital markets, longer-term foreign holders of roubles are unlikely to swap them for gold, preferring to sell them for other fiat currencies. So now could be a good time to introduce a gold-exchange standard.
The greatest threat to a rouble-gold parity would probably arise from bullion banks in London and New York buying roubles to submit to the CBR in return for bullion to cover their short positions in the gold market. This would be eliminated by regulations restricting gold for rouble exchanges to legitimate import-export business, but also permitting the issue of roubles against bullion for non-trade related deals and not the other way round.
So we can see that the management of a gold-exchange standard is certainly possible. That being the case, the rate of exchange could be set at close to current prices, say 60,000 roubles per ounce. Instead of intervention in currency markets, the CBR should use its foreign currency reserves to build and maintain sufficient gold to comfortably manage the rouble-gold exchange rate.
As the rate becomes established, it is likely that the gold price itself will stabilise against other currencies, and probably rise as it becomes remonetised. After all, Russia has some $380bn in foreign currency reserves, the bulk of which can be deployed by buying gold. This equates to almost 10,000 tonnes of gold at current prices, to which can be added future foreign exchange revenues from energy exports. And if other countries begin to follow Russia by setting up their own gold exchange standards they likewise will be sellers of dollars for gold.
The rate of increase in the cost of living for the Russian population should begin to drop as the rouble stabilises, particularly for life's essentials. This has powerfully positive political implications compared with the current pain of food price inflation of 11.5%. Over time domestic savings would grow, spurred on by low welfare provision by the state, long-term monetary stability and low taxes. This is the ideal environment for developing a strong manufacturing base, as Germany's post-war experience clearly demonstrated, but without her high welfare costs and associated taxation.
Western economists schooled in demand management will think it madness for the central bank to impose a gold exchange standard and to give up the facility to expand the quantity of fiat currency at will, but they are ignoring the empirical evidence of a highly successful Britain which similarly imposed a gold standard in 1844. They simply don't understand that monetary inflation creates uncertainty for capital investment, and destroys the genuine savings necessary to fund it. Instead they have bought into the fallacy that economic progress can be managed by debauching the currency and ignoring the destruction of savings.
They commonly assume that Russia needs to devalue her costs to make energy and mineral extraction profitable. Again, this is a fallacy exposed by the experience of the 1800s, when all British overseas interests, which supplied the Empire's raw materials, operated under a gold-based sterling regime. Instead, by not being burdened with unmanageable debt and welfare costs, by maintaining lightly-regulated and flexible labour markets, and by running a balanced budget, Russia can easily lay the foundation for a lasting Eurasian empire by embracing a gold exchange standard, because like Britain after the Napoleonic Wars Russia's future is about new opportunities and not preserving legacy industries and institutions.
That in a nutshell is the domestic case for Russia to consider such a step; but if Russia takes this window of opportunity to establish a gold exchange standard there will be ramifications for her economic relationships with the rest of the world, as well as geopolitical considerations to take into account.
An important advantage of adopting a gold exchange standard is that it will be difficult for western nations to accuse Russia of a desire to undermine the dollar-based global monetary system. After all, President Putin was more or less told at the Brisbane G20 meeting, from which he departed early, that Russia was not welcome as a participant in international affairs, and the official Fed line is that gold no longer plays a role in monetary policy.
However, by adopting a gold exchange standard Russia is almost certain to raise fundamental questions about the other G20 nations' approach to gold, and to set back western central banks' long-standing attempts to demonetise it. It could mark the beginning of the end of the dollar-based international monetary system by driving currencies into two camps: those that can follow Russia onto a gold standard and those that cannot or will not. The likely determinant would be the level of government spending and long-term welfare liabilities, because governments that leech too much wealth from their populations and face escalating welfare costs will be unable to meet the conditions required to anchor their currencies to gold. Into this category we can put nearly all the advanced nations, whose currencies are predominantly the dollar, yen, euro and pound. Other nations without these burdens and enjoying low tax rates have the flexibility to set their own gold exchange standards should they wish to insulate themselves from a future fiat currency crisis.
It is beyond the scope of this article to examine the case for other countries, but likely candidates would include China, which is working towards a similar objective.Of course, Russia might not be actively contemplating a gold standard, but Vladimir Putin is showing every sign of rapidly consolidating Russia's political and economic control over the Eurasian region, while turning away from America and Western Europe. The fast-track establishment of the Eurasian Economic Union, domination of Asia in partnership with China through the Shanghai Cooperation Organisation, and plans to set up an alternative to the SWIFT banking payments network are all testaments to this. It would therefore be negligent to rule out the one step that would put a stop to foreign attempts to undermine the rouble and the Russian economy: by moving the currency war away from the foreign exchanges and into the physical gold market were Russia and China hold all the aces.
*Technically a gold standard is a commodity money standard in which the commodity is gold, deposits and notes are fully backed by gold and gold coins circulate. A gold exchange standard permits other metals to be used in coins and for currency and credit to be issued without the full backing of gold, so long as they can be redeemed for gold from the central bank on demand.

http://www.zerohedge.com/news/2014-12-03/russias-monetary-solution

Tuesday, December 2, 2014

After Abysmal Thanksgiving Spending, Cyber Monday Is Latest Dud, Rising Less Than Half 2013 Pace

Prepare to hear much more of the "retail spending slowed down because the economy is just too strong" excuses today, used most hilariously by the NRF on Sunday to explain the unprecedented 11% collapse in the 2014 4-day holiday weekend spend, when pundits "justify" why Cyber Monday sales were only the latest proof the US consumer - that 70% driver of US GDP - is being crushed day after day, pardon, basking in the warm glow of America's centrally-planned golden age.
Here are the facts: Internet holiday shopping rose only 8.1% on Cyber Monday yesterday, usually the busiest day for Web shopping as people return to their desks after the U.S. Thanksgiving holiday weekend. This was a big miss to expectations, and is less than half then growth posted just last year, when online sales grew at 17.5%, according to IBM.
Enter the spin doctors:
... Cyber Monday sales growth is slowing as consumers embrace the convenience of online shopping, spreading out their purchases instead of being lured by one-day specials.

... The declining pace of growth reflects an earlier start to the year-end shopping season, with Amazon.com Inc. and other online retailers offering online deals a week before Black Friday, when stores traditionally began offering holiday discounts.

... “We’re still getting really strong growth on Black Friday and Cyber Monday, but people are realizing it’s a season of shopping,” Soren Mills, chief marketing officer at Newegg Inc., an online electronics retailer. “We’re releasing new deals all the time. We refresh constantly and bring in new deals to keep the excitement there. People are turning it from a day-long occasion to a monthlong occasion.”

... “Consumers are definitely shopping earlier,” said Scot Wingo, ChannelAdvisor’s chief executive officer. “Thanksgiving eats into Black Friday, and Saturday and Sunday are eating into Cyber Monday.”
NRF's CEO Matt Shay attributed the drop to a combination of factors, including the fact that retailers moved promotions earlier this year in attempt to get people out sooner and avoid what happened last year when people didn’t finish their shopping because of bad weather. He also attributed the declines to better online offerings and an improving economy where “people don’t feel the same psychological need to rush out and get the great deal that weekend, particularly if they expected to be more deals,” he said.
Yes, consumer spending is plunging due to a stronger economy. Clearly this guy went to Princeton.
All of which is not only funny, but an outright lie as well, because as reported previously, when aggregating all the Thanksgiving spending data from Thursday to Sunday, we find that shoppers spent an average $159.55 online, down 10.2% from $177.67 last year. This took place as there was an actual decline in the percentage of Black Friday weekend shopping taking place online. So not only did Americans buy less online, they spent less online!

Which is why, of course, one needs spin. The problem is when people no longer buy, pardon the pun, the bullshit:
This year, many shoppers stayed home. The NRF had predicted that 140.1 million customers would visit retailers last weekend. Instead, only 133.7 million showed up. The slow start may make it harder for retailers to hit sales targets over the next month. The NRF had predicted a 4.1 percent sales gain for November and December -- the best performance since 2011.
And it may still get it... if all retailers go "full Amazon" and liquidate their wares well below cost, leading to another wave of retail bankruptcies and even more evil, evil deflation.

Exclusive: FBI warns of 'destructive' malware in wake of Sony attack

BOSTON (Reuters) - The Federal Bureau of Investigation warned U.S. businesses that hackers have used malicious software to launch a destructive cyberattack in the United States, following a devastating breach last week at Sony Pictures Entertainment.
Cybersecurity experts said the malicious software described in the alert appeared to describe the one that affected Sony, which would mark first major destructive cyber attack waged against a company on U.S. soil. Such attacks have been launched in Asia and the Middle East, but none have been reported in the United States. The FBI report did not say how many companies had been victims of destructive attacks.
"I believe the coordinated cyberattack with destructive payloads against a corporation in the U.S. represents a watershed event," said Tom Kellermann, chief cybersecurity officer with security software maker Trend Micro Inc. "Geopolitics now serve as harbingers for destructive cyberattacks."
The five-page, confidential "flash" FBI warning issued to businesses late on Monday provided some technical details about the malicious software used in the attack. It provided advice on how to respond to the malware and asked businesses to contact the FBI if they identified similar malware.
The report said the malware overrides all data on hard drives of computers, including the master boot record, which prevents them from booting up.
"The overwriting of the data files will make it extremely difficult and costly, if not impossible, to recover the data using standard forensic methods," the report said.
The document was sent to security staff at some U.S. companies in an email that asked them not to share the information.
The FBI released the document in the wake of last Monday's unprecedented attack on Sony Pictures Entertainment, which brought corporate email down for a week and crippled other systems as the company prepares to release several highly anticipated films during the crucial holiday film season.
A Sony spokeswoman said the company had “restored a number of important services” and was “working closely with law enforcement officials to investigate the matter.”
She declined to comment on the FBI warning.
The FBI said it is investigating the attack with help from the Department of Homeland Security. Sony has hired FireEye Inc's (FEYE.O) Mandiant incident response team to help clean up after the attack, a move that experts say indicates the severity of the breach.
While the FBI report did not name the victim of the destructive attack in its bulletin, two cybersecurity experts who reviewed the document said it was clearly referring to the breach at the California-based unit of Sony Corp (6758.T).
"This correlates with information about that many of us in the security industry have been tracking," said one of the people who reviewed the document. "It looks exactly like information from the Sony attack."
FBI spokesman Joshua Campbell declined comment when asked if the software had been used against the California-based unit of Sony Corp, although he confirmed that the agency had issued the confidential "flash" warning, which Reuters independently obtained.
"The FBI routinely advises private industry of various cyber threat indicators observed during the course of our investigations," he said. "This data is provided in order to help systems administrators guard against the actions of persistent cyber criminals."
The FBI typically does not identify victims of attacks in those reports.
Hackers used malware similar to that described in the FBI report to launch attacks on businesses in highly destructive attacks in South Korea and the Middle East, including one against oil producer Saudi Aramco that knocked out some 30,000 computers. Those attacks are widely believed to have been launched by hackers working on behalf of the governments of North Korea and Iran.
Security experts said that repairing the computers requires technicians to manually either replace the hard drives on each computer, or re-image them, a time-consuming and expensive process.
Monday's FBI report said the attackers were "unknown."
Yet the technology news site Re/code reported that Sony was investigating to determine whether hackers working on behalf of North Korea were responsible for the attack as retribution for the company's backing of the film "The Interview."
The movie, which is due to be released in the United States and Canada on Dec. 25, is a comedy about two journalists recruited by the CIA to assassinate North Korean leader Kim Jong Un. The Pyongyang government denounced the film as "undisguised sponsoring of terrorism, as well as an act of war" in a letter to U.N. Secretary-General Ban Ki-moon in June.
The technical section of the FBI report said some of the software used by the hackers had been compiled in Korean, but it did not discuss any possible connection to North Korea.
(Reporting by Jim Finkle. Additional reporting by Lisa Richwine; Editing by Ken Wills)

http://mobile.reuters.com/article/idUSKCN0JF3FE20141202?irpc=932 

Monday, December 1, 2014

The American Dream Has Moved to Scandinavia

We noted in 2010 that the American Dream – the possibility of a “rags to riches” success story – has moved abroad … since social mobility in the U.S. is much lower than in many other developed nations [5].
(And we pointed out that conservatives are as disturbed as liberals [6] by the collapse of social mobility in modern America.)
A paper published last year by University of Ottawa economics professor Miles Corak tells us [7] exactly where the American Dream has gone … to Scandinavia.  Here’s a chart from the study:
 [8]Denmark, Norway and Finland have the most social mobility (and Sweden is not that far behind).
On the other hand, the UK, Italy and America have the least social mobility.
True, the UK and Italy are a tiny bit worse than the U.S. in terms of social mobility.  But the U.S. has the most inequality.  Indeed, the U.S. arguably has the worst inequality anywhere in the world at any time in history [9]. Indeed, inequality is so severe in America that most of the profits are flowing into the hands of an incredibly small group [10] of people … and you’re not very likely to become one of them.
On the other hand, Sweden, Finland, Denmark and Norway have the least inequality. In other words, it’s a lot more likely that you can get a reasonable slice of the pie there.
Indeed, Norway is arguably the world's most prosperous [11] country. Denmark is 4th; Sweden is 6th; and Finland is 8th ... but the U.S. has dropped down to 10th [12] place.
Sadly, the American Dream is now spoken with a Scandinavian accent.

Did they want more violence in Ferguson? 10 'coincidences' too glaring to ignore

Was it a conspiracy or was it incompetence? Those appear to be the only two alternatives that we are left with after the horrific violence that we witnessed in Ferguson on Monday night. The first round of Ferguson rioting back in August took everyone by surprise, but this time authorities had more than three months to prepare. They had the ability to control precisely when the grand jury decision would be announced and how many cops and National Guard troops would be deployed on the streets. 

But despite all this, the violence in Ferguson on Monday night was even worse than we witnessed back in August. Either this was a case of almost unbelievable incompetence, or there was someone out there that actually wanted this to happen. If someone out there is actually trying to provoke more violence in Ferguson, then the rioters are being played like a fiddle. 

Most of them have no idea that they could potentially just be pawns in a game that is far larger than they ever imagined. The only other alternative to explain what we just saw is incompetence on a level that is absolutely laughable. 

Something definitely does not smell right about all of this, and let us hope that at some point the American people get the truth. 

The following are 10 "coincidences" from Monday night in Ferguson that are too glaring to ignore... 

#1 Federal, state and local law enforcement authorities had more than three months to prepare for the violence that would follow the announcement of the grand jury decision. The mainstream media endlessly hyped this controversy and everyone knew that trouble would be brewing. But despite an enormous amount of time to prepare, very little was actually done to prevent any violence from happening. 

#2 Someone made the decision to make the public announcement about the grand jury decision in the evening. Anyone involved in law enforcement knows that crowd control is far more difficult after dark. This also ensured that instead of being tied up with work or school, a maximum number of protesters would be able to be involved in the violence. 

#3 Fortunately for the mainstream media, the announcement of the grand jury decision was perfectly timed to provide the largest possible number of prime time viewers for the big news networks. 

#4 Just like back in August, no law enforcement authorities of any kind responded while dozens of businesses were vandalized, looted and set of fire. 

#5 According to Ferguson Mayor James Knowles, National Guard troops were purposely held back from intervening in the rioting that was unleashed when the grand jury decision was made known to the public...
In a press conference, he called the delay "deeply concerning" and said the Guard troops were available but were not deployed when city officials asked.

The troops had been readied last week by Gov. Jay Nixon as the grand jury announcement neared. But as gunshots rang out in the night and looters torched buildings, they were nowhere to be seen.
#6 It is being reported that the heavily armed National Guard troops were limited to "keeping the peace at a courthouse, patrolling the outskirts of town and preventing disturbances in other suburbs" as horrific violence raged in the heart of Ferguson on Monday night. 

#7 Missouri Lieutenant Governor Peter Kinder has accused Missouri Governor Jay Nixon of holding back the National Guard troops because of pressure from the Obama administration. On Monday night, he angrily made the following statement to Fox News...
"Is the reason that the National Guard was not in there because the Obama Administration and the Holder Justice Department leaned on you to keep them out? I cannot imagine any other reason why the governor who mobilized the National Guard would not have them in there to stop this."
#8 The Washington Post has documented that Attorney General Eric Holder had been in direct contact with Governor Nixon and had expressed "frustration" with the fact that the National Guard had been activated...
A top aide to Holder called the governor's office earlier this week to express Holder's displeasure and "frustration," according to a Justice Department official.

"Instead of de-escalating the situation, the governor escalated it," said the official, who spoke on the condition of anonymity because he was not authorized to speak on the subject. "He sent the wrong message. The tone of the press conference was counterproductive."
#9 Firefighters in Ferguson did not immediately respond to calls to put out the multiple fires that were set by protesters. As a result, many businesses essentially burned to the ground. But this did make for some amazing television footage. 

#10 In the worst of the "war zones", journalists with cameras and microphones were crawling all over the place while there were hardly any police to be seen at all. How is it possible that law enforcement could have failed so badly? Could it be possible that this was orchestrated on purpose? 

Sadly, as I have written about previously, the civil unrest that we are witnessing in Ferguson is just a small preview of what is coming to America. 

The anger and frustration that are seething under the surface in this country have reached a boiling point. Instead of coming together, we are seemingly more divided than ever. Americans have been trained to hate one another, fear one another and blame one another. I fear that we are not too far away from actually becoming ungovernable. 

And when the next major wave of the economic crisis strikes and we start experiencing real suffering in this nation, the temper tantrums that we are going to witness in our major cities are going to make what is happening in Ferguson right now look like a Sunday picnic

So buckle up and hold on, because it is going to be a really bumpy ride from here on out. 

Ferguson is not the end - it is just the beginning of a horrible new chapter in American history.

http://www.sott.net/article/289493-Did-they-want-more-violence-in-Ferguson-10-coincidences-too-glaring-to-ignore

Netherlands, Germany Have Euro Disaster Plan - Possible Return to Guilder and Mark

The Dutch and German governments were preparing emergency plans for a return to their national currencies at the height of the euro crisis it has emerged. These plans remain in place.

German Gold Deutsche Mark - (Special Edition)
The Dutch finance ministry prepared for a scenario in which the Netherlands could return to its former currency - the guilder. They hosted meetings with a team of legal, economic and foreign affairs experts to discuss the possibility of returning to the Dutch guilder in early 2012. 
The Dutch finance minister during the period has confirmed that Germany also discussed such scenarios.
At the time the Euro was in crisis, Greece was on the verge of leaving or being pushed out of the Euro and the debt crisis was hitting Spain and Italy hard. The Greek prime minister Georgios Papandreou and his Italian counterpart Silvio Berlusconi had resigned and there were concerns that the eurozone debt crisis was spinning out of control - leading to contagion and the risk of a systemic collapse.
A TV documentary broke the story last Tuesday. The rumours were confirmed on Thursday by the current Dutch minister of finance, Jeroen Dijsselbloem, and the current President of the Eurogroup of finance ministers in a television interview which was covered by EU Observer andBloomberg.
“It is true that [the ministry of] finance and the then government had also prepared themselves for the worst scenario”, said Dijsselbloem.
“Government leaders, including the Dutch government, have always said: we want to keep that eurozone together. But [the Dutch government] also looked at: what if that fails. And it prepared for that.”
While Dijsselbloem said there was no need to be “secretive” about the plans now, such discussions were shrouded in secrecy at the time to avoid spreading panic on the financial markets.
When asked about Germany, Dijsselbloem said he couldn’t say whether that country’s government had made similar preparations.
German Silver Deutsche Mark - (1951-1974)
However, Jan Kees de Jager, finance minister from February 2010 to November 2012, acknowledged that a team of legal experts, economists and foreign affairs specialists often met at his ministry on Fridays to discuss possible scenarios.
“The fact that in Europe multiple scenarios were discussed was something some countries found rather scary. They did not do that at all, strikingly enough”, said De Jager in the TV documentary.
“We were one of the few countries, together with Germany. We even had a team together that discussed scenarios, Germany-Netherlands.”
When the EU Observer requested confirmation from Germany, the German ministry of finance did not officially deny that it had drawn up similar plans, stating simply:
“We and our partners in the euro zone, including the Netherlands, were and still are determined to do everything possible to prevent a breakup of the eurozone.” 
This is quite a revelation. At that time the German finance minister Wolfgang Schauble had said that the Euro could survive without Greece. Whether it could survive without the Dutch is another matter entirely.
A Euro without Holland and especially Germany is currently inconceivable. De Jager also states that other countries found the prospect of a Euro break-up frightening.
So much so that they buried their heads in the sand rather than deal with the situation facing them. It appears that no emergency contingency plans were made in the unfortunately named PIIGS nations - Portugal, Ireland, Italy, Greece and Spain.
One has to wonder if the plans would have been made public had a TV documentary not forced the Dutch government to confirm the claim.
It is interesting to note that it is these two countries, Germany and Netherlands, whose citizens have also been at the forefront of the gold repatriation movement currently sweeping across Europe - France's second largest party entered the fray this week.
In a climate with a lack of faith in fiat currencies, any return to a purely fiat guilder or mark would be risky in the absence of the confidence that gold backing provides.
Despite the implication that secrecy is no longer necessary because Europe is over the worst we believe the Dutch repatriation of 20% of it's sovereign gold from the U.S. indicates that the Dutch are still, wisely, preparing for the worst - whether that be a euro crisis or indeed a dollar crisis and an international monetary crisis.
Their stated reason for returning their 122 tonnes of gold to Netherland’s soil was to instil public confidence in the Dutch central bank.
The prospect of a Euro-break up is a frightening one. It would appear that most Eurozone nations are ill-prepared and indeed unprepared for. 
As always we recommend investors act as their own central bank by taking delivery of bullion or keeping gold and silver in secure, allocated and segregated vaults in safer jurisdictions such as Switzerland and Singapore.
For investors and savers currently using the euro, it begs the important question do you have a euro failure contingency plan? 
Indeed, for investors and savers internationally using other fiat currencies, it begs the important question do you have a currency failure contingency plan? 
While the risks in peripheral European nations of reversion to their national currencies and currency devaluations have diminished – some risks still remain.
The risk is that individual national governments may elect to take this route rather than suffer deflationary economic collapse and Depressions. Alternatively, it could happen through contagion or a systemic event like the collapse of a large European bank, a la Lehman Brothers, that leads to a domino effect jettisoning a member state out of the monetary union.
It could also come about should the German people and politicians decide that the European monetary project is not worth saving or they decide that it cannot be saved and elect to return to the Deutsche mark.
All significantly indebted nations, so called PIIGS and non PIIGS such as Japan, the UK and the U.S. are at risk of currency devaluations.
Competitive currency devaluations or the debasement of currencies for competitive advantage and currency wars poses real risks to the long term stability and prosperity of all democracies in the world and to the finances and savings of people in all countries.
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UC Davis Economics Professor: There Is No American Dream

DAVIS (CBS13) — A UC Davis economics professorhas determined there is no American Dream.
Gregory Clark is sharing his research as a hard truth with no hope—whether or not you can get ahead in America is as predictable as any formula.
In fact, he says, the formulas for social mobility in the United States show there’s nothing to dream about.
“America has no higher rate of social mobility than medieval England, Or pre-industrial Sweden,” he said. “That’s the most difficult part of talking about social mobility is because it is shattering people s dreams.”
Clark crunched the numbers in the U.S. from the past 100 years. His data shows the so-called American Dream—where hard work leads to more opportunities—is an illusion in the United States, and that social mobility here is no different than in the rest of the world.
“The status of your children, your grandchildren, your great grandchildren your great-great grandchildren will be quite closely related to your average status now,” he said.
UC Davis students CBS13 spoke to dismissed the findings.
“The parents’ wealth has an effect on ones life but it’s not the ultimate deciding factor,” Andy Kim said.
Clark has heard the naysayers before.
“My students always argue with me, but I think the thing they find very hard to accept, is the idea that much of their lives can be predicted from their lineage and their ancestry,” he said.
Stuck in a social status is no American Dream—Clark says it’s the American reality.
“The good news is that this is coming from an economist, because economists are used to being unpopular, and so we are the right people to bear this message that the world is a limiting place,” he said.
There’s one caveat to the study, and that is for any one of us, there is always an exception to the rule.
Clarks’ study was published by the Council on Foreign Relations.

http://sacramento.cbslocal.com/2014/11/26/uc-davis-economics-professor-there-is-no-american-dream/