Danielle’s weekly market update

Danielle was a guest today with Jim Goddard on Talk Digital Network, talking about recent developments in the world economy and markets.  You can listen to an audio clip of the segment here.

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A sober look at oil prices

As the market awaits the next Baker Hughes rig count to be released at 1 p.m E.T. today, a few big picture charts on oil offer a heads up.  See:  Why Sub $50 oil is more likely than $70 oil.

Since the OPEC cut deal last September, crude prices have moved back above $50 a barrel and incentive to produce has naturally moved higher with them.  This has attracted even more hopeful capital into the space, and led to yet another wave of over-investment.  In the US alone, 130 additional horizontal rigs have been brought on stream since last fall, taking U.S. crude inventories to new record highs.  Last week 13.8 million barrels were added to U.S. storage–the second largest in history.  And it’s not just America, OECD inventories and are now more than 400 million barrels above the 5-year average (charted here since 2012).

As shown below, over-production by the U.S. and Canada has been most prominent.

What about all those momentum trading algos and bullish speculators?

A recent Wall Street Journal article noted a new record in long crude oil futures positions during the last week in January. It went on to speculate that this meant a possible end to the over-supply of oil and that prices should increase.

That observation is not supported by history. In fact, record long positions are commonly followed by a drop in oil prices. Notable examples shown in Figure 8 include price declines around the 2008 Financial Collapse, the 2014 world oil-price collapse, and the brief rally to $60 prices in the Spring of 2015.

Meanwhile the move away from fossil fuels is only getting started.  This week, Pueblo, Colorado and Moab, Utah became the 22nd and 23rd cities in the U.S. to commit to transition to 100% clean, renewable energy. No matter who is in the White House, or what words they ban from text books and federal government websites, the renewable energy evolution is here to stay, and will keep steadily eroding oil demand.

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The unvarnished truth about who is running America

Many good points are raised by the guests in this discussion. The Democrats and their self-interested submission to corporate capture played a leading role in the victory of Trump. Now the varnish is off. Trump and his cabinet lack the appearance of civility, and this is shocking for people who were previously lulled into complacency. But the powers and status quo in charge today, remain largely the same as under previous administrations. The question is: now that vested interests are so obvious and garish to behold, what will ‘we the people’ do about it?

Chris Hayes talks to the Oscar winning actor for first time since the election and since she suggested that Donald Trump could bring a revolution. Here is a direct video link.

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The [painfully slow] return to reason in banking

The last 20 years have been one for the history books of financial madness and mayhem, the next chapter in Galbraith’s essential “A Short History of Financial Euphoria” and Kindleberger’s Manias, Panics, and Crashes.

With the final loss and damage still yet to be tallied, one thing is clear:  the world will be digging out of this reckless debacle for many years to come. Sure the brain-fevered, unable to admit (or see?) the error of past ways, are still manning the media and advising households, business and government.  But slowly [painfully so], thinking people are coming to their senses once more, one by one. What’s the saying? “When you find yourself in hell, keep going.

This week we receive more postcards from the edge, courtesy of two clear-eyed Fed converts who are banging the drum on necessary reforms.  The first is former Dallas Fed insider Danielle DiMartino Booth’s new book Fed up: An Insider’s Take on Why the Feberal Reserve is Bad for America (gee, do ya think??)  DiMartino Booth makes some practical, intelligent recommendations that include:

  • Congress must remove the second ‘maximizing employment’ goal and leave the Fed with just a price stability mandate.
  • get the Fed out of the business of trying to compel people to borrow and spend and re- institute a focus on shoring up capital and savings in the banking system and households.
  • set a minimum floor of at least 2% on the overnight rate needed to sustain the banking system, and never go under it.
  • Limit the number of academics at the Fed and bring in others who work in the outside world and have seen the mess that financialization has wrought for workers and savers.
  • Restructure the Fed Districts to reflect the diverse interests in America’s economy, why should Wall Street dominate the Fed, not main street?

Another intelligent admission and recommendation comes courtesy of President of the Federal Reserve Bank of Minneapolis and a participant in the Federal Open Market Committee, Neel Kashkari, who writes Make Big Banks Put 20% Down–Just like home buyers do.  Financial CEOs say capital requirements are already too high, but the facts suggest otherwise:

“Capital is the best defense against bailouts. Although capital standards are higher than before the last crisis, they are not nearly high enough. The odds of a bailout in the next century are still nearly 70%. Large banks need to be able to withstand around a 20% loss on their assets to protect against taxpayer bailouts in a downturn like the Great Recession, according to a 2015 analysis by the Federal Reserve. Unfortunately, regulators have taken it easy on the large banks, which today have only about half of the equity they need.

There is a simple and fair solution to the too-big-to-fail problem. Banks ask us to put 20% down when buying our homes to protect them in case we run into trouble. Similarly, taxpayers should make large banks put 20% down in the form of equity to prevent bailouts in case the financial system runs into trouble. Higher capital for large banks and streamlined regulation for small banks would minimize frustration for borrowers. If 20% down is reasonable to ask of us, it is reasonable to ask of the banks.”

All very sound deduction that is needed and should be implemented immediately.  Of course it’s also directly in opposition to what the financial sales companies want.  On that I am reminded of this quote attributed to former Fed Chair Paul Volcker (in Payoff: Why Wall Street Always Wins by Jeff Connaughton):

“You know, just about whatever anyone proposes, no matter what it is, the banks will come out and claim that it will restrict credit and harm the economy…It’s all bullshit.”

Such a relief to hear people call bullshit on this self-serving, destructive cartel that continues to suck the real economy dry, and inflict so much harm on all of us.

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Bill Black on swamp inside Trump cabinet

Far from embarrassed about the swamp inside his cabinet, Trumpco boasts about how smart and wealthy they all are.  Not to mind the criminal activities used to get the money…

Former financial regulator Bill Black says that a Mnuchin-owned bank made hundreds of billions of dollars of fraudulent mortgage loans that caused a financial catastrophe.  Here is a direct video link.

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About those 4% US growth targets

Stock and corporate bond markets have soared since the US election in November. Bulls say bidding up assets that were already richly overvalued is all good, because demographics and debt be damned, the new Trump admin are business wizards and will make the US economy double its growth rate stat (it’s averaged 2.1% since 2009) to 4% to 2020. In reality, the math is not lining up with the confident thesis. In fact, as Goldman Sachs and many others have pointed out, Trump policies are actually like to lower, not raise, the economy’s growth trajectory from here.

Morgan Stanley’s EM Head: Trump Can’t Get 4% Growth.

Here is a direct video link.

Here is a chart of Goldman’s most bullish, base and expected growth projections, from the proposed fiscal stimulus through 2021.

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