Oil breaks below $80

Oil (WTI) has broken below $80 this morning on the back of surging global production, weakening demand and the strengthening US dollar. Canada’s Federal budget forecasts are based on oil north of $95 a barrel…at current levels and lower, deficits will mount in Canada and other energy exporters.

“Goldman Sachs has slashed its 2015 oil price forecasts, making it the most bearish among major financial institutions, following a near 25 percent fall in crude prices over the past five months.

The U.S. investment bank said rising output will outstrip demand—with its forecast weighing further on benchmark Brent crude prices—as forecasters generally pare back estimates for oil due to global growth, a strengthening dollar and ample supplies.

Goldman analysts said in a report released late on Sunday that it expects U.S. benchmark West Texas Intermediate crude to fall to $75 a barrel and Brent to $85 a barrel in the first quarter of 2015, both down $15 a barrel from its previous forecast.” See: Goldman slashes 2015 oil price forecast

Here is a direct video link.

Secular support for oil lies in the $40 a barrel range as shown in my partner Cory’s chart below. Of course no politicians or mainstream economists have even considered what such a decline would mean for global cash flows and budgets.

Each $10 drop in oil prices transfers approximately .5% of global GDP from energy exporters to energy importers. An upside is that energy importers tend to be less wealthy countries and so more dollars in importing nations tends to have a greater multiplier effect in terms of consumer spending. On the other hand, where those consumers are heavily indebted (like today in most countries) the energy savings are more likely to go to debt repayment than increased consumption. This will be good for longer term household balance sheet repair which is desperately needed, but detracts from global growth in the near and medium term.

WTIC Oct 14 2014

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Wealth gap flashing recession warning

The present spike of wealth (asset values) above income coincides with similar tops in 1929, 2000 and 2007. Here is a direct video link.

This chart from the Inequality for all, documentary, also shows peaks in the top 1% of the population’s income since 1920. We can see that while the financial/leverage bubbles of 1928, 2000 and 2007 inflated incomes for the 1% holding financial assets (because total income includes stock options, capital gains and dividends) historically the effect has always been fleeting, dramatically mean reverting once asset values collapse once more. The declines also then crush government tax revenues that during the bubbles become concentrated on capital gains and inflated property values rather than employment and business income. This causes sudden and dramatic deficits for municipal to Federal budgets in the process.

Income-Inequality-Graph-from-Robert-Reichs-New-Film

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The financial engineering market

Worthwhile article by Jared Dillian, courtesy of Mauldin Economics today:

“Ten years ago, during the housing boom, the consumer was the most leveraged entity, taking out negative amortization mortgages, cashing out home equity, things like that. The consumer got a margin call, which was ugly—you know the story—and has spent the last six years deleveraging.

While the consumer was taking down leverage, the US government was adding leverage, taking the deficit to over 10% of GDP at one point. But even the government is deleveraging (for the moment), and now it is America’s corporations that have been adding leverage, at a furious pace. We’ve had trillions of dollars in corporate bond issuance in the last few years.

So when corporations sell bonds, what do they typically use the proceeds for?

In theory, the proper use for debt is to finance capital expenditures. Growth. But in this last cycle, that’s not what the money has been used for. It’s primarily been used for stock buybacks and dividends…

So what can we learn about financial engineering? It works, up to a point. In the short term, you can conceal from investors the fact that your business model is broken and you don’t have a plan. You can conceal it for a number of years, in fact. That is the thing about finance: you can suspend the laws of economics in the short term. But not forever. It will always come back to haunt you.”

Read the whole article: The Financial Engineering Market, for more insight on how IBM and other S&P companies have recklessly borrowed trillions to buyback shares and pay dividends, degrading their balance sheets for a temporary pump of stock values to unsustainable levels.

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El Erian: market sell off driven by weak fundamentals and too high prices

Mohamed El-Erian talks about why the stock market has become so volatile and why the Fed will exit QE and try to rely on forward guidance. Here is a direct video link.

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Government approval ratings at recessionary lows

QE has done nothing to help the real economy or real workers, statements to the contrary are propaganda from its sponsors. The good news is that the power to recover meaningful financial strength and balance lies not with governments or central banks, but in the self-discipline, habits and choices of individuals to waste less and save more.

Government approval ratings have hit new all-time lows, according to Gallup, which has been measuring the standing of big institutions since the 1970s. The percentage of Americans saying they have confidence in Congress has dropped to the earthworm level of 7%, the lowest in the history of the poll. The Supreme Court registered its own all-time low of 30%. The presidency, with a confidence rating of 29%, is at the lowest level since Barack Obama took office in 2009, though it was lower in 2007 and 2008, the last two years of George W. Bush’s second term.

Government approval ratings typically drop during recessions, since more people feel worse off and some of them blame the government. Approval ratings usually bounce back during recoveries, as people have less to complain about. That makes the current levels of dissatisfaction unusual.” Here is a direct video link.

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Jim Rogers on preserving capital in the era of “crazy” central bankers

Why Jim Rogers owns dollars printed by “crazy” fed bankers.  Here is a direct video link.

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60 Minutes: Saving Italy’s history

As the government struggles to maintain the country’s historic ruins and monuments, Morley Safer discovers it’s become fashionable to help. Here is a direct video link.

(If you can stand the Viagra adverts!)

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Revolving door between regulation and finance must be jammed

Regulators and financeA first hand account of the corrosive regulatory capture caused by the revolving door between token finance regulators and the financial firms that hire them as defence counsel and lobbyists once they leave office.

“The real world sees a pandemic of bank misconduct, but to the white-collar defense lawyers of Washington, the banks are the victims as they bow beneath the weight of regulators’ remarkably harsh punishments…”  See:  The Big Bank Backlash:

“These strategies have been employed to glittering success. The guilty pleas and admissions have been largely by subsidiaries or been rendered toothless. Entities have admitted to charges that were narrow or unspecific and did not open up them up to further private litigation. And, of course, no powerful individuals at any of the large, fine-paying companies — Credit Suisse, BNP Paribas, the banks in the rate-manipulation investigations, HSBC, Toyota, General Motors, BP — have been criminally charged. (And we aren’t even talking about financial crisis-related malfeasance.)

This is how power and influence work in Washington. Former top officials, whose portraits mount the walls, weigh in on matters of enforcement. Now working for the private sector, they assail the regulatory “overreach.” Sincerely held or self-serving, these views carry weight in Washington’s clubby legal milieu.

Financial firms led the fight against Eliot Spitzer, the hard-charging former New York attorney general. When the Bush administration issued a set of guidelines for prosecuting corporations that included some relatively tough procedures, the United States Chamber of Commerce and the white-collar bar revolted.

And now, just when corporate punishments are starting to prick the skin, the backlash is in full cry. Former regulators are the mouthpieces. And given what they say in public, one can only imagine what is happening behind closed doors.”

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Attacks in Canada’s capital

Parliament Hill came under attack today after a man with a rifle shot a soldier standing guard at the National War Memorial in downtown Ottawa. A gunman inside Parliament has been confirmed dead. Ottawa police say shots were fired at three locations in Ottawa and one suspect is believed still at large. Here is a direct video link.

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Canadian financials wobble

The picture of risk for the Canadian broad market: the financial sector is its most concentrated exposure (today 38% of the TSX) as the basket of shares (XFN) lept an outrageous 100% in the last 2 years of ‘QE-ever’ mania. Today rolling over once more at near-term resistance, a retest at short term support (marked below) seems likely.

XFN Oct 22 2014For further thoughts on downside potential and ramifications for the Canadian market, see Canadian equity market: concentrated capital risk.

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After 65 years of ‘add debt and stir’: time to sober up

I am for the founding principles of democracy: one voice, one vote, self-initiative, self-reliance and individuals accepting personal responsibility for their decisions. I am for the rule of law–that rules must be transparent and applicable to everyone in the society regardless of station or association. I am for level-playing fields, hard work, self-discipline and fiscal conservatism that minimizes debt and encourages responsible spending and saving. I am against rigged markets and purchased political favor that affords a few great advantage, while tapping the public purse to prop up certain asset values and protect those few from their deserved financial losses.

It is not that anyone should expect income equality. A meritorious society naturally affords different compensation for different people and activities. It is the opportunity inequality which has become so extreme, systemic and self-defeating over the past 30 years. By multiplying debt to toxic levels, households, corporations and governments have all come to expect too much for too little. Now at the end of a 65 year debt Supercycle it is time for everyone, from the left to the right, to sober up.

Former Clinton labor secretary, Robert Reich joined Moyers & Company to discuss the 2013 documentary film, Inequality for All. Here is a direct link to the interview. Here is a direct video link to the “Inequality for all” film trailer in case you haven’t yet seen it.

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How Ebola was discovered in 1976

Microbiologist Peter Piot brought Ebola to the world’s attention nearly four decades ago. With rarely seen footage from his visit to Zaire in 1976, he describes how his team solved the mystery of the virus. Here is a direct video link.

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Danielle on The Financial Survival Network

Danielle was a guest today with Kerry Lutz on The Financial Survival 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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Bill Black updates on “Too big to jail”

Important discussion on Moyer and Co this month.

“Attorney General Eric Holder’s resignation last week reminds us of an infuriating fact: No banking executives have been criminally prosecuted for their role in causing the biggest financial disaster since the Great Depression.

“I blame Holder. I blame Timothy Geithner,” veteran bank regulator William K. Black tells Bill this week. “But they are fulfilling administration policies. The problem definitely comes from the top. And remember, Obama wouldn’t have been president but for the financial contribution of bankers.”

And the rub? While large banks have been penalized for their role in the housing meltdown, the costs of those fines will be largely borne by shareholders and taxpayers as the banks write off the fines as the cost of doing business. And by and large these top executives got to keep their massive bonuses and compensation, despite the fallout.

But the story gets even more infuriating, the more Black lays bare the culture of corruption that led to the meltdown.”

Here is a direct video link.

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Chinese downturn continues

Jim Rickards, Chief Global Strategist at West Shore Funds, explains China’s gross domestic product figures. Here is a direct video link.

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