Excessive monetary stimulants have killed the patient

Draghi rolled out his much threatened QE bazooka yesterday and global inflation expectations have plunged further in response. Commodities and North American yields are falling some more…

Belief in monetary magic may have felt fun while it lasted. Unfortunately after toxic injections of ‘stimulants’, global demand is now non-responsive.

Mario Draghi led the European Central Bank into a new era, committing to a quantitative easing program worth at least 1.1 trillion euros ($1.3 trillion) to counter the threat of a deflationary spiral. Here is a direct video link.

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Saudis: too much supply, too little demand, reason for oil decline

The fact is that a world of over-levered companies and economies are desperate for cash flow and so are ‘weak hands’ that will go down pumping out product even as prices plunge…

The world will never again see the price of oil at $100 per barrel, according to one of Saudi Arabia’s biggest investors. Prince Alwaleed Bin Talal Bin Abdulaziz Al Saud, the chairman of Kingdom Holdings, spoke with CNBC’s “Squawk on the Street” following the death of his uncle, Saudi Arabian King Abdullah. While he admitted that his country—which derives 90 percent of its budget from oil—is feeling the pain of the commodity’s collapse, he predicted that Saudi Arabia would not be the first to blink.  Here is a direct video link.

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Plunging petro price is opportunity to diversify dependent economies

Diversify or die? Since few producers comprehend the need to diversify revenue streams when oil and gas prices are high, a secular shift to lower prices may prove the catalyst to force wiser planning. A good piece from David Suzuki reminds us of the clear and present opportunities now at hand:

“With oil prices plunging from more than $100 a barrel last summer to below $50 now, the consequences of a petro-fuelled economy are hitting home — especially in Alberta, where experts forecast a recession. The province’s projected budget surplus has turned into a $500-million deficit on top of a $12-billion debt, with predicted revenue losses of $11 billion or more over the next three or four years if prices stay low or continue to drop as expected. Alberta’s government is talking about service reductions, public-sector wage and job cuts and even increased or new taxes on individuals. TD Bank says Canada as a whole can expect deficits over the next few years unless Ottawa takes money from its contingency fund.
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It’s absurd that a lower price on a single commodity could have such a profound economic impact, but that’s what happens when you put all your eggs in one basket and fail to plan for such contingencies.”

See: Oil prices drop as global warming rises

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Overvalued realty markets don’t need rate hikes to decline

And so the mean reversion in over-valued, highly levered real estate begins with the overbuilt Canadian condo market…

A report on the impact falling oil prices are having on Calgary’s condo market. Here is a direct video link.

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Danielle’s weekly market update

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

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Next black swan candidate: financial shares?

Investment banks have been instrumental in driving investor capital and leverage into the energy sector the past few years.  For an excellent primer see:  How Wall Street Drove the Oil & Gas Drilling Boom that’s Turning into a Disaster.

First it was the tech wreck in 2000, then it was the housing bust in 2007.  Same players, similar tactics.  Now the downside of all that reckless risk-selling looms large for over-indebted energy companies, but also for the banks (and their investors) who are holding toxic securities as prices plunge.  This chart of the Canadian financial sector index (XFN) offers a glimpse of where the mean reversion cycle is so far.  No doubt the losses compounding for bank investors will be just as violent and unexpected by the consensus intelligentsia, as the collapse in energy has been to date.

XFN Jan 22 2015

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