Nick Rost van Tonningen ~ Gleanings II ~ 512 Posted by John on May 24, 2013

Credit Suisse said its Global Risk Appetite Index had surged to 4.53 (5 being “euphoria”), up from 1.76 MoM. And it noted two unusual features thereof : it wasn’t accompanied by increased momentum in global economic growth & was largely driven by one asset class, Japanese equities.

Quietly in the background the Cyprus situation is going from bad to worse. With constraints on bank account withdrawals & capital controls still in place, the locals are hoarding cash, worsening the supply of trade credit. First Quarter car sales were down 59% YoY. Tourists are scarcer. The restructuring of its two biggest banks into a “good” & a “bad” one is not going according to plan since the former is getting all domestic loans of both, whether good or less so. The share of uninsured deposits to be forceably converted into equity of the “good” bank is now expected to be 60%, not the original 37.5% and, according to a leaked EC document, the banks will require a 10.6BN, rather than a 7.8BN Euro bailout. And while GDP declined 2.4% last year & the EC before the bailout projected declines of 3.5% in 2013 & 1.3% in 2014, its latest numbers are 8.7% & 3.9% respectively (numbers which one local consultant deems wildly out of touch with reality : she expects 15% declines both  years & another 5% in 2015 (which would represent a GDP shrinkage vastly greater than even Greece’s, & in half the time). So we likely haven’t heard the last of this. 

At last report the number of directional oil drilling rigs operating in the US had doubled to about 150 in the past three years, while that of directional gas drilling rigs had halved in the same period to about 50. But the real difference was in horizontal drilling rig activity : for oil it had grown almost 8x to 800+, while for gas, after initially rising to 650 from 500, it has in the past 18 months cratered to less than 200 – given the short productive life of ‘fracked’ wells, the euphoric era in the US of ‘cheap’ natural gas may therefore be about to come to an ignominious end, despite the fact that on April 30^th the US Geological Survey doubled, tripled & quadrupled respectively its 2008 estimates of ‘undiscovered but technologically recoverable’ US oil-, NGL- & natural gas reserves.

The media breathlessly reported that YTD the volume of IPOs in the US stock market has been US$16.8BN, the most since before the 2007 financial crisis. But what got less coverage was that  First Quarter corporate share buyback program approvals were US$208BN, the fourth-largest quarterly total ever (after the Second, Third & Fourth Quarters of 2007). And one of those  alone, Home Depot’s at US$17BN, all but matched the IPO total YTD – while these buyback programs are seldom anywhere near 100% executed, if even they were only 10% implemented, they would more than offset the supply of equities from IPOs.

Recently in a speech in New York touting the Keystone XL pipeline (prompting one columnist to  observe it needs states-, not sales-, men, but where can one find the former these days?), Prime Minister Harper trashed the rapidly-growing & railway bottom line-boosting crude oil transportation-by-rail alternative on environmental grounds (as if he cares a fig about the environment!). A few days later, & very inconveniently so, a CP Rail train derailed near Jansen, Sask. With five oil-carrying cars going off the track, one of which spilled its cargo (the media coverage of this was interesting : it first said the car spilled 575 barrels of oil & then, a little while later, that such cars  typically hold 600 barrels of the stuff, rather than reporting that ‘one car spilled its entire load’). 

A survey by Ipsos Reid found 29% of Canadian households live from paycheque to paycheque, 25% seldom save anything, & 80% expect to have to dip into whatever savings they have within the next three years to meet their day-to-day needs. Today’s national savings rate is just 3.8%, one-fifths of that three decades ago, much of which, however, may be a rational response to ultra-low interest rates that penalize savers & subsidize the financially irresponsible (incl. governments?).

Earth scientists are excited about the discovery in the Timmins region of Northern Ontario of a source of saline water deep in the Canadian Shield geological formation that analysis of the isotopes of the compounds therein suggests is over one-,  & possibly as much as 2.6-, billion years old. They are now waiting with baited breath on whether further work will detect signs of life in the water that may throw light on the Earth’s origin.

The Arctic Council is an inter-governmental forum for the eight riparian governments [Canada, Denmark (also representing Greenland – which, unsuccessful in its efforts to become a member in its own right, boycotted the recent Kiruna meeting – & the Faroe Islands), Finland, Iceland, Norway, Russia, Sweden & the US] to address issues of common interest with regard to, & those of the indigenous people in, the region. At its recent bi-annual Ministerial level meeting in Kiruna, Sweden, Canada assumed its (rotating) Chairmanship for a two year term. Last fall Prime Minister Harper ordained that Health Minister Leona Aglukaqq, Canada’s first Minister of Inuk origin, would fill the Chairman’s position on Canada’s behalf. While generally speaking, & from his perspective, a logical choice, her performance as a Minister in the Health portfolio has been anything but awe-inspiring & the additional duties this post brings with it are unlikely to improve her performance in that capacity (but this may give the Prime Minister an easy way out to remove her from the Health portfolio in the widely-anticipated & much-needed major Cabinet shuffle expected this summer to strengthen its public image ahead of the next election, in two years’ time. And following her assumption of the Council’s Chairmanship Ms. Aglukaqq lost no time showing that as a faithful acolyte she would propagate the Prime Minister’s biases when she announced that during the next two years her focus will be on “creating economic development” (along the lines of the  Republican war cry of the 2008 US Presidential Election campaign “Drill, baby, drill”?) & promised ‘big changes’ at the Council, one of which will be to end the practice of science for its own sake in favour of a business-oriented approach.

Meanwhile, the Prime Minister’s Conservative Party, that was already in the doldrums in the polls, is now enmeshed in a worsening mess of its own making. It all started with a bit of expense account diddling by four (

non-elected) both-feet-in-the-trough Senators, three of them somewhat dubious choices of the Prime Minister himself. And in what almost seems like a replay of Watergate forty years ago, what at the outset had been something that shouldn’t have had much by way of “legs”, has been so mishandled that the real issue is increasingly becoming the role played in the affair by the Prime Minister’s Office, & the way its fallout has been handled, rather than the event itself – which in the case of Watergate ultimately cost Nixon his job – we should only be so lucky!

BookNet Canada is a non-profit that seeks to make it easier for the Canadian book industry to promote & sell books, reach new audiences & ride the “ever-cresting wave of new technology”.  Based on a survey of 4,000 book-buying consumers, it concluded that last year paperbacks had a 58% market share in Canada, hard covers 24% & ebooks 15% (with the remaining 3% presumably due to rounding & ‘miscellaneous other’). But BookNet Canada President Noah Genner said early data YTD suggest that ebook sales now are holding steady, rather than growing and that most consumers still seem to prefer buying their books in stores rather than online.

Israeli Prime Minister Binyamin Netanyahu found himself the target of public ire after Israel’s Channel 10 TV reported that, while the forthcoming budget is expected to include painful austerity initiatives & tax increases to combat a growing deficit, US$127,000 was spent last month to install a ‘special sleeping cabin’ (in an El Al jet) so he could sleep in comfort on the five hour flight to London for Margaret Thatcher’s funeral. And his office seeking to justify this by saying his  schedule prior to departure had been busy & he needed to be fresh for important meetings in London didn’t cut it with irate Israeli taxpayers, especially after a recent report his office had been spending US$2,700 a year on his favourite ice cream – how can these people be so bloody dense?  

On May 21^st Iran’s candidate-vetting Guardian Council cleared eight ‘loyalist’ candidates for the June Presidential elections but vetoed two others. The exclusion of  Ahmadinajad protégé Esfandar Rahim Mashaei came as no surprise. But that of the supposed pragmatist former President Ali Akbar Hashemi Rafsanjani disappointed many who had hoped that the Supreme Leader, Ayatollah Ali Khameni, who has the final say in all such matters would at least give the regime’s critics a chance to vote for someone, with the worst case scenario from him being that, if Rafsanjani were successful, the country would get a President who might deal more deftly with the West than most & who has a management track record as the patriarch of a large family-owned business that might help restore some order to the economic chaos created by Ahmadinejad’s mismanagement). But with the election outcome now ensuring greater harmony between political & religious leaders, this move was akin to the old Western practice of ‘putting the wagons in a circle’. 

After the Fukushima disaster Naoto Kan, the then Prime Minister of Japan, under public pressure to shut down its nuclear power plants, did order the shutdown of all but two of its 54 such plants. In last year’s election Shinzo Abe ran, among others, on a promise to reverse that decision; while in part due to his ties to the nuclear power lobby, the more important reason was that his Abenomics program to reinvigorate the country’s economy requires cheaper power than the fossil-fueled power plants can produce. So he is now considering bringing the younger, & larger, of the country’s two nuclear fuel reprocessing facilities, the Rokkasho plant, back on stream. This isn’t sitting well with the White House; for, while the plutonium produced in processing spent nuclear fuel can be used to produce more power, it can also be used for making nuclear weapons. So Washington fears this will undermine its policies vis a vis the nuclear programs of North Korea & Iran and, more generally speaking, could lead to greater nuclear weapons’ proliferation. Be that as it may, even the Rokkasho plant does not have the capacity to process all the spent nuclear fuel that Japan’s nuclear power plants generate when in operation; all its construction did achieve was to significantly reduce the amount of spent fuel that had to be sent to British & French reprocessing plants or stored in ‘temporary’ storage facilities at home. One issue being swept under the rug relates to the aging of Japan’s nuclear power plant ‘fleet’ (which now averages 27½ years); it’s now into, or about to enter, its ‘second half life’, with some of its older plants already well into-, if not past-, that (the potential cost implications thereof can be gauged from the estimate a few years ago in the UK that the cost in due course of decommissioning its two dozen nuclear power plants would be North of £100BN (at which point nuclear power ceases to be “cheap”).           

GLEANINGS II – 512

Thursday May 16^th, 2013

SHALE BUST : NORTH AMERICAN NATURAL GAS PRODUCTION SET TO SERIOUSLY DECLINE (The Energy Report, Keith Schaefer)

•                The past three years have been dominated not by gas prices but by new technology & cheap foreign capital clamouring to get a piece of the action. But we may be returning to a market driven by economics. For natural gas production is  declining in every US shale gas formation except the Marcellus (which benefits from being close to the high-demand East Coast markets). But a serious  price rise may still be as much as two years away since much of the still ongoing drilling for gas is in the Marcellus, and small operators are unlikely to resume drilling seriously until the futures market hits US$5 for at least a few weeks. While new Marcellus-like ‘elephants’ may still be out there, all the low-hanging fruit has likely already been picked (for most ‘recently discovered’ shale formations were long known to exist but had lacked the technology to make them economic. Meanwhile, for gas  “It’s a bad spiral : You drill less, you produce less and your declines are high.”

Voices not caught up in the shale euphoria have warned for years about the rapid production fall-off (up to two-thirds in the first three years) of shale wells. One example of the prior knowledge of the shale oil was that half a century ago already the US Geological Survey prognosticated that an oil formation underlying the Dakotas (the Bakken) contained more oil than Saudi Arabia. 

CO2 RECORD ILLUSTRATES ‘SCARY’TREND (AP/NBCNews, Seth Borenstein)

•                On May 9^th CO2 levels at the Mauna Loa monitoring site in Hawaii, the global benchmark, hit 400 parts per million (ppm). While only a one day reading in a month when greenhouse gas readings in the Northern Hemisphere are typically high, the average for all of 2013 is expected to be 396 ppm. And the average rate won’t stay below 400 much longer for it has long been trending upwards. James Butler, Director of Global Monitoring at the National Oceanic and Atmospheric Administration’s Research Laboratory in Boulder, Colo, says that within a decade 400 ppm will just be a distant memory, even during the fall when the rate is usually lowest & that “The 400 is a reminder … our emissions are not only continuing, but … accelerating … We’re stuck. We’re going to keep going up.”

•                AT 450 ppm the world is expected to be 2  Celsius warmer. Back in 1958, when CO2 levels were first measured, the rate was 315 ppm. Since then it has grown at an accelerating annual rate now closing in on 2 ppm. Scientists say the last time the rate was 400 was during the Pleistocene Age, two million years ago, when there were forests in Greenland & sea levels were 10-20 metres higher. And they believe that after being around 200 during the Ice Age, they rose to 280 by the onset of the Industrial Age; if so, in the last 55 years it will have risen by about as much as during the previous 7,000 (years).

The world puts 38.2BN tons of CO2 into the atmosphere each year, 10BN tons of it by China, growing at 10%/year, & a slowly declining 5.9BN tons by the US This is not the first warning of an imperative need to slow down the rate of growth of CO2 emissions (which, however, could turn many oil & gas reserves into ‘stranded assets’).  And, while climate change deniers may question the veracity of CO2 readings in the distant past, the last 55 years’ readings are beyond reproach.

WHAT IF WE NEVER RUN OUT OF OIL? (The Atlantic, Charles Mann)

•                Winston Churchill’s role in the evolution of the oil industry is not well known. As First Lord of the Admiralty before WW I he made the British Navy convert its ships from being coal-, to oil-, powered; for, since pound for pound oil contains 2x the energy of coal, this would enable them to travel faster & farther. And because Britain had no oil, the government bought 51% of what is now BP to gain a ”right to oil at source” in today’s Iran, thereby triggering a race between Western powers for Mid-East sources of oil.

•                But a signal this era may be drawing to a close was sent by the January sailing of a Japanese vessel, the Chikuyu (“Earth”), to the Philippine Sea. A US$540MM deepsea drilling vessel capable of ‘running out’ a 6-mile drill stem, it was built to probe earthquake-generating zones in the earth crust, a matter of interest in earthquake-prone Japan. But this voyage is part of a plan to try & reduce Japan’s dependence on Mid-East oil by tapping crystalline natural gas (aka methane hydrate), methane gas locked in water molecules below the ocean floor in amounts that may be as high as 2x all known fossil fuel reserves.

•                While the US Department of Energy has funded a methane hydrate program since 1982, Japan’s program didn’t get launched until 1995. Today it operates through Japan Oil, Gas, and Metals National Corporation (JOGMEG), an SOE.. It has worked doggedly behind the scenes with the same remorselessness that in the 1960s & 70s transformed offshore wells from exotics into a mainstay of the oil & gas industry.  This will be the first attempt ever to recover large volumes of the gas rather than just lab samples. While lots of questions remain (as always with ‘frontier’ developments), incl. how to bring down the cost of this gas to commercially competitive levels, once solved, methane hydrate could have a similar impact on the global energy industry as fracking has had on North America’s oil & gas industry. And it could have major geopolitical consequences for all petro-autocratic governments, incl. Russia, Venezuela & those in the Middle East. On the other hand, a new plentiful source of gas could undermine efforts to combat climate change; for while gas is marketed as a “clean” fuel, it is only clean relative to oil & coal : burning it still produces CO2, albeit it less than oil, & far less than coal.

The article’s subtitle seems appropriate : “New technology and a little-known new energy source suggest that fossil fuels may not be finite, This can be a miracle – and a nightmare”.

WASHINGTON SIGNALS DOLLAR DEEP CONCERN

(Institute for Political Economy, Paul Craig Roberts) 

•            Since December 2008 the Fed’s QE has created a billion dollars a year of liquidity to fund the US deficit, & prop up the prices of debt-related derivatives on the books of “too-big-to-fail” banks by buying MBS (Mortgage-Backed Securities).  If it hadn’t done so, interest rates would now be much higher & bank balance sheets much smaller.

•                One result has been to make most US interest rates negative in real terms (& another to make the supply of dollars exceed the demand). Since the latter would have lowered the dollar’s exchange rate & undermined its reserve currency role (which is critical to the US’ position in the world & its ability to finance its wars, and fund its fiscal & trade deficits), the Fed has convinced other major central banks to join the liquidity-creation game.

•                The only threats to the Fed’s strategy are ‘alternate currencies’, gold & silver and, recently, Bitcoin (the threat of which was largely removed last week when the Department of Homeland Security seized the accounts in Iowa of a major Bitcoin exchange on the grounds it had failed to register with the US Treasury to conform with its anti- money laundering requirements). When gold hit US$1,917.50, the Fed panicked; for if the US dollar were to continue to be devalued vis a vis gold, it would have to quit printing money & lose control over interest rates, and the bond-, & stock-, markets would im-, & interest rates ex-, plode.

•                The gold market is a two-tier market, one a paper market in which speculators gamble & the other a ‘real’ market in which investors take possession of physical gold. On Friday April 12 short sales in the paper market hit unprecedented levels & since then repeated attempts have been made to drive the paper gold price down; often these have been timed for 2:00 p.m Hongkong time/2:00 a.m. New York time, before London opens, when the market is “thin” & activity light, and modest-sized sell orders can dramatically drive the price down. Meanwhile the demand for physical gold remains high, & is waxing, with investors taking advantage of the low paper gold price to load up on physical gold.

•                The Fed is at its wit’s end. The consumption-driven US economy is deprived of consumer income by offshoring. The BRICS countries are settling their trade accounts in their own currencies, rather than the US dollar (thereby weakening its reserve currency role). A perfect storm is lying in wait for it; for while real interest rates are negative, debt & money is being created with abandon. And while it can print dollars to keep the bond- & stock markets afloat, it cannot print the foreign currencies needed to keep the game afloat.

In a subsequent column Roberts claims Soros’ May 15^th filings with the SEC show that, contrary to earlier reports he had reduced his exposure to gold (which had been used to validate the gold bear market thesis), he had in fact boosted his exposure to the yellow metal, & that his much-ballyhooed reduction in his SPDR Gold Shares ETF holdings had been misinterpreted; for he had not cashed in his shares but rather had redeemed them for physical gold. Furthermore, that other savvy big investors are engaging in “Looting the gold ETFs of their gold” by picking up the shares in gold ETFs dumped by investors panicked by shouts of ‘bear market, sell gold!’ & presenting the shares to the ETFs for redemption into physical gold. 

RISK OF VICIOUS CIRCLE FOR GOLD AS HEDGING RETURNS

(The Telegraph, Ambrose Evans-Pritchard)

•                On May 21^st LSE-listed Petropavlovsk, a major Russian gold producer (but only one-tenth the size of industry leader Barrick Gold), announced it was hedging 96,000 ounces of its expected Second Quarter 2014 gold output (i.e. 55% of that expected for the quarter) at US$1,408/ounce. According to Chairman Peter Hambro this was because “We have a huge investment program and … a little price protection …  will let us sleep better at night.”

•                Nomura’s Tyler Broda says this may signal the return of “structural hedging” by the industry that would “increase the pressure on the spot gold price over the coming years” as hedging begets lower spot prices which then beget more hedging, etc., etc., a process that pushed the price of gold down to US$252 in 2009 (the latter is a printing error, it should have read 1999, for by 2009 the gold bull market was in full flight & the price a multiple of US$252). On the other hand, Ross Norman of Sharps Bixley, while acknowledging hedging killed the gold market in the 90’s, thinks history in this instance won’t repeat itself since “the forces that led to the bull market in the first place will prevail.” And Peter Hambro warned this hedging initiative is not a bet on the gold bull market being over (“the world is in a terrible mess. That has not changed.”) & ‘involves only a tiny fraction of “our 25MM ounce resource base”, and noted “We receive requests regularly from souvereign wealth funds interested in acquiring gold, and they want physical gold, not paper” & that “an enormous number of mines are losing money and will have to close, thereby putting a floor under the market.”

This is not the breathless scoop the headline suggests it is. For a year ago last February this company announced it had hedged 399,000 ounces of its newly mined gold production over 14 months at a price of US$1,663; so this is merely a modestly larger extension thereof. And this hedging initiative seems to be a risk management-driven one; for the Company has a big (US$1.1BN) debt load to fund a huge, multi-year capex program (parts of which it recently put on hold) that demands avoiding needless cash flow risks. And more generally speaking, things really ‘are different’ this time; for in the 90’s the deleterious effect on the price of gold of hedging was aided & abetted by the central bank complex’s massive gold sales & shorting of gold, whereas today it is a net buyer (in the First Quarter alone by 100+ tons, i.e. more than 6x the entire amount  Petropavlovsk has hedged for the 17 months’ period ending next March). And their hedging in the late 90’s cost big gold miners, incl. Barrick & AngloAshanti, billions when the gold bull market got started after the turn of the century; this likely will make them ‘headshy’ about further hedging.  

THE FEDERAL REVENUE SURGE WON’T LAST (WSJ, Red Jahncke)

•                In this year’s first four months US individual income tax receipts were US$483BN, up 25.4%  YoY. But much of this was due to the final personal income tax receipts for 2012 including taxes on capital gains booked before yearend to take advantage of the 15% ‘Bush’ rate before it expired on December 31^st & the rate returned to 28.3% for high-bracket income earners. This is similar to what happened during the Reagan years : ahead of the rate jumping from 20% for 1986 to 28% for 1987, individual income tax receipts jumped from US$310BN in 1985 to US$580BN in 1986, only to crash back to US$250BN in 1987. So 2013 too may see few, if any, capital gains tax receipts.

April is usually a surplus month due to high personal income tax receipts but this year federal revenues also benefitted from huge dividends received from Fannie Mae & Freddie Mac, and from the Post Office showing a surplus. So this April’s surplus of US$112.9BN was almost twice last April’s US$59.1BN (& slightly ahead of the US$106.5BN expected), even though spending YTD was down only marginally YoY to US$2,091 from US$2,103TR (this was before sequestration kicked in). The forecast now is that the deficit for the entire fiscal year ending September 30^th will be US$845BN (which would make it the first deficit < US$1TR in five years), the risk in which is that it will make politicians feel less time-pressed to raise the debt limit (the ‘drop-dead’ date for which Treasury Secretary Jack Lew recently postponed from next month until “after Labor Day”).

US SEIZES ACCOUNTS OF MAJOR BITCOIN EXCHANGE  (Reuters, Brett Wolf)            

•                On May 14^th the Department of Homeland Security froze the account at the Veridian Credit Union (with US$1.4BN in assets Iowa’s largest credit union) of Mutum Sigillum LLC, a Delaware-incorporated subsidiary of Japan-based Mt. Gox, on the grounds it was violating federal laws as an unlicensed money transmitter.  And earlier the authorities had seized a Mutum Sigillum account at Wells Fargo opened in 2011 by the owner of the Mt. Gox entity, Mark Karpeles, who declared at the time it was not a money transmitter.

Mount Gox is said to account for 80% of all Bitcoin trading; so this is a serious blow to the concept. Meanwhile in Canada Joseph David, the owner of Virtex, a Calgary-based Bitcoin exchange, got a surprise when RBC informed him it no longer wanted its business & closed out its account. So, while Bitcoin portrays itself as an alternate currency operating outside the banking system, its Achilles heel, for the time being at least, is that it still needs the banking system to enable current or aspiring Bitcoin owners to get into the game, or cash in their ‘chips’ .

THE AUSTERITY THAT ISN’T (FP, Martin Masse)

•                Keynesian critics of austerity blame it for Europe’s economic ills & advocate forgetting about debt & deficits and engaging in some full-fledged full-speed ahead & damn the torpedoes counter-cyclical spending. But the problem with this argument is that, while since 2009 there has been a 1.7% decline in government spending relative to GDP in the 27-member EU, it is still almost four percentage points higher than in 2007 (49.4% vs 45.6%). And in the last three years government spending has grown by 6.3% as most of the time when Finance Ministers announced budget cuts they didn’t talk about cuts in absolute terms but in spending from earlier planned higher levels. From a free market perspective it is not austerity, but bloated governments & higher taxes, that should be blamed for the European economies still being in the doldrums several years after the financial crisis.

It shouldn’t surprise anyone the author is publisher of the libertarian Le Québécois Libre. The government spending vis a vis GDP numbers are fallacious because of shrinking GDPs. And in the blame game one should not overlook witless politicians & lousy policy decisions.

EU HATCHES PLAN TO REPLENISH FIS STOCK (Reuters)

•                On May 15^th , after 36 hours of haggling, European fisheries ministers agreed to overhaul the 1970’s EU Common Fisheries Policy to end decades of overfishing & the discarding of unwanted or over quota species by subsidized, industrial-sized fishing fleets that have devastated fish stocks. While their Chairman, Ireland’s Fisheries Minister Simon Coveney, said that this “ hopefully paves the way for successful negotiations” (it still needs the EU Parliament’s approval), environmental groups are less sanguine, said the plan goes  nowhere near far enough & fear the EU Parliament will play an obstructionist role.

The environmentalists will likely be proven right on all counts. And even in a best case scenario, bringing back fish stocks driven to the edge of oblivion is easier said than done, as has been proven in spades by the cod fish population off Canada’s East Coast.

JAPAN’S NIKKEI DIVES 7.3% IN SPECTACULAR U-TURN (Market Watch, V. Phani Kumar)