Mish's Global Economic Trend Analysis

New Poll Shows US Citizens in Every Demographic Support Torture (Republicans, Democrats, White, Black, Young, Old)
Ruble Moves 25% Intraday; Bid/Ask Spread at Latvia Currency Exchange Goes Wild; Ruble a Buy?
Spanish Newspaper Association Asks Government to Stop Google News Closure "To Protect Rights of Citizens and Businesses"
What's Behind the Plunge in Oil? Winners and Losers? Boon to Spending or Recessionary?
China Flash Manufacturing PMI in Contraction, at 7-Month Low

New Poll Shows US Citizens in Every Demographic Support Torture (Republicans, Democrats, White, Black, Young, Old)

Posted: 16 Dec 2014 10:05 PM PST

The disgusting poll of the week by the Washington Post shows From moderate Democrats to White Evangelicals, Nearly Every Demographic Group Believes Torture Can Be Justified.

The Post says "nearly" but they are being generous. Close scrutiny shows "every" group supports torture.

Here's the question at hand: "Looking ahead, do you feel that torture of suspected terrorists can often be justified, sometimes justified, rarely justified, or never justified."

Disgusting Results Part One

Disgusting Results Part Two

Comments and Analysis

There is not a single group in any age, in any race, in any party, or in any religious affiliation where a majority says torture is always wrong.

Only by adding "rarely justified" to "never justified" can one find any majority disapprovals.

In that combined group, only the Democrats, Liberals, No Religion, and Liberal Democrats take a generally opposing stance.

Torture Approved at Every Level

It's no wonder the CIA tortures. They have support at every level.

No one objects until it's done to them or their families. But then it's too late. When it happens to them no one will care.

Torture in the Name of Jesus

Do it in the name of Jesus, you can justify it in the end. Of course ISIS feels exactly the same way.

Link if video does not play: "Do it in the Name of Jesus"

Torture Always Counterproductive

I am thoroughly sickened by these results, but I have an explanation: People have been totally brainwashed by fearmongering and phony "time bomb analogies" they believe torture will produce results.

The fact of the matter is torture never has and never will produce the desired results.

Torture is 100% without a doubt counterproductive. It never works and is never justified. I can prove it, and will do so later today.

I am proud to take a moral stand on this issue while Evangelical Protestants, and "alleged" Conservatives lead the way in moral corruption.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Ruble Moves 25% Intraday; Bid/Ask Spread at Latvia Currency Exchange Goes Wild; Ruble a Buy?

Posted: 16 Dec 2014 01:10 PM PST

Reader "Luke" from Riga, Latvia emailed an amusing image he took today of exchange rates at the Latvian currency exchange "Marika".

Latvia is on the Euro.

Notes

Pērk means buy.
Pārdod means sell.
The bid/ask spread for euros to British Pounds (GBP) at this particular exchange is a hefty 4.7%.
The bid/ask spread for euros to Rubles (RUB) at this particular exchange is an amazing 43%.

Needless to say no one was buying rubles at that exchange.

Ruble Moves 25% Intraday

If one looked at the open vs. the close the move was only 3.18%. However, the move bottom to top was 25.64%!

Thus, wild bid/ask spreads at currency exchanges reflects wild moves in the currency itself.

Ruble a Buy?

Inquiring minds may be wondering is the Ruble is a buy or if Russian stocks are a buy. I believe they are. So does Pater Tenebrarum at the Acting Man blog - emphasis mine.

He took that position earlier today in his post From Ruble to Rubble in a Heartbeat.

Does this move make much sense? We actually don't think so – oil is certainly very important for Russia's economy, but a recent Study of the Russian Economy concludes that the energy industry actually contributes only 16% to total economic output in Russia.

Moreover, Russia's money supply growth has been slowing quite sharply in recent years (admittedly we are not up-to-date on what has occurred in this respect in the most recent months).

The Rate Hikes in Perspective

It is a good bet that the ruble is by now egregiously undervalued, even in light of the oil price decline and economic sanctions. Russia's central bank is actually known for being quite conservative. Instituting massive rate hikes in such a situation is certainly a better approach than wasting foreign reserves in market interventions. Hong Kong once hiked rates into triple digit territory for a little while to defend its peg against speculative selling. Obviously, the main objective is simply to increase the cost of carry for traders shorting the currency and at the same time make the currency more attractive to those looking for high yields. It seems rather unlikely that Russia's economy actually needs base rates between 17 to 18% right now, but as a preemptive measure to cool speculation against the currency, such rate hikes probably make sense. We suspect there will be more central bank moves to come before the situation calms down again – especially as the rate hikes have not had much of an effect yet (that is actually an understatement).

Conclusion

Situations like this one very often turn out to have been great opportunities in hindsight. Readers may recall the Russian crisis of 1998 – anyone buying shares and bonds in Russia when the news and the market action were at their very worst made out like a bandit in the end (those brave enough to wade in were eventually rewarded with absolutely stunning gains in this particular case). Of course in a panic sell-off, (or its corollary, a blow-off move), being early by just a few days can be pretty painful in the short run. Nevertheless, this is one of those times when it seems to us that opportunity beckons for those able to stand the risk. There is probably no hurry, we will certainly keep a very close eye on developments.

My position is the same. Generally Pater and I are on the same page. See above link for charts on Russia money supply growth and Russia's central bank balance sheet.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Spanish Newspaper Association Asks Government to Stop Google News Closure "To Protect Rights of Citizens and Businesses"

Posted: 16 Dec 2014 11:29 AM PST

Last Friday, I reported Google News Closes in Spain.

The closure was a direct result of an inane new law in Spain that requires every Spanish publication to charge services like Google News for showing even the smallest snippet from their publications, whether they want to or not.

I commented ...

"There is absolutely no way, anyone, anywhere, benefits from a news vacuum other than corrupt leaders and tiny media outlets that support corrupt leaders. Spanish publications may think they won a victory, but they will soon find out otherwise when their traffic slumps and ad revenue right along with it."

The law was passed at the request of the Spanish Newspaper Publishers' Association. Results were both swift and amusing.

Please consider this extremely ironic result: Spanish Newspaper Publishers' Association Now Asks Government To Help Stop Google News Closure

AEDE announces it wants the Spanish government and EU competition authorities to stop Google closing Google News: "to protect the rights of citizens and businesses".

The main media lobby behind Spain's new intellectual property law, which caused Google to announce late on Wednesday night that it was to close Google News in Spain, has now said it wants the Spanish government and European competition authorities to intervene to stop Google shutting down the service.

The Spanish Newspaper Publishers' Association (AEDE) issued a statement last night saying that Google News was "not just the closure of another service given its dominant market position", recognising that Google's decision: "will undoubtedly have a negative impact on citizens and Spanish businesses".

Irene Lanzaco, a spokeswoman for AEDE, told The Spain Report by telephone that "we're not asking Google to take a step backwards, we've always been open to negotiations with Google" but, she said: "Google has not taken a neutral stance".

"Of course they are free to close their business, but one thing is the closure of Google News and quite another the positioning in the general index."

Rights of Citizens

Apparently the rights of citizens and businesses in Spain includes free services from Google.

Actually, it goes even further. As I commented last week, Google News makes no money and does not even have advertising on the site.

Neutral Stance Irony

The AEDE wants a "neutral stance".

Here's a second irony. If Google actually provided a "neutral stance", it would seek to make money either off advertising or by charging the AEDE for promoting its news publishers.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

What's Behind the Plunge in Oil? Winners and Losers? Boon to Spending or Recessionary?

Posted: 16 Dec 2014 02:43 AM PST

What's Behind the Plunge in Oil?

In the wake of a widely unexpected, huge oil price decline, I have received many questions and comments.

Some speculate US pressure on Saudi Arabia to punish Russia. Others think "big oil" is out to punish the frackers.

I responded to a friend today that the explanation is simple. No conspiracy theories needed. This was my proposal.

Explaining the Plunge in Oil

Slowing global economy, especially China and Europe
US production expansion
OPEC pumping above quotas – they all cheat
Iran embargo failing
Increased fuel economy
Attitudes of millennials towards cars and driving

I give heaviest weight to number one, but they all cascade.

To maintain revenue with US producing more of its own oil, OPEC members cheated more to maintain revenue. Increased fuel economy and attitudes of millennials are longer-term factors, but they become more important as demand drops due to the slumping global economy.

Discarding Conspiracy Theories

I am a big fan of Occam's Razor, a principle that suggests the simplest workable explanation is likely to be the best one. (For a tie-in to bank lending, please see Occam's Razor and Bank Lending.)

In this case, a slowing global economy thesis is a far simpler explanation than the notion that the US pressured Saudi Arabia and OPEC, and both of them agreed to cooperate, simply to punish Russia at the request of the US.

Did that happen? Not likely!

OPEC and or "Big Oil" attacks on frackers are equally ridiculous for exactly the same reason.

Reflections on the Price of Oil

Just minutes after I responded to my friend, a contact emailed an interesting report on "The Price of Oil" by Dieter Helm.

Helm dismisses peak oil, I don't (and to a certain extent he misses the construct), but much of the rest of what he has to say is accurate enough.

Helm states "Around the world high prices triggered the search for new supplies."

That's certainly a true statement, but in the next breath he states "It has turned out that the earth's crust has plenty of oil and gas left, that R&D is not confined to non-fossil fuels, and that there are physically abundant supplies for decades to come. The problem is not an imminent shortage of oil and gas, but rather a super-abundance, enough to fry the planet many times over."

The idea of a "super-abundance" of oil is ridiculous. The US saw an increase in production not because there is abundant supply, but rather because prices got high enough to make diminishing supply profitable to exploit. After all, that's what peak oil is about.

And with this plunge in oil, new development has come to a halt. Many of these drillers are not profitable at these prices and huge numbers of bankruptcies will result.

OPEC to the Rescue?

Helm is on target with comments regarding OPEC.

It is claimed that OPEC will come to the rescue. Since the oil producers have squandered the revenues from the price increases, they now need high prices to keep on buying off their populations, especially in the Middle East where Arab Spring revolutions in several countries has scarred authoritarians and dictators. It is claimed that many of the key players need a price of $90 a barrel or more. The idea that because of the waste and corruption and populist spending, these countries can therefore enforce a particular price on the market is nonsense. A price can only be imposed if they all agree, they all actually cut production and the consequences of their behaviours is not to cut demand and increase non -‐ OPEC supplies. None of this is likely to be true.

The first point to note is that OPEC's market power is waning. The US (and North American) production has transformed the market. The US is still over 20% of global GDP. Half its trade deficit was oil and gas. Now the US and the rest of North America are well on their way to rough energy balance. That is an enormous withdrawal of demand from OPEC. Europe is also reducing demand and economic growth is flat. China is slowing down and developing alternative supplies. It is now much harder in theory for OPEC to call the market. But even if it did want to fix the price, the mechanics are also a whole lot harder than they were in the 1970s, the last time it really had much impact.

There are two myths about OPEC. The first is that Saudi Arabia can on its own increase or decrease production enough to make a difference. This is true now only in the very short term, and it would have to make a really big reduction to offset other increases, it would make a big hole in its budget and the result would be to encourage an even faster diversification away from it, notably by the U.S.

....

Second, the fracking genie is out of the bottle. Lots and lots of countries will apply the new technologies. Some of this will be gradual and largely unnoticed outside the industry. More will be got from existing conventional reserves, and gradually new reserves will be opened up. There is no shortage of shale reserves around the world.

It is highly likely there are substantial shale reserves. But at what price point cost-wise do they make sense to develop? And what about pollution costs and environmental cleanup?

All of this has come together now in the perfect storm for oil producers.

Innovation

People keep asking me "where will the jobs come from?" And I keep responding along the lines "I don't know, but innovation creates jobs over the long haul".

Right now we are in a "creative destruction" phase where the internet created massive numbers of jobs, but now seems to be taking them away. But what about the future?

Helm has some ideas.

For many bright young researchers in the universities, their commitment to develop new low carbon energy supplies is a further source of optimism about technical progress, and their motivation is exogenous to price. It is the one bit where the market's reach is limited. The likely product of this research is very large, and indeed is already producing a bewildering number of options and opportunities.

His thesis on energy (and mine on jobs) needs to happen before we blow ourselves up over trade wars, currency wars, energy wars, and religious wars.

Winners and Losers

The winners in this oil selloff are generally oil importers. The losers are the exporters.

The Financial Times has this interesting graphic of Winners and Losers of Oil Price Plunge.

Big Winners

From the above graphic it would appear that Europe is the big winner.

Falling oil prices enable producers to pass on lower prices for the benefit of consumers and producers alike. One would never know for all the European bitching and moaning over price deflation.

Nonetheless, the biggest winner in all of this is Japan, not Europe. Falling oil prices are the one thing that has saved Abenomics from complete disaster.

Big Losers

The biggest losers are easy enough to identify, but the chart has it wrong as Saudi Arabia.

Arguably the two countries most punished by falling oil are Russia and Venezuela. The latter I expect to default sometime in 2015.

The Financial Times notes one of the ironies in this mess. "As late as October, a 'key concern' of the International Monetary Fund was the risk of an oil price spike caused by geopolitical tensions. Instead, rising production and weaker demand growth have left suppliers competing to find willing customers."

As usual, the IMF worries about the wrong things with a perpetually overoptimistic view of the global economy.

Central Banks Enter the Fray

I commented on the Russia impact in Moscow Hikes Interest Rates to 17% from 10.5% in Emergency Middle-of-Night Action.

Bloomberg chimed in on the winners and losers debate with Oil Spilling Over Into Central Bank Policy as Fed Enters Fray.

Norway's central bank stunned investors last week by cutting its main interest rate to head off a "severe downturn" due to plunging oil prices. Ninety minutes later, Russia's central bank raised its benchmark to bolster a currency weakened by crude's decline.

The split among two of the largest oil exporters shows how the slump in the price of crude to its lowest in five years will make 2015 a year of divergence for global central banks and increased volatility in financial markets.

The U.S. Federal Reserve enters the fray this week. Some economists expect it to drop the commitment to hold rates near zero for a "considerable time." Hiring is accelerating and officials including Vice Chairman Stanley Fischer have emphasized the boost to consumer demand from oil's decline.

Cheaper oil "lends support to our expectation of monetary-policy divergence next year, making Fed tightening in the first half more likely, while pushing other central bankers to be relatively more dovish," Credit Suisse Group AG economists led by Neville Hill and James Sweeney said in a Dec. 12 report to clients.

Boon to Spending or Recessionary?

As noted above Credit Suisse Group AG economists think cheaper oil will make "Fed tightening in the first half more likely."

I propose it's not that simple. Indeed, I am willing to take the other side of the bet, in line with the Reuters article Early Slowdown Signs Emerge for U.S. Oil States After Crude Slide.

After leading the U.S. economic recovery out of recession, some of the nation's top oil states are showing early signs of a slowdown as a result of the plunge in crude prices.

In Houston, Texas, the first oil industry layoffs have been announced, with realtors there predicting a sharp decline, up to 12 percent, in home sales next year.

Alaska's 2015 fiscal year budget revenue forecast will have to be lowered by almost $2 billion, according to Fitch Ratings, because of the sharp drop in the state's forecast crude prices. That will widen Alaska's budget gap to almost $3.4 billion, Fitch said in a Dec. 11 report.

States such as Texas, North Dakota, Alaska, Oklahoma and New Mexico are all likely to feel strains next year, Wells Fargo Securities municipal analyst Roy Eappen said in a recent report.

Meanwhile, household sentiment in Texas, Louisiana, Oklahoma and Arkansas where memories of the catastrophic 1980s oil crash are still fresh, weakened in October more than any other region, according to a report by Decision Analyst Inc. The Texas-based research company surveys monthly thousands of homeowners in the Census Bureau's nine regional divisions.

The West South Central division, comprising those four states, had seen the strongest growth for four years, but in October survey lagged the rest of the nation, with economic gauges improving in six regions and two recording no change.

That's a lot of weakness. And given the Fed responds to stock market declines with dovish statements, the Fed just may have its hands tied in 2015.

Watch Junk Bonds!

Junk bonds, especially energy junk bonds have been crushed lately as I noted on December 11, in $550 Billion Energy Junk Bond Bubble Busts; "Whac-A-Mole" Distortions in Multiple Markets.

If energy prices decline, expect a spillover into all junk bonds. In fact, junk bonds are also at huge risk if the Fed tightens. And if Credit goes, speculative stocks will follow.

It will not take much to push the economy over the edge. Yes, I have said that for some time. And no it has not happened yet.

But every delay of the inevitable pushed asset prices higher and higher. Equity prices are currently more richly priced than any time in history with the exception of 1929 and the 2000 tech bubble.

Stocks are a sell on their own accord. The energy shakedown, currency volatility in numerous countries, a slowdown in China, numerous Eurozone problems, and bubbles in bonds and equities do not bode well for 2015.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

China Flash Manufacturing PMI in Contraction, at 7-Month Low

Posted: 15 Dec 2014 11:58 PM PST

The slowdown in China continues, as evidenced by contraction in China Flash Manufacturing PMI, now at a seven-month low.

Key points:

Flash China Manufacturing PMI™ at 49.5 in December (50.0 in November ). Seven-month low.
Flash China Manufacturing Output Index at 49.7 in December (49.6 in November ). Two-month high.

Commenting on the Flash China Manufacturing PMI survey, Hongbin Qu, Chief Economist, China & Co-Head of Asian Economic Research at HSBC said: "The HSBC China Manufacturing PMI dropped to a seven-month low of 49.5 in the flash reading for December, down from 50.0 in November. Domestic demand slowed considerably and fell below 50 for the first time since April 2014. Price indices also fell sharply. The manufacturing slowdown continues in December and points to a weak ending for 2014. The rising disinflationary pressures, which fundamentally reflect weak demand, warrant further monetary easing in the coming months."

China PMI and Production

The question, as always is whether or not this is just more meandering around above and below the expansion-contraction line.

I propose energy is the key tell. With prices plunging, how much traction does the global economy have?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Economy News

16.12.14

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

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