Natural Gas

Greece, Slovakia, Czech Republic, Germany... the chorus of voices demanding an end to Russian sanctions is starting to drown out the neocon warmongering efforts of the west...

There is a standard view of energy and the economy that can briefly be summarized as follows: Economic growth can continue forever; we will learn to use less energy supplies; energy prices will rise; and the world will adapt. The following view of how energy and the economy fit together is very different - it is based on the principle of reaching limits in a finite world.

Following another monthly surge in the June PPI print, when it rose by 0.4%, or the second highest amount in a year, the July headline reading was a far tamer 0.1%. This was driven entirely by the plunge in energy prices (supposedly due to the Iraq military incursion and the "de-escalation" of the Ukraine civil war), which resulted in a -0.6% plunge in energy costs, which was the biggest monthly drop in over a year, matching the decline recorded in November of 2013. Offsetting the energy drop was a 0.4% increase in food prices, following two months of -0.2% decline. When stripping the volatile, and easily manipulated asset prices linked to brent, crude and the like, core PPI ex food and energy rose by 0.2%: the highest since March.

There were headlines for everyone this morning, but especially for fans of what is increasingly known as Russia's "Schrodinger Invasion" of East Ukraine: one which may or may not be happening depending on i) one's point of view and ii) how one is observing it.

The Ukrainian parliament approved a law on Thursday to impose sanctions on Russian companies and individuals "for financing terrorism." As Reuters reports, Prime Minister Arseny Yatseniuk told parliament that "by approving the law on sanctions, we showed that the country is able to protect itself." The first 'threat' though - that European energy companies would have to agree major contract revisions when purchasing Russian natural gas, potentially disrupting supplies in the coming winter months - seems suicidal... and EU leaders are not happy. Slovak Premier Robert Fico asked rhetorically, "Isn't it strange that a country, which has signed an association agreement, a country, which we are all trying to help, is taking steps that jeopardize the interests of individual EU members?"

In July, the rest of the world once again succeeded in exporting its deflation to the US, confirmed by a -0.2% drop in the Import Price Index, its first decline since April following a 0.1% increase in June, if just a fraction better than than the -0.3% consensus.This was also a 0.8% increase Y/Y, suggesting June may have been a Y/Y top following 5 consecutive months of annual increases. The key drivers for the decline: Fuel imports as well as car prices. To wit: the price index for import automotive vehicles declined 0.8 percent in July, the first monthly decrease for the index since a 0.1-percent decline in February and the largest 1-month drop since the index fell 1.1 percent in December 1992. Why? Because foreign car sellers have no choice but to slash prices to compete with the US subprime flood making domestic car prices effectively "free."

U.S. energy independence, we're told, is at our fingertips thanks to the so-called “shale revolution”. Offsetting declines in conventional oil and gas production, shale gas and tight oil (shale oil) are being heralded as the means by which the U.S. will become energy independent – a net exporter of natural gas and once again the world’s largest oil producing nation. But two new reports by Post Carbon Institute and Energy Policy Forum show that the hype simply doesn’t stand up to scrutiny.

• Obama says Missouri shooting death tragic, reflection needed (Reuters)
• U.S. Weighs Iraq Rescue Mission to Save Yazidis (WSJ)
• Maliki says Abadi's appointment as Iraqi PM 'has no value' (Reuters)
• Iran Joins U.S. in Backing Replacement for Iraq’s Maliki (BBG)
• Kurds Push Attack in North Iraq as Maliki Clings to Power (BBG)
• Obama Donors Embrace Corporate Inversions He Criticizes (BBG)
• Syrian Forces Advance on Aleppo, Rebels Fear Another Siege (WSJ)
• Israel, Palestinians pursue Gaza deal with ceasefire clock ticking (Reuters)
• Ebola Drug’s Success Bolsters Approach for Other Diseases (BBG)
• With Natural Gas Byproduct, Iran Sidesteps Sanctions (NYT)
• Kazakhs to Hoard Food as Putin Sanctions Rattle Alliance (BBG)

The western world has placed many sanctions on Russia and its economy. However, Russia holds major leverage over Europe; it has oil and Europe needs it (and may just do a 'deal').

It's All About Erbil

• Gunshots, tear gas in riots over shooting of black Missouri teen (Reuters)
• Russia sends big aid convoy to Ukraine, West sounds warnings (Reuters)
• Maliki Bid to Block Successor Escalates Crisis in Iraq (BBG)
• Poor German data pushes euro toward 9-month lows against dollar (Reuters)
• Derivatives Reincarnate Boosting Debt Wagers in New Era  (BBG)
• Israel Says No Gaza Talks Progress as Hamas Warns on Truce (BBG)
• Traders brace for research crackdown as easy money dries up (Reuters)
• U.S. Bank Profits Near Record Levels (WSJ)
• Unproven Ebola Drugs Are Ethical to Use in Outbreak: WHO (BBG)
• Caesars’ CEO Loveman Says No Qualified Bidders for Revel (BBG)

"The US government's decision to apply more sanctions on Russia is a grave mistake and will only escalate an already tense situation, ultimately harming the US economy itself. While the effect of sanctions on the dollar may not be appreciated in the short term, in the long run these sanctions are just another step toward the dollar's eventual demise as the world's reserve currency."

Sorry Ukraine, but when Europe has to choose between you and Russian gas, the gas wins every time.

Since there is nothing on today's data docket, it will be all about, you guessed it, geopolitical risks, where "consensus" is best summarized by these two Bloomberg headlines:

• Stay USD Long as Geopolitical Risks Loom
• USD is mixed and world stock markets rise as concerns over geopolitical risks ease

That pretty much covers it, although in addition to the Ukraine civil war one can now add an Iraq coup to the list of geopolitical fiascoes instigated by US foreign policy.

Investing in oneself and enterprises one actively controls may now be the only legitimate deployment of capital that qualifies as an investment in the traditional sense - that is, capital isn't being risked in rigged gambling halls and Ponzi schemes.