New Normal

The Saudi strategy has yet to bear itself out, but early indications suggest it is generating returns. Non-OPEC supply is expected to suffer its steepest decline in two decades in 2016, at a drop of nearly 0.5 mbpd. Moreover, U.S. shale producers are among the hardest hit. Oil production across the seven most prolific shale plays is expected to plummet a combined 116,000 bpd in January 2016. Still, the strategy is not without sacrifice, and several OPEC members are struggling to find – and, more importantly, endure – that magical balance between non-OPEC pain, market share retention/growth, and self-inflicted damage. Their tipping points are nearly impossible to predict, but there will be more losers than winners in this game of brinksmanship.

The new normal... 1000 point swings in less than 3 trading days...

Having stated unequivocally last week that "we can't let this become the new normal.. enough is enough," following the Planned Parenthood shooting, President Obama - having seen a record amount of background checks for gun purchases over the Black Friday weekend - is set to make a statement (alongside his National Security Team) with regard the mass shooting in San Bernardino yesterday...

The recent attacks in Paris evoke strong emotions for many people, but investors need to look through those feelings to the short, medium, and long-term implications. We believe Paris may mark an important turning point for Europe and the global business cycle... but for different reasons than you may think. There is a chance that the slow disintegration of Europe will drive more capital onto US shores, boosting valuations and fueling a blow-off top in the US equity market; but beware global shocks and take any rally as a chance to get defensive.

"it's not just energy...it's everywhere!"

Hot on the heels of the biggest collapse in Australian Capex ever, and just as we predicted back in 2012, we thought it about time to once again re-visit - Godot-like - the never-ending wait for 'recovery' (or ongoing crash) in Capital Expenditure around the world.

"The political left is happy to see people cross borders but would gladly restrict the flow of capital and goods. The political right is happy to see capital and goods cross borders but would gladly build a fence to restrict the flow of people. I’m afraid that the compromise might be to restrict people, capital and goods."

The Fed, in its reflexive attempt to boost confidence in the economy, is not only engaging in massive policy error, but is about to unleash a recession which will promptly force it to cut rates again (to negative) and start another episode of QE.

"The Islamic State has grown that strong due to the irresponsible policy of the United States," exclaimed Russian PM Dmitry Medvedev this morning, demanding that "really consolidated efforts" are needed to counter ISIS' terrorist threats. This comes just hours after President Obama toughened his rhetoric, vowing that the global coalition formed to destroy ISIS "will not relent," adding, rather oddly, that the group responsible for the Paris terror attacks is "a bunch of killers with good social media."

Courtesy of the Fed, the most bearish trade going into the year end period is to go long a handful of very specific stocks.

Between the French (Interior Minister Cazeneuve: "we're face with a new kind of terrorism", and Hungary (PM Orban: "allowing people into our own back yard" who may then commit acts of terrorism was irresponsible), AP reports that the EU's founding treaty with regard to passport-free travel - the so-called Schengen Agreement - is to be reformed. "We want Europe, which has lost too much time on a certain number of questions, to note the urgency and take decisions today," exclaimed Cazeneuve, with Orban adding "the founding treaty is currently an obstacle to this and I believe it needs to be reconsidered." According to Cazeneuve, the reforms will happen by year-end.

China’s producers couldn’t get the prices they wanted anymore, as early as 4 years ago, and that’s where deflationary forces came in. No matter how much extra credit/debt was injected into the money supply, the spending side started to stutter. It never recovered.

Having detailed the "perverted nonsense" that is the collapsing and negative US swap spreads (here, here, here, and here) and noted money manager's concerns that the big question remains whether there is "something bigger brewing under the surface that so far hasn’t been pinpointed yet," it appears Goldman Sachs feels the need to 'explain' the anomaly in what appears an effort to calm fears about the broken money markets. Of course, we don’t have to figure out what the “market” is saying about a negative spread because it isn’t saying anything other than “something” is wrong and even Goldman admits this signals funding and balance sheet strains are worsening since August.

The market's reaction to today's FOMC Minutes was, to some, a little odd given the "December is on" hawkish narrative being sold to the public. Stocks rallied, longer-dated bonds rallied, gold managed gains, and the US Dollar sold off... not exactly the reaction one would expect from a 'hawkish' Fed statement. But there is one thing that would explain those moves... and it appears Goldman Sachs found it buried deep inside the 12 pages of Minutes...