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The Oil-Price-Shock Contagion-Transmission Pathway
As we noted previously, counterparty risk concerns (and thus financial system fragility) are starting to rear their ugly heads. In the mid 2000s, it was massive one-way levered bets on "house prices will never go down again." When the cracks started to appear, the mark-to-market losses in derivatives led to forced liquidations and snowballed systemically. In the mid 2010s, it is massively levered one-way asymmetric bets on "commodity prices [oil] will never go down again." Meet WTI-structured-notes... the transmission mechanism for oil-price-shocks blowing up the financial system.
Because nothing says exuberant ignorance like limited upside, unlimited downside OTC (illiquid) derivatives...
Here's BNP Paribas' 1-Yr WTI-linked notes that collapse if oil drops below $70...
And Credit Suisse's ironically-names "TWIn-win" notes that collapse once oil prices close below $65
And finally Barclays, Leveraged Contingent Buffer Enhanced Notes Linked to the Performance of WTI Crude that start to die if oil prices close below $77.28
* * *
All of these "notes" are simply bundles of risk-free bonds subsidized by written derivative premiums on oil-prices - and sold to greater-fool yield-reaching muppet investors around the world who never saw a short-term tren they did not extrapolate - the question is - who is on the other side of all these notes? Especially now that capital is actually being eroded instead of simply less gains...
The snowball is starting (which explains why bank credit spreads have started to bleed higher)
We are still trying to size this market but its complexity and recent issuance suggest it is anything but "contained."
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You assume that what you read on Zero Hedge isn't propaganda, but that's not necessarily true, Bob. I accept some of what is posited here and reject other items - after I filter it through what else I know. Likewise with CNN, Fox, et al.
Regarding posting what you find offensive - even when scrupulously documented - I'll continue to drag you by your thinning locks and force you to either read or skip over what I post.
I could care less whether my posts continue to receive down arrows (or no arrows at all), but I feel it's important for idiots like yourself to be exposed to more balanced facts and analysis than those you've chosen to ingest.
If my posts or account are deleted, I'll post my comments in this forum using another account (and another, and other...).
We need a thorough airing of the issues, not a one-sided argument against straw men.
your posts ???? WTF all you do is copy and past MSM articles and you call that your own analysis
, have you gone mad dude or are you just stupid ? or is the pay good ?
I MUST WARN YOU, ZH READERS ARE NOT YOUR AVG Joe, Au contraire we have a lot of intelligent and well informed people here
Bob, the facts and analysis are contained in each of the articles I post. You may not agree with them, but it's there.
Object away, you're going to have it thrust in front of you.
Haha. And you talk about strawman arguments? That's pretty rich. You should know by now that nobody here is reading that crap you cut and paste.
Give it up.
I just down vote and move on.
The facts and analysis were in the piece I posted, Bob. But it appears you're unable to read.
Facts:
1. Just a year ago, foreign reserves held by its central bank stood at more than $515 billion; today, those reserves are about $100 billion less.
2. Net capital outflows this year are set to reach $125 billion, the highest since the 2008 financial crisis.
3. Russia has billions of dollar-denominated debts that will either have to be paid or refinanced in 2015.
4. Former Finance Minister Alexei Kudrin, who set up two wealth funds in Russia, has expressed alarm over the current situation.
Analysis:
It doesn’t take an idiot (although perhaps a Zero Hedger will suffice) to understand that Russia has some tough years ahead of it, and that for the same reason – falling oil – Americans will be better off.
Sorry to say, there wasn't much in the way of facts and analysis in your CNN repost, more like anecdotes, partial (as well as vague and unspecified) "poll" results, accompanied by a bit of boilerplate wishful thinking from one of Putin's political opponents (and a good bit of editorializing by a reporter with a fondness for cheese). Not much there there, all in all. Smells like bulls... propaganda to me.
While I'm no Woodrow Wilson scholar, I have written facts (and the occasional analysis of facts) for publication. Your post to which I'm replying has some numbered "facts" (and number four is not a fact but merely heresay, BTW) but, damn, no way to verify your assertions that those facts are accurate... And your analysis? Well, I rather doubt you're a Woodrow Wilson scholar either. Maybe you're one of those kids that "won" ribbons for "participating".
But I don't want you banned -- I hold free speech in high regard. Though some folks, and you ought consider yourself among them, merely display their arrogance and ignorance when opening their mouths.
Now, before you get all gooey with the usual Putin "man-love" brush you so dearly love to paint ZH posters with, I should note that I'm not overly fond of former spies holding any political office be it elected or appointed -- looking at you, Poppy.
Dear AP, Whenever I place my member in your mouth, please close your eyes and say "lalalalalala" (while moving your head back and forth) until you've got a creamy filling.....
jackass.
Hey, Fake Wresteler
The only cream that will ve found in you is when you get smacked in the head hard enough to pop that carbuncle you use for a brain.
Get back to your job of cleaning Obama's butt plug before he uses your pin head for a substitute.
member for 18 weeks?
gtfo with your high and mighty garbage.
Roflmao!
What utter nonsense. The Russians will get rid of Putin and put some zio-oligarch in to continue the rape the Bolshies did? Pure CiaNN fiction.
You are a VOA troll. If I want propaganda, I can go and get it myself. Fuck off.
Amerikan Patriot:
We want to force the present leadership of the country (USA), using pressure from society, to change its aggressive course in its international as well as domestic policy and abide by the American Constitution.
There, fixed it for you.
Looking at the carnage in oil markets makes me think: What exactly did Christophe de Margerie plan to do before he had his "unfortunate" snowplow accident?
he questioned the Role of the Dollar ...............
Seriously, when I look at the dates on those notes and square that up with the fact that we are engaged in economic warfare with Russia...
...wouldn't Vlad read this bullshit in the tea leaves and take the other side?
It would explain this insane stealth elements jammed in the cronybus bullshit and the shackles on PM
Just spit balling here. I'm no pro, but if I were Vlad, it's the move I'd make for checkmate.
Why would anyone invest in these? Anyone with a passing knowledge of options could come up with an OTC options pairing that would give a similar return profile. Sell $100 put option buy $90 call option.
These are for state pension funds no one with a brain would buy this crap. The pension fund managers generally get paid by amount of money under management not return.
While oil prices were soaring, Russia amassed a pile of hard currency that most countries could only dream of. Just a year ago, foreign reserves held by its central bank stood at more than $515 billion, including tens of billions in energy export revenue pumped into two big sovereign wealth funds that invested the money in foreign government bonds and other overseas assets.
Now the hoard is starting to dwindle. Over the past year, total foreign reserves have fallen almost 20 percent, to less than $419 billion. The Bank of Russia has spent billions in an effort to prop up the ruble, while the Kremlin has begun raiding the sovereign wealth funds to aid banks and companies hit by Western sanctions.
The finance ministry says it will probably take $10 billion out of one of the funds to plug a hole in the government’s 2015 budget. And in his annual address to lawmakers on Dec. 4, President Vladimir Putin said that the other fund, which is intended to support Russia’s pension system, should be tapped for an unspecified amount “to implement a program for recapitalization of leading domestic banks,” which in turn would be expected to invest in infrastructure projects.
True, the remaining $419 billion is still a heckuva lot of money. Only four countries—China, Japan, Saudi Arabia, and Switzerland—have bigger hard-currency reserves.
But the demands on Moscow’s cash pile keep growing, and with oil prices at a five-year low and the economy sinking into recession, the money can’t easily be replenished. Russia Inc., barred by sanctions from tapping Western capital markets, is scrounging to pay maturing foreign debt. State oil giant Rosneft, for example, has asked for $44 billion, equaling more than half the remaining balance in the so-called Wellbeing Fund that’s earmarked to support the pension system. The government also plans to raid the funds, because its planned 2015 budget was based on $100-a-barrel oil, while the current price is less than $70.
Former Finance Minister Alexei Kudrin, who set up the two wealth funds, has expressed alarm over the situation. Tapping the Wellbeing Fund to aid an oil company such as Rosneft defeats the fund’s purpose, which is to ensure that oil price shocks don’t endanger the pension system, he told Bloomberg News last month. “At the moment when it’s necessary to use it, the value of the Wellbeing Fund will fall, together with oil and Russian capital markets, and will be of no help,” he said.
Financial institutions including VTB Bank and Gazprombank have already gotten more than $7 billion from the Wellbeing Fund and are asking for billions more. The fund essentially buys their shares in exchange for a capital injection. The central bank could step in with additional aid, says Timothy Ash, an economist at Standard Bank in London. One reason the bank has reduced the frequency of its currency interventions recently is that it is “conserving funds to use, to support corporations and banks in this way,” he says.
The flight of private capital from Russia only adds to the pressure. Net capital outflows this year are set to reach $125 billion, the highest since the 2008 financial crisis. Putin on Dec. 4 offered full amnesty to Russians who repatriate their foreign capital. The offer “smells of desperation,” Lars Christensen, chief emerging-markets economist at Danske Bank in Copenhagen, tells Bloomberg News. It’s “completely unlikely to have any impact,” he adds.
Separately, the Kremlin is asking state-controlled exporters such as Rosneft to convert more of their foreign revenue into rubles. Putin has said he has no plans to impose controls to prevent capital from leaving the country—a move widely seen as a last resort that would scare off any future foreign investment. But when the government makes such a request of “companies whose business depends on or is controlled by the state,” that is tantamount to “an introduction of capital controls, although in a different sense than the one we’re used to,” says Alexander Losev, chief executive of Moscow-based Sputnik Asset Management.
Bear plays rope-a-dope. This is exactly how I'd want my enemy to see me, just before I up and fucked him proper,
Just you fucking watch. Slight of hand.
@ Amerikan Patriot
again written by the MSM
bio Carol Matlack: is a Paris correspondent for Bloomberg Businessweek. Previously, she worked as a correspondent for Businessweek in Moscow. Before Businessweek, she was managing editor of Washington's National Journal. Prior to that, Matlack covered an ambitious young governor named Bill Clinton for The Arkansas Gazette. Matlack is a graduate of Oberlin College. She is the recipient of a 1981 Congressional Fellow of the American Political Science Assn. in Washington.
stop posting CRAP PLEASE
Still puts Vlad over 18T ahead of us, doesn't it?
This is how banks will fund their pennies-on-the-Dollar shale companies buy-out program.
Let's see what will happen to DB in the coming weeks. 55 trillion in derivatives might blow up.
I'm not worried 'cause I'm diversified in my equities: MFGlobal, KOH, Lucent technologies and Lehman MiniBonds.
S&P rated them all as AAA+
Dropping oil prices add a new surprising new dimension to the stability of the world financial system. While often heralded as a godsend to the economy and the end consumer we must remember lower prices hurt both producers and those in the business of oil exploration, drilling, and sales.
When financial problems occur in the energy sector it is often accompanied by political instability and sometimes her ugly sister war. As a rule the economy loves stability, bottom-line dropping oil prices means more risk for an already shaky world economy. All this is being complicated by the recently strong dollar.
The dollars strength and the rising American stock market could also be taken as a sign of an unstable global economy. The money flowing in from other countries in search of a safe home screams of a bigger problem! When a strong shift in currencies occurs someone usually gets hurt and this can lead to bankruptcy, default, or contagion.
http://brucewilds.blogspot.com/2014/11/dropping-oil-prices-increase-risk-to.html
aside from the camel jockeys and JR down in Texas, who the hell cares...I'm happy gas per gallon is down and I dont have to pay so much for heating oil this year. if the Saudis want to give away their oil cheap, who am I to complain?
If the financed markets collapse hard enough then no one may get their heating oil deliveries as the shipping/freight companies may be less than willing to sell at very low market prices, or they may be bankrupt also.
The margins are so low the Gas Stations may close...so no simple way to buy cheap gas or heating oil.
My Jeep Rubicon runs on Raspberry Slurpy.
And folks thought Noah was crazy.
Anyway, gas stations don't make their cheese from gas.
This is fine. Cheaper for me now. If the whole thing gets flushed then we can celebrate the end of the false narrative control system we are currently living under. Then the hard work begins.
Falling oil prices are A-W-E-S-O-M-E !
I'm going to have another $100/month to invest elsewhere.
Can I interest you in some alternative energy bonds?
the dude is troller , read all his ppostings
Nothing to do with crude, but all I have to say is: petsmart.com
garden.com
Crocs
All day fucking long.
To the fucking moon.
Alex, I'11 take -100% for $1,000.
This is all a result of the unwritten LIMP policy (low interest market ponzi) of FED Yellen.
Since it's limp it will go down.
Come on Tyler
The derivative writer won. The counter party is any one of a number of state pension funds. Yes the taxpayer will bail them out.
"I don't know honey...It seemed like the right thing to do...I mean, where else could you get a sure thing 12.5% on the kids college fund?
"Umm...Well, that's not the only thing. You see...I took a second on the house too. I mean, Jeez...The rates were so low and..."
"What are you doing with my gun?"
Crude future at new low of 56.58: world equities are still ignoring the probable high yield bond collapse, the bank impairments, and the commercial paper shut off to oil companies, but the problems can't be hidden out there in plain sight for much longer:
http://www.sgxniftydowfutureslive.com/index_files/DOWFUTURES.htm
http://www.investing.com/commodities/crude-oil-advanced-chart
http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=hyt&insttype=&freq=2&show=&time=20
All analyses done by serious oil experts have shown that in the past years the cost of marginal oil production has increased at 10%/yr since 2009. The Oil majors eg. Shell have been crying loud about this.
Which means that Oil major Capex will tend to decrease if Oil prices JUST STAY constant.
As we all know the shale oil plays have been highly financially leveraged and price hyped.
The fact is that we are in a FINITE WORLD, irrespective of what Saud may do in the short term.
Our "temporary" glut indicates that a constant physical growth model is hitting an asymptote as investment in incremental hydrocarbon production cannot be met at constant prices; let alone in a backwardation scenario due to demand deflation choked on debt accumulation.
If in addition the financial speculative plays have linked the new oil production (USA/Canada) to huge financial risk that means both the Oil Majors investments as the hi-yield oil Junk bonds and incidental derivative plays are now potential time bombs.
And there is nothing anybody can do, as the level of debt is unsustainable if we don't have constant energy renewal for growth to occur in the market, if nothing more to reduce DEBT.
If the energy export model collapses, and OIL stays in the ground and production declines, even to grow food, people will rely more and more on local energy and local products. And our global export trade model (WTO) collapses. That has incalculable geo-political risks associated.
We may be heading there !
Happened in the 70's too. Then the 80's rolled around and suddenly the cost of production collapsed too.
Oil prices can collapse quite easily and this has happened many times in the past with barely a fart in the wind as a consequence to the economy.
In 1987 the stock market crashed 20 plus percent in just a few days because folks realized oil was dead for a LONG time.
And of course oil got crushed for the entire 90's tulip mania.
I think the Banks have been prepping for this for some time (except Goldman of course) and don't really see the problem here. Neither do currency markets I might add.
Debt markets which are so large they cannot be hedged on the other hand...
I'm tired of having to have Yellen go up my FAFSA can't they bring down college tuitions too.
Structured products are very popular in the HNW market...sold on low correlation and favorable asymmetric risk/return. The underwriter hedges the potential upside payout. Very little regulatory oversight, and highly profitable to the firm.
Wow, what an eye opener.....
I thought dod-frank cured all this bullshit..........
(sarc)
What's next? The Pope popping altar boys?...
Thankyou boooyaaaah!!
At least my South Korean monitors are working. Bitchez
This cyclone is just starting to "spin-up" BITCHEZ
Who else but the same crew (Citi, Deutsche, Barclays, etc) who have been peddling these structured notes. Their risk mgt systems of course will say that all is "ok" for those that they warehouse.
You can't go far wrong that these creators are concentrated among the financial institution with a large mkt share in the wealth mgt biz. (UBS, etc).
China too has lots of this created by their banks under "white labels". Concern is that their second tier banks have hidden the numbers from PBOC and will just dump their inventories to get out of trouble. Again the foreign banks active in these snake-oil are the same crew (Citi, etc).
whadaya talkin bout ma bank account is already gone, ain't no kinda bailin gona find any jack here, as fer jack he done closed the book and left town months ago
Bonds for chumps who don't know about futures? What a scam. Easily hedged by the lender while the investor will get screwed on any move down. These instruments shouldn't even be allowed.
Wow we get Swan dipped in Crude for the holidays!! YUMM now that is one drippy black bird!! (might be REALLY hard to get that sucker plucked, unlike Muppets who just get ripped open at the seams)
Who cares, it was about a fake peak oil agenda. Casted members have be revealed. This includes, futurist Chris Martenson working groups hidden under NGO factions.
http://theglobaljournal.net/top100NGOs/
The talk about oil shock may, or may not continue.
The biggest shock, or among the top of many, and also what the babylon bankster war mongers are preparing for, is the out right theft of the American peoples bank accounts. Prolly part of the CRONYbus bill.:
http://www.activistpost.com/2014/12/the-global-bankers-coup-bail-in-and....
Ha! Hypothetical Return
That reminds me of when Bush was telling America that the news is hypothetically real but in reality completely fake
Maybe those returns and the media can have a hypothetical lunch together sometime soon
https://www.youtube.com/watch?v=cCvrJSBVfnI
What I take from this is the Central Banks will now be buying the fuck out of Oil futures which will indrirectly bid the general markets up, kills two birds with one stone, look at this $2 miraculous crude ramp in the middle of the night, with a 100 point related Dow ramp and Europe isn't even open yet...now whether they can keep this steady is a no brainer and Oil now up $3 on no news!
there are very few stories about it, but china's SPR is being built out and they had curtailed purchases.....all they need to do is -announce- they wiill be refilling and oil will be up 15%.
lesson for Putin is that China only looks out for china's interests. is US wants to punish Putin/Venezuels/Libya/etc by having its puppet Saudia drive prices down, well good for China bad for Russia, so sowry!
what will be interesting is that is oil bounces(!), 10% to $64, energy stocks will probably P/e expand to put prices on XLE down 10%, while oil still off 30%.
I wonder who got the privilege of being offerd this irresistable deal?
Pull!!! Booom! Pull! Boom!!! Muppets!!!
at current prices, these look very interesting. $770 offer, and I get $1000 if oil is back to $65 by Oct 2015? 12% incr in price gives me a 35% return, but only 1 for 1 on the downside? a bit more research to be sure, but interesting.