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Unraveling The Mystery Of Oil And The Swiss Franc
Submitted by Vitaliy Katsenelson via Contrarian Edge blog,
I want to preface my article with a short excerpt from one of my favorite books,Antifragile, by Nassim Taleb:
A turkey is fed for a thousand days by a butcher; every day confirms to its staff of analysts that butchers love turkeys “with increased statistical confidence.” The butcher will keep feeding the turkey until a few days before Thanksgiving. Then comes that day when it is really not a very good idea to be a turkey. So with the butcher surprising it, the turkey will have a revision of belief—right when its confidence in the statement that the butcher loves turkeys is maximal and “it is very quiet” and soothingly predictable in the life of the turkey.…The key here is that such a surprise will be a Black Swan event; but just for the turkey, not for the butcher….
“Not being a turkey” starts with figuring out the difference between true and manufactured stability.
(emphasis mine).
Our global economy and thus stock markets have experienced manufactured (not true) stability, and this is what I am puzzling about in the following article that I wrote for Institutional Investor.
* * *
Has the DNA of the global economy been gradually altered by endless injections of quantitative easing, morphing it into a freakish mutant? Are things that are not supposed to happen for centuries on end going to become common occurrences? The collapse of oil prices and jump in the Swiss franc have forced me to puzzle over these weighty questions. In isolation, these events and the direction of their moves did not worry me, but their magnitude, velocity and proximity to each other sent me on an intellectual quest.
Let’s start with oil. Supply has been increasing due to growth in shale oil production in the U.S., and that increase along with a stronger dollar drove oil prices lower (since oil is priced in dollars). Additionally, demand for oil has weakened in the developed markets as vehicles have become more fuel-efficient. However, none of these things are new. You can also blame the fall in oil prices on OPEC and its unwillingness to lower production, but what is now an obvious decline was not obvious six months ago. Oil prices have sunk more than 50 percent in less than five months, and this happened not during a financial crisis but in a (supposedly) stable global economy where most economies are growing.
Now let’s place these events in the context of the current environment. Ultralow global interest rates have pushed all market participants into riskier assets. For instance, investors who in the past could tolerate only the risk of high-quality, short-duration Treasury bonds are now gulping long-duration junk bonds as if they were default-free Treasuries. In addition, low interest rates are also pushing investors into using more leverage. This point is now more important than ever. Volatility and leverage are not friends. Crucially, we don’t know where all the leverage is buried and will only find out after the fact.
So far, corporate defaults are de minimis — but that won’t last forever. In other words, investors to date have only reaped the benefits of owning riskier assets but have not suffered from the “risky” part of that theme. But suffering will come, unless you believe that QE injections have miraculously modified the laws of financial gravity so that by taking more risk you simply get ever-higher returns.
If you are waiting for Wall Street economists or strategists to warn you about impending risks, don’t hold your breath — none of them were forecasting $50 oil prices a year ago. Oil production and the global economy as a whole did not fundamentally change in 2014, but oil now costs half as much as it did a year ago. The lesson we should learn from the oil price decline is that risks can develop fast in places we don’t expect them, and they may only be obvious in hindsight.
Now let’s talk about the Swiss franc, which jumped 16 percent in one day when the Swiss National Bank decided it couldn’t afford to go on losing billions of francs month after month, desperately trying to keep its currency down in relation to the euro and dollar. Instead, it opted to pass the burden of losses on to investors looking for a safe harbor in the Swiss franc, by imposing negative interest rates on deposits.
Let’s expand on this fact for a second: Today, if you buy bonds issued by the Swiss government, you’ll pay interest for the privilege of holding your hard-earned savings in the Swiss currency. Normally, governments pay you — the investor — for your consideration in investing in their bonds. But for the Swiss these are not normal times.
I cannot recall when the currency of a developed country — we’re not talking about a banana republic here; we’re talking about Switzerland — moved 16 percent in one day. (Unlike stocks, a 1 or 2 percent intraday move in a currency is considered to be a big shift.) By the way, negative interest rates are not part of the normal economics curriculum either.
Here is the lesson from this:
We don’t know what the ultimate consequences of near-zero interest rates will be, but we are pretty sure their impact will be amplified by increased leverage in the system and the dangerous mismatch between risky assets and their holders. This will lead to increased volatility in places we don’t expect.
Here’s another analogy: The arguments in favor of GMO crops are that they increase yields, decrease the need for pesticides and mitigate soil erosion. The argument against them is simple but more ambiguous: We don’t know the long-term consequences of growing and eating GMOs. It’s the same thing with QE, which is even less organic to the economy than GMOs are to the soil and the human body. We know the positives, but it is the hidden consequences, the things we don’t know, that scare me.
We are dialing down on risk even further in our stock selection; and despite the euphoria in the stock market, we are raising the bar for stocks in our portfolio — we are going medieval on quality and the margin of safety. This will cause our cash balances to increase. Cash has not been the investor’s friend — it is never a friend in a rising market. But oil prices and the Swiss franc have reminded us again that risk can spread quickly, and when you need cash it may already be too late to raise it. We are giving up some returns today for the ability to buy attractive stocks at lower prices in the near future.
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http://hedgeaccordingly.com/2015/03/russian-tycoon-leonid-fedun-100-oil-...
Of topic...Harrison Ford just crashed a single engine plane in a LA golf course http://www.tmz.com/2015/03/05/harrison-ford-plane-crash-landing-golf-course-santa-monica/
sorry for tmz... first feed I found
Understanding the government run world:
“Chaos is found in greatest abundance wherever order is being sought. It always defeats order, because it is better organized.”
- Terry Pratchett
they used to be once in a hundred year weather events. now it's once in ten years or less. apply that knowledge to the synthesized markets and you are seeing once in a decade events happen once in a year. and moreso with exponential ramnifications. this is the "new normal". by being on the sideline i can watch in awe, lol 'g and plan for some kind of a black swan opportunity. almost all cash and patient...
great article for thinking thinkers...
Central banks, governments, and pension funds and other institutional capital providers are lurching from one macro-economic event to the next. This is because what matters is not the underlying economic data that trickles out over time, but the Central Bank's reaction to that data. The market is focused on the rule makers and only on the data to the extent the data affect the likelihood of changes in the rules. The Swiss National Bank basically took advantage of its position as a slightly more flexible "maker of the rules" than the ECB and front ran the ECB's QE announcement to avoid taking a bigger loss on its balance sheet than it otherwise would have. Meanwhile, with ultralow economic growth the risk of recession is ever present. One bump in the economic road could send the car careening. And with governments already running massive deficits and sitting on huge piles of debt, and central banks at ZIRP or NIRP, there are no more fiscal or monetary guardrails to keep the car on the road.
Here is more...
America's 'Full-Spectrum' Failure
Military success is unimportant, because failure is even better than success for stirring up panic and justifying Draconian 'security' measures
http://russia-insider.com/en/2015/03/04/4094
Granting that I thought I was the biggest failure..
Uh oh, looks like he can expect a visit from the Secret Service.
Penmar park is where I started my Baseball career.
I wish I could go back and start all over.
"Ford" and "nosedive" within the same article ought to tip off at least a couple of HFT algos.
that's only worth reporting if he landed on bammy.
Heh.
"If you are waiting for Wall Street economists or strategists to warn you about impending risks, don’t hold your breath — none of them were forecasting $50 oil prices a year ago."
Actuallly Harry Dent has been predicting this type of commodity deflation for years now. If he is correct then gold will be the next one to be taken out, stood against a wall, and shot. $250 an ounce?
Talking about prices in the absence of true price discovery is a fool's errand. But hey, I was masterbating anyway, so I figured I would read the piece.
i think this is true price discovery. If you factor in work force participation, GDP, Baltic dry at lows, and rig count, this is probably the real price of crude. The mechanism of price discovery is not happening to wherever the QE money is going, i.e.Real estate, stocks and interest rates.
Bluebux... [Oh wait ~ are my lips FROZEN in this weather]???...
HELP!!!
Facts? Real numbers? Are you shitting me?
Wall Street knows no honesty at all. Heard the SEC is on to more than a few companies....no biggie.
Your job on Wall Street is to move those numbers not read them.
The Banks of course are suppose to be the arbiter of real value...not the last one to the Party "making up for lost time."
Maybe this go around the Government won't bail them out of course...giving them all a clean bill of health right now is not what I would call "getting off to a good start" tho.
Maybe if we had Star Wars they would start lending into this recovery...
Here are oil production numbers for 2009 to 2013 in millions of barrels a day
85,763.0 88,177.8 88,569.6 90,456.6, 90,878.2
Oil production was hardly increasing fast enough to cause a 50% crash in the price of oil. It is an oil war against Russia (50% of its exports are energy related), Iran and Venezuela
http://www.eia.gov/cfapps/ipdbproject/iedindex3.cfm?tid=5&pid=53&aid=1
Maduro blames plunging oil prices on U.S. 'war' vs Russia, Venezuelahttp://www.reuters.com/article/2014/12/30/us-venezuela-oil-idUSKBN0K8020...
No, no, unpossible. It's an invisible hand. There is no selling out, no secret plans going on, no elite working for themselves. What is going on is the natural developpment of Smithian economics, economics that were cheerfully chosen by the US People.
The tenets of Smithian economy are respected and implemented. Nothing more required to be known. Please.
Its the damned Icelanders I tell ya.
Just look at them, sitting there smug & smiling, eating their raw fish Gollum-like, as if we don't know what they're up to!
Not only that, but Iceland benefittiated from a soft punishment. What they did is something not new and countries which tried it before were usually punished.
Normal punition method was to extract more wealth from them than they did manage to trap in resultments of their scheme. Iceland's punishment was more in the line with keep that what you stole and please now strive in your stealings to steal at a slower rate.
But hey, Icelanders just performed the 'american' way. From the US citizen perspective, this could be a noble act.
You can't trust anyone that avoids using vowels in their words, I tell ya.
"Its the damned Icelanders I tell ya."
Yep, only country to sack the bankers AND jail them!
It's definitely their fault!
Those are not oil production numbers, they're total liquids including alcohol, propane, butane, NGLs, etc. Take those out and substract US Shale, which is too light to refine here without adding heavier crude and actual oil production is about 76mm bbls/day and declining at about 5%/yr. Which makes the supply side argument very weak.
Well how about the demand side then.
Doesn't it seem odd to you that natural gas prices which collapsed many years ago did not stop further production?
The alternative of "to produce at any price" is in fact an alternative.
Forget trying to understand that for a moment and ponder trying to compete with that.
Ahhh, yes..."peak oil therefore I can create infinite liquidity.". Every Wall Street Banker's dream...
Maduro blames plunging oil prices on U.S. 'war' vs Russia, Venezuela
http://www.reuters.com/article/2014/12/30/us-venezuela-oil-idUSKBN0K8020...
Of course it is; all to do with the 'Petrodollar', just as Iraq and Libya were. Saddam was selling his oil in Euros and Gaddafi advertised his for Gold-Dinar only. (this gold still not found) Then we have Iran - Syria who both trade their oil outside of the 'dollar', protected by Russia, who have the largest field in the world and are about to open a 'Eurasian' market, using the Renminbi.
http://www.sovereignman.com/trends/the-chinese-have-put-out-billboard-ad... The US want to route Qatari gas though Iraq - Syria to mediterainian and on to Europe, thus cutting out Russia.
We now have US controlled ISIS,
http://www.veteranstoday.com/2014/12/31/shock-waves-part-ii/
waging war in the ME, slaughtering Shite Muslims and trying to force themselves upon Assad in Syria.
To the best of my knowledge, modern economics has never experienced the monetary interventions that have now become commonplace and permanent since 2008. Central Banks broke all the rules of capitalism and free marekets, there is no price discovery period! Central banks are engaged in central planning of stocks, bonds and interest rates, everything we were told socialists and communists do, is now being done by the capitalist's central bankers of the world. The 1% have been guaranteed a Soviet Style Income based of free money for them, via ZIRP. Interest Rate Apartheid is now a feature of Western economies, with a tiny minority on the winning side of Apartheid, and the 99% firmly in the losing side. Thus, Central Banks are picking Winners and Losers, and letting all economic gains go to less than 1%, while all losses are transfered to the 99% via interest rate apartheid and losses being transfered to public balance sheets, while all gains and all formerly public assets get transfered to private balance sheets.
Ireland. A land hardly short of water. Ireland had public water untilites, and low cost water services. The crisis where private bank losses were put on the Irish government balance sheet demanded austerity. Austerity meant transfer of public untilties to private profit seekers. Result, expensive water bills for everyone. Once it was public and cheap, now it is private an expensive, and no shortage of water exists in the Emerald Isles.
all true, but price discovery is the result of what you, just suddenly and unexpectly, unless you are a zher...
....we're down to discovering our own balls now, not much left to do but wait for the bolt to the forehead
Moo!
My dilemna is always misinterprolating when it is time for "moo" or when is time for "baaa". I know they are averagely applied over a common denominer but still, this unproficiency seems not possible to lessen.
Drowning in an Ocean of energy is nothing new as far as the USA is concerned.
Who do you think created OPEC? Not the Middle East that's fer sure.
Well...now America IS OPEC...yet again.
Only this time there is a LOT more debt involved.
Too Big to Fail just might be Too Big period.
Might need to increase the haloperidol or something.
talking about privatisation, as max keiser so eloquently put it: sell the cow to buy some milk.
make no mistake, i'm not advocating for public utilities, but to sell the government monopoly to corrupt private interest is furthest from the free market. and with the utility of money, it was just given away, so now we have to deal with the derivative called currency.
just ask the Greeks...and Iranians, Chileans, Peruvians, Algerians, Tunisians, Africans etc.
and remember, "they hate us for our freedoms"
Sadly the analogies here don't work here though the article is good.
DNA is really an incredibly stable substance and it really take quite a bit of work to cause it to mutate. This is why you don't see many people walking around with arms growing out of their foreheads. Mutating a global economy is far more simple. Also, the use of pesticides has dramatically increased since GMOs have hit the shelves so if the reduction was a sale point, we have been lied to again. Just shocking!
Miffed
i follow gmo closely and the resultant human consequences. HFCS is of great concern. leading scientists are linking cancers to "this shit" via the unlocking the dormant cancers in all our cells. truely scarey stuff. we are wading into a pool of sharks that will feed on these very cells inability to naturally defend themselves. I think the food producers know the consequences.
have you looked into hydrogenated water? the mitochondria absorbes the extra hydogen producing less oxide. interesting stuff...
next sigma event- ha, gold drops to 1200 from 1900! ah shit it already did..
Unravelling Mystery.:
http://www.presstv.ir/detail/2013/12/25/341807/israel-suppressing-report...
yo, nice link. failure keeps the train chugging to the next stop. carnage of human lives.
i have to believe r and c are planning their own world coup, starting with dolla death...
heh-heh-heh...yup, that's what a lil birdie tells janus bout dem dere 28 pages...well, a lil birdie whispered it years ago. anywho, i must in any event chortle, chuckle and giggle over the whole affair. starting a few years ago, the stage was set for an unveiling -- an apocalypse, if you will -- and the saudis were to be unmasked as the arch-villains extrodinare -- we all knew there was 'something' we didn't know bout 9-11; and then we were all well-satisfied that that thing we didn't know was what we suspected all along. and, boy-oh-boy did the republifags ever buy it hook line & SINKER (emphasis on the 'sinker' is janus'). garsh, wouldn't it be sumptin if'n obama's been slyly positionin himself for to reap a wind-fall when those 28 pages are at last released for public consumption? i reckon those what invited bibi to washington will come down with a serious case of indigestion. shit's about to get real interestin, bitchez. i wonder how long the weekly standard will remain in print?
btw, great article vataliy.
janus
Yabba-dabba-doo!
No moar privacy on the net?
New totalitarian control??
Moar unravelling mysterious revelations???
http://americanprosperity.com/obama-helps-fcc-pass-net-neutrality-find-o...
The problem I have with this article and (un)relatable analogy is the assumption of surprise. I don't know how many of these engineered constructs one has to watch unfold before you have to start asking yourself.... Was that truly an unexpected occurance? If a multi-billion dollar enterprise, with the depth of resources of a central bank, is unable to foresee the potentially destructive imbalances deveopling in their self proclaimed area of expertise and CONTROL then gee. whiz.....
Or you could make a different assumption, one that reasons these events are entirely predictable, historically noted even, and therefor intentional, more or less, when you have an entity such as the FED that is publicly admitting to influence the market.
One might even go one step farther and assume there are certain parameters to which the events must occur. In the case of the FED, as it has taken on the liabilities of "stablizing" our economic system, and therefor specific individual components as well, then one could begin to build an outline of what might just HAVE to happen. Applied to a relative timeline, clarified by the concentration of wealth and one might never have to fight the FED.... Just simply front run it.
All human endeavour is "manufactured".
There is no natural or "true" stability in a homosapien system, other than anarchy; which is the antithesis of civilization, man's time line on earth.
We create our own world according to the POWER and KNOWLEDGE memes, both are MANUFACTURED concepts that acquire hard lined definitions through technology and bureaucracy with a time line that evolves.
It is this eternal fight between power (oligarchy/feudal stability) and knowledge (collective/populist stability) which is the eternal debate in society. Whether civilizations should have more or less VERTICALITY or HORIZONTALITY, and how the tensions inherent in those antagonistic value systems should be resolved by each age.
As Man is eternally an unsatisifed animal whose spirituality is constantly corrupted by ephemeral quests the power/knowledge dialectics makes civilization's pendulum swing from one extreme to the other.
We stay the propagators of our own impending downfall as fragile and irrationally exuberant species.
The analogy with the turkey is misleading. Its part of the circle of life as man needs other species or plant life to nourish his appetite.
The asymptote of each civilization is when the dialectics of power and knowledge peter out and there is no resolution or progress other than decadence and then a new paradigm is created by a new power/knowledge structure.
The current power/knowledge meme has been created by the Pax Americana hegemony which has morphed into a triple axis matrix since Dear Henry days of dollar debasement via BW revoke and unlimited money creation and then Reaganista FIRE (financialized asset economy) supply side deregulation : MIIC (massive military supremacy and intelligence networks), Oil energy monopoly via surrogate country control worldwide, and petrodollar monopoly of money in a capitalist system based in homeland, all based on the false paradigm of "our money your problem"; aka our debt is YOUR debt not your ASSET.
The coordination of this triple axis is the nexus of Pax Americana power. And its gone topsy turvy to say the least as in their greed the US oligarchs (along with EU) have outsourced production of industrial goods and services to their own new power rivals in BRIC in order to create the current 1% power structure all based on collective debt for the 99%; a runaway train hurtling to the abyss !
Are we near that civilizational asymptote like for Charles V's universal empire?