Saturday, June 28, 2014

The Fed, War, and Cronies- Stockman


Tuesday, June 24, 2014

Stockman- The Fed and the Damage to Our Economy

If you have not read The Great Deformation, you are really missing out. In the mean time, I thought I would share the video below.

The Energy Revolution or Cheap Money Trap

You will find a bull vs. bear debate of sorts below, with two opposing views on the fracking revolution and what are the drivers of the before mentioned growth. 

First, the bull case via Wealthtrack

It may just be my investment personality but I get uneasy and skeptical when I hear buzz words like 'game changer', but lets move on to the bear case via

Today’s Mises Daily article covered the impact of government subsidies and infrastructure on the fracking boom. But there is another big player in the oil and gas boom that is routinely ignored by “energy independence” enthusiasts who claim the sky is the limit for fracking: cheap money from the central bank.
Energy companies are employing massive debt schemes to finance exploration and initiation of extraction plans. According to Bloomberg
Quicksilver acknowledges the company is over-leveraged, said David Erdman, a spokesman for Quicksilver. The company’s interest expense equaled almost 45 percent of revenue in the first quarter. “We have taken concrete measures to reduce debt,” he said.
Drillers are caught in a bind. They must keep borrowing to pay for exploration needed to offset the steep production declines typical of shale wells.
“Interest expenses are rising,” said Virendra Chauhan, an oil analyst with Energy Aspects in London. “The risk for shale producers is that because of the production decline rates, you constantly have elevated capital expenditures.”
Chauhan wrote a report last year titled “The Other Tale of Shale” that showed interest expenses are gobbling up a growing share of revenue at 35 companies he studied. Interest expense for the 61 companies examined by Bloomberg totalled almost $2 billion in the first quarter, 4.1 percent of revenue, up from 2.3 percent four years ago.
Yes, “interest rates are rising,” but they’re still extremely low in the big scheme of things, thanks to the unending new money flowing from central banks. Even with rising rates, however, fracking operations, in order to remain viable, will need to keep borrowing since, as it turns out,  fracking is extremely expensive. Bloomberg explains:

The path toward U.S. energy independence, made possible by a boom in shale oil, will be much harder than it seems.
Just a few of the roadblocks: Independent producers will spend $1.50 drilling this year for every dollar they get back. Shale output drops faster than production from conventional methods. It will take 2,500 new wells a year just to sustain output of 1 million barrels a day in North Dakota’s Bakken shale, according to the Paris-based International Energy Agency. Iraq could do the same with 60.
Consider Sanchez Energy Corp. The Houston-based company plans to spend as much as $600 million this year, almost double its estimated 2013 revenue, on the Eagle Ford shale formation in south Texas, which along with North Dakota is one of the hotbeds of a drilling frenzy that’s pushed U.S. crude output to the highest in almost 26 years. Its Sante North 1H oil well pumped five times more water than crude, Sanchez Energy said in a Feb. 17 regulatory filing.Shares sank 7 percent.
The U.S. oil industry must sprint simply to stay in place. U.S. drillers are expected to spend more than $2.8 trillion by 2035 even though production will peak a decade earlier, the IEA said. The Middle East will spend less than a third of that for three times more crude.
So, if we read through the lines just a tiny bit, we can see that the fracking boom towns, like those that dot Noth Dakota, Wyoming, and Colorado, are resting on a shaky foundation of cheap money. If interest rates move into more normal territory, then the funds for fracking will dry up even before the wells do (which is pretty fast).

You can’t blame the fracking frenzy on just some parochial search for profit, though. Energy policy is always of great interest in DC. On the foreign policy front, of course, “energy independence” is always of importance because it allows the American state a free-er hand to meddle in oil-producing countries without wild fluctuations in domestic oil prices. The fact that it’s largely illegal to export American oil means that more domestic production means more control over domestic supplies without having to worry about OPEC turning off the spigot.

There are more mundane domestic concerns as well. Energy prices, including oil and gas for heating homes, and also gasoline, are a big part of the consumer price index. If domestic energy prices can be kept under control by turning up the volume on fracking operations, then it’s easier to push the idea that inflation is low by pointing to the CPI.
Bloomberg again: 
Energy prices have become disinflationary in the U.S. as America comes closer to attaining energy independence, which has been bolstered by the proliferation of hydraulic fracturing, or fracking, of the nation’s shale deposits.
While a Labor Department report last week showed that fuel helped lift consumer prices 0.3 percent in December, the most in six months, energy expenses for all of 2013 still decreased.
And on top of all of this is the fact that the states, which can collect huge tax revenues from fracking operations, love it, and it can create booms for local economies.

For example, last week’s state-by-state GDP map shows some interesting growth patterns:
gdpmapWe can see that the highest growth is, for the most part, concentrated in the interior West.
Some conservative web sites rather simplistically tried to make the case that this proves the triumph of Red State Republicanism.  While it is likely true that conditions for economic growth are in fact better in places like Texas and Nebraska than they are in New York and Pennsylvania, why are the red states of the east, such as Tennessee and Alabama showing such lackluster growth?

The answer: This map shows that GDP growth is especially strong in oil and gas producing states (Wyoming and Colorado), and in states with close ties to the industry, such as Texas.

Nowhere is this connection to recent economic growth more obvious than in North Dakota which registers a whopping change of 9.7 percent (year over year). The Bakken shale formation up there has created boom conditions for that economy.

Thus, we can see that the politicos will favor cheap and easy fracking as long as possible. If the party needs to kept going by more tax breaks, or subsidies, or more easy money, then the friends of the oil and gas companies in DC will make sure that the favors keep flowing. Of course, when inflation becomes undeniable, and as cheap money becomes not-so-cheap, the party will be over.

If you look at the economics of fracking, costs and capital outlays are significantly higher than traditional drilling sources, a fact that is typically ignored or glossed over. More so, money being thrown at the industry make it ripe for the development of a bubble.

Yellen- Simple-Minded Leadership Into the Next Bubble's Burst

When you are reading the short column from David Stockman below, just think about what will happen after next fed meeting when the taper takes the monthly average QE below the smoothed treasury issuance levels.

via David Stockman's Contra Corner

The Fed’s so-called DSGE (dynamic stochastic general equilibrium) model should be smashed into bits and dumped into the dustbin of history. In today’s release everything is the same—–above trend economic growth for years into the future accompanied by below target inflation, full-employment and sub-normal real interest rates as far as the eye can see.

Except…except for 2014 real GDP, which is already -2% in the hole after the impending further markdown of Q1 results. Accordingly, economic growth for 2014—-the year that “escape velocity” was a sure thing—has been marked down by nearly 25% since last quarters outlook, and at downwards of 2.5% is a pale comparison to the upwards of 4% projected as recently as Q4 2011.

The Fed is a dictatorship of dangerous Cool-Aid drinkers. To every question about obvious structural failures in the US economy such as the drastic rise long-term unemployment and labor force dropouts and the anemic level of business investment in future productivity and growth—which has been at deeply sub-historical levels since 2000—-Yellen had a ritualistic response: All the bad stuff is due to the fact that the cyclical path of the US economy has fallen short of the DSGE prediction for 5 years running, but all those failures will automatically fix themselves once the economy gets back on the Fed’s perpetually limp hockey stick!

Never has one person talked in so many circles in such a short period of time. In truth, the Fed’s new chair is an appallingly na├»ve and simple-minded paint-by-the-numbers Keynesian. She will lead the Fed right into the jaws of the next bubble smash-up, and as one wag put it, no one will even bother to leave the room.
In any event, the following chart posted on Zero Hedge says it all.

Income Inequality: The Obvious Answer

by posted in Banking, Economics and

In this post by Bob Murphy, some commenters disagree with the use of the early 1970s as the point when income and wealth inequality started to become a problem.

Thomas Piketty has recently gained some fame for pointing this out. His sometimes co-author Emmanual Sanz has done a lot of work pointing to this same conclusion.

The income and wealth divide that is now seen as a problem did start right around 1970 (depending on what type of data you want to look at to judge this, it started as early as 1968 or as late as 1973). The income divide is not fabricated, nor are these dates just pulled from thin air.

Whether income inequality is a problem is another issue. Incidentally I don’t think it is, as I’ve argued here and here.

But rather than look at statistical work by economists, we can use some more common measures to make the point.

income inequality
The Gini index is a very simple measure that shows the degree of income distribution within a country. A Gini figure of 0 would mean that everyone earns the same amount. A figure of 1 means there is a maximum degree of inequality. By this very common measure income inequality in the US bottomed out in 1968 and has advanced ever since.

The ratio of the average wage to the minimum wage is a good way to gauge how much more the average wage earner makes relative to the bottom of the wage-earning scale. (Technically speaking the unemployed are the bottom rung of that ladder, but we’ll just deal with those with jobs.)

A rising ratio means that the average wage earner is enjoying more income growth than the minimum wage earners. Again, this figure was more or less constant until the late 1960s, before it jumped. It was only the outbreak of the crisis in 2007 that really compromised this advance, though even that is now bygone past.
In short, income inequality is advancing. It’s not necessarily a problem, but it has definitely occurred more-or-less starting around 1970.

When I say it’s not “necessarily” a problem I mean that earned income inequality is quite fair. Those who work hard, put in long hours, or have great ideas will see their incomes rise relative to those who lack those skills. They get richer as a reward, but we’re all better off because of them as well. The problem right now is with unearned inequality.

So what could be the source of unearned inequality? How could one group get ahead without having to put in the long hours, hard work or bringing forth great ideas?

How about we look at how income is defined – with money. The period of time right around 1970 was unique in recent history as it was the end of the Bretton Woods era and the start of a pure fiat standard by all the central banks of the Western world. It ushered in a period of unanchored central bank credit creation, and government deficit spending. If one wants to blame something for the inequality that coincided exactly with this momentous event, why not pick the obvious reason?

Monday, June 23, 2014

Crony Capitalists by Buffet's Blessing

if you have not read Vitaliy Ratsenelson's column in II, you are rally missing out on gems and insights into the world of high finance. The June 2014 edition is especially exception and should be required reading. Not only does it cast some doubt on the idea of an 'Oracle from Omaha' but it shines a rather glaring light on the inner workings behind board room doors.

The following is an excerpt for which the entire article can be found here.

There may be some quirky nuances in the alternate universe of corporate governance to which I am not privy, but voting against a compensation plan is not considered going to war in the universe where I live. Buffett has been one of the loudest and most respected critics of exorbitant corporate compensation, but when it came time to lead by example, he did not — unless his message was, when you disagree with excessive compensation, abstain.
But you, dear reader, have heard nothing yet. In another question, Buffett was asked about his son Howard, who sits on the board of Coke and did not vote against its cushy executive compensation plan. Though the elder Buffett did not directly answer that question, his nonanswer sent chills up my spine.
He explained that independent directors are not necessarily independent. Though they don’t work for the company, they make $300,000 a year for attending six meetings. It’s a sweet gig, and they typically do very little to rock that gravy train. Aside from the financial benefit, there is a lot of prestige in being on a major corporate board. Boards don’t look for “dobermans,” Buffett said, “they look for cocker spaniels.” Then he added that when he served on many boards, he approved compensation plans and mergers he did not like.
Pause for a second to digest this. What Buffett told us (I truly applaud him for his honesty) was that corporate boards are not there to protect and serve the interests of shareholders. Their incentives — lavish compensation without any accountability for their actions or nonactions — have created an environment where board members are chosen not by how much value they’ll add to protecting the interests of shareholders but on their pedigrees and, more important, their ability to sing “Kumbaya.”