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01-23-16 SII


Why Oil Under $30 Is A Major Problem

Submitted by Gail Tverberg via Our Finite World blog,

A person often reads that low oil prices–for example, $30 per barrel oil prices–will stimulate the economy, and the economy will soon bounce back. What is wrong with this story? A lot of things, as I see it:

1. Oil producers can’t really produce oil for $30 per barrel.

A few countries can get oil out of the ground for $30 per barrel. Figure 1 gives an approximation to technical extraction costs for various countries. Even on this basis, there aren’t many countries extracting oil for under $30 per barrel–only Saudi Arabia, Iran, and Iraq. We wouldn’t have much crude oil if only these countries produced oil.

Figure 1. Global Breakeven prices (considering only technical extraction costs) versus production. Source:Alliance Bernstein, October 2014

Figure 1. Global breakeven prices (considering only technical extraction costs) versus production. Source: Alliance Bernstein, October 2014

2. Oil producers really need prices that are higher than the technical extraction costs shown in Figure 1, making the situation even worse.

Oil can only be extracted within a broader system. Companies need to pay taxes. These can be very high. Including these costs has historically brought total costs for many OPEC countries to over $100 per barrel.

Independent oil companies in non-OPEC countries also have costs other than technical extraction costs, including taxes and dividends to stockholders. Also, if companies are to avoid borrowing a huge amount of money, they need to have higher prices than simply the technical extraction costs. If they need to borrow, interest costs need to be considered as well.

3. When oil prices drop very low, producers generally don’t stop producing.

There are built-in delays in the oil production system. It takes several years to put a new oil extraction project in place. If companies have been working on a project, they generally won’t stop just because prices happen to be low. One reason for continuing on a project is the existence of debt that must be repaid with interest, whether or not the project continues.

Also, once an oil well is drilled, it can continue to produce for several years. Ongoing costs after the initial drilling are generally very low. These previously drilled wells will generally be kept operating, regardless of the current selling price for oil. In theory, these wells can be stopped and restarted, but the costs involved tend to deter this action.

Oil exporters will continue to drill new wells because their governments badly need tax revenue from oil sales to fund government programs. These countries tend to have low extraction costs; nearly the entire difference between the market price of oil and the price required to operate the oil company ends up being paid in taxes. Thus, there is an incentive to raise production to help generate additional tax revenue, if prices drop. This is the issue for Saudi Arabia and many other OPEC nations.

Very often, oil companies will purchase derivative contracts that protect themselves from the impact of a drop in market prices for a specified time period (typically a year or two). These companies will tend to ignore price drops for as long as these contracts are in place.

There is also the issue of employee retention. In a sense, a company’s greatest assets are its employees. Once these employees are lost, it will be hard to hire and retrain new employees. So employees are kept on as long as possible.

The US keeps raising its biofuel mandate, regardless of the price of oil. No one stops to realize that in the current over-supplied situation, the mandate adds to low price pressures.

One brake on the system should be the financial pain induced by low oil prices, but this braking effect doesn’t necessarily happen quickly. Oil exporters often have sovereign wealth funds that they can tap to offset low tax revenue. Because of the availability of these funds, some exporters can continue to finance governmental services for two or more years, even with very low oil prices.

Defaults on loans to oil companies should also act as a brake on the system. We know that during the Great Recession, regulators allowed commercial real estate loans to be extended, even when property valuations fell, thus keeping the problem hidden. There is a temptation for regulators to allow similar leniency regarding oil company loans. If this happens, the “braking effect” on the system is reduced, allowing the default problem to grow until it becomes very large and can no longer be hidden.

4. Oil demand doesn’t increase very rapidly after prices drop from a high level.

People often think that going from a low price to a high price is the opposite of going from a high price to a low price, in terms of the effect on the economy. This is not really the case.

4a. When oil prices rise from a low price to a high price, this generally means that production has been inadequate, with only the production that could be obtained at the prior lower price. The price must rise to a higher level in order to encourage additional production.

The reason that the cost of oil production tends to rise is because the cheapest-to-extract oil is removed first. Oil producers must thus keep adding production that is ever-more expensive for one reason or another: harder to reach location, more advanced technology, or needing additional steps that require additional human labor and more physical resources. Growing efficiencies can somewhat offset this trend, but the overall trend in the cost of oil production has been sharply upward since about 1999.

The rising price of oil has an adverse impact on affordability. The usual pattern is that after a rise in the price of oil, economies of oil importing nations go into recession. This happens because workers’ wages do not rise at the same time as oil prices. As a result, workers find that they cannot buy as many discretionary items and must cut back. These cutbacks in purchases create problems for businesses, because businesses generally have high fixed costs including mortgages and other debt payments. If these businesses are to continue to operate, they are forced to cut costs in one way or another. Cost reduction occurs in many ways, including reducing wages for workers, layoffs, automation, and outsourcing of manufacturing to cheaper locations.

For both employers and employees, the impact of these rapid changes often feels like a rug has been pulled out from under foot. It is very unpleasant and disconcerting.

4b. When prices fall, the situation that occurs is not the opposite of 4a. Employers find that thanks to lower oil prices, their costs are a little lower. Very often, they will try to keep some of these savings as higher profits. Governments may choose to raise tax rates on oil products when oil prices fall, because consumers will be less sensitive to such a change than otherwise would be the case. Businesses have no motivation to give up cost-saving techniques they have adopted, such as automation or outsourcing to a cheaper location.

Few businesses will construct new factories with the expectation that low oil prices will be available for a long time, because they realize that low prices are only temporary. They know that if oil prices don’t go back up in a fairly short period of time (months or a few years), the quantity of oil available is likely to drop precipitously. If sufficient oil is to be available in the future, oil prices will need to be high enough to cover the true cost of production. Thus, current low prices are at most a temporary benefit–something like the eye of a hurricane.

Since the impact of low prices is only temporary, businesses will want to adopt only changes that can take place quickly and can be easily reversed. A restaurant or bar might add more waiters and waitresses. A car sales business might add a few more salesmen because car sales might be better. A factory making cars might schedule more shifts of workers, so as to keep the number of cars produced very high. Airlines might add more flights, if they can do so without purchasing additional planes.

Because of these issues, the jobs that are added to the economy are likely to be mostly in the service sector. The shift toward outsourcing to lower-cost countries and automation can be expected to continue. Citizens will get some benefit from the lower oil prices, but not as much as if governments and businesses weren’t first in line to get their share of the savings. The benefit to citizens will be much less than if all of the people who were laid off in the last recession got their jobs back.

5. The sharp drop in oil prices in the last 18 months has little to do with the cost of production. 

Instead, recent oil prices represent an attempt by the market to find a balance between supply and demand. Since supply doesn’t come down quickly in response to lower prices, and demand doesn’t rise quickly in response to lower prices, prices can drop very low–far below the cost of production.

As noted in Section 4, high oil prices tend to be recessionary. The primary way of offsetting recessionary forces is by directly or indirectly adding debt at low interest rates. With this increased debt, more homes and factories can be built, and more cars can be purchased. The economy can be forced to act in a more “normal” manner because the low interest rates and the additional debt in some sense counteract the adverse impact of high oil prices.

Figure 2. World oil supply and prices based on EIA data.

Figure 2. World oil supply and prices based on EIA data.

Oil prices dropped very low in 2008, as a result of the recessionary influences that take place when oil prices are high. It was only with the benefit of considerable debt-based stimulation that oil prices were gradually pumped back up to the $100+ per barrel level. This stimulation included US deficit spending, Quantitative Easing (QE) starting in December 2008, and a considerable increase in debt by the Chinese.

Commodity prices tend to be very volatile because we use such large quantities of them and because storage is quite limited. Supply and demand have to balance almost exactly, or prices spike higher or lower. We are now back to an “out of balance” situation, similar to where we were in late 2008. Our options for fixing the situation are more limited this time. Interest rates are already very low, and governments generally feel that they have as much debt as they can safely handle.

6. One contributing factor to today’s low oil prices is a drop-off in the stimulus efforts of 2008.

As noted in Section 4, high oil prices tend to be recessionary. As noted in Section 5, this recessionary impact can, at least to some extent, be offset by stimulus in the form of increased debt and lower interest rates. Unfortunately, this stimulus has tended to have adverse consequences. It encouraged overbuilding of both homes and factories in China. It encouraged a speculative rise in asset prices. It encouraged investments in enterprises of questionable profitability, including many investments in oil from US shale formations.

In response to these problems, the amount of stimulus is being reduced. The US discontinued its QE program and cut back its deficit spending. It even began raising interest rates in December 2015. China is also cutting back on the quantity of new debt it is adding.

Unfortunately, without the high level of past stimulus, it is difficult for the world economy to grow rapidly enough to keep the prices of all commodities, including oil, high. This is a major contributing factor to current low prices.

7. The danger with very low oil prices is that we will lose the energy products upon which our economy depends.

There are a number of different ways that oil production can be lost if low oil prices continue for an extended period.

In oil exporting countries, there can be revolutions and political unrest leading to a loss of oil production.

In almost any country, there can be a sharp reduction in production because oil companies cannot obtain debt financing to pay for more services. In some cases, companies may go bankrupt, and the new owners may choose not to extract oil at low prices.

There can also be systemwide financial problems that indirectly lead to much lower oil production. For example, if banks cannot be depended upon for payroll services, or to guarantee payment for international shipments, such problems would affect all oil companies, not just ones in financial difficulty.

Oil is not unique in its problems. Coal and natural gas are also experiencing low prices. They could experience disruptions indirectly because of continued low prices.

8. The economy cannot get along without an adequate supply of oil and other fossil fuel products. 

We often read articles in the press that seem to suggest that the economy could get along without fossil fuels. For example, the impression is given that renewables are “just around the corner,” and their existence will eliminate the need for fossil fuels. Unfortunately, at this point in time, we are nowhere being able to get along without fossil fuels.

Food is grown and transported using oil products. Roads are made and maintained using oil and other energy products. Oil is our single largest energy product.

Experience over a very long period shows a close tie between energy use and GDP growth (Figure 3). Nearly all technology is made using fossil fuel products, so even energy growth ascribed to technology improvements could be considered to be available to a significant extent because of fossil fuels.

Figure 3. World GDP growth compared to world energy consumption growth for selected time periods since 1820. World real GDP trends for 1975 to present are based on USDA real GDP data in 2010$ for 1975 and subsequent. (Estimated by author for 2015.) GDP estimates for prior to 1975 are based on Maddison project updates as of 2013. Growth in the use of energy products is based on a combination of data from Appendix A data from Vaclav Smil's Energy Transitions: History, Requirements and Prospects together with BP Statistical Review of World Energy 2015 for 1965 and subsequent.

Figure 3. World GDP growth compared to world energy consumption growth for selected time periods since 1820. World real GDP trends from 1975 to present are based on USDA real GDP data in 2010$ for 1975 and subsequent. (Estimated by the author for 2015.) GDP estimates for prior to 1975 are based on Maddison project updates as of 2013. Growth in the use of energy products is based on a combination of data from Appendix A data from Vaclav Smil’s Energy Transitions: History, Requirements and Prospects together with BP Statistical Review of World Energy 2015 for 1965 and subsequent.

While renewables are being added, they still represent only a tiny share of the world’s energy consumption.

Figure 4. World energy consumption by part of the world, based on BP Statistical Review of World Energy 2015.

Figure 4. World energy consumption by part of the world, based on BP Statistical Review of World Energy 2015.

Thus, we are nowhere near a point where the world economy could continue to function without an adequate supply of oil, coal and natural gas.

9. Many people believe that oil prices will bounce back up again, and everything will be fine. This seems unlikely. 

The growing cost of oil extraction that we have been encountering in the last 15 years represents one form of diminishing returns. Once the cost of making energy products becomes high, an economy is permanently handicapped. Prices higher than those maintained in the 2011-2014 period are really needed if extraction is to continue and grow. Unfortunately, such high prices tend to be recessionary. As a result, high prices tend to push demand down. When demand falls too low, prices tend to fall very low.

There are several ways to improve demand for commodities, and thus raise prices again. These include (a) increasing wages of non-elite workers (b) increasing the proportion of the population with jobs, and (c) increasing the amount of debt. None of these are moving in the “right” direction.

Joseph Tainter in The Collapse of Complex Societies points out that once diminishing returns set in, the response is more “complexity” to solve these problems. Government programs become more important, and taxes are often higher. Education of elite workers becomes more important. Businesses become larger. This increased complexity leads to more of the output of the economy being funneled to sectors of the economy other than the wages of non-elite workers. Because there are so many of these non-elite workers, their lack of buying power adversely affects demand for goods that use commodities, such as homes, cars, and motorcycles.1

Another force tending to hold down demand is a smaller proportion of the population in the labor force. There are many factors contributing to this: Young people are in school longer. The bulge of workers born after World War II is now reaching retirement age. Lagging wages make it increasingly difficult for young parents to afford childcare so that both can work.

As noted in Section 5, debt growth is no longer rising as rapidly as in the past. In fact, we are seeing the beginning of interest rate increases.

When we add to these problems the slowdown in growth in the Chinese economy and the new oil that Iran will be adding to the world oil supply, it is hard to see how the oil imbalance will be fixed in any reasonable time period. Instead, the imbalance seems likely to remain at a high level, or even get worse. With limited storage available, prices will tend to continue to fall.

10. The rapid run up in US oil production after 2008 has been a significant contributor to the mismatch between oil supply and demand that has taken place since mid-2014.  

Without US production, world oil production (broadly defined, including biofuels and natural gas liquids) is close to flat.

Figure 5. Total liquids oil production for the world as a whole and for the world excluding the US, based on EIA International Petroleum Monthly data.

Figure 5. Total liquids oil production for the world as a whole and for the world excluding the US, based on EIA International Petroleum Monthly data.

Viewed separately, US oil production has risen very rapidly. Total production rose by about six million barrels per day between 2008 and 2015.

Figure 6. US Liquids production, based on EIA data (International Petroleum Monthly, through June 2015; supplemented by December Monthly Energy Review for most recent data.

Figure 6. US Liquids production, based on EIA data (International Petroleum Monthly, through June 2015; supplemented by December Monthly Energy Review for most recent data).

US oil supply was able to rise very rapidly partly because QE led to the availability of debt at very low interest rates. In addition, investors found yields on debt so low that they purchased almost any equity investment that appeared to have a chance of long-term value. The combination of these factors, plus the belief that oil prices would always increase because extraction costs tend to rise over time, funneled large amounts of investment funds into the liquid fuels sector.

As a result, US oil production (broadly defined), increased rapidly, increasing nearly 1.0 million barrels per day in 2012, 1.2 million barrels per day in 2013, 1.7 million barrels per day in 2014. The final numbers are not in, but it looks like US oil production will still increase by another 700,000 barrels a day in 2015. The 700,000 extra barrels of oil added by the US in 2015 is likely greater than the amount added by either Saudi Arabia or Iraq.

World oil consumption does not increase rapidly when oil prices are high. World oil consumption increased by 871,000 barrels a day in 2012, 1,397,000 barrels a day in 2013, and 843,000 barrels a day in 2014, according to BP. Thus, in 2014, the US by itself added approximately twice as much oil production as the increase in world oil demand. This mismatch likely contributed to collapsing oil prices in 2014.

Given the apparent role of the US in creating the mismatch between oil supply and demand, it shouldn’t be too surprising that Saudi Arabia is unwilling to try to fix the problem.


Things aren’t working out the way we had hoped. We can’t seem to get oil supply and demand in balance. If prices are high, oil companies can extract a lot of oil, but consumers can’t afford the products that use it, such as homes and cars; if oil prices are low, oil companies try to continue to extract oil, but soon develop financial problems.

Complicating the problem is the economy’s continued need for stimulus in order to keep the prices of oil and other commodities high enough to encourage production. Stimulus seems to takes the form of ever-rising debt at ever-lower interest rates. Such a program isn’t sustainable, partly because it leads to mal-investment and partly because it leads to a debt bubble that is subject to collapse.

Stimulus seems to be needed because of today’s high extraction cost for oil. If the cost of extraction were still very low, this stimulus wouldn’t be needed because products made using oil would be more affordable.

Decision makers thought that peak oil could be fixed simply by producing more oil and more oil substitutes. It is becoming increasingly clear that the problem is more complicated than this. We need to find a way to make the whole system operate correctly. We need to produce exactly the correct amount of oil that buyers can afford. Prices need to be high enough for oil producers, but not too high for purchasers of goods using oil. The amount of debt should not spiral out of control. There doesn’t seem to be a way to produce the desired outcome, now that oil extraction costs are high.

Rigidities built into the oil price-supply system (as described in Sections 3 and 4) tend to hide problems, letting them grow bigger and bigger. This is why we could suddenly find ourselves with a major financial problem that few have anticipated.

Unfortunately, what we are facing now is a predicament, rather than a problem. There is quite likely no good solution. This is a worry.





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As volatility in the stock market grows, a handful of experts are raising an alarm about the rise of index ETFs and mutual funds, which has never accounted for this much of the market before.

They warn that the unprecedented amount of index ETFs trading in the market — index ETFs accounted for nearly 30 percent of the trading in the U.S. equities market last summer — could magnify, or even cause, flash crashes.

In turn, that may put individual investors, who are increasingly invested in index funds, more at risk. And many may not realize how exposed they are to the risks of a relatively small group of stocks held in the major indexes, said experts.

financial bubble NYSE
Siegfried Layda | Getty Images

Tim McCarthy, a former president of San Francisco-based Charles Schwab and Japan's Nikko Asset Management, has been a longtime proponent of index investing. But he now advises that investors diversify their investment styles as well as their asset classes.

He suggested investors move 25 percent to 50 percent of their equity portfolios into actively managed absolute return funds, preferably those with a 10-year track record and a relatively small amount of assets of between $1 billion to $2 billion. (Research has shown over the years that active managers stand their best chance of success before their assets under management grows too high.)

As always, he said, investors should look for low fees.

A stock bubble in index funds

He said he has grown increasingly uneasy about the risks based on the hypergrowth of index funds, and the price difference between stocks outside and inside index funds.

From 2007 through 2014, index domestic equity mutual funds and ETFs received $1 trillion in net new cash and reinvested dividends, according to the Washington, D.C.-based Investment Company Institute. In contrast, actively managed domestic equity mutual funds experienced a net outflow of $659 billion, including reinvested dividends, from 2007 to 2014.

Meanwhile, the price of the underlying equities in index funds is rising, though no one is sure exactly why. Research by S&P Capital IQ, as of Dec. 31, found stocks that were in the Russell 2000 were trading at a 50 percent premium to stocks that were not, up from 12 percent in 2006. The statistics are based on median price-to-book ratio.

That kind of price difference is seen by some as a kind of canary in the coal mine, indicating that there is a bubble in the stocks of companies held in index funds — and that their prices could come down further and faster than other stocks in a downturn. In turn, that could put pressure on the share prices of the index mutual funds and ETFs themselves.

"It's complicated, but it could be a very big problem," said David Pope, managing director of quantamental research at S&P Capital IQ. He and colleague Frank Zhao studied the liquidity in the market for the S&P 500 last summer and identified the 10 stocks that had the biggest difference in liquidity at that time, compared with the index. They included ExxonMobilBerkshire HathawayJohnson & Johnson,MicrosoftGeneral ElectricWells FargoProcter & GambleJPMorgan ChasePfizer and PepsiCo.

"A structural problem may arise when the liquidity demanded by the ETF exceeds the liquidity availability of some of the underlying holdings," they wrote.

Basically, if an investor wants to sell an index fund as the market declines, the managers of the fund might have trouble selling some of the stocks in the fund. An active manager could choose to sell any stock in her fund and thus potentially navigate a downturn better. But an index fund manager has to sell exactly the shares held in the index in the same proportion as demanded by the index. If the fund manager doesn't find a buyer for, say, shares of ExxonMobil, the price of ExxonMobil will fall until a buyer is found.

Assessing the risks

While market theorists have always recognized this as a potential problem for index investing, no one has been sure exactly how it would play out or when problems might arise. As long as there are enough buyers and sellers actively setting prices and trading, index funds and stocks should pose no extra risk. It's just that no one is sure exactly how many is enough.

Indeed, not everyone thinks McCarthy is right, and others point to different risks as bigger causes for concern, including the unknown impact of the way that high-frequency traders place orders.

"So we have two new factors when it comes to a potential market situation," said John Rekenthaler, vice president of research for Chicago-based Morningstar. "There are always new factors. Most of the time, new factors don't play out according to expectations."

He pointed out that two decades ago, people worried about what the impact of 401(k)s would be in the market and whether non-professional investors would be apt to sell more quickly in a downturn. The opposite turned out to be the case.

Even if the risk posed by index investing is rising, the growth in index funds doesn't necessarily pose a huge system risk, pointed out Sean Collins, senior director of industry and financial analysis for the Washington, D.C.-based Investment Company Institute. "The share of assets going into index funds is rising. Does that necessarily cause markets to be dysfunctional? The answer is no," he said.

He pointed out how much more diversity there is now in index investing. Much of the money flowing into index funds has been going into markets in which there hasn't been much indexing before, including emerging markets equities and bond markets.

McCarthy said investors would be wise to look at their portfolios with the emerging risk of index funds in mind. There's not much an individual investor can do to guard against the risks posed by high-frequency trading, short of bowing out of the market entirely.

What investors should do

But there are some steps investors could take to manage the risks posed by an index fund-dominated market.

In addition to investing some of their stock portfolios in actively managed funds, McCarthy suggests investors take a hard look at how diversified they are.

First, he said, an investor could make sure he or she isn't double-exposed to the same stocks. He cited the case of a friend of his, a doctor, who had invested in blue-chip stocks, some mutual funds and in an S&P 500 fund that turned out to hold — guess what — many of the same blue chips and tech stocks. In the downturn in 2000–2001, he lost 50 percent of his portfolio.

Every market is different, McCarthy said. But in part because of the flow of money into index funds, the U.S. equities market has become more dominated by a handful of big technology stocks. That's something that index fund investors, like his doctor friend, may not easily recognize now.

As someone who has managed the back end of trading systems, McCarthy said he is increasingly uneasy about the level of index investing and has begun to give speeches about the potential dangers of a market in which a growing number of managers are hamstrung by the requirement that they match their indexes.

But he knows that he's at the leading edge of people talking about it — and that many think he is warning too hard and too fast. "This is unfamiliar territory for me," he acknowledged. "But index investing has so much power, and it's derivative-priced.

"Sometimes it's better to be vaguely right than exactly wrong," he said.

— By Elizabeth MacBride, special to






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Profit, Multiple & Margin Trouble Are In Store For Global Equities In 2016

The U.S. dollar has recently been negatively correlated both with the MSCI All-Country World Index (ACWI) and deep cyclical sectors. Given that the U.S. comprises over 50% of the MSCI ACWI, a firming in the U.S. dollar eats into U.S. corporate sector profitability via negative translation effects and the importing of global deflation. In fact, global EPS have been contracting for three consecutive quarters and according to our model will remain under pressure in 2016. Now P/E multiples are under pressure. Since the late 1970’s the forward P/E multiple for the S&P 500 has compressed at the onset of fresh Fed tightening cycles. Consequently, global equity markets are unlikely to make any significant headway in 2016, especially as margin pressures intensify. Instead, the risks are heavily titled to the downside, making a capital preservation portfolio mindset a necessity.

For additional information on Global Alpha Sector Strategy’s Quarterly Review & Outlook please visit the website at


  • Hopes fading for global profits, once seen as equity catalyst
  • Forecasts are still too high for 2016, market watchers say

Stocks are losing their last line of defense.

Amid a selloff that erased more than two years of gains -- about $14 trillion -- from global stocks now on the brink of a bear market, at least earnings stood as a potential bright spot. Those hopes are fading: analyst profit downgrades outnumbered upgrades by the most since 2009 last week, according to monthly data from a Citigroup Inc. index that tracks such changes.

Declines in oil and and other commodities, the withdrawal of Federal Reserve support, Europe’s fragile recovery and China slowdown fears are combining to jeopardize one of the few remaining stock catalysts after a global rally of as much as 156 percent since 2009. And profit growth estimates are still too high for this year and 2017, says Bankhaus Lampe’s Ralf Zimmermann.

“The momentum in the global economy is slowing down to such an extent that people are seriously talking about recession,” said Zimmermann, a strategist at Bankhaus Lampe in Dusseldorf. “This is not just China, it’s far more widespread. There are few places to hide. Even defensives will feel the pain.”

Investors are running for the door -- they pulled about $12 billion from global stock funds last week, and the MSCI All-Country World Index is near its lowest level since August 2013.

Economists’ projections for worldwide expansion in 2016 have dropped steadily in the past months to just 3.3 percent, with estimates for China and the U.S. falling since the summer. The biggest bears are getting more bearish -- DoubleLine Capital’s Jeffrey Gundlach sees global growth slowing to just 1.9 percent in 2016, making it the worst year since the aftermath of the financial crisis in 2009.

This earnings season may not provide much reassurance, say strategists at JPMorgan Chase & Co. Analysts project a 6.7 percent contraction in fourth-quarter profits for Standard & Poor’s 500 Index members. For peers in Europe, estimates call for growth of just 2.7 percent for all of 2015, about half the pace predicted four months ago.

There are some pockets of optimism: lower energy prices may encourage consumers to spend more, Europe’s recovery has been exceeding expectations and the Fed has given itself the flexibility to delay further rate hikes. The earnings bar is so low that the scope for positive surprises is great, says ETF Securities’ James Butterfill.

“Fundamentals in the U.S. and Europe still look pretty good,” said Butterfill, head of research and investment in London. “Markets seem to be overly focused on the poor state of global manufacturing, and losing their view of the consumer. Confidence is rising, people have more money in their pockets, and company earnings should reflect that. Now is a good opportunity to buy because everyone is so bearish.”

For others, the outlook is gloomy. Europe’s resilient recovery is threatened by companies heavily reliant on American and Asian demand.

“Even without a recession, profit forecasts for the full year are too optimistic,” said Stewart Richardson, chief investment officer at RMG Wealth Management in London. “It’s not just a China problem, U.S. growth is slowing on its own right. It looks like Europe is not slowing, but give it six or 12 months and maybe it will be.”

THESIS - Mondays Posts on Financial Repression & Posts on Thursday as Key Updates Occur


  • LOSS OF CONFIDENCE & TRUST - People No Longer Believe in the System
  • DEMONIZATION OF OPINION & EXPRESSION - Era of "Controlling the Narrative"
  • ERA OF UNCERTIANTY - A World of Increasing Uncertainty & Risk
  • CASUALTIES OF UNCERTAINTY - Individualism, Risk Taking, Capitalism & Economic Growth
2016 THESIS 2016


Davos – The Collapse in TRUST

Before the World Economic Forum

The most telling sign that we are heading into a real political economic shit storm is the fact that “TRUST” is collapsing on all sides. Obama is looking for any opportunity to disarm Americans. Why? This is simply because government is in trouble and they no longer “trust” the people. Likewise, the “rich” are starting to withdraw their money from investments that would create jobs because they are worried about the rising discontent among the majority of the population. Then we have the collapse in “trust” among anyone who is a career politician. So welcome to the theme of Davos — the collapse in “trust”.

NOTE: This is an absolute atrocious German translation - but the point is still clear!

Worldwide survey

Politicians and Elites have gambled trust

Elites distrust people massively, as a global poll shows. 

© DPASecurity forces on the roof of a convention hotels in Davos, Switzerland

This news alarmed shortly before the start of the World Economic Forum in Davos deeply: In Germany, the confidence plunges into the actions of politicians in the light of the refugee crisis almost from. And all over the world mistrust of the general public to the better-educated and high-earning strata is widening. The elites no longer lead. Also, the information behavior of the corresponding groups falls further and further apart. The world gets an understanding problem.

For the "Trust Barometer" the global PR agency Edelman has more than 33,000 people surveyed in 28 countries around the world between October and November of last year. The result is clear: Confidence in the German politics has sunk in the informed population by 5 percentage points. A similar dynamic down there has otherwise given only in countries such as India, the United Arab Emirates and Poland. And events such as the conflict in the New Year's Eve in Cologne are not yet included in these figures because it took place only after the end of the survey period. It is obvious that they have yet led to significantly poorer than the measured values ​​last fall.

Growing distrust of "those up there"

Here, the fundamental trust in governments, industry, NGOs and the media is to inform the world among those who have a higher education and belong to the intense upper 25 percent of the income pyramid, most recently even increased. These may have contributed especially the extremely good state of the economy in 2015, which in turn particularly applies to the situation in Germany. That confidence in this country yet so strong decline in the policy precisely in this group makes the German decline particularly remarkable - besides the fact that the Cabinet around ChancellorAngela Merkel (CDU) has cut above average in the polls of the past and in Compared to other governments had been regarded in the world as a guarantor of stability.

Around the world comes a phenomenon added, which should also be interested in the elites: In the vast majority believed "those up there" increasingly rare. Data that have been gathered from the media analysis company Media Tenor, confirm these impressions. The studies of Media Tenor and Edelman are the Frankfurter Allgemeine Zeitung before advance. In the data can be found not primarily an economy of inequality, as has been described by the French economist Thomas Piketty in his bestseller "The capital in the 21st century". What is reflected in the data, is an inequality of confidence around the world, which, however, often correlated with income inequality.

Trust inequality is reinforced by Trump, Le Pen & Co.

"It is a great illusion in the game, namely the idea that elites continue to lead and follow the masses," says the CEO Richard Edelman Edelman. And his boss Susanne Marell Germany-agrees. "Friends, family members and ordinary employees of an enterprise continues to be much more familiar than representatives of media, from companies or even politicians," says Marell.Greed, misbehavior, the democratization of the media, all that would mean that it was no longer so easy to gain the trust of the general population.

Infographics / Which institutions do you trust?

This inequality of trust has significant consequences. Quite obviously growing by the receptivity for politicians who want to make their prey to the fear of the population. As examples of this, both the refugee crisis and the bitter dispute over free trade agreements such as the targeted TTIP agreement between Europe and the United States can serve. Against TTIP go hundreds of thousands to the streets, the topic is emotionally heavy burden, especially the perceived or real lack of transparency in the negotiations bothers people. This is not altered, that democratically elected parliaments in each country of the agreement must agree in the end. Who benefits from this development?International fall Edelman to names of politicians such as Donald Trump or Marine Le Pen a.

Public confidence in elites decreases

In times of a new industrial revolution, which has the digitization of the entire value chain in the economic result, is added another worrisome finding. The skepticism about innovation is increasing in the general population. And the expectation of governments to regulate the market more, is diametrically opposed to the wishes of the economy, not to overdo it exactly in this point. The confidence barometer survey from Edelman message is perfectly clear on this point, however: The general population has become quite clearly too high, the pace of innovation. Here you want to see slow down the state and its representatives.

In more than 60 percent of the countries that were included by Edelman to the survey, the confidence of the masses in politics, business, NGOs and the media, however, is even fallen below a level of 50 percent. In marked contrast, the confidence of the elites has risen and is at the highest levels since the survey began. The average gap in confidence in the four institutions has grown between the elites and the general population to 12 percentage points. In the United States, the difference is 19 percentage points, suggesting the elites in the country on a huge disaffection the general population. In Germany, there are 9 points, here, however, on a constant level. Because the trust barometer also shows that each major differences with the income inequality in the countries concerned are related.

Discrepancy between elites and broad mass

Fittingly, in two-thirds of the countries surveyed, less than half the general population thinks it you better go than even five years ago. Also that is remarkable in view of a steady economic recovery: Is the observation match the reality, the profits made are disproportionately ended up in the hands of the higher-earning elite. This development is likely the debate about where the future flow automation dividends from the digitization of the economy, provide new food.

Hardly surprising, therefore, is that the biggest difference between the elite and the wider population is then also be seen in the attitude towards the economy and the company. While the confidence of elite has risen sharply in the economy, given the good economic in recent years, prevails in the crowd in front of deep skepticism. This skepticism is particularly high in certain sectors - and the financial services covered here still to strongly negative. There is a gap of more than 20 percentage points between the resurgent confidence of the elite in the industry and the general population.

The image of the greedy Bankers remains influential

The data that Media Tenor has collected through the analysis of the media coverage in the past year, confirm - and more: because the crisis of confidence is not confined to the financial sector. The diesel and emissions scandal at Volkswagen has led to resignations of once highly esteemed managers like the VW CEO Martin Winterkorn, will cost the shareholders of the Group's many billions of euros and has damaged not only the reputation of the automaker, but the entire German economy, as Susanne Marell Notes of Edelmann.

"But the public image of the banking sector deteriorated again," says Roland Schatz of Media Tenor - rights issues and the effectiveness of regulation stood still in the focus of media coverage. "Some banks were indeed able to convey a message of improvement, but the overall impression remains," says Schatz. So the new leadership of Deutsche Bank mediate among the Britons John Cryan currently although the feeling of a new beginning. But the overall impression is to act within remains of an industry that is dominated by the poorly educated, greedy managers. Account must be taken, however, that the German media tended compared to the United States or Great Britain to a particularly critical enterprise reporting. In fact, the image that has the general population from the banks, namely recently improved somewhat again as the trust barometer of Edelman shows has.

Tupperware shows how it works

For this survey, there is also that companies will always be given the chance to regain confidence quickly back. For confidence in the Chairman's basically risen again significantly - unlike the people involved in politics. The company will also have expected, the rapid transformation of the economy to cope better than politics, whose confidence levels are on the ground. 80 percent of the population at large expect companies to know both increase profits and contribute to improving the economic and social conditions in the communities in which they operate.

A good example of this is in the eyes of Edelman, the company Tupperware: Nearly 3.1 million women in countries such as China, India, Indonesia and South Africa make sales for the company - and bring much needed money home to their families. But the bosses, for example, Unilever or Starbucks would have made it through appropriate action in the past few months to improve the image of their business significantly in the public notices Susanne Marell from Edelman.




2013 - STATISM












2016 Outlook – James Turk, Alasdair Macleod, John Butler;

Financial Repression Is Intensifying

Discussion on the year ahead .. negative interest rates potential for the U.S.$ – unintended consequences .. the risks of capital controls .. malinvestments from ZIRP & massive money printing .. the importance of investment in real assets as stores of value .. how financial repression is intensifying  .. 48 minutes









THEMES - Normally a Thursday "Themes" Post & a Friday "Flows" Post




- - CRISIS OF TRUST - Era of Uncertainty G THEME  




  01-08-16 THEME




FLOWS - Liqudity, Credit & Debt

LIQUIDITY: Central Bank Liquidity Increases has slowed or Stopped

>> CREDIT: Cycle has turned

DEBT: Defaults/ Bankruptcies Will Emerge





w/ R Duncan



S&P 500 Below 1109

Before Credit Cycle To Turn BAck Up


We maintain that this will likely fall this low before the downside of the credit cycle is finished. With earnings now, a single digit p/e would imply an S&P 500 below 1109; a whopping 40% below current levels.


We like to consider the longest time periods available to find reliable historical trends in data series. Of these, the price/earnings ratio (p/e ratio) of the S&P 500 index is instructive to study. Major bull markets in equities tend to start from heavily disfavored markets; those with earnings multiples (p/e ratios) in the single digits.In a sense, investors have to give up hope in the stock market before it can regain popularity. In the chart below, you will see that price/earnings ratios around 6 or 7 have preceded long equity bull markets.

Yet, for all the upheaval in the markets over the last 16 years, the US stock market has not yet fallen to single digit p/e ratios. The S&P 500 p/e ratio is currently about 16 and it has been 33 years since the index last traded with p/e below ten. We maintain that this will likely fall this low before the downside of the credit cycle is finished. With earnings now, a single digit p/e would imply an S&P 500 below 1109; a whopping 40% below current levels.

It is important to note that these are glacial processes and we aren't predicting this to happen on any particular schedule, but markets in 2016 have returned to a sense of fear and we just want to remind readers that there is a lot of space between 1870 and 1100 in the S&P 500.


The Fragile Forty


How The World Lost

$17 Trillion In 6 Months

It's official. More than 50% of the "wealth" effect created from the 2011 lows to the 2015 highs has been destroyed (despite the world's central banks going into money-printing overdrive over that period). Almost $17 trillion of equity market capitalization has evaporated in just over 6 months with over 40 global stock indices in bear markets...

As Bloomberg adds,

The U.K. was the latest market to fall 20 percent from its peak, while India is less than 1 percent away from crossing the threshold that traders describe as the onset of bear market.Nineteen countries with $30 trillion have declined between 10 percent and 20 percent, thereby entering a so-called correction, according to data compiled by Bloomberg from the 63 biggest markets on Wednesday.

Emerging nations bore the brunt of the meltdown, accounting for two out of every three bear markets. Slowing Chinese growth, the 24 percent slump in oil this year and currency volatility have driven developing-nation stocks to the worst start to a year on record.

Among equity indexes that are on the cusp of entering bear territory are Australia, India and the Czech Republic, each having fallen about 19 percent from their rally highs. New Zealand and Hungary are putting up the best resistance to the turmoil, limiting their losses to less than 7 percent.

So just before you (Jim Cramer et al.) demand the central banks do more, just remember what reality looks like - will you use any centrally-planned rally to buy moar or sell into as the smoke and mirrors of yet another bubble is exposed with the business cycle inevitably beating the rigging...

























Read More - OUR RESEARCH - Articles Below

Tipping Points Life Cycle - Explained
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